13 www.loubar.org July 2024 Elizabeth Monarch MBA, CAI, CRI Auctioneer/Realtor 2023 KYR Realtor State President Lonnie Gann GRI, CAI Auctioneer/Realtor 502.551.1286 auctionsolutionsllc.com Real Estate & Auction Specialist Providing Real Estate & Auction Services: • Estate Liquidation • Senior Living Transitions • Divorce Property Settlements • Business Liquidation • Real and Personal Property Evaluation Serving all of Kentucky and Indiana derbycitylitho.com • duplicatorsales.net 1-800-633-8921 • 831 E. Broadway, Louisville, KY 40204 PRINT, CONNECT, SUCCEED Tailoring your Office Technology Solutions since 1959. Network Printers and Copiers Fleet and Managed Print Solutions Corporate Mailing Systems Computer Systems and Managed IT Document Management Professional Print be, as well as whether or not exempt residu- ary beneficiaries ultimately receive a smaller share of the estate in order to cover the taxes owed by a non-exempt beneficiary. Additionally, clients should be informed of the three year look back rule. Any gifts made by a client to an otherwise non-exempt beneficiary within three years prior to the client’s death – regardless of whether the client was making the gift for estate planning purposes or simply to be charitable to a friend – will be presumed to be made “in contemplation of death” and will incur inheritance tax liability. Transfers made more than three years prior to death can also be subject to inheritance tax if it is determined that such transfer was made “in contemplation of death.” Payment of Inheritance Tax All property belonging to a resident of Ken- tucky is subject to the tax except for real estate located in another state. Also, real estate and personal property located in Kentucky and owned by a nonresident is subject to being taxed. If tax is owed, it must be paid within 18 months of the individual’s death. However, if the tax is paid within nine months of death, a five percent discount is allowed, which can be significant, particularly if a majority of the estate passes to non-exempt beneficiaries. If payment is not made within 18 months, inter- est and penalties begin to accrue. Absent language to the contrary, all execu- tors and administrators (hereafter “personal representatives”), trustees, beneficiaries and heirs shall be personally responsible for the taxes until they are paid, but only to the ex- tent that property from the estate come into their hands, and in no case shall the personal representative or trustee be liable for a greater amount than passes through their hands. KRS 140.190. Courts have held that this joint re- sponsibility to pay the tax generally precludes personal representatives from liability to the beneficiaries for failing to timely pay the tax because, within certain limitations, the obliga- tion to pay the tax is placed as much on the beneficiaries/heirs receiving the property as it is on the personal representative. Motch’s Ex’x v. Motch’s Ex’rs, 306 Ky. 334 (1948). This joint obligation is particularly useful in situations where an individual with a minimal probate estate named a non-exempt individual as a transfer-on-death (TOD) beneficiary of a non-probate asset. For example, say an individual owned a $100,000 savings ac- count at death, along with a $3,000 checking account. The individual, who never married or had children, named a friend as a transfer- on-death beneficiary of the savings account, while the checking account passed through the individual’s probate estate. An inheritance tax of $12,670 will be owed on the transfer to the friend, though the probate estate only consists of $3,000. If the friend refuses to cooperate with the personal representative of the pro- bate estate, the personal representative cannot be held responsible by the friend for either i) failure to obtain the nine month discount, or ii) failure to pay the tax at all. Should a personal representative find them- selves in a situation like the one above, the Kentucky Department of Revenue recom- mends the personal representative make a reasonable effort to collect the tax owed from the non-exempt beneficiary. If the non-exempt beneficiary refuses to cooperate, the Depart- ment advises that the personal representative should i) file the inheritance tax return, ii) pay any tax owed on any probate assets in the personal representative’s hands passing to non-exempt beneficiaries, iii) list the non- probate asset passing to the friend on the return, and iv) make a note that the friend has not paid their share of the inheritance tax liability. The Department will then reach out to the friend to bill them individually for the tax owed. This prevents an uncooperative beneficiary from holding up the administra- tion of the probate estate. Last, inheritance tax owed as a result of certain qualified retirement plans, such as IRAs, can be avoided if certain requirements are met. Under KRS 140.063, an otherwise taxable IRA can avoid triggering inheritance tax if the receiving non-exempt beneficiary enters into an agreement with the custodian of the IRA to make “substantially equal pe- riodic payments from the account over a period exceeding 36 months.” Kentucky law states that this arrangement converts the IRA into an annuity, and annuities are exempt from Kentucky inheritance tax. To prove the above requirements are met, the Kentucky Department of Revenue requires written documentation from the beneficiary and the financial institution managing the IRA evidencing the agreement. Depending on the financial institution, obtaining these written materials can be effortless, impossible and anything in-between. The Kentucky inheritance tax can serve as an unwelcome surprise to personal representa- tives, beneficiaries and attorneys who do not frequently practice in probate. To avoid unnecessary taxes and headaches, attorneys and clients should take a moment to familiar- ize themselves with our unusual tax regime. Matthew Burnett, Dinsmore & Shohl, practices in the areas of estate, gift and income tax planning, asset protection planning, and estate (probate), trust, and guardianship administration. Burnett also advises individual and corporate fiduciaries regarding their responsi- bilities and liabilities, and beneficiaries regarding protecting and securing their interests in wills, trusts and powers of at- torney. Monica Davidson is a Wealth Advisor and Estate Administrator with Stock Yards Bank & Trust Co. Prior to joining Stock Yards Bank & Trust, Davidson practiced law as a sole practitioner for 13 years with an empha- sis on estate planning and administration. Most recently, she worked at Frost Brown Todd as an attorney with the firm’s Electronic Data Discov- ery Group. n (continued from previous page)