If you turn on your television to your favorite business news channel, you’ve probably heard an expert talking about the current lifetime “exemption” for gift and estate taxes. At present, this exemption is $12.92 million per person; this will rise to $13.61 million per person in 2024. The takeaway is that a married couple can presently shield the first $25.84 million of their estate from any federal estate tax. Only estates in Kentucky in excess of this amount will have to file a federal estate tax return and pay any estate tax.
Now, most people at this point probably think to themselves, “Well, I don’t have that much, so I don’t need to worry!” For the most part, they are correct. A vast majority of estates will not run into a federal estate tax issue.
But for residents of Kentucky, estate planning does not end with the determination that the assets presently owned by an individual will likely fall below the threshold of the federal estate tax exemption. This is because Kentucky is one of the five remaining states that impose a state-level inheritance tax. And it is this fact which makes estate planning all the more important for Kentucky residents.
The distinction between an estate tax and an inheritance tax is best understood by identifying who the tax will be levied upon. An estate tax is levied on the value of the gross estate of the deceased individual (the “decedent”) – the estate pays the tax. An inheritance tax, on the other hand, is levied on the value of the property received by a beneficiary of the estate – the beneficiary pays the tax.
In Kentucky, there are three “classes” of beneficiaries – creatively, “A,” “B,” and “C.” Each class is determined based on the nature of the relationship between the decedent and the beneficiary. Immediate family members are considered “class A” beneficiaries; extended family members (think aunts and uncles, nieces and nephews) are “class B” beneficiaries; finally, the most distant relatives (cousins and beyond!) and any individuals unrelated to the decedent are then “class C” beneficiaries. This classification of the beneficiaries determines what inheritance tax is ultimately due. Class A beneficiaries are fully exempt from Kentucky inheritance tax; class B and C beneficiaries, on the other hand, pay inheritance tax on their shares based on a sliding scale that ranges from 4% to 16%.
Because there can be significant Kentucky inheritance tax considerations in estate planning, it is best to work with an experienced estate planning attorney in Kentucky to ensure that your estate will not run into any unexpected tax traps.