Kentucky Inheritance Tax: Planning and Paying
Beneficiaries of a will in Kentucky may be subject to the Kentucky inheritance tax. The inheritance tax is different from an estate tax-which was repealed in Kentucky in 2002-because it is paid by the beneficiaries rather than the estate. Whether a tax comes out of an estate or a legacy, however, most people making wills would prefer to avoid taxes on inheritance if at all possible.
Only six states in the country impose an inheritance tax, and each state's tax is different. The taxes can be significant, and inheritance tax rates in Kentucky vary depending on the beneficiary and the amount of the bequest. Estate planning involving Kentucky property and Kentucky residents should be handled by an experienced Kentucky probate attorney to minimize or avoid taxes on inheritance.
Does Kentucky Have an Inheritance Tax?
Kentucky does have an inheritance tax that applies to certain property and certain beneficiaries.
All property of a Kentucky resident is subject to the Kentucky inheritance tax, with the exception of the resident's real estate that is not located in Kentucky. For example, taxable property under inheritance tax laws in Kentucky includes real estate, cash, bank accounts (even if located outside of Kentucky), certificates of deposit, stocks, bonds, life insurance payable to the insured or the estate, annuities, household goods, livestock and crops, vehicles, jewelry, and antiques.
Additionally, real estate and personal property located in Kentucky is subject to the tax, even if it is owned by a nonresident.
Inheritance tax laws in Kentucky divide beneficiaries of a will into three classes: A, B, and C. Very simply, persons in Class A are exempt from the inheritance tax. Persons in Class B pay lower inheritance tax rates in Kentucky than persons and groups in Class C.
Persons Exempt from the Kentucky Inheritance Tax
The good news is that Class A beneficiaries of an estate are exempt from the Kentucky inheritance tax. Class A beneficiaries include the following:
- The deceased's surviving spouse or parent(s);
- The deceased's child or children, including biological children, stepchildren, and adopted children who were raised by the decedent;
- The deceased's grandchild, meeting the same requirements as outlined for children; and
- The deceased's whole or half siblings.
Who Are Class B Beneficiaries?
Under inheritance tax laws in Kentucky, Class B beneficiaries of the deceased's estate must pay the Kentucky inheritance tax. Class B beneficiaries include the deceased's nephews, nieces, half-nephews, half-nieces, daughters-in-law, sons-in-law, aunts, uncles, or a biological great-grandchild, step-grandchild, or adopted grandchild meeting the requirements previously outlined. Note that nephews and nieces by marriage and great-nephews and great-nieces are Class C beneficiaries who pay higher inheritance tax rates in Kentucky.
Legacies to Class B beneficiaries are exempt up to $1,000. Thereafter, the bequest is taxed at rates varying from four to 16 percent, depending on the amount.
Who Are Class C Beneficiaries?
Class C estate beneficiaries include all persons not included in Classes A or B and "educational, religious, or other institutions, societies or associations, or public institutions not exempted" by Kentucky Revised Statutes § 140.060. Cousins and friends would also come under Class C, according to inheritance tax laws in Kentucky.
Legacies to Class C beneficiaries are exempt up to $500; thereafter, the amount of the legacy is taxed at rates ranging from six to 16 percent.
How Much Is the Kentucky Inheritance Tax?
The amount of Kentucky inheritance tax depends on the class of beneficiary and varies significantly with the amount that is left to the beneficiary. As noted, Class B and Class C estate beneficiaries pay different rates. Additionally, the inheritance tax rates in Kentucky increase with the amount of the beneficiary's legacy or distributive share.
Paying the Kentucky Inheritance Tax
According to the Kentucky Department of Revenue, if taxes are due, the state inheritance tax return must be filed within 18 months from the date of the decedent's death. The forms are available through the Department's website. If the tax due is not paid within 18 months of death, interest and perhaps penalties will be assessed.
Completion of tax returns should not be delayed awaiting a federal estate tax audit, receipt of a closing letter, or because sale of the estate is pending. If the beneficiary pays the inheritance tax within nine months of the decedent's death, a five percent discount applies.
Avoid Taxes on Inheritance with Thoughtful Planning
In estate planning, the best way to avoid taxes on inheritance is to leave the estate to beneficiaries who are exempt from the tax. While a testator may wish to benefit a favorite great-grandchild, that person may change his or her mind upon learning that the gifts will be taxed under inheritance tax laws in Kentucky, whereas a legacy gift to a grandchild will not be.
Another way to avoid taxes on inheritance is to limit the amount of the legacy to an amount below the exempt amount. If a testator wants to remember and recognize great-grandchildren in a will, limiting the amount to $1,000 should mean no inheritance tax would be due.
There are many other ways to avoid taxes on inheritance, such as lifetime gifts (which must occur more than three years before the giver's death, and not be made in contemplation of death), certain life insurance policies, trusts, and other standard tax-avoidance mechanisms. A Kentucky probate attorney can structure an estate plan to avoid or minimize the inheritance tax in many situations, including charitable gifts.
Don't Leave Beneficiaries a Tax Bill
Kentucky residents, owners of Kentucky real and personal property, and professionals assisting people who own property in the Bluegrass State should consult a Kentucky probate attorney familiar with the application of the Kentucky inheritance tax. The last thing a testator wishes to leave his loved ones is an unexpected tax bill. Call an experienced estate planning attorney, like Anna M. Price, from Jenkins Fenstermaker, PLLC, toll-free at (866) 617-4736 or use Anna's online contact form to set up a consultation. Anna is licensed to practice law in Kentucky and West Virginia and enjoys helping clients meet their estate planning goals.