Nebraska Inheritance Tax: 1% to Kids, 15% to Strangers

The decision: Margaret’s $300,000, and who gets taxed

Margaret, a 78-year-old widow in Lincoln, Nebraska, has a $300,000 brokerage account she wants to leave to one person. Her question is simple and the answer is not: how much inheritance tax will Nebraska take, and does it matter who she names?

It matters enormously. If Margaret leaves the $300,000 to her daughter, Nebraska’s county inheritance tax is $2,000. If she leaves the same $300,000 to her longtime friend and caregiver, the tax is $41,250. Identical asset, identical amount, identical state — the bill differs by $39,250 based on nothing but the relationship line on the inheritance tax worksheet.

Here is the math, controlled by Neb. Rev. Stat. §77-2004 (immediate relatives) and §77-2006 (unrelated heirs):

• To her daughter (Class 1): 1% × ($300,000 − $100,000 exemption) = 1% × $200,000 = $2,000.
• To her friend (unrelated): 15% × ($300,000 − $25,000 exemption) = 15% × $275,000 = $41,250.

That single fact — that Nebraska taxes the heir by relationship, not the estate by size — is the whole game. It’s why this tax behaves nothing like the federal estate tax, and why the planning moves are different.

Why Nebraska is different: county-collected, relationship-based

Nebraska is one of only five states that still levies an inheritance tax (the others are Kentucky, Maryland, New Jersey, and Pennsylvania). It is the only state where the tax is collected at the county level rather than by the state revenue department. The county court where the decedent was domiciled assesses and keeps the money — inheritance tax funds roughly 4-5% of county budgets statewide, which is precisely why repeated repeal efforts have failed. Counties don’t want to lose the revenue.

An inheritance tax is fundamentally different from an estate tax. The federal estate tax (IRC §2001) is levied on the estate before anything is distributed, based on the estate’s total size. Nebraska’s inheritance tax is levied on each heir’s share after distribution, based on that heir’s relationship to the decedent. There is no estate-size threshold. A $50,000 estate left entirely to a non-relative can owe Nebraska inheritance tax even though it is hundreds of times below the $13.99M federal estate exemption.

The three classes and what each pays

Nebraska sorts every heir into one of three classes. Each class has its own rate and its own per-heir exemption. The exemption is applied separately to each beneficiary, not to the estate as a whole.

Two categories pay nothing at all. A surviving spouse is fully exempt (Neb. Rev. Stat. §77-2004) — spouses never owe Nebraska inheritance tax. And since LB310, any heir who is under age 22 at the date of death is also fully exempt, regardless of class. Charities and certain qualifying organizations are exempt as well.

What LB310 changed in 2023

For more than a century, Nebraska’s inheritance tax was punishing for distant and unrelated heirs — the top rate was 18% and immediate relatives got only a $40,000 exemption. LB310, effective for deaths occurring in 2023 and later, was the first meaningful cut in the tax’s history. It made three changes that matter for planning:

1. Class 1 exemption quadrupled from $40,000 to $100,000 per immediate relative. This is the single largest break — a child inheriting $100,000 or less now owes $0.
2. Top unrelated rate dropped from 18% to 15%. On Margaret’s $300,000-to-a-friend example, that change alone saved roughly $8,250 versus the old law.
3. Under-22 heirs fully exempted. Minor grandchildren, young beneficiaries, and anyone not yet 22 at the date of death pay nothing, regardless of how the relationship class would otherwise score them.

If you read older guidance citing an 18% top rate or a $40,000 Class 1 exemption, it is pre-2023 and wrong for any death occurring now. Use the LB310 figures.

The lifetime-gift lever: Nebraska has no gift tax

Here is the move most Nebraska families miss. Nebraska does not have a gift tax, and gifts made more than three years before death are excluded from the inheritance tax base entirely (Neb. Rev. Stat. §77-2002). That means lifetime gifting is the cleanest way to shrink the taxable inheritance — especially for non-relatives facing the 15% rate.

Federally, you can give up to the $19,000 annual gift exclusion per recipient in 2026 (IRC §2503(b)) with zero federal gift-tax consequence and no use of your $13.99M lifetime exemption. Nebraska piggybacks on that with no gift tax of its own. So if Margaret wanted to benefit her friend, she could give $19,000 per year for several years — moving the money out of the taxable estate while she’s alive, completely free of the 15% inheritance tax, as long as she survives three years past each gift.

Compare the two paths on $114,000 destined for an unrelated heir:

The gift path eliminates the entire $13,350. The catch is the three-year clawback and the need to actually live long enough to complete the gifting — which is why this works best when started early, not on a deathbed.

What most people miss: the trust does not save you here

The single most common Nebraska mistake is assuming a revocable living trust avoids the inheritance tax. It does not. A revocable living trust avoids probate — the court process — but assets passing through the trust to your heirs are still subject to the county inheritance tax based on each heir’s relationship class. Nebraska looks through the trust to the beneficiary. The county still gets its 1%, 11%, or 15%.

People conflate three separate things:

• Probate avoidance (what a living trust, joint titling, and POD/TOD designations do) — saves court time and cost, not inheritance tax.
• Federal estate tax (IRC §2001, $13.99M exemption, 40% rate) — irrelevant to the overwhelming majority of Nebraska estates, which fall far below the federal threshold.
• Nebraska county inheritance tax (relationship-based, no estate-size floor) — the one that actually hits most Nebraska families, and the one the living trust does not touch.

A second myth: that naming a non-relative as a life-insurance beneficiary dodges the tax. Life insurance proceeds paid to a named beneficiary are generally not subject to Nebraska inheritance tax — that is a genuine exemption. But proceeds payable to the estate (no named beneficiary, or the estate is the beneficiary) fall back into the taxable base. Name a person, not the estate.

Worked example: a $600,000 estate split three ways

Walter, a farmer near Grand Island, dies with a $600,000 estate. He leaves $300,000 to his son, $150,000 to his niece, and $150,000 to a neighbor who helped run the farm. Three heirs, three classes, three different bills:

The son inherits twice what the niece does but pays one-sixth the tax. The neighbor and niece inherit the identical $150,000, yet the neighbor pays $6,650 more — purely because “niece” is Class 2 and “neighbor” is unrelated. Walter’s estate is $600,000, far below the $13.99M federal estate exemption, so it owes $0 federal estate tax. Every dollar of the $32,850 is Nebraska county inheritance tax.

The step-up still applies — don’t gift appreciated assets blindly

One more wrinkle that cuts against reflexive lifetime gifting. Assets that pass at death receive a step-up in basis to fair-market value under IRC §1014 — one of the largest breaks in the tax code. Assets you gift during life carry your original cost basis to the recipient (carryover basis), exposing them to capital-gains tax when sold.

So if Margaret’s $300,000 is in highly appreciated stock she bought for $50,000, gifting it to her daughter to dodge a $2,000 Class 1 inheritance tax would saddle the daughter with capital-gains tax on $250,000 of built-in gain. At the 15% federal long-term rate (IRC §1(h)) that is $37,500 — and if the daughter’s modified AGI clears $200,000 (single), the 3.8% Net Investment Income Tax under IRC §1411 stacks on top, pushing the combined federal hit toward 18.8% (roughly $47,000) on the part of the gain above her NIIT threshold. The 1% inheritance tax is trivial next to that lost step-up. Gift cash and low-basis-but-low-appreciation assets; let appreciated assets pass at death for the step-up. The gift lever is powerful for non-relatives facing 15%, but it has to be weighed against the basis step-up it forfeits.

The decision lever

Nebraska’s inheritance tax is a relationship tax, not a wealth tax. The lever you control is who you name and how the assets get there. If your heirs are children, parents, and grandchildren, the 1% rate over a $100,000 exemption is a rounding error — let assets pass at death for the step-up and don’t over-engineer it. If you intend to leave meaningful value to a friend, an unmarried partner, or a distant relative facing the 11% or 15% rate, that is where lifetime annual-exclusion gifting ($19,000 per recipient in 2026), life-insurance beneficiary designations, and charitable structures earn their keep — started early enough to clear the three-year clawback. Run the relationship classes against your beneficiary list, and move the high-rate transfers first.