Kentucky is among the relatively few states that have an inheritance tax. That’s important for anyone who is planning to leave assets to loved ones and others to understand as they do their estate planning.
An inheritance tax, as the name suggests, is a tax on the assets a beneficiary receives from a deceased person. It does not apply to real estate located outside of Kentucky. However, if a deceased person lived outside of Kentucky and owned property in the state, that property may be subject to the state’s inheritance tax.
Classes of beneficiaries
Taxation rules vary depending on the familial relationship between the beneficiary and the deceased — the closer the relationship, the lower the tax rate. There are three “classes” of beneficiaries.
- Class A: Surviving spouses, parents, children, grandchildren and siblings (full or half)
- Class B: Nieces and nephews (full and half), aunts and uncles, daughters- and sons-in-law and great-grandchildren
- Class C: Cousins and other beneficiaries not included in the other classes
Class A beneficiaries are exempt from having to pay inheritance tax. Class B beneficiaries are required to pay inheritance tax on amounts over $1,000. The tax rate is anywhere from 4% to 16%, depending on the value of the inheritance.
Class C beneficiaries are taxed at between 6% and 16% for any inheritance over $500. Non-profit organizations are typically exempt from inheritance taxes.
It’s important for those leaving an inheritance to anyone outside of Class A that will be subject to taxation to make sure they’re aware of the tax and filing requirements. Currently, the Kentucky Department of Revenue gives a 5% discount on the amount owed if it’s paid within nine months of the date of death.
Many people would prefer to avoid burdening anyone with an inheritance tax. There are certainly a number of legal tax-avoidance strategies. With sound estate planning guidance, all of those can be explored.