No matter how big or how small, everyone has an estate and you should take the necessary steps to make sure your assets end up where you want them to when you die or are incapacitated. Your estate is made up of everything you own including your vehicle, residence, other real estate, checking and savings accounts, investments, life insurance, furniture, and personal possessions.
Clearly you want to control how your estate is distributed, what people receive, and when they are to receive it. You also want to minimize the amount paid in taxes, legal fees, and court costs.
One element of good estate planning is considering the tax implications of your plan. There are typically two types of taxes to consider: federal and state. These two taxes do not touch as many people as they did when I began practicing law.
Federal Estate and Gift Taxes
A federal return (Form 706) is only required when the combined gross assets prior to taxable gifts exceed $11.4 million. That means an individual can leave $11.4 million to heirs and pay no federal estate or gift tax (TAX-FREE), while a married couple may be able to shield $22.8 million. The annual gift tax exclusion amount is $15,000. For the wealthy, these numbers represent planning opportunities. For everybody else, they serve as a reminder: Even if you don’t have a taxable estate, you still need an estate plan.
Kentucky Inheritance Tax
Whether there is a Kentucky inheritance tax or not depends on the relationship of the beneficiary to you and the value of your property. The closer the relationship, the greater the exemption and the smaller the tax rate.
There are no inheritance taxes in Kentucky if the beneficiary is a:
- surviving spouse,
- half-brother, or
If the beneficiary is a niece, nephew, half-niece, half- nephew, daughter-in-law, son-in-law, aunt, uncle or great-grandchild, there is no tax on the first $1,000 but after that, the rate increases from four percent to sixteen percent. It gets to the sixteen percent after $200,000. All other beneficiaries have a $500 exemption and the rate after that starts at six percent and goes to sixteen percent after $60,000. The tax value is generally fair cash value as of decedent’s death and gifts made within three years of death are brought back into the estate for taxation purposes if made in contemplation of death and not for a living reason.
One thing to be aware of is if your Will says that your estate will pay the Kentucky inheritance tax, the Kentucky Department of Revenue assesses this as a Bequest of Tax, which, in essence, increases the inheritance value, which increases the tax. If you state in your Will that your beneficiaries are to pay their own tax on their inheritance, a Bequest of Tax will not be assessed.
Richmond attorney Walt Ecton has practiced law in Kentucky for over 35 years. He offers experienced estate planning services, including drafting Wills and trusts. We welcome you to contact Ecton & Shannon if you would like to request an estate planning consultation.