Federal Estate Tax and Nebraska Inheritance Tax Update and Possible Future Changes

A Nebraska resident potentially faces two types of taxes on the transfer of their assets at death: 1. The Federal Estate Tax, and 2. The Nebraska Inheritance Tax. These two taxes are commonly referred to as “death taxes.”

THE FEDERAL ESTATE TAX

The federal tax that can affect a deceased Nebraska resident and their heirs is the Federal Estate and Gift tax. The estate tax is a tax imposed by the federal government and enforced by the Internal Revenue Service. The tax is based upon the gross value of all assets owned by the deceased person valued at their date of death less certain allowed deductions and exemptions. The Tax Cuts and Jobs Act (TCJA) of 2017 provided for exemptions from estate tax on the following amounts:

The Federal Estate Tax will continue to have the $13,610,000 exemption until 2025. On December 31, 2025, the $13,610,000 exemption amount is set to expire. Unless Congress passes new estate and gift tax legislation, the exemption amount will revert back to the 2017 amount with adjustments for inflation which is estimated to be approximately $7 million.

The Estate Tax rates start at 18% of the taxable estate value and progressively increases to a 40% rate when the taxable amount of the estate exceeds one million dollars. The tax is due nine months after the death of the decedent.

Six Possible Options When the Current Estate Tax Exemptions Expire

1. Keep the current estate tax exemptions and rates. This would entail passing legislation that would make the current $13,610,000 exemption and the current tax rates permanent.
2. Change the estate tax rate and/or exemption amount. This proposal would propose a combination of lowering the current estate tax rates and increasing the exemption amounts.
3. Repeal the Federal Estate Tax. There have been bills introduced in the U.S. House of Representatives in the past to totally eliminate the Federal Estate Tax. The ability to repeal the Federal Estate Tax is unpredictable, and hinges upon the political leanings and makeup of the Congress and the President.
4. Find a compromise. Congress coming to a consensus for an exemption between $13,610,000 and the $7 million exemption. Alternatively, allowing the current $13,610,000 exemption to extend beyond the tax year 2025, with slight increases in the marginal rates.
5. Congress does nothing. This would cause the higher estate exemption of $13,610,000 to lapse and automatically revert to the lower $7 million exemption for deaths after January 1, 2026. The highest 40% estate brackets would remain in place.
6. Lower the estate tax exemption amount. The American Housing and Economic mobility Act of 2024 proposes lowering the exemption amount to $3.5 million and increase the progressive rate structure to 55% for estates valued between $3.5 million and $13 million, 60% for estates valued between $13 million and $93 million, and 65% for wealthier estates. Also, estates valued at $1 billion or more would see an additional 10% tax surcharge.

Planning for Federal Estate Tax Changes‍

There are a number of strategies that can be used to reduce your estate through gifting. The exemption amounts discussed in this article apply both to exemptions at death as well as amounts you can gift during your life. It may be wise to consider gifting assets while the $13,610,000 exemption from estate and/or gift tax still apply. Also, there are techniques involving the use of irrevocable trusts that allow shifting assets that have appreciation potential to a trust while retaining certain benefits of those assets while reducing the estate and its future appreciation away from being subject to estate taxation. It is important to start planning for these strategies before there is a potential decrease of the unified gift credit.

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THE NEBRASKA INHERITANCE TAX‍

Nebraska is one of only six states that imposes an inheritance tax. Nebraska’s inheritance tax distinguishes itself from the Federal Estate Tax. The Federal Estate Tax is assessed based upon the gross value of the estate minus certain allowed deductions. The estate tax is imposed regardless of who receives the assets from the estate.
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The Nebraska Inheritance Tax is based upon the value of the assets in the estate with certain deductions allowed to arrive at a taxable estate. The tax is then determined by two factors: (1) the total value of the decedent’s assets received by a beneficiary; and (2) the beneficiary’s relationship to the decedent. Any assets that pass to a surviving spouse and qualified charities are completely exempt from taxation. Thereafter, the more remote the relationship to the decedent, the lower the amount exempt from tax and the higher the inheritance tax rate. The inheritance tax is due within 12 months of date of death of the decedent.
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The Nebraska Unicameral passed legislation effective January 1, 2023 that lowered the inheritance tax rate and increased the exemption amounts. The table below summarizes the old inheritance tax rates and exemptions and the changes effective 1/1/2023:

Effective Strategies to Reduce the Nebraska Inheritance Tax‍

Nonresidents who own Nebraska Real Estate
Real estate and tangible property held in Nebraska are subject to the state’s inheritance tax. Intangible assets owned by nonresidents are not subject to the inheritance tax. Nonresidents should consider transferring title to their Nebraska real estate to a separate legal entity as a corporation or limited liability company. The real estate interest is considered an intangible ownership interest held by the nonresident that is not subject to Nebraska Inheritance Tax.

Valuation Discounts for Closely-Held Assets
Interests in closely-held business entities like an LLC, corporation or limited partnership generally is considered to have a lower appraised value due to the interest not having a controlling interest which usually establishes a lower value for the property. This is called a valuation discount. Additionally, it is often considered undesirable to purchase a non-controlling ownership which therefore makes the interest less marketable. This is called a “lack of marketability” discount. These discounts can lower the value of those assets and correspondingly lower the inheritance tax on these assets.

Gifting More than Three Years Before Death
Gifts to any person made prior to three years of the death of the decedent are considered a transfer to that person which is no longer a part of the deceased person’s estate. These gift exclusions are for amounts that are over the annual exclusion amount which in 2024 currently is $18,000. Additionally, gifts made within three years of death can be excluded if they are under the annual exclusion amount.

CONCLUSION

Planning for the Federal Estate Tax and Nebraska Inheritance Tax can be daunting; however, with proper legal guidance, there are many strategies that can help to minimize any “death taxes.” It is important to have a properly drafted estate plan that takes advantage of these legal strategies. There are many changes occurring with death taxes. Clients with existing estate plans should check with their attorney regularly to make certain their estate plans are up to date to assure they are minimizing any federal or state death taxes their estate may incur at death.

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