People are often confused about estate taxes and assume it is the same thing as an inheritance tax. These two taxes are not the same. Estate taxes are taxes on a decedent's entire estate without concern for who the beneficiaries of the estate are. Inheritance taxes, on the other hand, are concerned about beneficiaries. The Kentucky inheritance tax is a tax imposed on certain beneficiaries who inherit property or money from a Kentucky estate.
Most states do not impose an inheritance tax or an estate tax. Some states, like Tennessee, impose neither an inheritance or estate tax (though federal estate taxes may apply to qualifying estates). However, Kentucky is one state that imposes an inheritance tax, and as such, it joins only a handful of other states that do, too. Here's an overview of what you should know about this tax.
What Do You Need to Know about Kentucky's Inheritance Tax?
Kentucky assesses an inheritance tax on beneficiaries of Kentucky estates. This tax applies to both real and personal property in Kentucky. It does not apply to property owned by the decedent outside of Kentucky.
The value of the inheritance tax is calculated in consideration of the relationship the beneficiary had with the decedent and the value of the inherited property. The relationship particularly matters because Kentucky offers exemptions, and the closer the relationship was means the greater the exemption will be.
Here's how it works:
Relationships are categorized in classes, and in Kentucky, there are three Classes: A, B, and C. Class A includes immediate family members while Class C includes extended family members and Class B is something in-between. Kentucky Department of Revenue lists who is specifically included in each class, and that list is reproduced below.
Class A beneficiaries include the below-listed immediate family members as well as some charitable organizations.
- surviving spouse
- child (adult or infant, blood, step, or adopted)
- grandchild (adult or infant, blood, step, or adopted)
- brother (whole or half)
- sister (whole or half)
These individuals are completely exempt from paying Kentucky's inheritance tax.
Other members of the decedent's family are also exempt, and these include the below-listed members.
These individuals are eligible for a $1,000 exemption, and the tax rate is 4 to 16 percent, depending on the value of the property.
Class C includes everyone not listed in Class A or Class B, like nieces and nephews by marriage or cousins. These individuals are eligible for a $500 exemption, and the tax rate is 6 to 16 percent, depending on the value of the property.
What are Examples of Taxable Property in a Kentucky Estate?
As mentioned, any real and personal property in which the deceased person owned or had an interest in is potentially taxable. Examples are provided below.
- personal residences
- vacation homes
- undeveloped land
Personal Property (Tangible and Intangible)
- farm equipment
- income tax refunds
- bank accounts (in or outside of Kentucky)
- certificates of deposit
- life insurance payable to the insured or the estate but not life insurance payable to a beneficiary
- Debt owed the decedent
- fine art
- interests in a business
- partnership interests
Also, it's important to note that if you were gifted any of these things within three years of your loved one's death, it could be taxed. The exception is if the gifted property was gifted purely to give and not in contemplation of an impending death.
What can be Deducted from the Value of the Kentucky Estate?
As mentioned, the value of the property is a factor when the amount of the inheritance tax is determined. There are deductions that can bring the value of the estate down. Things that can be deducted include:
- any debts owed by the decedent
- funeral expenses (but not over $5,000)
- estate administration expenses (e.g., attorney fees, appraiser fees, court costs)
- a proportion of federal estate taxes.
There are ways, however, to avoid the burden of an inheritance tax on some of your property if that property is to go to non-exempt family, friends, and charities. Things like trusts (irrevocable trusts particularly) can be used. To find out how and what is the best way for you to protect your estate for your heirs and beneficiaries, it is a good idea to consult with an experienced estate planning attorney. An inheritance tax can be significant, so reducing the value of that tax is also a significant way to plan your Kentucky estate.