Kentucky Inheritance Tax: Who Pays and How Much?
Kentucky is one of only a handful of states that still imposes an inheritance tax — and the rates can be surprisingly steep depending on who’s inheriting. If you’re planning your estate or settling a loved one’s affairs, understanding how Kentucky’s inheritance tax works is essential. The good news: with the right planning, many families can reduce or eliminate the tax entirely.
How Kentucky’s Inheritance Tax Is Structured
Unlike a federal estate tax (which taxes the estate itself), Kentucky’s inheritance tax is imposed on the recipient of the inheritance. The amount of tax depends on the beneficiary’s relationship to the deceased person. Kentucky divides beneficiaries into three classes under KRS 140.070:
Class A: Exempt. This includes the surviving spouse, parents, children, grandchildren, brothers, and sisters. Class A beneficiaries pay zero inheritance tax, regardless of the amount they inherit.
Class B: Moderate rates. This includes nieces, nephews, daughters-in-law, sons-in-law, aunts, uncles, and great-grandchildren. Class B beneficiaries receive a $1,000 exemption, and the tax rate ranges from 4% to 16% on amounts above the exemption.
Class C: Highest rates. This includes everyone else — friends, unmarried partners, more distant relatives, and entities like trusts or LLCs. Class C beneficiaries receive a $500 exemption, and the tax rate ranges from 6% to 16% on amounts above the exemption.
The Numbers Can Add Up Quickly
The graduated rate structure means that larger inheritances to Class B and C beneficiaries face steeper rates. For example, a Class C beneficiary inheriting $100,000 could owe roughly $14,260 in Kentucky inheritance tax. That’s money that never reaches the person you intended to benefit — and it’s entirely avoidable with proper planning.
Common Planning Strategies
There are legitimate ways to reduce or eliminate Kentucky inheritance tax exposure:
Beneficiary designation planning. Life insurance proceeds paid to a named beneficiary generally pass outside of probate and may be structured to minimize tax exposure.
Lifetime gifts. Kentucky does not impose a gift tax. Making gifts during your lifetime can reduce the size of your taxable estate. However, gifts made within three years of death in contemplation of death may be pulled back into the estate for tax purposes under KRS 140.020.
Trust planning. Certain trust structures can be used to manage the inheritance tax impact, particularly when Class B or C beneficiaries are involved.
Charitable bequests. Bequests to qualifying charitable organizations are exempt from Kentucky inheritance tax.
Filing Requirements
A Kentucky inheritance tax return must be filed within 18 months of the date of death if the estate includes property passing to Class B or Class C beneficiaries. The personal representative is responsible for filing the return and paying any tax due from the estate. Interest accrues on unpaid tax after 18 months.
If you have questions about how Kentucky’s inheritance tax might affect your estate plan or a loved one’s estate, I’m happy to talk it through. Call me at (859) 225-9540 or use the contact form on this site.
Joseph D. Buckles is an attorney at Buckles Law Office, PLLC in Lexington, Kentucky.
