When a person dies a resident of Nebraska or with property located in Nebraska, the Nebraska county inheritance tax will likely apply to the decedent’s property. To determine the applicability and amount of the Nebraska tax, the practitioner’s first step is to determine the relationship of the recipient to the decedent. This dictates the applicable exemption levels and tax rate. Moreover, the practitioner must determine the value of the decedent’s property and whether the nature of the decedent’s property exempts any portion from tax. Finally, within one year of the decedent’s death, an inheritance tax return must be completed, an inheritance tax proceeding must be instituted in the appropriate county court, and the tax must be paid.
Unlike a typical estate tax, Nebraska inheritance tax is measured by the value of the portion of a decedent’s estate that will be received by a beneficiary. Furthermore, the extent to which such portion is subject to tax depends on the decedent’s relation to the beneficiary.
Determine the relationship of the beneficiary to the decedent.
If the decedent’s property passes to his or her spouse in full, no inheritance tax will be due. Nebraska law specifically states that an interest in any property passing from the decedent to a surviving spouse by any means shall not be subject to tax. R.R.S. Neb. § 77-2004. If the decedent’s property passes to his or her parents, grandparents, siblings, children, or any lineal decedents, or the spouse of any such person (so called “Class 1” beneficiaries), the inheritance tax is imposed on the value of property in excess of $40,000 at a rate of 1 percent. (The rules discussed in this article apply for decedent’s dying on or after January 1, 2008.) If the decedent’s property passes to an aunt, uncle, niece, nephew, any lineal decedent of such persons or their spouses (“Class 2” beneficiaries), the tax is imposed on the value of property in excess of $15,000 at a rate of 13 percent. R.R.S. Neb. § 77-2005. For all other beneficiaries (“Class 3”), the rate of tax is 18 percent on the value of the property in excess of $10,000. R.R.S. Neb. § 77-2006. A practitioner should also note that for inheritance tax purposes, Nebraska law will treat as a “child” of the decedent, any person to whom the deceased, for not less than 10 years prior to death, stood in the acknowledged relation of a parent. R.R.S. Neb. § 77-2004.
Determine the property subject to tax and the value thereof.
The Nebraska inheritance tax applies to all property, including life insurance proceeds paid to the estate, which passes by will or intestacy. R.R.S. Neb. § 77-2001. Thus, a practitioner is well advised to note that insurance proceeds payable to a specific beneficiary or living trust will not be subject to tax. In addition, property that is the subject of either: (a) a transfer made in contemplation of death (defined as a transfer made three years prior to death for which a federal gift tax return was required to be filed); (b) a transfer intended to take effect after death; (c) a transfer that results in beneficial entitlement or possession as a result of death; or (d) a transfer that is a result of joint tenancy ownership (except to the extent the property was contributed by the survivor) is also subject to tax. R.R.S. Neb. § 77-2002. Thus, these rules subject property held by revocable trusts and property passing by beneficiary designation (other than life insurance) to Nebraska’s inheritance tax. However, any property passing to the federal or state government or to a religious, charitable, or educational organization is generally exempt from tax. R.R.S. Neb. §§ 77-2007.03, 77-2007.04.
With respect to employee benefit plans, Nebraska law specifically states that such payments are subject to tax if the benefits are subject to federal estate taxation pursuant to IRC § 2039. R.R.S. Neb. § 77-2007. Thus, the value of the benefit payments receivable by the decedent prior to death that were contributed by the decedent or the decedent’s employer should be subject to Nebraska inheritance tax.
Nebraska inheritance tax is imposed on the “clear market value” or “fair market value” of the decedent’s property. See e.g., R.R.S. Neb. § 77-2004. Although these terms are not defined in the Nebraska statutes, the Nebraska regulations state that the fair market value of a property interest such as an annuity, life estate, term for years, remainder or reversion is the present value as determined under the provisions of the Internal Revenue Code. Nebraska Admin. Code Title 316, Ch. 17, Reg-17-001. Thus, to value these types of interests, the practitioner should generally rely on federal tax law. In addition, with respect to real estate, the county attorney generally accepts the assessed value as determined for property tax purposes as the property’s clear market value for inheritance tax purposes.
File a return and initiate a proceeding to determine the tax in the appropriate county.
Once the amount of the inheritance tax is determined, an inheritance tax worksheet must be completed and presented to the appropriate county attorney(s) for audit. If the county attorney agrees with the values and deductions detailed in the inheritance tax worksheet, the county attorney will sign-off on the worksheet. By signing the worksheet, the county attorney enters his or her voluntary appearance in the inheritance tax proceeding and waives his or her right to notice of the proceeding.
Assuming that the county attorney agrees with the inheritance tax worksheet, the personal representative of the decedent’s estate or, if no probate is required, the trustee of the decedent’s trust or other interested person in the decedent’s estate, must petition the county judge for an order determining and assessing inheritance tax. Usually, the decedent’s beneficiaries will agree to enter voluntary appearances, waive notice of the hearing, and enter an agreement to pay the inheritance tax due. However, upon a disagreement, the beneficiaries may file an objection. The proceeding must be instituted and the inheritance tax must be paid within one year of the decedent’s death. R.R.S. Neb. § 77-2010.
Example: David, a Nebraska resident, owns real estate worth $300,000, and bank account worth $500,000. He dies unmarried on January 1, 2008 and gives his property equally to his son Joe, his brother Brian, his nephew Bob, and his unrelated next door neighbor Nick. Brian and Joe, as Class 1 beneficiaries, will pay a 1 percent tax on $160,000 less applicable deductions ($200,000 – $40,000 exemption). Bob, a Class 2 beneficiary, will pay a 13 percent tax on $185,000 less applicable deductions ($200,000 – $15,000 exemption). Finally, Nick, a Class 3 beneficiary, will pay an 18 percent tax on $190,000 less applicable deductions ($200,000 – 10,000 exemption). The tax must be paid and the inheritance tax proceeding must be filed by January 1, 2009.
These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws.