Kentucky Inheritance Tax: Rates and Exemptions

Kentucky has no estate tax, and its inheritance tax never reaches close family.1

A brother or sister inherits completely tax-free, right alongside your spouse and children.1 The tax only reaches further out, to nieces, nephews, cousins, and friends, and even then it starts small. This guide covers who owes the Kentucky inheritance tax, who is exempt, which class each relative lands in, and what the rates run for everyone the tax does touch.

In This Guide

• Kentucky Inheritance Tax at a Glance
• Inheritance Tax vs. Estate Tax
• How the Kentucky Inheritance Tax Works
• The Beneficiary Classes
• What About Medicaid Estate Recovery?
• Frequently Asked Questions
• Next Steps

Kentucky Inheritance Tax at a Glance

Here is the short version. Kentucky does not tax your estate. It taxes certain people who inherit from you, and the rate depends entirely on their relationship to you.

The exempt circle reaches past the nuclear family. Kentucky folds siblings, including half-brothers and half-sisters, into its fully exempt Class A.1 So a spouse, children, parents, grandchildren, and siblings all inherit free of Kentucky inheritance tax.

The tax only kicks in for relatives outside that circle, and the rates climb based on how distant the relationship is. That is the whole logic of the Kentucky inheritance tax: close family pays nothing, and the rest pay on a graduated scale.

One line in that circle catches people out. Grandchildren are Class A, but great-grandchildren are not. They sit in Class B.1 Check the class of every heir by name rather than by how close they feel on the family tree.

Inheritance Tax vs. Estate Tax

These two get confused constantly, and the difference decides who pays.

An estate tax is paid by the estate before anyone inherits, triggered by the size of the estate. An inheritance tax is paid by the heir, triggered by the heir's relationship to the person who died.1 Two people inheriting equal amounts from the same estate can owe very different tax, because one was a child and the other was a cousin.

Kentucky has no estate tax, and has not had one since January 1, 2005.1 The inheritance tax is the only state death tax it levies.

And the federal government has no inheritance tax at all. It has only an estate tax, and that one reaches so few estates that most families never come near it. So for a Kentucky death, the state inheritance tax is usually the only death tax to think about, and for close family it does not apply either.

How the Kentucky Inheritance Tax Works

The tax sorts every beneficiary into one of three classes, and the class sets both the exemption and the rate.1

Class A is the exempt circle: a spouse, parent, child, grandchild, brother, sister, half-brother, or half-sister. They pay nothing. Class B covers a niece, nephew, half-niece, half-nephew, daughter-in-law, son-in-law, aunt, uncle, or great-grandchild; they get a $1,000 exemption and then pay 4 to 16 percent. Class C covers everyone not in Class A or Class B, meaning cousins, nieces and nephews by marriage, great-nieces and great-nephews, unrelated heirs such as friends, and institutions that are not otherwise exempt; they get a $500 exemption and pay 6 to 16 percent.1 Within Class B and Class C, the rate climbs as the inheritance gets larger.

The Class A exemption carries a date in the Department of Revenue's own wording: it applies where the date of death is after June 30, 1998.1 Every Kentucky death being settled today falls on the exempt side of that line, so for any estate a family is handling now, the exemption simply applies.

The inheritance tax return is filed with the Kentucky Department of Revenue. When every beneficiary is Class A, the estate may not owe any inheritance tax at all.

The Beneficiary Classes

Every Class A row in that table reads the same way: a full exemption and a rate of 0 percent, with no dollar ceiling, no matter how large the inheritance.1 A few other things are worth pulling out.

Siblings are exempt. A brother or sister inherits free of tax, in the same Class A as a spouse and children.1 Half-brothers and half-sisters sit in Class A as well, so they are exempt on the same terms.

Class B starts at 4 percent. Nieces, nephews, half-nieces, half-nephews, sons- and daughters-in-law, aunts, uncles, and great-grandchildren get the first $1,000 tax-free. The rate is graduated, running from 4 percent up to 16 percent as the inheritance gets larger.1

A great-grandchild is Class B, not Class A. Children and grandchildren are Class A, but the line stops at grandchild: a great-grandchild is Class B, with a $1,000 exemption and a 4 to 16 percent rate.1 It is easy to get wrong, because a great-grandchild feels like immediate family while the Department of Revenue's classes place them a step out.

Class C starts at 6 percent. Class C is everyone not in Class A or Class B: cousins, nieces and nephews by marriage, great-nieces and great-nephews, and unrelated beneficiaries such as friends. They get the first $500 tax-free, and the rate runs from 6 percent up to 16 percent as the inheritance gets larger.1 Note which way the "by marriage" versions go: a niece by blood is Class B, a niece by marriage is Class C.

Class C is not only individuals. Educational, religious, or other institutions, societies or associations, and public institutions are listed in Class C as well, to the extent KRS 140.060 does not exempt them.1 So a bequest to a church, a school, or a charity is not automatically free of Kentucky inheritance tax. Whether it is exempt turns on that statute, which is worth checking before the will is drafted rather than after.

A small bequest can owe nothing even in a taxable class. The exemption is per heir, applied against what that person receives, not against the whole estate. A niece who inherits $900 is under the $1,000 Class B exemption and owes no Kentucky inheritance tax; a friend who inherits $400 is under the $500 Class C exemption and owes nothing either.1 Being in Class B or Class C means the tax can reach you, not that it does.

For most Kentucky families, where assets pass to a spouse, children, or siblings, the inheritance tax never comes into play.1 It is the gifts to extended family and friends that get taxed.

What About Medicaid Estate Recovery?

This is a separate process people often confuse with the inheritance tax, so it is worth drawing the line clearly.

If the person who died received certain long-term-care benefits through Medicaid, the state may seek repayment from their estate after death. That is Medicaid estate recovery, and it is not a tax. It is the state recouping what it spent on someone's care, and it can reduce or wipe out what heirs receive before any inheritance tax question even arises.

Both can touch the same estate, but they answer different questions. The inheritance tax depends on who inherits; estate recovery depends on what care the deceased received. If you are settling an estate where the person was on Medicaid, treat them as two separate matters.

Next Steps

The planning lesson in Kentucky is reassuring: leaving assets to close family, including siblings, keeps the inheritance tax out of the picture entirely.1

• Check whether any heir falls outside Class A. Gifts to nieces, nephews, aunts, uncles, great-grandchildren, cousins, or friends are what trigger the tax. Check each heir by their actual relationship, not by how close they feel.
• Coordinate with the estate plan. How property is titled and whether it passes through the estate affects what gets taxed. A Kentucky estate attorney can model the bill.
• Separate the tax from estate recovery. If Medicaid paid for care, handle that claim on its own track.

For families weighing how an inheritance fits into paying for a parent's care, our guides on building a senior care funding plan and selling or renting a home for care walk through the money side in plain terms.

Learn More

Find personalized help understanding how an inheritance affects your family's care plan at brevy.com.

The information on Brevy.com is for educational purposes only and is not a substitute for professional legal, financial, or medical advice. Rules vary by state and program and change frequently. Always verify with the relevant agency or a qualified professional. Brevy is not a law firm, financial advisor, or healthcare provider.