Tax Implications of Estate Planning in Kentucky

man working on his estate plan

Kentucky does not impose an estate tax, meaning that individuals who pass away in the state will not have their assets taxed at their death. This can benefit estate owners as it allows them to transfer their wealth to their beneficiaries without a significant tax burden on the estate itself. However, it is important for residents to understand that Kentucky does have an inheritance tax, which applies to the heirs who receive assets from the estate. As a result, when planning an estate, it is crucial to consider the implications of the inheritance tax, as this can affect how much of the estate ultimately reaches the heirs.

The Difference Between Estate Tax and Inheritance Tax

A government imposes an estate tax on the total value of an individual’s estate when they pass away. This tax is imposed before any assets or funds are handed over to the designated heirs, ensuring that tax liabilities are cleared before wealth is transferred. Commonly known as the “death tax,” this estate tax applies only to estates exceeding a specific monetary threshold, which can differ among jurisdictions. In contrast, the inheritance tax has several distinct characteristics compared to the estate tax. While the estate tax is calculated on the total estate before distribution, the inheritance tax is applied to the assets or money that heirs obtain after settling the estate. Individual states typically impose inheritance taxes, and the obligation to pay this tax falls on the beneficiaries receiving the inheritance. The owed amount will also often depend on the value of the inheritance and the beneficiary’s relationship to the deceased, with closer relatives generally subject to lower tax rates than more distant relatives or non-relatives.

Inheritance Taxes in Kentucky

Kentucky tax law classifies beneficiaries into three distinct categories based on their relationship to the decedent, which determines their tax obligations upon receiving an inheritance.

Man putting money in a jar
  • Class A: These beneficiaries include the decedent’s surviving spouse, parents, children (including biological, stepchildren, and legally adopted children), grandchildren, and siblings (both full and half). Individuals in this class are exempt from any inheritance tax, meaning they can inherit without incurring any tax liability.
  • Class B: These beneficiaries are individuals related to the decedent but do not fall into Class A. This group includes distant relatives, such as aunts, uncles, cousins, and other blood relatives not explicitly listed in Class A. For individuals in Class B, the tax rates typically range from 4% to 16%, depending on the value of the inheritance and the specific relationship to the decedent.
  • Class C: These beneficiaries consist of individuals who are not related to the decedent at all, such as friends, acquaintances, or distant relations. This class is subject to taxation at a higher rate than Class B, with tax rates ranging from 6% to 16%. The percentage owed is based on the value of the inherited property or assets.

How Can Inheritance Taxes Impact Your Future?

When planning their estates, individuals need to have a clear understanding of the relevant tax laws. This includes not only those expecting to inherit assets but also those managing the estate, as they, too, should learn how these taxes may affect the estate’s value and the heirs’ benefits. By understanding the tax implications, beneficiaries can better anticipate potential tax liabilities and make informed choices about managing the assets they inherit.

 

Contact Hoffman Walker & Knauf Today To Learn More

If you wish to create an estate plan in Kentucky or explore ways to ensure your loved ones are protected and your wishes respected, reach out to Hoffman Walker & Knauf today to discuss your questions with a knowledgeable Kentucky estate planning attorney.