Originally published June 2016. Last updated March 2026.
Estate taxes don’t affect most Americans. But if your net worth is climbing, or if you own a business, real estate, or significant life insurance, the rules matter more than you think. Especially right now.
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1. The Exemption Is Historically High — and About to Drop
In 2025, the federal estate tax exemption is $13.99 million per person. For a married couple, that’s $27.98 million before any estate tax kicks in. The tax rate on amounts above the exemption is 40%.
These numbers exist because of the Tax Cuts and Jobs Act (TCJA) of 2017. That law is scheduled to sunset on January 1, 2026, which would cut the exemption roughly in half — to approximately $7 million per person.
If your estate is between $7 million and $14 million, you’re in the window that’s directly affected. Assets above the new exemption would be taxed at 40%.
2. Kentucky Has an Inheritance Tax (Not an Estate Tax)
Kentucky doesn’t have a state estate tax. But it does have an inheritance tax, which works differently. The tax is paid by the person receiving the inheritance, not the estate itself.
Class A beneficiaries are exempt: spouse, children, grandchildren, parents, and siblings owe nothing.
Class B beneficiaries (nieces, nephews, aunts, uncles, sons/daughters-in-law): taxed at 4-16% on amounts above $1,000.
Class C beneficiaries (everyone else — friends, unmarried partners, distant relatives): taxed at 6-16% on amounts above $500.
This catches people off guard. If you’re leaving money to anyone outside your immediate family, plan for the tax or plan around it.
3. Portability Lets Married Couples Double the Exemption
If one spouse dies and doesn’t use their full estate tax exemption, the surviving spouse can claim the unused portion. This is called portability.
Example: Spouse A dies in 2025 with a $5 million estate. Their unused exemption is $8.99 million ($13.99M – $5M). Spouse B can add that to their own $13.99 million exemption, for a combined $22.98 million.
Critical step: Portability isn’t automatic. The executor must file an estate tax return (Form 706) within 9 months of death (with a 6-month extension available), even if no tax is owed. If you skip this filing, the unused exemption is lost forever.
4. Your Estate Is Probably Bigger Than You Think
When calculating your estate for tax purposes, include:
- All investment and bank accounts
- Real estate (current fair market value, not what you paid)
- Retirement accounts (IRAs, 401(k)s — the full balance counts)
- Life insurance death benefits (if you own the policy, the payout counts as part of your estate)
- Business interests (your share of any business you own)
- Personal property (vehicles, art, jewelry, collections)
Life insurance is the one that surprises people. A $2 million term policy that costs you $100/month counts as $2 million in your estate. An irrevocable life insurance trust (ILIT) can remove the policy from your estate, but it needs to be set up correctly and at least three years before death.
FAQ
Do most people actually pay estate taxes?
At the current $13.99 million exemption, fewer than 0.1% of estates owe federal estate tax. But if the exemption drops to $7 million in 2026, more families will be affected — particularly business owners and people with significant real estate or life insurance.
What’s the difference between estate tax and inheritance tax?
Estate tax is paid by the estate before assets are distributed. Inheritance tax is paid by the individual receiving the assets. Kentucky has an inheritance tax but no state estate tax. The federal government has an estate tax but no inheritance tax.
Can I avoid estate taxes with a trust?
Certain types of trusts (irrevocable trusts, bypass trusts, ILITs) can reduce or eliminate estate tax liability. But they’re permanent — you give up control of the assets. Work with both a financial advisor and an estate planning attorney to structure this correctly.
Schedule a free 20-minute consultation to review your estate tax exposure, especially with the 2026 sunset approaching.
R.L. Brown Wealth Management
106 W Vine St, Suite 300, Lexington, KY 40507
859.317.5889
