While this is a common misconception, I believe it mixes up two ideas, estate planning and estate tax planning. Estate tax planing is actually a small, but important, part of the overall estate planning process.
Estate planning is about making sure your estate is in order and passes as you wish. Estate tax planning is making sure the government gets as little of your estate as you can.
Estate planning uses a trust, or a will, to organize your affairs and distribute it to who you care about when you die. Estate planning is for tax and non-tax reasons. Of course no one is required to have an estate plan. Many would be unhappy to know that our legislature in Arizona has written an estate plan for everyone that hasn’t written an estate plan themselves.
This question gets asked a lot. Sometimes it is asked if the Feds or Arizona tax you when you die? Sometimes it is asked if the State gets part of your estate when you die? Mostly it is thought of in terms of probate whether you have a Last Will & Testament or not.
The short and simple answer for almost everyone is zero, the Feds and Arizona gets absolutely nothing when you die. Of course there are exceptions, but they are very limited.
One exception is if your total estate is over $5,250,000 at least for year 2013. If a married couple have done proper estate planning they can pass $10,500,000 this year estate tax free. And no, the State of Arizona does not have an inheritance or death tax. Some states do but Arizona does not.
Another exception is if you do not have a Will or Trust and you have no heirs. This means no parents, children, spouse, nieces and nephews, cousins, etc. Very rare, but possible. If this is the case, the State of Arizona takes the entire estate.
Another exception, but I don’t really think this should be thought of as an exception but basic taxation, is that if you have any assets that are pre-tax, for example an IRA, then when the funds are distributed, they are subject to income tax as they would have been if the person was still alive.
So in answer to the question, no, the Feds and the State of Arizona will very unlikely get a piece of your Estate. Of course this doesn’t mean your Estate will go where you want it to without careful estate planning. That is a subject of another post.