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LB 310 Changes to Inheritance Tax

LB 310 Changes to Inheritance Tax

After many years of debate and proposals, the Nebraska Unicameral passed LB 310 in this past session, which was signed by the governor and is now law. LB 310 provides several small changes which could have a big impact on your estate planning.

Nebraska is one of only six states which imposes an inheritance tax. Iowa recently repealed its inheritance tax, with the tax being completely phased out by 2024. In April 2022, the Platte Institute released a report showing Nebraska has the 12th highest combined tax burden in the US.

The Nebraska inheritance tax rate is based on the beneficiary’s relationship to the decedent. It breaks beneficiaries down into three classes. Based on the beneficiary’s class, the tax exemption and tax rate differ.

Class

Beneficiary Relationship

Exemption

Tax Rate

1

Children/Grandchildren

Siblings

Parent/Grandparent

$40,000

1%

2

Niece/Nephew

Aunt/Uncle

$15,000

13%

3

All others (non-relatives)

$10,000

18%

There is also a fourth class of beneficiaries—those who are entirely exempt from inheritance taxes. This class includes surviving spouses and charity beneficiaries.

In an effort to reduce the burden on families after the loss of a loved one, LB 310 works in two ways to reduce inheritance taxes. Under LB 310, the exemption amount for all beneficiaries increases, and the tax rate decreases. Starting on January 1, 2023, the tax exemptions and rates will be as follows:

Class

Beneficiary Relationship

Exemption

Tax Rate

1

Children/Grandchildren

Sibling

Parent/Grandparent

$100,000

1%

2

Niece/Nephew

Aunt/Uncle

$40,000

11%

3

All others (non-relatives)

$25,000

15%

Additionally, LB310 provides that all beneficiaries under 21 years of age at the time of the decedent’s death, regardless of class, are completely tax-free.

Let’s take an example to show the effect of this change:

Susie died with a net estate of $1,000,000. Susie had five beneficiaries who shared her estate equally: two children, a nephew, a neighbor, and her church. Each received $200,000 under Susie’s will. Under current law, the breakdown of inheritance tax is as follows:

Beneficiary

Class

Inheritance

Exemption

Taxable Amount

Tax Rate

Tax Due

Child One

1

$200,000

$40,000

$160,000

1%

$1,600

Child Two

1

$200,000

$40,000

$160,000

1%

$1,600

Nephew

2

$200,000

$15,000

$185,000

13%

$24,050

Neighbor

3

$200,000

$10,000

$190,000

18%

$34,200

Church

Charity

$200,000

Unlimited

$0

N/A

$0.00

Total

$61,450

And here is the breakdown of tax under LB310:

Beneficiary

Class

Inheritance

Exemption

Taxable Amount

Tax Rate

Tax Due

Child One

1

$200,000

$100,000

$100,000

1%

$1,000

Child Two

1

$200,000

$100,000

$100,000

1%

$1,000

Nephew

2

$200,000

$40,000

$160,000

11%

$17,600

Neighbor

3

$200,000

$25,000

$175,000

15%

$26,250

Church

Charity

$200,000

Unlimited

$0

N/A

$0.00

Total

$45,850

As you can see, LB310 results in these beneficiaries paying a combined $15,600 less in inheritance taxes! This matters for an additional reason many people don’t realize. Most Wills/Trusts direct that the Estate/Trust pay inheritance taxes, not the individual beneficiary. This means that under LB310 each beneficiary would see their distribution from the estate increase by $3,120.

This reduction in tax rates may open up some opportunities in your estate planning that were not available or tax-efficient before. If you would like to discuss how this new law will impact your estate plan, please give Carlson & Blakeman, LLP a call at (402) 858-0996.