When people leave their loved ones inheritances, they want them to benefit from them as fully as possible. When people don’t get qualified estate planning guidance, however, some of that inheritance can be diminished by one or more types of taxes.
Kentucky is one of the few states that levies an inheritance tax on some beneficiaries. That tax can apply to the estate of anyone who is a resident of Kentucky when they pass away, as well as on inherited property located in Kentucky — like a vacation home or farm, for example.
Not all beneficiaries are subject to inheritance tax. In fact, most close relatives of the deceased are not. However, people who are preparing their estate plan should understand who is subject to it. They may be able to take steps to help avoid saddling people with it.
Kentucky’s beneficiary classes
Kentucky has three beneficiary classes. Let’s look briefly at those.
- Class A beneficiaries are exempt from Kentucky’s inheritance tax. These include surviving spouses, parents, children, grandchildren and siblings (both full and half). Most non-profit organizations are also exempt.
- Class B beneficiaries get a $1,000 inheritance tax exemption. The tax rate for inheritances worth more can vary from 4% to 16% based on the size of the inheritance. This class includes nieces, nephews (full and half), aunts, uncles, daughters- and sons-in-law and great-grandchildren.
- Class C beneficiaries get a $500 exemption. Amounts above that are taxed at 6% to 16% based on asset value. This class includes those relatives not in Class A or B and non-related beneficiaries.
Both the testator (the person creating the will) and their executor should be aware of the inheritance tax and other aspects of the law that could affect beneficiaries. If a beneficiary doesn’t pay the inheritance tax they owe, they can face a fine. Further, if they pay the tax within nine months after the death, the Kentucky Department of Revenue discounts the amount they owe by 5%.
As noted, having sound estate planning guidance from an experienced legal professional can help maximize the value of the estate that Kentucky residents leave behind for their loved ones and others. It can also make things easier for their family after they pass away.