Understanding Estate Tax in Kentuckiana: What Heirs and Homeowners Should Know

The words “estate tax” might not come up in everyday conversation, but if you’re inheriting property in Kentuckiana (referring to the region encompassing parts of Kentucky and Southern Indiana)—whether in Kentucky or Southern Indiana—it’s a term you’ll want to understand. Beyond the emotional weight of settling a loved one’s affairs, there are layers of legal and financial steps that can impact what happens to their home. One of the biggest potential roadblocks? Estate tax. Estate and inheritance taxes are sometimes referred to as "death taxes" (a term often used in legal and tax contexts), and you may see these taxes referred to by that name in various resources.

If you’re a homeowner, real estate investor, or heir navigating this process, here’s what you need to know about estate tax in our region—and how it could affect inherited property. The date of death is crucial, as it determines the valuation date for calculating tax obligations, exemptions, and the deadlines for filing returns and paying any death taxes owed.

What Is Estate Tax?

An estate tax is a tax on the transfer of a decedent’s assets. The decedent is the owner of the property at the time of death, and their assets are taxed before being distributed to beneficiaries. Estate tax is assessed based on the total value of the estate before assets are distributed to beneficiaries. This includes things like bank accounts, investments, and—crucially—real property like a house or land. The beneficiary is the person who will receive property from the decedent. The estates of certain persons may be subject to estate tax depending on the value and applicable laws.

It’s different from an inheritance tax, which is paid by the beneficiary when they receive property. Estate taxes are paid by the estate itself before anything gets passed down or taxed to the beneficiaries.

Does Kentucky or Indiana Have an Estate Tax?

Here’s where it gets specific to our area.

• Kentucky does not impose an estate tax. However, it does have an inheritance tax governed by state law, with tax rates and payment deadlines established by law. Inheritance tax applies to property owned by residents of Kentucky or to property located in Kentucky, regardless of the beneficiary’s residency. Whether this applies depends on your relationship to the deceased. For example, spouses and children are exempt, but nieces, nephews, and unrelated heirs may owe taxes based on the property’s value as of the date of the decedent's death. The inheritance tax must be paid within nine months of the decedent's death to qualify for a 5 percent discount; after this date, interest may accrue on any unpaid tax. Payments should be made payable to the Kentucky Department of Revenue, and inheritance tax returns must be filed with the department. A portion of the inheritance tax may be deferred or paid in installments if an election is made on the return. For more information, refer to the Kentucky Department of Revenue's website or see page 12 of the Kentucky Inheritance Tax Guide for detailed instructions.

• Indiana repealed its inheritance tax in 2013 and does not have an estate tax either. Good news if the property’s located on the Indiana side of the river.

So technically, there’s no estate tax in Kentuckiana—but that doesn’t mean you’re in the clear. The federal estate tax may still apply if the estate is large enough (as of 2024, that’s estates valued over $13.61 million). The estates of decedents may be subject to federal estate tax, and the estate tax return must be filed within nine months of the decedent's death. The date of death is used to value the estate for tax purposes, and the revenue from the estate is used to calculate the gross estate. The law establishes the filing requirements and deadlines for estate tax returns. If the decedent's unused estate tax exemption is not fully used, a portability election can be made on the estate tax return to allow the unused exemption to pass to a surviving spouse, provided the election is filed on time. While this affects a small percentage of estates, it’s important to know where you stand.

Filing Thresholds and Exemptions

When it comes to estate taxes, understanding the filing thresholds and exemptions is crucial for anyone managing an estate in Kentuckiana. While Kentucky does not currently impose an estate tax, beneficiaries may still face inheritance tax depending on their relationship to the deceased and the value of the property or personal property they receive. For example, a surviving spouse or child is typically exempt from Kentucky’s inheritance tax, but more distant relatives or unrelated heirs may be required to pay taxes on their share.

On the federal level, the estate tax only applies to estates with a gross estate plus adjusted taxable gifts exceeding $13.61 million for individuals or $27.22 million for married couples in 2024. If the value of the estate—including real estate, insurance, annuities, debts, and other interests acquired at the decedent’s death—surpasses this threshold, the personal representative must file a federal estate tax return (Form 706). The taxable estate is calculated by adding up all property and gifts, then subtracting allowable deductions such as debts and funeral expenses.

It’s important to note that the filing process and exemptions can be complex, especially when dealing with multiple types of property or when a surviving spouse is involved. If you’re unsure whether your estate is subject to federal estate taxes or Kentucky inheritance tax, consulting with a tax professional can help ensure you file the correct forms and take advantage of all available exemptions.

Gift Tax Implications

Gift tax is another important consideration in estate planning, especially for those looking to transfer property or money to loved ones during their lifetime. The federal gift tax is part of the unified credit system, which means that lifetime taxable gifts made since 1977 are added to the value of your estate at death to determine if estate tax is owed. The gift tax rate ranges from 18% to 40%, depending on the size of the gift and how much of your exemption you’ve already used.

In 2024, individuals can give up to $16,000 per recipient each year without triggering the gift tax, thanks to the annual exemption. Married couples can combine their exemptions to give up to $32,000 per recipient. If you give more than the annual exemption, you’ll need to file a gift tax return (Form 709), and the excess amount will count against your lifetime exemption.

Understanding how gifts made during your life affect your taxable estate is essential for effective estate planning. By strategically using the annual exemption and unified credit, you can minimize the amount of estate tax your heirs may have to pay after your death. If you’re considering making significant gifts, it’s wise to consult with an estate tax professional to ensure you’re maximizing your tax benefits and complying with all filing requirements.

Charitable Giving and Tax Benefits

Charitable giving is not only a way to support causes you care about—it can also offer substantial tax benefits when planning your estate. Assets left to federally recognized charities are generally exempt from federal estate tax, which means charitable bequests can reduce the size of your taxable estate and potentially lower or eliminate estate taxes altogether.

Including charitable gifts in your estate plan can be a tax-efficient strategy for transferring wealth. Whether you make donations during your life or leave a bequest at death, these contributions can impact both your gift tax and estate tax calculations. The estate tax system is designed to encourage charitable giving by providing exemptions for property transferred to qualifying organizations.

In Kentucky, charitable gifts are also exempt from inheritance tax, offering an additional incentive for donors in the region. By incorporating charitable giving into your estate plan, you can support your favorite organizations while reducing the tax burden on your estate and beneficiaries. If you’re interested in exploring the tax benefits of charitable bequests, consider speaking with a tax advisor or estate planning attorney to ensure your gifts are structured for maximum impact.

How Estate and Inheritance Taxes Affect Real Estate

Even if you’re not facing a federal estate tax, inheritance tax or probate can still complicate what happens next with a home.

Let’s say you’ve inherited a house in Louisville from an aunt. She wasn’t married, and you’re her niece—the beneficiary. The property may be subject to Kentucky’s inheritance tax, which is assessed based on the value of the property as of the date of death. The inheritance tax liability arises as of the decedent's death, and the property is taxed before the beneficiary can receive property. That tax has to be paid before you can take full ownership, refinance, or sell.

And here’s the catch: Lenders may require extra steps before they’ll approve a refinance or a sale of an inherited property. Title must be clear. Probate may need to be completed. And any tax liens or obligations have to be resolved first.

What Heirs Should Do Before Selling or Refinancing

If you’ve inherited property in Kentuckiana and are planning to sell or refinance, here are a few key steps:

1. Confirm Ownership & Title – If the property went through probate, make sure the title has been properly transferred into your name and confirm that the property is legally owned by you as the heir.

2. Check for Tax Obligations – If you’re in Kentucky, determine whether inheritance tax applies. Inheritance tax returns must be filed with the appropriate department, specifically the Kentucky Department of Revenue. Tax payments should be made payable to the Kentucky Department of Revenue. Be aware that interest may accrue on any unpaid inheritance tax after a certain date, typically starting 18 months after the date of the decedent's death. A portion of the inheritance tax may be paid in installments if necessary. There are specific dates and deadlines for filing and payment. Indiana? You’re likely in the clear.

3. Prepare for Lender Requirements – Whether you’re keeping the home or selling it, lenders will likely ask for probate documentation, death certificates, and proof that any taxes have been paid.

4. Talk to a Mortgage Pro Early – This is a big one. If you’re even thinking about refinancing or selling, connect with a mortgage advisor early. They’ll help flag any potential roadblocks and walk you through what lenders will need.

Final Thoughts

Passing down property is a powerful way to build generational wealth—but only if you know how to navigate the process. In Kentuckiana, inheritance tax (in Kentucky) or federal estate tax (in rare cases) could affect what happens next. And when lenders get involved, things like probate and title transfer become essential details, not just legal formalities.

So if you’ve inherited a home—or expect to—take a beat. Get a clear handle on the property’s status, talk to a tax advisor or attorney if needed, and don’t wait to connect with a local mortgage expert who understands the Kentuckiana landscape.

At Summit Edge Realty, we’re here to help guide families through every stage of homeownership—including the ones that start with a tough goodbye. If you have questions about inherited property, let’s talk.