Posted by John Posey on May 26, 2020
Did you realize there’s actually a difference between estate taxes and inheritance taxes? I have heard the two sometimes referred to interchangeably, but they are very much separate from one another. The key difference is an estate tax is assessed against the value of the estate and inheritance tax is assessed against bequests to specific classes of beneficiaries (ie – immediate relative, remote relative or non-relative). Estate taxes are paid before money is distributed to heirs and inheritance taxes are paid by the heirs receiving the assets. As of 2019, many states don’t have an estate or inheritance tax, but remember federal estate taxes can still apply depending on the size of your estate. In 2020, there is a $11.58M federal estate tax exemption per individual / $23.16M federal estate tax exemption per couple. A few states have either a state estate tax or an inheritance tax and in some cases both. NOTE: State laws change frequently so you should double check your state’s rules when evaluating your estate plan. A 2019 state-by-state summary of estate and inheritance tax can be referenced here. Be sure to check your specific state’s laws for the important and relevant details.
All you fellow Nebraskans currently have a potential inheritance tax situation. Even those non-Nebraska residents that own real estate in Nebraska are subject to Nebraska inheritance tax. I think I hear the “Go Big Red” chants slowly fading. Now I’d like us to be more like the other thirty some odd states that don’t have these taxes and I’d also like a football team that could make a bowl game in three years, but I digress. We have to play the hand we’re dealt so here we go…no fear of failure as Coach Frost would say! Here’s how the Nebraska inheritance tax works:
- Surviving spouses & charities: entirely exempt
- Immediate relatives including parents, grandparents, siblings, children including those legally adopted and any other lineal descendant: $40,000 exemption per beneficiary – 1% inheritance tax
- Remote relatives including uncles, aunts, nieces or nephews related to the descendent by blood or legal adoption, or lineal decedents of the same or the spouse/surviving spouse of any such persons: $15,000 exemption per beneficiary – 13% inheritance tax
- Non-relatives: $10,000 exemption per beneficiary – 18% inheritance tax
So, what’s the moral of the story? Your ultimate benefactors are going to have to forgo some of their inheritance to pay inheritance tax unless you’re leaving it all to charity. The larger the inheritance, the larger the inheritance tax liability will be, and it will be substantially larger for remote and non-relative beneficiaries. Here’s a few thoughts you may consider as you look at your estate plan:
- Is it likely my beneficiaries will have a significant inheritance tax burden (tens of thousands in taxes or more) upon my estate transfer?
- If so, will my estate have the cash and liquidity to cover the inheritance taxes or do my beneficiaries have sufficient financial means to take care of it?
- How likely is it that my beneficiaries may have to start selling illiquid assets like real estate to cover the expenses of the estate? Am I okay with that?
If you have an estate made up of a lot of valuable, illiquid assets such as real estate and business assets (ie - machinery), which is common in rural America, liquidity may be lacking especially considering the tax burden for remote and non-relative beneficiaries. If you want to limit the odds beneficiaries may have to start liquidating real estate and other non-liquid assets to cover estate expenses best to start planning ahead now. Life insurance proceeds and liquid assets like cash, CDs and investment accounts can be very useful in these situations. Here’s a side note on life insurance: have your beneficiaries listed as individuals or potentially a trust, but DO NOT use your estate. Life insurance proceeds payable to the decedent’s estate are included in the value of the estate hence subjecting it to potential federal and state estate taxes.
Now if you have potential federal estate tax issue (ie – In 2020, assets in excess of $11.58M individual or $23.16M for couples), you’d be wise to do some thorough planning with an attorney that may involve irrevocable trusts, second-to-die life insurance, limited partnerships among other estate planning techniques. The federal and state departments of revenue aren’t even going to send you so much as a thank you letter for all the money in taxes you stand to give them from a lack of planning.
Even if your perspective is, “Heck, let the beneficiaries figure it out. I can’t take it with me!”, you may want to mention these feelings to your heirs so they aren’t slapped in the face with it later.
Advisory services offered through Plains Advisory LLC, an investment adviser registered with the State of Nebraska. Insurance products and services are offered and sold separately through John Posey, a licensed insurance agent. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.
Any information provided is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal, tax, financial or investing advice and cannot be used to avoid tax penalties or to promote, market, or recommend any plan or arrangement. Please note that Plains Advisory LLC does not give legal advice. You are encouraged to consult an attorney.