Kentucky, like other states with an inheritance tax, doesn’t tax everyone who inherits; close family members are exempt. Both inheritance tax exemptions and tax rates are based on how closely the inheritor and deceased person were related.
Kentucky inheritance tax can be imposed on property left by a Kentucky resident, or a nonresident who owned real estate or tangible property located in the state.
If it falls to you to file an inheritance tax return, get advice from an experienced local attorney. These returns are complicated.
Kentucky law classifies inheritors into three groups:
Class A. These are the closest family members: the surviving spouse, parents, children, grandchildren, brothers, and sisters. They are exempt from state inheritance tax.
Class B. This group contains nieces, nephews, aunts, uncles, daughters- and sons-in-law, and great-grandchildren. 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 of four percent to 16%.
Class C. Everyone who doesn’t qualify for Class A or Class B—for example, cousins, friends, and corporations—goes here. For Class C members, only $500 is exempt from tax. The tax rate starts at six percent and goes up to 16%.
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 files an “Affidavit of Exemption” with the probate court, stating that no tax is due. There’s a sample of this simple form on the Kentucky Department of Revenue website, and it’s also available from local taxpayer service centers.
In addition to the regular inheritance tax return, Kentucky offers a short form version for “small, uncomplicated” estates. The form sets out the rules for which estates can use the short form. The Kentucky Department of Revenue website offers inheritance tax return forms, instructions, and current tax rates.
For either form, the value of the gross estate (all the property in the estate) must be calculated. If the deceased person was a Kentucky resident, the return lists 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.
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 due is calculated by applying the tax rate (based on the classification of the inheritor) to the amount of the net estate he or she inherits.
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, beneficiaries 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. Kentucky offers an installment plan to people who owe more than $5,000 in inheritance tax. (See Kentucky Department of Revenue Form 92A928, “Election to Defer the Payment of Inheritance Tax Through Installments.”)