1) Nebraska Inheritance Tax. Nebraska is one of the few states with an inheritance tax. The rate depends on the beneficiary of an estate. A surviving spouse is completely exempt from Nebraska’s inheritance tax. Immediate relatives, including parents, grandparents, siblings, children and their issue, and the spouse of any such persons, have an exemption amount of $40,000 each; the excess inherited is taxed at 1%. Remote relatives, including aunts, uncles, nieces, and nephews, have an exemption of $15,000; the excess is taxed at 13%. The exemption for the last category, which applies to everyone else, is only $10,000; the excess is taxed at 18%.
2) Federal Estate Tax. The federal estate tax applies to the transfer of assets at death. Currently, each individual has an $11.4 million exemption. That means a person can leave up to $11.4 million to heirs and pay no federal estate or gift tax. Considering the high exemption limit, few people will owe federal estate tax. However, the exemption amount is subject to change and sunsets in 2025, falling back to $5 million. The estate tax rate is also high, 40%. Clearly, politics are at play here. The next President and Congress may have a different idea than the present administration does and reduce the exemption sooner. You will want to keep an eye on the exemption amount and revisit your estate plan regularly.
3) Portability. Upon the death of the first spouse, the surviving spouse may elect to transfer (or port) any unused federal estate exemption to the survivor. That requires a Form 706 Federal Estate Tax Return to be filed within nine months of the date of death of the first spouse. Once filed, the exemption amount that was unused by the deceased spouse will be added to the survivor’s exemption limit. With volatility in our politics, this is an important planning opportunity.
4) Gift Taxes. The gift tax applies to transfers made while a person is living. Currently, an individual can give any number of people up to $15,000 each in a single year without incurring a taxable gift or needing to report the gift. If your gift exceeds $15,000 to any person during the year, you must report it on a gift tax return. However, you will not pay gift tax until your gifts exceed the current federal $11.4 million limit, as it is tied to the estate tax exemption. If the federal estate tax exemption amount decreases significantly, gifting can be an excellent tax planning technique to preserve the higher exemption limit.
5) Step-up in Basis. Upon a decedent’s death, the tax basis of the decedent’s real estate, equipment, livestock, etc. is generally stepped-up to fair market value at the time of the date of death, in the cases of active operation. This generally eliminates or significantly reduces capital gain or ordinary income tax if your heirs sell these assets. Gifted assets do not receive the benefit of the step-up in basis.
By implementing an estate plan tailored to meet your individual needs, you can minimize these tax consequences. Call us today to discuss your estate plan and these taxes as they apply to your unique situation.
Alissa (Doerr) Baier is an attorney with Krotter Law Group PC, LLO. We are a full-service law firm with locations in O’Neill, Atkinson, and Norfolk.