Kentucky Inheritance Tax Planning
Last updated: 16 Oct 2025 • Author: Alexander Foelsche CPA (US), WP (DE), RE (CH)
Kentucky Inheritance Tax — Planning Guide
Practical strategies to reduce, allocate, and fund Kentucky inheritance tax. Use with our Overview, Nonresident Guide, Forms & Deadlines, Cases, and Calculator.
Top planning moves (at a glance)
Design the distribution
- Favor Class A where consistent with wishes (outright or in trust) to keep transfers exempt.
- Group Class B/C bequests into cash or non-KY assets when feasible to minimize KY exposure.
- Use specific vs. residuary gifts intentionally so Class B/C gifts don’t swell with appreciation.
Reduce the taxable base
- Charitable bequests (to qualifying charities) reduce the share taxed to B/C beneficiaries.
- Debts & expenses — document and court-approve to secure deductibility.
- Lifetime giving — consider inter vivos gifts to B/C beneficiaries to shift growth (watch federal gift rules).
Beneficiary-class tactics
Class A (exempt)
- Prefer Class A as default takers; use trusts to control downstream disposition without KY tax at first transfer.
- Confirm relationships (adoption, step-relations) to ensure Class A status is documented.
- When all takers are Class A, consider No Tax Due (92A201) or Affidavit of Exemption.
Class B/C (taxable)
- Cap volatile assets for B/C; prefer cash or out-of-state intangibles.
- Discount planning: Target payment within 9 months for the 5% discount; pre-fund with liquidity.
- Installments: If a beneficiary’s net tax > $5k, consider up to 10 annual payments (interest applies).
Nonresident & situs planning
- Limit KY-situs assets for B/C beneficiaries (e.g., sell/1031 pre-death, or direct KY assets to Class A, while giving B/C non-KY intangibles).
- Intangibles (stock, brokerage) of nonresidents are generally not taxed unless they have a business situs in KY — maintain documentation of management outside KY.
- Closely held interests: Clarify where the business is operated/managed to avoid business situs arguments.
See the Nonresident Guide for rules and examples.
Charitable & trust structures
| Tool | Goal | Practice note |
|---|---|---|
| Charitable bequest / CRT / CLT | Reduce taxable share to B/C, align income-tax benefits. | Coordinate federal split-interest rules; ensure charity qualification and documentation. |
| QTIP-style marital trust | Channel value to Class A (spouse) while controlling remainder. | Useful when non-Class A remaindermen exist; model downstream exposure. |
| Disclaimers | Post-mortem re-routing to Class A to avoid B/C tax. | Must be timely, qualified, and consistent with overall plan and probate deadlines. |
Liquidity & timing
Funding the 9-month discount
- Set aside liquid accounts or ILIT-owned insurance for quick cash.
- Use escrow at closing if selling KY property to meet discount timing.
Documentation
- Keep appraisals, invoices, court orders approving expenses.
- Track which beneficiary owes tax; receipts should reference the beneficiary share when relevant.
Suggested planning workflow
- Map assets (KY-situs vs. non-KY; probate vs. non-probate) and beneficiaries by class.
- Model exposure with the calculator (by beneficiary share).
- Draft/update documents: will/trust, charitable components, disclaimer pathways, and class-aware bequests.
- Plan liquidity for 9-month discount; identify installment candidates (>$5k per beneficiary).
- Execution & review: retitle assets, update designations, and set review triggers for life events.
Checklists
Pre-mortem plan
- Asset & debt schedule; identify KY-situs items.
- Beneficiary map by class (A/B/C).
- Target structure (charitable, QTIP-style, disclaimers).
- Liquidity plan for discount/instalments.
Post-mortem actions
- Order appraisals; confirm situs and management locations.
- Compute per-beneficiary tax; decide discount vs. installment.
- Prepare 92A200/92A201 or Affidavit of Exemption as applicable.
FAQs
Is portability relevant for Kentucky?
Portability is federal estate tax; Kentucky uses a state inheritance tax by beneficiary class. Plan class outcomes directly.
What’s the fastest way to reduce KY tax?
Route assets to Class A where suitable, and use charitable bequests to offset B/C shares. Ensure timely documentation for deductions.
How should nonresidents plan?
Limit KY-situs assets for B/C beneficiaries; keep intangibles clearly outside KY business situs; prepare liquidity to capture the 9-month discount.
Will a living trust avoid KY inheritance tax?
No. It may streamline probate, but KY inheritance tax hinges on beneficiary class and situs, not probate status.