How Kentucky’s Gift Tax Rules Affect Your Estate Plan
Making gifts during your lifetime is one of the most common estate planning strategies — it can reduce the size of your taxable estate, provide financial support to family members when they need it most, and allow you to see your beneficiaries enjoy their inheritance. But gifting has tax implications that Kentucky residents need to understand, particularly in connection with the federal gift tax and its interaction with the estate tax.
Kentucky Does Not Have a State Gift Tax
The first thing to know is that Kentucky does not impose its own gift tax. Gifts made during your lifetime are not subject to a separate Kentucky tax. However, Kentucky does have an inheritance tax under KRS Chapter 140, which taxes transfers at death to certain beneficiaries. Lifetime gifts can be a legitimate strategy for reducing the assets subject to the inheritance tax at death — though the inheritance tax exemptions for close family members (Class A beneficiaries, including spouses, children, grandchildren, parents, and siblings) effectively eliminate the tax for most transfers within the immediate family anyway.
The Federal Gift Tax
The federal gift tax is imposed on the donor — the person making the gift — not the recipient. Under the Internal Revenue Code, any transfer of property for less than full consideration may be subject to the gift tax. However, several important exclusions and exemptions significantly reduce the number of people who actually owe gift tax.
Annual exclusion: You can give up to the annual exclusion amount (currently $19,000 per recipient for 2025, adjusted annually for inflation) to as many people as you want without incurring any gift tax or needing to file a gift tax return. A married couple can combine their exclusions, allowing them to give up to $38,000 per recipient per year. This annual exclusion is one of the simplest and most effective estate planning tools available.
Lifetime exemption: Above the annual exclusion, you have a lifetime gift and estate tax exemption. Effective January 1, 2026, this exemption is $15 million per individual ($30 million for a married couple), as established by the One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025. This amount will continue to be adjusted annually for inflation. Gifts that exceed the annual exclusion reduce your available lifetime exemption but do not trigger actual gift tax liability until the exemption is exhausted. Given the size of this exemption, very few people actually owe gift tax.
The Exemption Is Now Permanent
The high lifetime exemption was originally established by the Tax Cuts and Jobs Act of 2017 and was scheduled to sunset at the end of 2025, reverting to approximately $6–7 million per person. Many estate planners spent years advising clients to make large gifts before that deadline. The One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, eliminated the sunset and made the increased exemption permanent — setting it at $15 million per individual effective January 1, 2026, with continued inflation indexing. While the sunset urgency is gone, the generous exemption still makes lifetime gifting an attractive planning tool. There is no guarantee that future legislation will not reduce the exemption, so taking advantage of the current law remains prudent.
Gifts That Are Not Subject to Gift Tax
Certain types of transfers are completely excluded from the gift tax, regardless of amount. Payments made directly to a medical provider for someone else’s medical expenses are not taxable gifts. Payments made directly to an educational institution for someone else’s tuition are not taxable gifts (but room, board, and books do not qualify). Gifts to your spouse (if a U.S. citizen) qualify for the unlimited marital deduction. And gifts to qualified charities qualify for the charitable deduction.
Gift Tax Returns
Even if no tax is due, you are required to file a federal gift tax return (Form 709) for any gift that exceeds the annual exclusion amount to a single recipient. The return reports the gift and tracks the use of your lifetime exemption. Failure to file when required can result in penalties and complications when your estate is settled.
Impact on Your Estate Plan
Lifetime gifts interact with your estate plan in several important ways. Gifts reduce the size of your probate estate — assets given away during your lifetime do not pass through your will. They also reduce the size of your taxable estate for federal estate tax purposes (to the extent they qualify for the annual exclusion or other exclusions). However, gifts made within three years of death may be brought back into the estate for certain purposes, and gifts of appreciated property carry a carryover basis for capital gains tax purposes — meaning the recipient takes your cost basis rather than getting a stepped-up basis at death.
This basis issue is an important planning consideration. In some cases, it may be more tax-efficient to hold appreciated assets until death (so the recipient gets a stepped-up basis) rather than gifting them during life.
Coordinate with a Professional
Gift tax planning requires coordination between your estate plan, your tax situation, and your financial goals. If you are considering making substantial gifts, Buckles Law Office can help you understand the implications and structure your gifts to maximize the benefits. Call (859) 225-9540.
