NOTE: State laws change frequently and the following information may not reflect recent changes in the laws. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not to be relied on as tax or legal advice and is not a substitute for tax or legal advice.
Kentucky is currently one of only seven states that assess a separate inheritance tax on certain property owned by a Kentucky resident and real estate and tangible personal property located in Kentucky that is owned by a non-resident. The other states that collect a state inheritance tax include Indiana, Iowa, Maryland, Nebraska, New Jersey and Pennsylvania; however, beginning in 2013 Indiana's inheritance is gradually being phased out so that it will completely disappear in 2022.
Estate Taxes vs. Inheritance Taxes - What's the Difference?
While it may just seem to be semantics, there is a real difference between an estate tax and an inheritance tax:
- An estate tax is charged against the entire estate regardless of who the beneficiaries of the estate may be.
- An inheritance tax is only charged against the shares of certain beneficiaries of an estate.
Which Beneficiaries Are Subject to the Kentucky Inheritance Tax?
Each beneficiary of a Kentucky estate receives an exemption from the inheritance tax based on the beneficiary's degree of relationship to the decedent. Here are the exemptions from the inheritance tax that are currently available under Kentucky law:
- Class A - Class A beneficiaries include the deceased person's surviving spouse, parents, children (by blood or adopted), grandchildren (by blood or adopted), stepchildren and step grandchildren (by blood or adopted), brothers and sisters (whole or half), and certain charitable organizations. Class A beneficiaries are completely exempt from paying the Kentucky inheritance tax.
- Class B - Class B beneficiaries include nieces and nephews, half-nieces and half-nephews, daughters-in-law and sons-in-law, aunts and uncles, and great grandchildren (by blood, by stepchild, or by child adopted during infancy). Class B beneficiaries are eligible for an exemption of $1,000 each.
- Class C - Class C beneficiaries include anyone not listed above as a Class A or a Class B beneficiary. Class C beneficiaries are eligible for an exemption of $500 each.
Is Life Insurance Included in a Kentucky Estate?
Only life insurance that is payable to the decedent or the decedent's estate is included in the value of the Kentucky estate.
What Expenses Can Be Deducted From the Value of a Kentucky Estate?
Certain expenses can be deducted from the value of a Kentucky estate, including:
- Funeral expenses not to exceed $5,000
- Expenses of administration, including executors'/administrators' commissions, attorneys' fees, appraisers' fees, and court costs
- Debts of the decedent, including real property taxes that were a lien against the decedent’s property at the date of death
- Federal estate tax in the proportion which the net estate in Kentucky subject to the federal estate taxes bears
What Are the Kentucky Inheritance Tax Rates?
The Kentucky inheritance tax rates are as follows:
- Class B beneficiaries are subject to an inheritance tax ranging from 4% to 16%
- Class C beneficiaries are subject to an inheritance tax ranging from 6% to 16%
For a chart showing the inheritance tax brackets, refer to pages 6 and 7 of A Guide to Kentucky Inheritance and Estate Taxes.
What Kentucky Inheritance Tax Forms Must Be Filed and When Are They Due?
If no Kentucky inheritance tax is due and a federal estate tax return (IRS Form 706) is also not required to be filed, then it will not be necessary to file a Kentucky inheritance tax return. Instead, an "Affidavit of Exemption" will be accepted for the final settlement and closing of the administration of an estate.
For estates subject to the Kentucky inheritance tax, a Kentucky Inheritance Tax Return (Form 92A200, 92A202, or 92A205) must be filed and the inheritance tax paid within 18 months of the decedent's date of death, otherwise interest and penalties will begin to accrue. If the inheritance tax is paid within 9 months of the date of death, then a 5% discount is applied.
Where Can You Find Additional Information About Kentucky Inheritance Taxes?
For more information about Kentucky inheritance taxes, refer to Kentucky Inheritance and Estate Tax Forms and Instructions. You can also write to the Financial Tax Section, Department of Revenue, Frankfort, Kentucky 40620, or call them at (502) 564-4810.