State Estate and Inheritance Tax Changes Create Planning Challenges

What Happened

States across America continue reshaping their estate and inheritance tax policies in 2026, creating a complex patchwork of rules that varies dramatically from one jurisdiction to another. While the federal estate tax exemption remains at $15,000,000 for individuals and $30,000,000 for married couples, state-level policies tell a far different story.

Connecticut has aligned its estate tax exemption with federal levels, setting its threshold at $15 million per individual with a flat 12 percent tax rate. New York raised its exemption to $7.35 million but maintains its distinctive "cliff" provision where estates exceeding the exemption by more than 5 percent face taxation on the entire estate value. Rhode Island maintains one of the lowest thresholds at $1.83 million, creating significant tax exposure for moderate-wealth families.

The inheritance tax landscape also shifted significantly when Iowa eliminated its inheritance tax entirely in 2025. This change leaves only five states imposing inheritance taxes: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. These taxes apply to beneficiaries rather than estates, with rates typically varying based on the inheritance size and the beneficiary's relationship to the deceased.

What It Means

For Kentucky families, the state's inheritance tax structure creates unique planning considerations that differ markedly from estate tax states. Kentucky imposes an inheritance tax with varying rates based on the beneficiary's relationship to the deceased. Class A beneficiaries, including surviving spouses, children, and parents, receive complete exemption from Kentucky's inheritance tax. However, more distant relatives and unrelated beneficiaries face tax rates that can significantly impact their inheritance.

The contrast between Kentucky's approach and neighboring states highlights the importance of understanding cross-border implications. While Kentucky families avoid state estate taxes entirely, they must navigate inheritance tax rules that can affect beneficiaries differently based on family relationships. This creates particular challenges for blended families, where stepchildren might face different tax treatment than biological children, and for individuals with significant assets intended for friends or charitable organizations.

Kentucky's probate system adds another layer of complexity to estate settlement. With a $30,000 threshold for small estate procedures, most estates require formal probate administration. The state's 6 months creditor claim period and typical 12 months to 18 months probate timeline mean families face extended settlement periods. Kentucky requires executor bonds, though wills can waive this requirement, adding costs that typically run 0.5% of the estate value annually.

Context from SimplyTrust

These state-by-state variations underscore why estate planning requires careful attention to jurisdiction-specific rules. A revocable living trust can help Kentucky families navigate both inheritance tax implications and probate requirements by providing clear asset management instructions and avoiding the court-supervised probate process entirely. For families with assets in multiple states, trusts offer particular advantages by centralizing asset management under consistent legal frameworks.

Understanding your state's specific requirements becomes crucial when planning for tax efficiency and family protection. SimplyTrust's comprehensive estate planning resources help families navigate these complex state-specific rules while ensuring their plans remain effective regardless of legislative changes. The platform's state-specific document preparation accounts for Kentucky's unique inheritance tax structure and probate requirements, helping families create plans that work within their state's legal framework.

Source: How Inheritance, Estate Taxes Are Changing Across US States – Newsweek