Even though you may be receiving an unexpected inheritance, you may still have some valid concerns about what that means. The primary concern is whether you will be forced to pay taxes on that inheritance. Whether you will be required to pay inheritance tax depends on the applicable state law. Kentucky inheritance tax is something you will be required to pay. Here is what you need to know about Louisville inheritance planning and taxes.
What is an inheritance tax?
An “inheritance tax” is imposed on property received from someone else’s estate after their death. The federal government does not impose an inheritance tax. Instead, inheritance taxes are imposed only at the state level. However, not all states impose an inheritance tax. In fact, only a few remaining states have continued to impose the tax. The amount of inheritance taxes owed depends on the property and the on the class of beneficiary.
Not everyone is required to pay Kentucky inheritance tax
Like many other states that still impose an inheritance tax, Kentucky does not require everyone who inherits to pay. Basically, close family members are exempt from inheritance tax. These inheritance tax exemptions are based on the closeness of the relationship. Also, the rate of the inheritance tax imposed is based on the same relationship.
Who is potentially liable for Kentucky inheritance tax?
Kentucky inheritance tax can be imposed on property left by either a Kentucky resident or a nonresident who owned real estate or tangible property located in the state. There are three classes of beneficiaries under Kentucky law. Which category you belong to will determine whether you owe inheritance taxes and if so, how much those taxes are likely to be. If you have questions about Louisville inheritance planning, we are here to help.
Classes of Beneficiaries
Class A beneficiaries are the closest family members to the deceased. That would include the surviving spouse, parents, children, grandchildren, brothers, and sisters. Class A Beneficiaries are exempt from Kentucky inheritance tax.
Class B beneficiaries are relatives, but not as close as Class A beneficiaries. This includes nieces, nephews, aunts, uncles, daughters- and sons-in-law, and great-grandchildren. Class B beneficiaries are entitled to an inheritance tax exemption of $1,000. If their inheritance exceeds that amount, then the excess is subject to a tax rate from 4% to 16%.
Class C beneficiaries consist of anyone who does not fit into either Class A or Class B. That would include, for instance, cousins, friends, and corporations. For Class C members receive only a $500 exemption from inheritance tax. The excess is subject to the same tax rate of 4% to 16%.
How inheritance tax is different from estate tax
The first difference between inheritance and estate taxes is the fact that the inheritance tax is only imposed on the state level, whereas estate taxes are federal taxes. Another difference is who is actually responsible for paying the tax. The estate tax is owed by the person leaving the property, not the beneficiary. This is an important consideration in inheritance planning.
How does the estate tax work?
The estate tax is a tax levied on the right to transfer property to others upon your death. The estate tax is calculated after an accounting has been made of everything you own or in which you have an interest . The total value of all of those assets is considered your “Gross Estate.” The types of property that are usually included in your gross estate include cash and securities, real estate, insurance proceeds, trusts, annuities, and business interests, as well as retirement plans, just to name a few. After required deductions are included in the equation you have arrived at your “Taxable Estate.” The estate tax is then assessed on the net amount.
Is there ever a reason to disclaim or reject an inheritance?
Though most clients are unaware of this, you can reject an inheritance that is coming to you. In fact, there are several good reasons why you should. Protecting your eligibility for government benefits is one reason. Protecting your estate plan is another. If you are considering what you need to do, then you should first discuss your options with your estate planning attorney. Disclaiming an inheritance requires more than just saying you do not want the money or property that is coming to you. Instead, there are specific laws for each state that govern the rejection of an inheritance.
Download our free estate planning worksheet! If you have questions regarding Kentucky inheritance tax or any other estate planning matters, contact the experienced estate planning attorneys at Gersh Law Offices, P.S.C. for a consultation either online or by calling us at (502) 423-7023.