Arizona is one of the majority of states that impose no tax of any kind at death. Its old estate tax was a so-called pick-up tax — it simply captured a credit the federal estate tax allowed for state death taxes. When Congress phased that credit out in the early 2000s, Arizona's tax collected nothing, and the legislature repealed the statutes in 2006. Arizona has never had an inheritance tax on beneficiaries in the modern era, and it has no gift tax, so lifetime giving is not taxed at the state level either.

The federal estate tax survives, but for most families it is a non-issue. Under the 2025 tax law, the basic exclusion amount is $15 million per person for deaths in 2026, indexed for inflation going forward, and a surviving spouse can generally inherit a deceased spouse's unused exclusion through portability — roughly $30 million of combined shelter for a married couple. If your estate is in the $1M–$5M range that most of our clients occupy, you will not owe federal estate tax under current law, and estate-tax-driven structures built for the old, lower exemptions may now be unnecessary complexity.

So why does inheritance still get taxed? Because the largest asset in most Arizona retirees' estates is a pre-tax IRA or 401(k), and those dollars have an embedded income tax bill that death does not erase. Your heirs inherit the account and the deferred tax liability with it. Under the SECURE Act, most non-spouse beneficiaries must empty the account within ten years, and if you died after your required beginning date, they must also take annual distributions in years one through nine. Every dollar comes out as ordinary income on their return — usually during their peak earning years, stacked on top of their salaries.

Taxable brokerage accounts and real estate work the opposite way: they generally receive a step-up in basis at death, which erases the unrealized capital gain entirely. Arizona's community property rules can make this even more favorable for married couples, stepping up both halves of community property at the first death. And because Arizona's income tax is a flat 2.5%, heirs who live here keep more of an inherited IRA than heirs in California or New York — which is why where your beneficiaries live belongs in the plan.

Stop worrying about the estate tax and start measuring the income tax. If you have $1.5M–$3M in pre-tax accounts, the realistic federal-plus-state tax bill your heirs will pay on that money over a forced ten-year window is often in the six figures — far more than the zero dollars of estate tax your estate will owe. That is the number worth managing.

The tools are income-tax tools, not estate-tax tools: Roth conversions during your low-bracket years so heirs inherit tax-free dollars, asset location so the right account type goes to the right beneficiary, charitable beneficiary designations for pre-tax money if you give anyway, and holding appreciated taxable assets for the step-up rather than selling late in life.

If your estate plan was built when the federal exemption was a fraction of today's, have it reviewed. Trust structures designed purely to dodge an estate tax you will never owe can create income-tax and administrative costs that outweigh their benefit under current law.

• Assuming 'no estate tax in Arizona' means inheritance is tax-free. The income tax inside pre-tax retirement accounts is the real bill, and it transfers to your heirs.
• Keeping estate-tax-driven trust structures from the 2000s that no longer serve a purpose at a $15 million exemption — and can forfeit the step-up in basis or compress trust income into top brackets.
• Selling appreciated taxable assets late in life and paying capital gains that the step-up in basis would have erased at death.
• Ignoring where heirs live. An inherited IRA is taxed at the beneficiary's state rates — 2.5% for an Arizona child, up to 13.3% for a California child.
• Treating the current exemption as permanent. Tax law changed in 2017, 2019, 2022, and 2025; plans should be reviewed when it changes again, not assumed.