Does Kentucky Have an Inheritance Tax?

UNDERSTANDING KENTUCKY INHERITANCE TAX VS. KENTUCKY ESTATE TAX

An estate tax applies to the value of the entire estate before the assets pass to anyone. An inheritance tax applies to the person who receives the property. There is no Kentucky estate tax on the overall value of a deceased person’s estate.

Kentucky’s inheritance tax, however, depends on each beneficiary and that person’s relationship to the deceased. The amount owed varies based on who receives the property and what they inherit under your will or trust. Understanding the difference helps you determine whether an inheritance may be subject to Kentucky tax.

HOW KENTUCKY INHERITANCE TAX APPLIES TO TRANSFERRED PROPERTY

Kentucky does not tax the estate as a whole. Instead, the tax applies to each beneficiary’s share. How an asset passes depends on how the owner holds title and whether it goes through a will, a trust, or another arrangement, such as joint ownership. Each route can affect what a beneficiary receives and what that beneficiary may owe.

The personal representative must file a return when any part of the estate passes to taxable beneficiaries. If all taxable assets pass to exempt beneficiaries and federal law does not require an estate tax return, the personal representative may file an Affidavit of Exemption with the court instead.

KENTUCKY INHERITANCE TAX CLASSES AND EXEMPTIONS BY BENEFICIARY

The amount of inheritance tax depends on how Kentucky law classifies the beneficiary. The state classifies beneficiaries into three groups: Class A, Class B, and Class C.

Class A beneficiaries are fully exempt from the inheritance tax. Class A includes surviving spouses, parents, children, stepchildren, grandchildren, and siblings. A 2026 change in Kentucky law also moved nieces and nephews into Class A for decedents who die on or after January 1, 2026.

Class B beneficiaries include sons-in-law, daughters-in-law, aunts, uncles, and certain great-grandchildren. These beneficiaries will generally owe inheritance tax. Class C includes everyone else, such as cousins and friends. Class C beneficiaries will generally pay a higher rate of inheritance tax than Class B beneficiaries.

HOW TO AVOID KENTUCKY INHERITANCE TAX

Because Class B and Class C beneficiaries face graduated rates and small exemptions, planning can affect what they ultimately owe. Property owners researching how to avoid Kentucky inheritance tax often seek legal ways to reduce it or lessen the financial burden on their beneficiaries. Common approaches include making lifetime gifts, establishing trusts, and naming beneficiaries on life insurance policies, each with its own limits:

• Lifetime gifts: Kentucky presumes that an owner who made a substantial gift within three years before death did so in contemplation of death, which can make the gift taxable.
• Trusts: Property in a trust that its creator can revoke remains subject to the tax.
• Life insurance: Proceeds payable to a named beneficiary are generally exempt, but proceeds payable to the insured’s estate are taxable.
  

The right strategy depends on your assets, your beneficiaries, and how you want your property distributed. An experienced estate planning attorney can review your plan and recommend changes that may reduce unnecessary state tax exposure while preserving more of your assets for the people you intend to benefit.

PROTECT YOUR LEGACY WITH CLARK & CORNETT LAW

Navigating Kentucky inheritance tax classifications and creating a comprehensive estate plan requires legal guidance tailored to your family’s needs. Clark & Cornett Law proudly serves clients throughout Lexington and the surrounding communities of Central and Eastern Kentucky with trusted representation in probate and estate planning. If you are ready to protect your family’s future, contact our office today to speak with a member of our team.