Earlier this week in this space we discussed the recent changes in the federal estate tax, and how they might influence planning around how to organize the transfer of assets either as gifts during one's lifetime or via an estate. While changes in the federal estate and gift tax rules can require some vigilance to keep up with, the changing landscape of states that impose either an estate or inheritance tax or both can be quite confusing.

First and most importantly, the state of Arizona no longer imposes an estate, inheritance or gift tax. Arizona had employed an estate tax for decedents dying prior to 2005. At that time the Arizona estate tax was designed to take advantage of the maximum allowable credit under the federal credit for state estate taxes.

Once the federal credit for state estate taxes was repealed, Arizona effectively no longer had an estate tax, as the amount of the tax was tied to the, now repealed, federal credit. However even if the federal government should now reinstate the federal state estate tax credit it will not automatically reinstate the Arizona estate tax. In 2006, the Arizona legislature repealed their estate tax provisions.

As for other states, 22 of the rest of the states impose an estate or inheritance tax. Two states actually impose both. The inheritance tax is generally only imposed when the heir is not a close family member. Illinois was the most recent state to pass a state inheritance tax. Its tax offers an exemption for the first $2 million and a 16% top rate.

While this may not be a concern for full time Arizona residents, with so many who spend portions of the year in Arizona and portions in other states, it is important to understand which state's taxes you may be subject to, and what those state's taxes are.

Source: Forbes "More States Want To Tax Your Estate" Ashlea Ebeling, February 15, 2011