When Arizonans set out to protect their legacies, the first hurdle is often understanding how the estate tax and inheritance tax work. These two “death taxes” are sometimes confused, yet they operate very differently:
- Estate tax is imposed on the net value of a decedent’s property before anything is passed on.
- Inheritance tax is levied on the people who receive assets after someone passes.
Arizona imposes neither tax. Still, the federal government and several states do impose a tax, making it vital to know where and when these rules apply. If your wealth straddles state borders—or if your heirs live elsewhere—an informed strategy can save both money and stress.
Early in the process, many clients visit us to explore estate-tax strategies and broader tax planning options. Addressing these questions up front keeps your future plan flexible and clear.
Understanding Estate and Inheritance Taxes
Because both charges only arise at death, people sometimes lump them together as estate and inheritance taxes. In reality:
- Estate tax exists at the federal estate tax level and in 12 jurisdictions—including Rhode Island and the District of Columbia—each with its exemption threshold.
- Inheritance tax appears in only six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania).
In each taxing state, inheritance tax rates depend on the beneficiary’s relationship to the deceased. A surviving spouse always pays 0 percent, and many states extend that break to children and immediate family members.
Opponents argue these levies discourage capital formation and slow economic growth; supporters view them as a source of public revenue that affects only wealthy taxpayers.
Federal Estate Tax
For 2025, the federal exemption levels are $13.99 million per person and $27.98 million for a married couple. Anything above those figures is taxed on a sliding tax rate scale that tops out at 40 percent. A built-in federal credit (the “unified credit”) shields assets up to the exemption and is applied automatically.
Heads-up: Unless Congress acts, the exemption will shrink by roughly half for the 2026 tax year. Planning now can prevent a shocking tax bill later.
State Estate Taxes
Twelve states plus D.C. add their own state estate taxes. Each sets a unique exemption and marginal rate schedule. For example:
Massachusetts taxes the first dollar once a taxable threshold is crossed.
Rhode Island indexes its exemption annually for inflation.
Oregon has one of the lowest thresholds in the country.
If you own real property in any of those places, your estate may need to pay taxes there even though you live in Arizona.
State Inheritance Tax
When an estate or inheritance tax is imposed by a state, the question is always, “Where did the decedent reside and where is the property located?” Location—not where the heir lives—controls.
Because only six jurisdictions assess inheritance duty, clients sometimes assume their families are safe. Yet a vacation cabin in Maryland or farmland in Iowa can bring the tax into play for other heirs who otherwise live in tax-free states.
Key Differences Between the Estate Tax and Inheritance Tax
| Feature | Estate Tax | Inheritance Tax |
|---|---|---|
| Trigger | Transfer of assets at death | Receipt of assets after death |
| Who paid? | The estate pays estate tax | Each beneficiary pays inheritance tax |
| Where imposed? | Federal + 12 states/D.C. | Six states only |
| Relationship matters? | No | Yes—closer kin usually pay less |
| Arizona impact | No Estate Tax | No Inheritance Tax |
Because the estate exceeds the exemption in relatively few cases, most families never owe federal duty. In contrast, even modest bequests can create inheritance liability if property sits in one of the six states.
Applying the Numbers: How Tax Calculations Work
For example, imagine the deceased leaves an estate worth $15 million. Under the current federal estate tax exemption, the first $13.99 million is sheltered; only the amount above that exemption threshold is exposed. The resulting federal tax is calculated using progressive estate tax rates, and the tax is levied and paid by the estate before any distribution to a beneficiary.
In the 12 states and the District of Columbia that impose state estate taxes, each treasury publishes its own tax rate tables and may add a limited tax exemption for family businesses or farms. Because rules differ, the same assets can face different liabilities depending on where they are located.
The six states with inheritance taxes—including Iowa—apply separate inheritance tax rates that rise with emotional distance: close relatives often owe nothing, while distant heirs shoulder the highest share. In those jurisdictions, the tax is paid by the individual recipient, not the estate.
Since most states impose neither levy, carefully choosing domicile and titling property can preserve family revenue and reduce complexity while staying fully compliant with the law.
Estate Planning Tips to Minimize Tax Burden
- Calculate the total value early. Knowing whether your holdings might surpass a threshold helps you plan ahead with clarity.
- Shift ownership thoughtfully. Lifetime gifts of business interests or other assets can reduce the size of the taxable pool.
- Use irrevocable trusts for liquidity. Proper structures let fiduciaries cover a looming bill without forcing the sale of cherished property.
- Keep paperwork current. Updated beneficiary designations prevent surprises when the time comes to distribute wealth.
Common Questions About Estate and Inheritance Taxes
Do Arizonans ever owe federal duty?
Yes, but only if the net estate tops the federal exemption. That threshold may tighten in 2026, so even moderate growth could change your exposure.
How do inheritance taxes work if my children live in Arizona?
They won’t pay, because none of the six taxing jurisdictions applies the levy to non-residents when the decedent and property are outside that state.
Is a revocable trust a shield?
No. While it avoids probate, it does not remove assets from the taxable pool. Separate, irrevocable vehicles are required to limit liability.
Practical Scenarios and State Nuances
First, consider how a transfer duty can vary when real estate straddles state borders. In Arizona, residents avoid an estate tax entirely, yet the same family might face an estate tax in Oregon on a mountain cabin. Because this transfer duty is calculated on the fair market value at death, accurate appraisals protect beneficiaries from overpaying. Portability between spouses allows unused estate tax exemption to transfer, potentially eliminating future transfer duty for the surviving partner.
The federal government updates the estate tax exemption each January for inflation. Federal tax law applies estate tax rates that top out at 40 percent, while state estate tax rates can range from just under 10 percent to nearly 20 percent.
By contrast, an inheritance tax applies only when the receiving recipient is in one of six jurisdictions. That tax is typically lower for a child and higher for a distant cousin. Strategic use of charitable bequests can erase or offset an inheritance tax without disinheriting loved ones. The current states with inheritance taxes are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Nebraska is the only state west of the Mississippi that still imposes a succession duty. If the tax falls on the beneficiary, payment is made directly by the beneficiary, not by the executor.
Example: If the deceased owned real estate in multiple jurisdictions, each location may require its own filing. When the deceased leaves digital assets, those accounts are part of the taxable estate.
A clear estate inventory speeds administration. Keeping estate records organized reduces disputes. Digital estate management tools can help successors locate key documents.
Estate Planning in Arizona: Why Location Matters
Because Arizona lacks both levies, our clients enjoy freedom that residents of Maryland or Pennsylvania do not. Still, cross-border real property, marketable securities, and multistate business interests can pull you under another jurisdiction’s rules overnight.
A single consultation can confirm whether your current footprint accidentally triggers outside duties and, if so, how best to neutralize the estate tax burden.
Final Thoughts: Why It Pays to Plan Ahead
Understanding these two post-mortem levies helps families keep more of what they have built. Today’s thresholds are generous, but they can change quickly, and assets grow. By mapping your holdings, confirming state exposure, and acting early, you give loved ones certainty and minimize risk.
Ready to safeguard your legacy? Connect with us and put a sound strategy in place—before the rules change again.
