As schooners aged, inevitable leaks jeopardized cargoes of grain and iron. However, leaky vessels could still carry wood, a cargo not easily damaged by exposure to water. Furthermore, soft woods could provide enough buoyancy to keep a flooded schooner afloat. Carrying wood, however, did not save the Kate Kelly. In May 1895, she left Alpena, Michigan, with a load of hemlock railroad ties and perhaps other wood products. The schooner stopped at Sheboygan, Wisconsin, before proceeding down the lake for Chicago.

On Monday morning, May 13, 1895, a vicious spring storm exploded across Lake Michigan, catching the Kate Kelly and sinking her. It is not known what specifically caused her loss, but local farmers reported observing a schooner capsize near where the Kate Kelly was later found. The storm was particularly severe: several vessels sank and many others suffered significant damage. On Tuesday, May 14, 1895, a Kenosha-based tug brought in wreckage that clearly confirmed that the Kate Kelly had gone down.

The following day, the local U.S. Lifesaving Service crew spied a mast protruding several feet from the water. Resting in 10 fathoms (60 feet) of water, the wreck ultimately proved to be the Kate Kelly. On June 9, 1895, diver John Harms explored parts of the wreck and reported that the jib boom and bowsprit were intact. The foremast was gone (its broken remains may have been removed by early salvors to reduce the wreck’s threat to other vessels), one anchor had been cast overboard, and the mizzenmast was enveloped in a tangle of rigging. Harms found no bodies, but brought up a large section of a flag that had been placed at half-mast in the forward rigging, perhaps a futile attempt at a distress signal. Given the eyewitness account, the distress flag, and the reported condition of the wreck, it seems likely that the Kate Kelly had battled the weather for some time. The end, however, came quickly, with the vessel either capsizing or plunging to the bottom after large seas swept the deck with enough force to tear off the cabin, yawl boat , monkey rails , and anchor.