Protect Heirs from the Nebraska Inheritance Tax with Life Insurance

Nebraska might be a lower-cost place to live, but it’s certainly not a low-cost place to die. The state doesn’t have an estate tax. Instead, it levies an inheritance tax against the individuals who receive property from your estate — and this tax can add up.

Some states consider it a privilege, not a right, to transfer your property to heirs. In Nebraska, it’s a privilege your heirs are going to have to pay for, as anyone receiving property from the estate of a Nebraska resident may be subject to an inheritance tax.

What You Need To Know About Nebraska Death Taxes

In Nebraska, it’s not your estate that gets taxed. The state doesn’t have an overall tax for that. Instead, individual portions of your estate get taxed as they’re transferred to your heirs. People who receive anything from your estate may be subject to an estate tax, depending on their relation to you. Generally, you can break down the overall tax as follows:

Beneficiary Exemption amount Taxable rate after exemption
Spouse or charity All exempt None
Immediate relatives (parents, grandparents, siblings, children) $40,000 1%
Distant relatives (uncles, aunts, or nieces or nephews related to the decedent by blood or legal adoption) $15,000 13%
All others $10,000 18%

One thing that beneficiaries in the state often ask about is if life insurance proceeds are considered taxable. Per state law, “Proceeds of life insurance receivable by the executor or administrator of an estate […] shall be subject to tax.”

Mainly this means that if life insurance proceeds are paid to your estate, then it could potentially cause your beneficiaries to be taxed. However, proceeds paid directly to a living beneficiary, or through an irrevocable trust, are exempt from this tax. This is good news to those who use irrevocable life insurance trusts (ILIT) as part of their estate planning.

How ILITs Protect Your Heirs from Inheritance Tax in Nebraska  

As long as the life insurance policy isn’t considered part of your estate, then it won’t be subject to tax. This can be good news for those who are trying to transfer property, as life insurance can be used to cover that tax.

Consider an instance where you want to pass a $1 million property onto a business partner. The property can’t easily be converted to cash. When they receive the property through your estate, they’re also going to get a tax bill of about $178,000 when you consider the 18% tax rate and the $10,000 exemption. That means that business partner is going to have to come up with those funds if they don’t want to liquidate the property to pay the tax. This is where life insurance held in an irrevocable trust can provide a tax-free pool of funding. Here are just a few of the benefits of using an ILIT in Nebraska:

  • Funds are held outside of your estate and aren’t subject to inheritance tax.
  • Large policies can be purchased for a fraction of the death benefit, creating a pool of funding for heirs.
  • When funded with universal life insurance or less commonly whole life, cash value can be leveraged to reduce premiums.
  • As the funds are managed outside of probate, heirs don’t have to wait for the estate to settle to receive their payment.

ILITs are a common strategy we use when one of our clients may be subject to an estate tax in Nebraska. In addition, Howard Kaye also offers solutions to cover your federal estate tax, meaning you can pass on more of your estate to heirs. If you are a Nebraska resident, contact us at 800-DIE-RICH to create an effective legacy plan.

 

Sources:

“Nebraska Revised Statute 77-2001.” Nebraska Legislature. The Nebraska Unicameral Legislature. 2016. http://nebraskalegislature.gov/laws/statutes.php?statute=77-2001

“Nebraska Revised Statute 77-2004.” Nebraska Legislature. The Nebraska Unicameral Legislature. 2016. http://nebraskalegislature.gov/laws/statutes.php?statute=77-2004

“Nebraska Revised Statute 77-2006.” Nebraska Legislature. The Nebraska Unicameral Legislature. 2016. http://nebraskalegislature.gov/laws/statutes.php?statute=77-2006