May 28, 2026
Overview of Nebraska’s Inheritance Tax System
Unlike the federal estate tax, which is imposed on the value of the estate as a whole, Nebraska’s inheritance tax is based on the beneficiary’s relationship to the deceased individual (“decedent”). For decedents who pass away on or after January 1, 2023, beneficiaries are divided into three separate groups or classes:
No inheritance tax is assessed on assets given to any person under age 22, a surviving spouse, or any qualified charity.
Non-Tax Benefits of a Revocable Trust
A revocable living trust functions as a will substitute and probate-avoidance tool. During life, the person creating the trust (known as the “settlor” or “grantor”) typically serves as trustee and retains complete control over the trust assets. The trust also remains fully revocable and amendable while the settlor is alive. In addition, a revocable living trust is disregarded for income tax purposes, so separate income tax returns do not need to be filed for the trust.
At death, however, the trust becomes irrevocable and distributes the trust assets according to its terms. The most common benefits of this structure are administrative rather than tax driven. For example, a revocable trust can help avoid probate, provide greater privacy, facilitate management during incapacity, and simplify the administration of assets located in multiple states. Despite all of these non-tax benefits, assets held in a revocable trust are still treated as transfers that take effect at death for Nebraska inheritance tax purposes.
Why Nebraska Inheritance Tax Still Applies
Nebraska’s inheritance tax statutes apply broadly to transfers occurring by reason of death, regardless of the mechanism used. The result is the same whether property passes by will, intestacy, joint tenancy, beneficiary designation, or a revocable trust. If the transfer takes effect at death, it is potentially subject to inheritance tax.
Avoiding probate, therefore, does not eliminate inheritance tax obligations. In practice, even when no probate estate is opened, inheritance tax proceedings typically still occur at the county court level. Trustees often work with legal counsel to prepare and file the necessary documentation so that the court can determine and approve the inheritance tax due.
Practical Example
Consider a Nebraska resident who creates a revocable trust and transfers all of his assets - valued at $1 million - into the trust. At death, the trust directs that $800,000 be distributed equally to two children (ages 21 and 23), with the remaining $200,000 passing to a close friend. Because all assets are held in the trust, no probate estate is opened. Despite this, Nebraska inheritance tax still applies.
Each child receives $400,000. The child who is under age 22 pays no inheritance tax. For the other child who is age 23, after applying the $100,000 exemption, $300,000 is subject to tax at 1%, resulting in $3,000 of tax. The friend receives $200,000, and after the $25,000 exemption, $175,000 is taxed at 15%, resulting in $26,250 of tax.
When Planning Can Make a Difference
Although a revocable trust alone does not eliminate Nebraska inheritance tax, thoughtful planning can meaningfully affect the overall result.
Because tax rates vary significantly based on the beneficiary’s relationship to the decedent, it is important to understand the after-tax impact of distributions, particularly when non-relatives are involved. In some cases, estate plans are structured so that each beneficiary effectively bears the tax attributable to their share, preserving the intended balance of distributions.
Lifetime transfers may also play a role. Properly structured gifts made during life can reduce the amount transferred at death, although care must be taken to ensure the transfer is complete and not deemed to take effect at death for inheritance tax purposes.
Charitable planning can also be effective. Because charitable beneficiaries are generally exempt from Nebraska inheritance tax, incorporating charitable components into an estate plan can reduce overall tax exposure while advancing philanthropic objectives.
The Bottom Line
A revocable trust remains an effective and often essential estate planning tool. It can streamline administration, protect privacy, and provide continuity in the event of incapacity. However, it is not a mechanism for avoiding Nebraska inheritance tax.
If you need any assistance with Nebraska inheritance tax planning, please contact a member of McGrath North’s Tax and Estate Planning Group.
Do Revocable Trusts Avoid Nebraska Inheritance Tax?
Revocable trusts are widely used and highly effective estate planning tools, offering a range of practical benefits. Nevertheless, clients often ask us whether assets placed in a revocable living trust are exempt from Nebraska inheritance tax. The short answer is no - a revocable trust does not, on its own, avoid inheritance tax. To understand why, it is important to examine how Nebraska’s inheritance tax system works and how it differs from probate.Overview of Nebraska’s Inheritance Tax System
Unlike the federal estate tax, which is imposed on the value of the estate as a whole, Nebraska’s inheritance tax is based on the beneficiary’s relationship to the deceased individual (“decedent”). For decedents who pass away on or after January 1, 2023, beneficiaries are divided into three separate groups or classes:
- Class 1: Immediate relatives (including grandparents, parents, siblings, children, grandchildren, and other lineal descendants) each receive a $100,000 exemption, with amounts above that taxed at 1%.
- Class 2: More remote relatives (including nieces, nephews, aunts, and uncles) each receive a $40,000 exemption, with amounts above that taxed at 11%.
- Class 3: All other beneficiaries (including unmarried partners, friends, and other unrelated individuals) each receive a $25,000 exemption, with amounts above that taxed at 15%.
No inheritance tax is assessed on assets given to any person under age 22, a surviving spouse, or any qualified charity.
Non-Tax Benefits of a Revocable Trust
A revocable living trust functions as a will substitute and probate-avoidance tool. During life, the person creating the trust (known as the “settlor” or “grantor”) typically serves as trustee and retains complete control over the trust assets. The trust also remains fully revocable and amendable while the settlor is alive. In addition, a revocable living trust is disregarded for income tax purposes, so separate income tax returns do not need to be filed for the trust.
At death, however, the trust becomes irrevocable and distributes the trust assets according to its terms. The most common benefits of this structure are administrative rather than tax driven. For example, a revocable trust can help avoid probate, provide greater privacy, facilitate management during incapacity, and simplify the administration of assets located in multiple states. Despite all of these non-tax benefits, assets held in a revocable trust are still treated as transfers that take effect at death for Nebraska inheritance tax purposes.
Why Nebraska Inheritance Tax Still Applies
Nebraska’s inheritance tax statutes apply broadly to transfers occurring by reason of death, regardless of the mechanism used. The result is the same whether property passes by will, intestacy, joint tenancy, beneficiary designation, or a revocable trust. If the transfer takes effect at death, it is potentially subject to inheritance tax.
Avoiding probate, therefore, does not eliminate inheritance tax obligations. In practice, even when no probate estate is opened, inheritance tax proceedings typically still occur at the county court level. Trustees often work with legal counsel to prepare and file the necessary documentation so that the court can determine and approve the inheritance tax due.
Practical Example
Consider a Nebraska resident who creates a revocable trust and transfers all of his assets - valued at $1 million - into the trust. At death, the trust directs that $800,000 be distributed equally to two children (ages 21 and 23), with the remaining $200,000 passing to a close friend. Because all assets are held in the trust, no probate estate is opened. Despite this, Nebraska inheritance tax still applies.
Each child receives $400,000. The child who is under age 22 pays no inheritance tax. For the other child who is age 23, after applying the $100,000 exemption, $300,000 is subject to tax at 1%, resulting in $3,000 of tax. The friend receives $200,000, and after the $25,000 exemption, $175,000 is taxed at 15%, resulting in $26,250 of tax.
When Planning Can Make a Difference
Although a revocable trust alone does not eliminate Nebraska inheritance tax, thoughtful planning can meaningfully affect the overall result.
Because tax rates vary significantly based on the beneficiary’s relationship to the decedent, it is important to understand the after-tax impact of distributions, particularly when non-relatives are involved. In some cases, estate plans are structured so that each beneficiary effectively bears the tax attributable to their share, preserving the intended balance of distributions.
Lifetime transfers may also play a role. Properly structured gifts made during life can reduce the amount transferred at death, although care must be taken to ensure the transfer is complete and not deemed to take effect at death for inheritance tax purposes.
Charitable planning can also be effective. Because charitable beneficiaries are generally exempt from Nebraska inheritance tax, incorporating charitable components into an estate plan can reduce overall tax exposure while advancing philanthropic objectives.
The Bottom Line
A revocable trust remains an effective and often essential estate planning tool. It can streamline administration, protect privacy, and provide continuity in the event of incapacity. However, it is not a mechanism for avoiding Nebraska inheritance tax.
If you need any assistance with Nebraska inheritance tax planning, please contact a member of McGrath North’s Tax and Estate Planning Group.
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