If you’re managing a family member’s estate or planning your own, you might have questions about how estate or inheritance taxes work. These taxes can affect the amount loved ones receive and how assets transfer after death. An Arizona estate planning lawyer can help you understand which taxes apply to your situation and how to minimize them within the law.

 What Is the Difference Between Inheritance Tax and Estate Tax?

Inheritance tax and estate tax both apply to the transfer of assets after someone’s death, but they work differently.

Estate tax applies to the total value of a person’s estate before it passes to beneficiaries. The person’s estate must pay this tax before it can distribute property, money, or other assets. By contrast, inheritance tax applies after an estate distributes assets. Each beneficiary pays inheritance tax on what they receive, depending on their relationship to the deceased and the state’s rules. In short, estate tax targets the total estate, while inheritance tax targets individual recipients.

Only about a quarter of U.S. states collect estate tax, and even fewer collect inheritance tax. The federal government imposes only an estate tax, not an inheritance tax. Inheritance tax rates are often lower for close relatives of the deceased.

Does Arizona Have an Estate or Inheritance Tax?

Arizona does not have an estate tax or inheritance tax. Arizona residents do not pay state tax on inherited money or property, and estates owe no state taxes upon the owner’s death. However, the federal estate tax still applies to estates that exceed the federal exemption limit, which changes periodically based on federal law. Owners of large estates should review current IRS thresholds to see if the federal estate tax applies.

Even though Arizona does not collect estate or inheritance taxes, a beneficiary may owe such taxes to another state if the deceased lived or owned property there. An experienced estate planning attorney can help families understand when and where these taxes might apply for those with multi-state assets or high-value estates.

How Do Gift Taxes Differ from Inheritance Taxes?

Gift tax applies to transfers made during a person’s lifetime, while inheritance tax applies after death. The IRS enforces the federal gift tax, which limits how much one person can give to another without reporting it. Each year, the IRS sets an exclusion amount that allows individuals to give up to a specific value tax-free per recipient. Transfers above that amount generally require filing a gift tax return.

Inheritance tax, by contrast, applies when someone receives assets from a deceased person.

Talk to an Arizona Estate Planning Lawyer for Help Navigating Taxes

When it comes to estate tax vs. inheritance tax rules, small details can make a big difference. The Arizona estate planning attorneys at Pennington Law, PLLC can explain how the rules apply to your situation and help you protect your assets before and after transfer. Contact us today for a free initial consultation.