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Inheritance tax is a tax on the transfer of assets from a deceased person to their beneficiaries. This article will explore the Kentucky inheritance tax, how it differs from the estate tax, how it can be avoided, and walk through an example of the Kentucky inheritance tax.
The inheritance tax is a tax on the transfer of assets from a person to their beneficiaries and is taxed to the beneficiaries of the assets. The tax is calculated on the value of the assets when they are gifted, and the tax rate is typically based on the value of the assets being inherited by the beneficiary, the relationship between the estate owner and the beneficiary, and the state they live in.
When a person dies, their assets are distributed according to the terms of their will, or if they did not have a will, according to the state’s laws. Depending on the value of the assets and the beneficiary’s relationship to the deceased, these gifts may be subject to paying inheritance tax.
There is no federal inheritance tax, but some states have a tax on inheritances. However, even in states with an inheritance tax, it does not apply to any assets distributed to their spouse, specific types of assets, and particular other beneficiaries based on each state’s rules.
The six states that impose an inheritance tax are:
Kentucky tax law identifies three classes of beneficiaries, based on how closely related you were to the decedent. Class A individuals (decedent’s surviving spouse, parent, child, stepchild, grandchild, brother, sister, half-brother, or half-sister) are exempt from taxation, while Class B (individuals related to decedent) and C (unrelated individuals) beneficiaries must pay tax. Tax rates generally range from 4% to 16% for Class B beneficiaries and from 6% to 16% for Class C beneficiaries).
Class B: If you were the decedent’s aunt, uncle, niece, nephew, daughter-in-law, son-in-law, or great-grandchild, your first $1,000 of inheritance is exempt from inheritance tax. Then you will pay rates ranging from 4% on inheritances worth up to $10,000 and 16% on anything worth $200,000 or more.
Class C: For all individuals not in classes A or B, the first $500 of inheritance is exempt and there are eight marginal tax brackets ranging from 6% up to 16%.
A tax exemption is a type of tax relief that allows certain people or organizations to be exempt from paying certain taxes. This can include income taxes, sales taxes, and property taxes. Fortunately, if you live in a state with an inheritance tax, you may still be eligible for a tax exemption for the inheritance tax. Here are some examples of potential inheritance tax exemptions:
The inheritance and estate tax are taxes on the transfer of assets from one person to another, but they are assessed differently. The estate tax is imposed on the estate of the deceased person or the person passing on the assets before they are distributed to heirs, and it is calculated on the total value of the assets when they are passed on. On the other hand, the tax on estate inheritance is imposed on the beneficiaries of those assets when passed on.
Another critical difference between the inheritance and estate tax is that there is no federal tax, and only some states impose an inheritance tax. On the other hand, there is a universal federal estate tax, and some states impose a state-level estate tax.
There are several ways to avoid or reduce the amount of inheritance tax owed outside exemptions. Common strategies are to:
Lets analyze how much is the inheritance tax in Kentucky with a real-life example.
Bob was a Maryland resident and passed away, leaving his $4m estate to his childhood best friend Jon. Because Jon isn’t a family member, he would be responsible for paying the Kentucky inheritance tax on the inheritance. As a result, he would owe around $637k in inheritance taxes.
On the other hand if Jon was Bob’s son, he would be able to inherit the $4m and avoid paying the inheritance tax.
The Kentucky inheritance tax can be a significant burden for beneficiaries. It is essential to understand if it applies to you, how it works, and the different strategies that can be used to reduce or avoid it. By understanding the differences between inheritance tax and estate tax and the specific rules of the Kentucky inheritance tax, individuals can plan to minimize the amount of inheritance tax their beneficiaries will have to pay.
Want to dive into inheritance taxes in depth? Check out our post on the U.S. inheritance taxes! Or contact our team for more information.
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