Kentucky Inheritance Tax

Kentucky is one of a handful of states that collects an inheritance tax. If you are a Kentucky resident, or if you own real estate or tangible property located in Kentucky, the people who inherit your property might have to pay a tax on the amount that they inherit. Whether they will have to pay the tax, and how much they will have to pay, depends on how closely they were related to you—the closer the family connection, the lower the tax rate. If they are not exempt from the inheritance tax, their tax rate also depends on the value of the property they inherit—the higher the value, the higher the rate.

Kentucky Inheritance Tax Exemptions and Rates

Kentucky law classifies inheritors into three groups:

Class A. This group of close family members is exempt from Kentucky's inheritance tax. They include the deceased person's:

• surviving spouse
• parents
• children (including stepchildren and adopted children)
• grandchildren
• brothers and sisters, and
• half-brothers and half-sisters.

Class B. Members of this group get an inheritance tax exemption of $1,000. If they inherit more than that, the amount exceeding $1,000 is subject to tax at a rate between 4% and 16%. This group includes the deceased person's:

• niece
• nephew
• half-niece
• half-nephew
• daughter-in-law
• son-in-law
• aunt
• uncle, and
• great-grandchild.

The exact tax rate depends on the amount inherited; the higher the amount, the higher the tax rate. For a detailed chart, see the inheritance tax table in the Kentucky Department of Revenue's Inheritance Tax Guide. By way of example, if the deceased person was a resident of Kentucky (rather than a nonresident who owned property in Kentucky), a Class B inheritor who inherited $25,000 would pay $860 plus 6% of the amount over $20,000 or $2,060 total. A Class B inheritor who inherited $150,000 would pay $8,960 plus 14% of the amount over $100,000, or $22,960.

Class C. Anyone who doesn't fall into Class A or Class B—for example, cousins, friends, and corporations—is part of Class C. For Class C members, only $500 is exempt from Kentucky's inheritance tax. After that, the tax rate falls between 6% and 16%. Again, check the table in the Inheritance Tax Guide for the exact rate within this range.

Filing a Kentucky Inheritance Tax Return

When an Inheritance Tax Return Is Unnecessary

If all property is inherited by beneficiaries who are exempt from inheritance tax, and no federal estate tax return is necessary, a Kentucky inheritance tax return does not need to be filed. Instead, the personal representative of the estate files an Affidavit of Exemption with the probate court, stating that no tax is due.

Use a Short-Form Tax Return for Small, Uncomplicated Estates

In addition to the regular inheritance tax return, Kentucky offers a short-form version of the tax return for "small, uncomplicated" estates. Estates can use this form if they satisfy several requirements, including:

• The estate does not need to file a federal estate tax return
• The assets of the estate consist of 10 items or less
• No gifts were made within the three years before death
• The deceased person had not inherited any real or personal property from another deceased person and paid inheritance tax on it with the five years before death.

The complete requirements for qualifying as a "small, uncomplicated" estate are listed on the form.

Calculating the Gross Estate and Net Estate

When filing either the short-form or long-form tax return, the gross estate (all the property in the estate) must be calculated. If the deceased person was a Kentucky resident, the return must list all of the deceased person's assets and their value as of the date of death. For a nonresident, only real estate and tangible items actually located in Kentucky are listed. The total sum is the value of the gross estate.

Liabilities of the estate—such as debts the deceased person owed, funeral expenses, and probate attorney fees and court costs—are subtracted from the gross estate. The result is the net estate. The tax a particular inheritor owes is calculated by applying the tax rate (see above; the exact rate will vary) to the portion of the net estate he or she inherits.

If it falls to you to file an inheritance tax return, it can be a good idea to seek the help of an experienced local attorney. These returns can be complicated.

Tax Filing and Payment Deadlines

If an inheritance tax return is required, the personal representative (executor or administrator) is responsible for filing it and collecting the tax from the inheritors who owe it. Just one return is filed, even if several inheritors owe inheritance tax. If the personal representative doesn't file the return, the inheritors are responsible for doing it.

The tax return must be filed with the Kentucky Department of Revenue 18 months after the date of death. Copies of the will, if any, and the federal estate tax return, if one was filed, must be attached to the return.

Any tax owed is also due 18 months from the date of death. Late payments will have interest added to the bill; there may be a penalty, too. A discount of 5% is available for early payments (made within 9 months of the date of death).

For those who owe more than $5,000 in inheritance tax, Kentucky also offers an installment plan: 10 annual installments of equal amount, with the first installment due 18 months from the date of death.