The Kentucky CPA Journal

Feature

state inheritance taxes

Issue 3
November 3, 2025

By Robert Salyer, CPA and Teressa L. Elliott, J.D.

There is sometimes confusion about the difference between state inheritance taxes and estate taxes. State inheritance taxes are levied on individuals who receive assets from a deceased person’s estate. Unlike estate taxes, which are paid by the estate itself before distribution, inheritance taxes are the responsibility of the beneficiaries and are based on the value of the asset they receive and their relationship to the deceased.

As of 2025, six states impose inheritance taxes:

• Maryland (both an estate and inheritance tax)
• Kentucky
• Nebraska 
• New Jersey
• Pennsylvania
• Iowa (fully repealed for deaths occurring after Jan. 1, 2025)

Kentucky and New Jersey have the highest top marginal inheritance tax rates at 16 percent as of 2024.

Unlike an estate tax, the Kentucky inheritance tax is a tax on a beneficiary’s right to receive property from a deceased person. The amount of the inheritance tax depends on the relationship of the beneficiary to the deceased and the value of the property. The closer the beneficiary’s relationship to the deceased, the greater the exemption and the smaller the tax rate.

All property belonging to a Kentucky resident is subject to the tax except for real estate located in another state. Additionally, real estate and personal property located in Kentucky and owned by a nonresident are also subject to the tax. Since Jan. 1, 2005, there has been no Kentucky estate tax.

All gifts and transfers of property made by the decedent within three years before death, without valuable consideration, are considered in contemplation of death and must be included in the inheritance tax return. If the inheritance tax is paid within nine months of the date of death, a 5 percent discount is allowed. The tax due should be paid when the return is filed.

If the beneficiary’s net inheritance tax liability exceeds $5,000 and the return is filed on time, an election can be made to pay the tax in 10 equal annual installments. The first installment is due when the return is filed. The portion of the tax deferred is charged interest at the rate established by law beginning 18 months after the date of death.

Classes of beneficiaries

The Kentucky Revised Statutes provide three classes of beneficiaries: exempt, Class B and Class C.

Exempt organizations include educational and religious institutions.

Exempt individuals for dates of death after July 1, 1998, include:

• Surviving spouse or parent
• Child (adult or minor) by blood, stepchild, child adopted during infancy, or a child adopted during adulthood who was reared by the decedent during infancy
• Grandchild or issue of a child by blood, stepchild, or adopted child
• Brother or sister (whole or half)

Class B beneficiaries include nieces, nephews, half-nieces, half-nephews, daughters-in-law, sons-in-law, aunts, uncles, and great-grandchildren. Class B beneficiaries receive a $1,000 exemption, and the tax rate ranges from 4 percent to 16 percent.

Class C beneficiaries include all persons not included in Class A (exempt) or Class B (for example, cousins). Class C beneficiaries receive a $500 exemption, and the tax rate ranges from 6 percent to 16 percent.

Beneficiaries must know which class they fall under and understand the basics of the Kentucky Inheritance Tax Return. This return is filed on Form 92A200 and must be used for an estate (resident or nonresident) when:

• The date of death is on or after Jan. 1, 2005, and
• Any asset of the estate passes to taxable beneficiaries or taxable organizations.

The Kentucky Inheritance Tax Instructions include the following example:

“An individual died a resident of Florida. The net value of the property subject to tax in Kentucky before federal estate taxes is $75,000. The Kentucky net estate is 20 percent of the total net estate in and out of Kentucky. The property subject to tax in Kentucky was devised to the decedent’s niece. The niece’s exemption subject to proration is limited to $1,000. The prorated exemption for the niece is $200 ($1,000 × 20%).”

In this example, the niece is a Class B beneficiary. This illustrates the tax burden beneficiaries may face under the inheritance tax.

Tax burden responsibility

The instructions to the inheritance tax clearly state that the tax burden is the responsibility of the beneficiary:

“If the will directs that the inheritance tax is to be paid from the residue of the estate, a bequest of the tax is added to and made a part of the distributive share of the beneficiary receiving the specific bequest or devise before residue is distributed.”

Case law also applies. In *Estate of McVey v. Department of Revenue*, 480 S.W.3d 233 (2015), the Kentucky Supreme Court considered whether inheritance taxes paid as a “cost of administration” under a will’s tax-exoneration provision could be deducted from the value of distributive shares under KRS 140.090 and whether the payment of tax by an estate on behalf of a beneficiary under a tax-exoneration clause constitutes a taxable “bequest of tax.”

The Court ruled that inheritance taxes paid by the estate on behalf of a beneficiary are not costs of administration but are separate bequests subject to inheritance tax. Those taxes paid by the estate do not reduce the total tax liability.

The Court concluded that inheritance taxes may not be deducted from the value of distributive shares under KRS 140.090 and that when a will includes a provision directing that inheritance taxes be paid out of the estate on behalf of beneficiaries, this “bequest of tax” is itself taxable. The Court plainly stated: “Taxes are taxes, not costs.”

The Court further noted that “a bequest of tax under a tax-exoneration clause ... is a taxable transfer of estate property.”

Accountants and attorneys in Kentucky should be aware of these issues to ensure their clients are not surprised by the application of the inheritance tax.

About the authors: 

	Robert Salyer, CPA, is a Senior Lecturer at Northern Kentucky University Haile College of Business. He received his Master of Science in Taxation from the University of Cincinnati, and a Bachelor of Science Degree in Accounting from the University of Kentucky.
	Teressa L. Elliott, J.D., is a Professor and Interim Associate Dean of Undergraduate Programs and Operations at the Northern Kentucky University Haile College of Business.

Sources

Kentucky Department of Revenue, Kentucky Inheritance and Estate Taxes: Forms and Instructions, Form 92A200.

Kentucky Revised Statutes, Chapter 140.

Estate of McVey v. Department of Revenue, 480 S.W.3d 233 (Ky. 2015).

Internal Revenue Service.

Federation of Tax Administrators, State Death Tax Chart, 2025.