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In Kentucky, there's an inheritance tax.  This tax falls on estates of people who inherit property and live in Kentucky.

Not all beneficiaries are subject to the tax. Kentucky levies tax on people based on their relationship to the deceased person.

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.

You can get a sample of this form and information about the tax returns due at the Kentucky Department of Revenue website.

This state-specific estate tax is in addition to the federal estate tax, and that tax also falls on the estate of the person who died, not on the people who inherit that property. There is an exemption of  $13,610,000, and only people who die with an estate larger than that exemption will have to pay estate tax, which means that it is estimated that only the richest .14% of Americans will be subject to the estate tax at all, or only 2 out of every 1,000 people who die.

If someone dies in Kentucky with less than the exemption amount (currently $13,610,000), their estate doesn't owe any federal estate tax. The heirs and beneficiaries inherit the property free of tax, and don't pay income tax on it, either, because inherited property is not ordinary income. The only exception to this are inherited retirement accounts, which are subject to income tax as the assets are withdrawn.


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