Getting Ahead: Estate & Inheritance Taxes

March 24, 2023

ESTATE AND INHERITANCE TAXES

by Patricia Jones, Alliance Community Task Force: Creating Opportunity

When a person dies, their assets could be subject to estate tax at the federal level and inheritance tax in Nebraska. Both of these were designed to limit the transfer of wealth to people who were not involved in earning it, and they are controversial.

Federal estate taxes were created in 1916, taxing estates valued at over $5 million. This amount changed to $50 million in 1932. In 1940 it dropped to $10 million, then $5, then $3. In 2002-2007 estates worth more than $2 million paid the tax. The exemption amount has increased annually since then.

In 2023, the federal estate tax applies only to estates worth more than $12.92 million. For a married couple, that is a combined exemption of $25.84 million. Only the amount over that threshold is taxed, and the rates are progressive. The first $1 million (over the $12.92 million) is taxed at lower rates – from 18% to 39%. Everything above that is taxed at 40%. This tax applies to about one tenth of one percent of Americans.

One of the reasons people argue that federal estate tax should be eliminated is the fact that there are ways to avoid paying anything at all. Every year, married couples can give away a certain amount in tax-free gifts to other people, including family members.  The annual gift tax limit is currently $16,000 per person. So, a husband and wife could each give away $16,000 every year for a combined $32,000 in annual tax-free gifts. Through annual gifts, married couples can reduce the value of their taxable estate while benefiting their intended beneficiaries.

Estate taxes can often be avoided by setting up a trust. Most trusts give the surviving spouse rights to the assets, with no estate tax on the assets put into this trust. For example, the surviving spouse can draw income from the trust, live in the house, etc. When the surviving spouse dies the trust assets are distributed to the intended beneficiaries.

A charitable trust names a charitable organization as the beneficiary of the trust assets. Assets in the charitable trust can include cash, stocks, real estate, and other property. There is a reason why the super-wealthy have foundations in their names.

A family limited partnership (FLP) is beneficial because it allows family members to pool their assets and then shift them to other members in the family, and it is common in agriculture. The assets you put into an FLP and transfer to others are taken out of your estate, with significant estate tax savings. FLPs offer a strategy for family farms to transition the farm on to the next generation. The older generation manages the operation at first, and the younger generation can, over time, take over the operation.

Nebraska is one of six states that collects an inheritance tax, and counties collect and use this tax. Inheritance tax is not calculated on the total of the estate; it is collected on the amount paid to each person who receives something from the estate.

The tax is levied on Nebraska property inherited from parents, siblings, extended family, and non-relatives. Spouses are exempt and inherit tax-free. Other beneficiaries inherit a certain amount tax-free, but then pay based on their relationship to the deceased. When property is inherited from immediate family members, the value worth more than $100,000 is taxed at 1%. Property inherited from near relatives is taxed at 11% for the part that is worth more than $40,000, and property inherited from distant relatives and non-relatives worth more than $25,000 is taxed at 15%.

The Revenue Committee of the Nebraska Legislature is considering advancing a constitutional amendment, LR23CA, to end inheritance tax. If approved, this would be on the ballot in the next general election for voters to decide.

If these two “death taxes” are ended, we must remember that the dollars collected from them must be made up with other taxes. This would be one more example of transferring tax obligations from the wealthy to those with no assets, again raising taxes on low-income households.

As you consider the benefits of leaving your legacy for the next generation, consider non-profit organizations, such as Snow-Redfern Foundation.  We build partnerships with communities and utilize data to determine how your gifts can best meet the needs of children.  For more information, please contact us or learn more at: https://www.snowredfern.org/give-today