Learn About Estate Tax Regulations in Kentucky

Kentucky Estate Tax Used to Mean a Pick Up Tax or Separate Estate Tax

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NOTE: State laws change frequently and the following information may not reflect recent changes in the laws. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.

The answer to this question is No, currently, Kentucky does not collect an estate tax at the state level.

A few years ago, however, things were different before major changes took effect with regard to federal estate tax laws. What do federal estate tax laws have to do with Kentucky estate taxes? Prior to January 1, 2005, Kentucky did collect a separate estate tax at the state level, called a "pick up tax," that was equal to a portion of the overall federal estate tax bill.

What is the Pick Up Tax?

The "pick up tax" is a state estate tax that is collected based on the state estate tax (or death tax) credit that the IRS allowed on the federal estate tax return, IRS Form 706, prior to January 1, 2005. Each state had different tax laws with regard to the pick up tax, so the amount that a state would collect varied based on that state's own estate tax laws. In essence, however, the overall estate tax bill was not increased or decreased due to the pick up tax. Instead, the total tax bill was apportioned between the IRS and state taxing authority.

So what does this mean in plain English? It means that a portion of the federal estate tax was actually taken away from the IRS and instead paid to the decedent's state taxing authority. Since as discussed below Kentucky collects a state inheritance tax, prior to January 1, 2005, the Kentucky Department of Revenue collected a state estate tax that was an amount equal to the amount by which the pick up tax (which was equal to the federal credit for state death tax as shown on line 15 of IRS Form 706) exceeded the Kentucky inheritance tax.

What is the Future of the Kentucky Estate Tax?

Effective January 1, 2005, the pick up tax was officially phased out under the provisions of the Economic Growth and Tax Relief Reconciliation Act ("EGTRRA" for short). In response to these changes in federal law that phased out the pick up tax, some states that used to collect a pick up tax chose to enact laws that allow the state to still collect a state estate tax. This is referred to as "decoupling" since the states that enacted a state estate tax no longer based their state estate tax laws on current federal estate tax laws.

The majority of states did absolutely nothing and therefore no longer collect a state estate tax, and Kentucky was one of them. In addition, while under the provisions of EGTRRA the pick up tax was supposed to return in 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRUIRJCA" for short) did not include reinstatement of the pick up tax. Nonetheless, the provisions of TRUIRJCA were set to expire on December 31, 2012, which would have brought the pick up tax back in 2013, but Congress and President Obama acted in early 2013 to pass the American Taxpayer Relief Act ("ATRA").

Under the provisions of ATRA, the rules governing federal estate taxes as set forth under TRUIRJCA were made permanent, which means that the pick up tax was not resurrected in 2013 and will not come back in future years without further action by Congress. Thus, don't expect Kentucky to begin collecting a state estate tax anytime soon.

For more on Kentucky estate taxes, refer to Inheritance Tax & Estate Tax on the Kentucky Department of Revenue website.

Does Kentucky Collect a State Inheritance Tax?

An inheritance tax is a tax imposed on the individual beneficiaries of an estate, while an estate tax is imposed on the entire value of an estate. So does Kentucky currently collect a state inheritance tax, as opposed to a state estate tax? As mentioned above, the answer to this question is Yes, Kentucky is one of seven states that collect a state inheritance tax.

So, even if the pick up tax never returns, Kentucky will still continue to collect a state inheritance tax. For more information about the Kentucky inheritance tax, refer to the State Inheritance Tax Chart.