Kentucky is one of just five states that currently has an inheritance tax. This kind of tax, as the name implies, is levied on beneficiaries of property and other assets located in the state.
Typically, this applies when a person living in Kentucky passes away. However, if someone inherits property located in Kentucky from someone who lived in another state, like Indiana, they may still be subject to the tax based on Kentucky law.
Classes of beneficiaries
Kentucky designates three beneficiary classes. Some beneficiaries are exempt from paying any inheritance tax, while others may be taxed at a rate up to 16% based on the value of the asset. The classes are based on how closely the deceased and the beneficiary are related (if at all).
- Class A: This includes surviving spouses, parents, children, grandchildren and full or half siblings. They’re exempt from Kentucky inheritance tax.
- Class B: This includes nieces, nephews (full and half), aunts, uncles, great-grandchildren and daughters- and sons-in-law. They’re required to pay inheritance tax on anything valued at more than $1,000.
- Class C: This includes cousins, other relatives not covered under Class A and B as well as non-related beneficiaries. They’re required to pay inheritance tax on assets valued at over $500. Non-profit organizations are generally exempt.
Class B beneficiaries are required to pay inheritance tax at rates of between 4% and 16%, with the rates increasing based on the value of the asset. For Class C beneficiaries, the rates range from 6% to 16%, with the rate increasing with the asset value.
It’s crucial for Kentuckians creating their estate plan to understand the possible tax ramifications of the assets they’re leaving to family members and other beneficiaries. With careful estate planning, there are ways to help them avoid or at least minimize tax impacts.
Beneficiaries should know their potential tax liability
It’s also important to make those who may be subject to those taxes aware of them so they don’t incur unnecessary fines for failure to pay them. A responsible estate executor can and should do that. Prompt payment of any inheritance tax owed has its advantages. The Kentucky Department of Revenue discounts the amount owed by 5% if it’s paid within nine months of the death.
If you’re fortunate enough to be able to leave behind a substantial estate to benefit loved ones and other people and causes you care about, it’s important to have experienced estate planning guidance to help ensure that your estate isn’t diminished unnecessarily by taxes.