Kentucky Estate Tax: Rate & Exemption Guide

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Paul Sundin, CPA

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Kentucky is called the Bluegrass State. It is a very picturesque state with recent large population increases.

But how much do you know about taxes in Kentucky? We will discuss in this post some of the potential taxes that can be assessed to Kentucky residents. 

Kentucky estate tax

Well Kentucky residents have one thing going for them. Kentucky does not levy an estate tax. That is great news for people with large assets who live in the state.

But just because Kentucky doesn’t have an estate tax does not mean that you won’t potentially be subject to an estate tax at the federal level.

Federal estate tax

The estate tax is commonly referred to as the death tax. Obviously, this is because it is a tax that is only assessed when a person passes away.

Even though the tax sounds onerous, it really doesn’t affect that many citizens. Only about 1/2 of 1% of people will pay an estate tax.

The tax is only levied against estates for individuals who have net assets that exceed $11.7 million for 2021. Thanks to something called portability, this estate tax exemption limit can be increased in many situations. As a result, it will not be assessed against many folks.

The calculation itself isn’t too challenging. However, it can be difficult gathering all the information and valuing all the assets.

The first step is to identify all assets in the estate. This would include real estate, stocks and bonds, retirement accounts, and household items (among other things).

In theory, most of these items are simple to value. But there is complexity in certain types of real estate and valuing businesses owned.

Once all assets have been valued, the estate executor can reduce the gross estate for any debt obligations and certain administrative expenses. Those obligations include mortgages, credit cards and other items. Administrative expenses will typically include professional fees like appraisal, legal fees, and tax return preparation.

Once the net state has been calculated, any amount that exceeds the annual estate exemption amount is subject to tax at a rate of 40%. There is discussion about the rate increasing and the exemption amount decreasing so make sure you stay tuned.

Trust estate planning

If you want to leave something to your beneficiaries after you pass away, you should consider creating a trust. This type of estate planning allows you to provide for your spouse, children, and grandchildren. It can also specify the distribution schedule, provide for educational expenses, and set an age limit for receiving money.

It’s important to get the advice of your attorney before making any changes to your trust. Once you’ve established your trust, you can move on to the next phase of planning: naming beneficiaries.

If you want to leave a large sum of money to your family, you should consider creating a trust. Leaving the money to your family directly can have negative consequences. One man left his son $250,000, which left him penniless six months later. A trust is a great way to prevent such an unwanted outcome.

A trust will transfer your property to a trustee, who is bound by a trust agreement stipulating how the funds should be distributed. Trusts provide a layer of protection and security for your family and beneficiaries.

Another important advantage of trusts is that they can prevent family feuds, unnecessary taxes, and avoid protracted probate. There are dozens of types of trusts available to choose from.

Revocable living trusts, for example, allow the grantor to specify how the trust assets should be distributed to heirs, and can avoid probate. This type of planning can be extremely helpful for people with blended families and remarriages.

The correct way to use a trust

While you may not have realized it, you may be subject to an estate tax. This tax applies to the entire estate, not just the beneficiaries. In some cases, the tax code may treat separate shares of an individual as separate.

For example, if you own a farm and use it as your principal residence, your heirs would receive a reduction of about $1 million in estate taxes. Similarly, if you have cash and marketable securities in your name, the tax value of these assets would be much lower.

If you have an unused exemption, your surviving spouse will receive it. This makes the decision easier, as your surviving spouse will inherit the unused exemption. It will also preserve the estate exemption for future beneficiaries.

In this way, your surviving spouse can avoid the estate tax. If you plan on leaving a large estate to your children, your surviving spouse can take advantage of this option. But there are many important details you should know about the estate tax.

The main difference between a grantor trust and a regular revocable trust is that the grantor trust has its own separate status under the income tax laws. This means that any distributions made by the trust to beneficiaries are not considered gifts under the gift tax.

Moreover, there is no estate tax due on the trust’s assets, and you may sell an appreciated asset to the trust with no income tax on the capital gains. This is beneficial for all parties because the tax burden is reduced when the asset is owned by the trust.

Inheritance tax and gift tax

Fortunately Kentucky does not have a gift tax. But you’re not that lucky when it comes to inheritance tax. Kentucky is one of seven states that has it inheritance tax.

The calculation of the inheritance tax depends on what class of heir you fall under and the net estate amount.

Tax picture

Kentucky is a reasonably friendly tax state. While they do assess an income tax and of course real estate taxes, there is no estate tax. Citizens of Kentucky that are higher income and have substantial assets may consider this a nice state to reside.

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