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Establishing a solid financial plan for your future can be daunting. That process becomes a little easier when you understand how estate and inheritance taxes may impact your legacy.
These taxes can be complicated and challenging to navigate, and they can enormously impact the wealth passed on to your beneficiaries. Understanding tax laws can help you make a plan for your estate.
Does Arizona Have an Estate Tax?
When planning for your future, you'll have a lot of questions. Here’s a simple answer to a common tax and wealth planning question: There is no Arizona estate tax.
Arizona does not impose any tax on estates when property is transferred after the owner's death.
The estate size does not matter and is irrelevant in this situation. With no state estate tax, those with substantial assets can enjoy their wealth without the burden of potential taxes. However, you may be subject to federal estate taxes.
Starting in 2023, the federal estate tax rates range from 18%-40% and apply to the total sum of assets worth more than $12.92 million. This is higher than 2022's tax exemption limit of $12.06 million.
Does Arizona Have an Inheritance Tax?
There is no inheritance tax in Arizona either. That should alleviate some concerns you may have about passing down assets to your heirs without a financial burden.
While Arizona residents are fortunate to have no estate or inheritance taxes, it is still important to plan for the future. Proper estate planning can guarantee that your assets will be shared and distributed correctly and provide peace of mind for you and your loved ones. In addition, there is no federal inheritance tax to worry about.
Why Do You Still Need Estate Planning?
Even though there is no inheritance tax in Arizona, gift taxes, or Arizona estate tax, you still need to protect your assets. There is no need to expose yourself to additional expenses that can occur when you pass down your assets.
At Asset Preservation Wealth and Tax, we look at the lack of inheritance tax in Arizona as just one piece of the puzzle. We also consider potential income taxes and expenses like probate when planning an estate for clients.
Living Trusts and Probate
While probate isn't inherently bad, it is expensive and time-consuming. Having a revocable living trust allows you to transfer the title of your assets, like your home, car, and investment portfolio, into the trust.
You will maintain complete control of the assets during your lifetime. Whoever you appoint as the successor trustee will manage the trust upon your passing. The trust documents how you want the trust's assets to be distributed, and the successor will help put that into effect. This is one effective way to avoid probate.
Thrift Savings Plans, IRAs and Qualified Funds
Thrift savings plans (TSPs) and IRAs have become key components of many people's retirement accounts, so it is important to understand what happens to these accounts upon death. The inherited amount from a Roth IRA is not taxable. However, when it comes to retirement accounts such as a traditional IRA or a 401(k), distributions from these accounts are typically taxable as income.
Your beneficiaries must understand that taking out money from their inherited accounts can add to their taxable income and increase the amount of taxes they have to pay. This could also push them into a higher tax bracket. It is important to consult a financial advisor or tax professional to ensure that all taxes are paid accurately and on time.
Inherited Property and Capital Gains
While there is no inheritance tax in Arizona for property, you still need to consider implications that could make your assets a burden on your heirs. If you have a property that you want to pass down, you might consider putting it in your beneficiary's name before you pass away to avoid taxes or probate. However, this could be a costly mistake because the step-up in basis would not apply.
A step-up in basis is a readjustment in the value of your appreciated assets for taxes. Here, the basis would be the cost or purchase price. Upon your passing, the value would be stepped up to match a fair market value, which can reduce the capital gains tax if the property is sold.
If, for example, you originally purchased your home for $60,000, it could appreciate significantly by the time you pass on — let’s say to a value of $250,000. If your beneficiary then sells the property for $280,000, then they would only pay capital gains tax on $30,000.
Planning For the Future
There might not be estate or inheritance tax in Arizona, but there are many other potential tax burdens and expenses associated with inherited assets. At Asset Preservation Wealth & Tax, we look at your entire situation to create a complete plan for you.
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We have access to highly skilled and experienced estate planning attorneys and tax professionals to give credible insight on what should work for your exact situation. And, as fiduciaries, we’re required to always put your best interests first.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
