I'm Sergei Tokmakov, Esq., an attorney who assists clients across the country with estate and gift tax planning. Arizona is uniquely positioned among the states I advise on: it combines the tax advantages of a community property state with no state estate tax, no inheritance tax, a flat 2.5% income tax rate, and a 500-year dynasty trust. Below I break down the key planning opportunities, with interactive calculators to estimate the savings these tools provide.
Arizona also stands out for the beneficiary deed (A.R.S. Section 33-405), available since 2001, which allows real property to bypass probate entirely. Combined with community property with right of survivorship (CPWROS), Arizona married couples have access to some of the most efficient title and transfer options in the country.
Arizona vs. Other States: Estate Planning Comparison
| Feature | Arizona | California | Texas | New York | Florida |
|---|---|---|---|---|---|
| State Estate Tax | None | None | None (constitutional ban) | Yes ($6.94M threshold) | None (constitutional ban) |
| Community Property | Yes (full step-up) | Yes (full step-up) | Yes (full step-up) | No (common law) | No (common law) |
| State Income Tax Rate | 2.5% flat | Up to 13.3% | None | Up to 10.9% | None |
| Dynasty Trust Duration | 500 years | 90 years | 300 years | Lives in being + 21 yrs | 360 years |
| Beneficiary / TOD Deed | Yes (since 2001) | No | Yes (since 2015) | No | Yes (since 2006) |
| Transfer Tax on Deeds | None | $1.10 per $1,000 | None | $2-$4 per $500+ | $0.70 per $100 |
| DAPT Available | No | No | No | No | No |
Unlike transfer-on-death deeds in other states, Arizona beneficiary deeds have been available since 2001 (A.R.S. Section 33-405). Arizona was among the first states to adopt this probate avoidance tool.
Arizona Estate Tax: Repealed in 2006
Arizona's estate tax was formally repealed in 2006. For decades before that, Arizona imposed a "pick-up" tax -- also known as a "sponge" tax -- that simply equaled the federal state death tax credit allowed under Internal Revenue Code Section 2011. This meant Arizona collected whatever the federal government gave as a credit, resulting in no additional tax burden on estates beyond what was owed federally.
When the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) phased out the federal state death tax credit by 2005 (replacing it with a mere deduction), Arizona's pick-up tax automatically dropped to zero. The Arizona legislature then formally repealed the estate tax statute in 2006 to eliminate any ambiguity.
Arizona currently imposes no estate tax, no inheritance tax, and no state-level gift tax. Residents need only plan around the federal estate tax ($13.61 million exemption per person in 2024, scheduled to drop to approximately $7 million in 2026 unless Congress acts).
No Movement to Reinstate
Unlike states such as Massachusetts and Oregon that actively maintain their estate taxes, there has been no serious legislative effort in Arizona to reimpose an estate tax. Arizona's political climate strongly favors low taxation, and the state has been moving in the opposite direction -- adopting a flat 2.5% income tax rate in 2023.
Constitutional Considerations
I want to note an important distinction: unlike Texas, whose constitution explicitly prohibits a state estate or inheritance tax, the Arizona Constitution contains no such prohibition. This means the Arizona legislature could theoretically reimpose an estate tax through ordinary legislation without a constitutional amendment. While this is politically unlikely in the current environment, it is a factor that distinguishes Arizona from states with constitutional bans.
Arizona's Flat 2.5% Income Tax
Arizona's flat individual income tax rate of 2.5% is among the lowest in the nation. This rate applies to all taxable income, including capital gains, dividends, and trust distributions. For estate planning purposes, this means beneficiaries who inherit income-producing assets in Arizona face minimal state tax on the ongoing income from those assets.
Arizona: One of Nine Community Property States
Arizona is one of nine community property states in the United States (along with California, Texas, Nevada, Washington, Idaho, Louisiana, New Mexico, and Wisconsin). Under A.R.S. Section 25-211, all property acquired during marriage by either spouse is presumed to be community property, owned equally by both spouses regardless of which spouse earned the income or whose name is on the title.
The Full Step-Up: IRC Section 1014(b)(6)
The most significant tax advantage of community property is the full stepped-up basis at the first spouse's death under IRC Section 1014(b)(6). In common law states, only the decedent's half of jointly held property receives a step-up to fair market value. In community property states like Arizona, BOTH halves -- including the surviving spouse's half -- receive a full step-up.
A married couple in Arizona purchases a home for $300,000 (their community property basis). By the time the first spouse dies, the home is worth $1,200,000. Under IRC 1014(b)(6), the entire property -- both halves -- receives a new basis of $1,200,000. If the surviving spouse sells the home for $1,200,000, the capital gain is $0. Had this been separate property or property in a common law state, only half would step up, leaving a $450,000 taxable gain on the surviving spouse's half.
What Qualifies as Separate Property?
Not all property in a marriage is community property. Under Arizona law, separate property includes:
- Property acquired before marriage -- retains its separate character as long as it is not commingled
- Property received as a gift -- even during marriage, gifts to one spouse remain separate property
- Property received by inheritance -- bequests or devises to one spouse are separate property
- Income or appreciation of separate property -- generally remains separate in Arizona (unlike some states)
Only the decedent's portion of separate property receives a step-up at death. The surviving spouse's separate property retains its original basis.
Community Property with Right of Survivorship (CPWROS)
Arizona offers a powerful hybrid form of property ownership: Community Property with Right of Survivorship (CPWROS). This combines two critical advantages:
- Probate avoidance: Like joint tenancy, the property automatically passes to the surviving spouse at death without going through probate
- Full step-up basis: Unlike joint tenancy in common law states, both halves of the property still qualify for the full community property step-up under IRC 1014(b)(6)
I consider CPWROS the optimal form of title for most married couples in Arizona. It avoids probate AND preserves the full step-up basis. The deed must specifically state "as community property with right of survivorship" to achieve this treatment. Standard joint tenancy language may not preserve the community property tax benefits.
Quasi-Community Property: Moving to Arizona
When married couples move to Arizona from common law states, property they acquired during marriage in the other state may be treated as "quasi-community property." Arizona does not have a formal quasi-community property statute like California (California Family Code Section 125), but the state does recognize community property agreements. Couples relocating to Arizona should consider executing a community property agreement to reclassify assets acquired in common law states, which can then qualify for the full step-up basis under IRC 1014(b)(6).
Beneficiary Deeds: A.R.S. Section 33-405
Arizona was one of the first states to adopt the beneficiary deed (sometimes called a transfer-on-death deed or TOD deed), making it available since 2001 under A.R.S. Section 33-405. A beneficiary deed allows a property owner to designate one or more beneficiaries who will automatically receive the property upon the owner's death, completely bypassing the probate process.
How a Beneficiary Deed Works
- Owner records the deed: The property owner executes and records a beneficiary deed with the county recorder in the county where the property is located
- No transfer during lifetime: The beneficiary deed does NOT convey any interest, legal or equitable, to the named beneficiary during the owner's lifetime. The owner retains full control, can sell the property, refinance it, or use it as collateral
- Automatic transfer at death: Upon the owner's death, the property transfers directly to the named beneficiary (or beneficiaries) by operation of law, outside of probate
- Beneficiary records affidavit: The beneficiary typically records a certified copy of the death certificate and an affidavit of succession to perfect their title
Revocability
A beneficiary deed is fully revocable during the owner's lifetime. The owner can revoke it by recording a new beneficiary deed naming a different beneficiary, recording a deed that expressly revokes the prior beneficiary designation, or simply selling or transferring the property to someone else during their lifetime.
A beneficiary deed MUST be recorded with the county recorder BEFORE the owner's death. If the deed is signed but not recorded before death, it is completely void and has no legal effect. The property will then pass through probate or under other estate planning documents. This is one of the most common and expensive mistakes I see in Arizona estate planning.
No Gift Tax Consequences
Recording a beneficiary deed does not trigger federal gift tax. Because no present interest passes to the beneficiary during the owner's lifetime, there is no completed gift for gift tax purposes. The beneficiary has a mere expectancy, not a property right, until the owner's death.
Affidavit of Property Value
Under A.R.S. Section 11-1134, an Affidavit of Property Value is generally required when recording a beneficiary deed, though exemptions may apply for certain types of transfers. I recommend consulting with the specific county recorder's office, as practices can vary between Maricopa County, Pima County, and other Arizona counties.
Multiple Beneficiaries
A beneficiary deed can name multiple beneficiaries. When doing so, I recommend specifying each beneficiary's percentage interest (e.g., "50% to Jane Smith and 50% to John Smith") rather than simply listing names, to avoid disputes about the intended division.
Limitations
- Spouse's community property rights: A beneficiary deed cannot override the community property rights of a surviving spouse. If the property is community property, both spouses must sign the beneficiary deed
- Creditor claims: The property transferred by beneficiary deed remains subject to the decedent's creditors' claims for a limited period after death
- Mortgage: A beneficiary deed does not eliminate any existing mortgage -- the beneficiary takes the property subject to any existing liens
- Title insurance: Some title companies may have specific requirements for insuring property that was transferred by beneficiary deed
The 500-Year Dynasty Trust
Under A.R.S. Section 14-2901(A)(2), Arizona allows trusts to continue for up to 500 years. Arizona modified the traditional Rule Against Perpetuities to permit this extended duration, making it one of the most favorable states for multi-generational trust planning. While some states (like South Dakota and Delaware) have completely abolished the Rule Against Perpetuities allowing perpetual trusts, Arizona's 500-year limit is functionally equivalent for most families' planning horizons.
A dynasty trust funded with assets up to the federal gift/estate tax exemption can grow and pass wealth for up to 500 years without additional estate or generation-skipping transfer (GST) taxes at each generation. This is a powerful tool for multi-generational wealth preservation.
Arizona Trust Code (ARS Title 14, Chapter 7)
Arizona has adopted a comprehensive trust code based on the Uniform Trust Code (UTC). Key provisions that I find particularly relevant for estate planning include:
- Trust modification: Arizona courts can modify irrevocable trusts when circumstances change in ways the settlor did not anticipate
- Decanting: Arizona allows trustees to distribute trust assets from one trust to another (decanting) under certain circumstances
- Trust protectors: Arizona recognizes trust protector provisions, allowing a designated individual to oversee the trustee and make certain changes to the trust
- Directed trusts: Arizona allows trusts where investment or distribution responsibilities are divided among different fiduciaries
Revocable Living Trusts
Revocable living trusts remain the most common estate planning tool in Arizona for probate avoidance. While Arizona's Uniform Probate Code makes probate relatively straightforward compared to states like California, many Arizona residents still prefer trusts to maintain privacy (probate records are public) and avoid any court involvement in estate administration.
Arizona Does NOT Have a DAPT Statute
Arizona does not have a Domestic Asset Protection Trust (DAPT) statute. A DAPT allows a person to be both the settlor and a discretionary beneficiary of an irrevocable trust while receiving asset protection from creditors. States like Nevada, South Dakota, Delaware, and Alaska offer DAPT statutes. Arizona residents seeking DAPT protection must establish trusts in those jurisdictions.
Despite the lack of a DAPT statute, Arizona's combination of no estate tax, community property benefits, the 500-year dynasty trust, beneficiary deeds, and a flat 2.5% income tax rate make it one of the most attractive states for estate planning overall.
Trust Income Tax in Arizona
Arizona taxes trust income at the flat 2.5% rate. Key considerations:
- Resident trusts: Trusts administered in Arizona or created by an Arizona domiciliary are taxed on all income from all sources
- Non-resident trusts: Only taxed on Arizona-source income (e.g., rental income from Arizona real property, Arizona business income)
- Grantor trusts: If a trust is treated as a grantor trust for federal purposes, the income is taxed to the grantor individually, not to the trust
- Distributable net income (DNI): Distributions to beneficiaries carry out DNI, shifting the income tax obligation to the beneficiary level
Affidavit of Property Value: A.R.S. Section 11-1134
Arizona requires an Affidavit of Property Value to accompany virtually every deed recorded with a county recorder. This requirement applies to sales, gifts, transfers to trusts, transfers to LLCs, and most other property conveyances. The affidavit discloses the property's value and the nature of the transaction, and the county assessor uses this information for property tax assessment purposes.
Affidavit Exemptions
Certain transfers are exempt from the Affidavit of Property Value requirement:
- Transfers between spouses incident to a divorce decree
- Transfers where no consideration is involved and the property remains in the same ownership for assessment purposes (e.g., adding a spouse to title)
- Certain trust transfers where the grantor is a beneficiary
- Transfers by operation of law (e.g., death, court order)
- Corrections of previously recorded deeds
No State Transfer Tax
Arizona does not impose a state transfer tax, documentary stamp tax, or conveyance tax on real property transfers. This is a significant advantage compared to states like Delaware (4% transfer tax), New York (combined transfer taxes exceeding 2-4%), and many others. The only costs associated with recording a deed in Arizona are the county recording fees and the Affidavit of Property Value.
County Recording Fees
Arizona county recording fees are standardized but modest:
- First page: Typically $30
- Each additional page: $3 per page
- Affidavit of Property Value: Filed concurrently, included in recording fees
These fees are among the lowest in the nation and apply uniformly across all Arizona counties.
Title Insurance: Maricopa vs. Pima Custom & Practice
Arizona title insurance customs vary by county, which can affect costs in real property transfers:
- Maricopa County (Phoenix): The seller customarily pays for the owner's title insurance policy, and the buyer pays for the lender's policy
- Pima County (Tucson): The buyer typically pays for the owner's title insurance policy
- Other counties: Practices vary; I recommend confirming the local custom before negotiating purchase agreements
For estate planning transfers (e.g., transferring property to a trust or via beneficiary deed), title insurance may not always be necessary, but it is advisable when the property will be sold or refinanced soon after transfer.
Recording a Beneficiary Deed
When recording a beneficiary deed under A.R.S. Section 33-405, the following are typically required:
- The completed beneficiary deed form, properly executed and notarized
- The Affidavit of Property Value (unless an exemption applies)
- County recording fees (approximately $30-$36 depending on page count)
- Legal description of the property matching the current vesting deed
No. Arizona repealed its state estate tax in 2006. Before that, Arizona imposed a "pick-up" tax that mirrored the federal state death tax credit. Since the federal credit was phased out by 2005, the Arizona tax effectively disappeared, and the legislature formally repealed it. Arizona currently has no estate tax, no inheritance tax, and no state-level gift tax.
Arizona's estate tax was formally repealed in 2006. The tax had already become effectively zero after the federal state death tax credit was phased out under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which eliminated the credit by 2005.
Technically, yes. Unlike Texas, the Arizona Constitution does not prohibit an estate tax. The Arizona legislature could theoretically reimpose one through ordinary legislation. However, there has been no serious legislative movement to reinstate the estate tax, and Arizona's political climate strongly favors low taxation.
No. Arizona does not impose an inheritance tax. Neither beneficiaries nor heirs pay any Arizona state tax on inherited assets. However, inherited assets may still be subject to federal estate tax if the decedent's estate exceeds the federal exemption threshold ($13.61 million per person in 2024).
Arizona is one of nine community property states. Under A.R.S. Section 25-211, all property acquired during marriage by either spouse is presumed to be community property, owned equally by both spouses. Separate property includes assets acquired before marriage, by gift, or by inheritance. The community property classification has significant tax advantages, particularly the full stepped-up basis under IRC Section 1014(b)(6).
Under IRC Section 1014(b)(6), when one spouse dies, both halves of community property receive a stepped-up basis to fair market value -- not just the decedent's half. For example, if a couple purchased a home for $200,000 and it is worth $800,000 at the first spouse's death, the entire property receives a new basis of $800,000, eliminating $600,000 in potential capital gains.
CPWROS is a form of title that combines the probate avoidance benefit of joint tenancy with the tax advantages of community property. When one spouse dies, the property automatically passes to the surviving spouse without probate, and both halves receive a full stepped-up basis under IRC 1014(b)(6). The deed must specifically state "as community property with right of survivorship" to achieve this treatment.
A beneficiary deed under A.R.S. Section 33-405 allows a property owner to name a beneficiary who will receive the property automatically upon the owner's death, bypassing probate entirely. Arizona has offered this tool since 2001. The deed does not transfer any interest during the owner's lifetime and is fully revocable.
A beneficiary deed MUST be recorded with the county recorder's office in the county where the property is located BEFORE the owner's death. If the deed is not recorded before death, it is completely ineffective and the property will pass through probate or under the terms of a trust or will. There is no grace period for late recording.
Yes. A beneficiary deed is fully revocable during the owner's lifetime. The owner can revoke it by recording a new deed that either names a different beneficiary or expressly revokes the prior beneficiary designation. The owner can also simply sell or transfer the property, which effectively revokes the beneficiary deed.
If a beneficiary deed is not recorded with the county recorder before the owner's death, it is void and has no legal effect. The property will pass according to the owner's will, trust, or Arizona intestacy laws, and will likely need to go through probate. This is one of the most common and costly mistakes in Arizona estate planning.
No. Recording a beneficiary deed does not trigger federal gift tax because no present interest in the property is transferred during the owner's lifetime. The beneficiary receives no rights, control, or ownership interest until the owner dies. The transfer at death is treated as a testamentary transfer, not a gift.
Under A.R.S. Section 11-1134, an Affidavit of Property Value must accompany most deed recordings in Arizona. This document discloses the property's value and transaction details for use by the county assessor. Certain transfers are exempt, including transfers between spouses and certain trust transfers.
The Affidavit of Property Value is required with virtually every deed transfer recorded in Arizona, including sales, gifts, and transfers to LLCs or trusts. Exemptions include transfers between spouses incident to divorce and certain trust transfers. The county recorder will reject a deed submission without the affidavit unless an exemption applies.
Under A.R.S. Section 14-2901(A)(2), Arizona allows trusts to last up to 500 years. This makes Arizona one of the most favorable states for multi-generational dynasty trust planning, allowing families to protect wealth from estate taxes across many generations while maintaining centralized management.
No. Arizona does not have a Domestic Asset Protection Trust statute. States like Nevada, South Dakota, and Delaware offer DAPT statutes. However, Arizona's combination of community property benefits, the 500-year dynasty trust, beneficiary deeds, and low income tax rates still make it an attractive jurisdiction for estate planning.
Arizona has a flat individual income tax rate of 2.5%, which is among the lowest in the nation. This flat rate applies to all taxable income regardless of amount, including capital gains. Arizona previously had a graduated income tax system but moved to a flat rate structure effective for tax year 2023.
Arizona taxes trust income at the flat 2.5% rate on Arizona-source income. Non-resident trusts are only taxed on income derived from Arizona sources. Resident trusts -- administered in Arizona or created by an Arizona resident -- are subject to tax on all income. Trust planning can minimize or eliminate state income tax depending on the trust's situs and income sources.
Arizona follows the Uniform Probate Code (UPC), which provides a streamlined probate process. Arizona offers informal probate (minimal court supervision, handled by a registrar), formal probate (supervised by a judge), and supervised administration. Most uncontested estates use informal probate, which is relatively fast and inexpensive compared to states like California.
Arizona allows a small estate affidavit for personal property valued at $75,000 or less and a separate affidavit for real property valued at $100,000 or less (A.R.S. Section 14-3971). These affidavits allow heirs to collect assets without any formal probate proceedings, provided at least 30 days have passed since the decedent's death.
Arizona is one of nine community property states. It stands out for its combination of no state estate tax, a flat 2.5% income tax, the 500-year dynasty trust, and early adoption of beneficiary deeds. Unlike California, Arizona has no additional state capital gains tax surcharge, making the full step-up on community property even more valuable for tax planning purposes.