Even though there is no Arizona estate tax, estate planning is still a critical step in financial planning. While the Arizona estate tax exemption may seem like a reason to forgo an estate plan, this notion is misguided and overlooks other benefits of proper planning. Arizona's laws are clear. Without an estate plan, your assets will be distributed according to the state's intestacy rules, which may not align with your wishes.
An estate plan gives you control over how your hard-earned assets are distributed after your passing, so your beneficiaries receive what you intended for them. An estate plan minimizes legal battles, avoids probate, and provides family peace of mind during a difficult period.
Does Arizona Have an Estate or Inheritance Tax?
There is no Arizona estate tax. When someone passes away, the state does not collect a portion of their money or property. Since there's no Arizona death tax, you only need to consider federal estate tax rules.
Also, there are no Arizona inheritance tax laws, either. Unlike some states, if you inherit property or money in Arizona, the state won’t charge you a tax just because you received it.
Why You Should Consider Estate Planning Despite No Arizona Estate Tax Rate
Even with the Arizona estate tax exemption, estate planning remains very important. Estate planning protects assets and ensures their distribution aligns with your wishes, providing peace of mind for you and your loved ones.
Simplify the Transfer of Assets
If you have a home, savings, investments, or other significant assets, an estate plan ensures that your assets are distributed as you wish. Without a comprehensive estate plan, the transfer of assets could be subject to unnecessary delays. On top of that legal fees reduce are paid by the estate, leaving less for your heirs. Your assets could even end up in the wrong hands.
Avoid Probate
Without an estate plan, state laws decide who gets your assets. You can avoid probate. Probate is an arduous, time-consuming court process determining the distribution of your assets and possessions. It’s also a public process; you might not want your private assets and personal information made part of the public domain.
It’s a clear directive as to who gets what and when. An estate plan is the only way to take control and dictate how your wealth is divided among your heirs, whether it's your children, grandchildren, or other beneficiaries.
Create a Healthcare Directive
Estate planning goes beyond just divvying up your assets after you're gone. It also handles decisions regarding your health care if you become incapacitated. In Arizona, you can create a healthcare power of attorney and a living will to address these matters.
A healthcare power of attorney allows you to appoint someone you trust to make medical decisions on your behalf if you're ever in a situation where you can't make those decisions yourself. A living will outline your preferences for medical treatment, such as whether you want to be kept on life support.
These documents ensure that your voice is heard, and your choices are respected, even when you can't express them yourself. Given the gravity of these decisions and their potential impact on your quality of life, having an open and honest conversation with your loved ones and legal advisors is essential.
Include the Right Beneficiaries
A well-crafted estate plan can reduce the federal tax burden on your inheritance, maximizing the amount your loved ones receive. A good estate plan can also prevent misunderstandings and conflicts among family members after you pass.
Family structures change for different reasons, such as remarriage, new children, or grandchildren. New family members may not be recognized without updates, or estranged members could inherit assets against your wishes. It helps families avoid financial stress.
Potential Tax Implications with an Arizona Estate Tax Exemption
No Arizona estate tax doesn’t automatically mean there are no other tax implications. Even though there won’t be an Arizona estate tax rate imposed on your assets, there may be different tax implications. The other taxes or financial implications that come can be considered the “Arizona death tax”, even though there is no direct tax on the estate.
Federal Estate Tax
If your estate is substantial, federal estate taxes should be a concern. While the prospect of having your estate subjected to this tax might seem harrowing, it's a reality that many affluent individuals must grapple with.
The key is to approach this issue with a candid and proactive mindset. Educate yourself thoroughly on the nuances of estate taxation and how it might impact your situation. Consult with professionals who can guide you through the estate planning process. An advisor can help you develop strategies to reduce the tax burden.
Income Taxes for Heirs
An Arizona estate tax exemption is only relief from one tax. Your heirs might have to pay income tax on certain types of inherited assets. For example, suppose they inherit retirement accounts like a traditional IRA or a 401k. In that case, they'll likely have to pay taxes on their withdrawals from those accounts.
This is because the money in these accounts was contributed pre-tax, and the taxes were deferred until withdrawal. When your heirs take distributions, they must report that income and pay the corresponding taxes.
It's a reality that can catch some beneficiaries off guard, especially if they need more preparation for the tax hit. The tax rates on these inherited retirement accounts can be substantial, so your heirs must understand the potential tax implications and plan accordingly. Working with a financial advisor and tax professional can help you to and develop a strategy to minimize the tax burden while maximizing the benefits of their inheritance.
Plan for the Future
Failing to plan is planning to fail, and in Arizona, the consequences of not having an estate plan can be severe. Work with the professionals at Asset Preservation Wealth and Tax to create a plan that suits your exact needs. Don't leave your legacy to chance—take control and protect your assets and your loved ones' future with a well-crafted estate plan.
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Tax loss harvesting is a strategy that may help minimize the amount of current taxes you have to pay on your investments by choosing to sell an investment at a loss. It is only appropriate for certain taxpayers in certain scenarios. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor before attempting a tax loss harvesting strategy.
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.
