Nebraska Farm Estate Tax Traps You Must Avoid

Why Nebraska Farm Estates Are Different

Farm and ranch estates in Nebraska face challenges that look very different from a typical suburban or urban estate plan. Most family wealth is tied up in land, equipment, and operating entities, not cash. That makes it harder to:

• Pay estate or inheritance taxes without selling ground
• Divide assets fairly among farming and non-farming children
• Keep the operation financially viable while ownership transitions

Nebraska does not currently impose a separate state estate tax, but counties are authorized to collect an inheritance tax under Neb. Rev. Stat. §§ 77-2001 to 77-2037. The tax generally depends on who receives the property and their relationship to the deceased, and it is administered by the county where the estate is probated. Combined with federal transfer tax rules and rapidly changing agricultural land values, this can create tax and liquidity problems if the plan is not tailored specifically to farm assets.

Trap 1: Confusing Federal Estate Tax With Nebraska Inheritance Tax

A frequent misunderstanding is assuming that if your farm is below the federal estate tax exemption, there is nothing else to worry about. In Nebraska, that assumption can be costly.

Key distinctions:

• Federal estate tax is based on the total value of the decedent’s taxable estate and is administered at the federal level.
• Nebraska inheritance tax is imposed at the county level and is based on who receives the property and their relationship to the deceased, under Neb. Rev. Stat. § 77-2004 and related provisions.

Consequences of this confusion may include:

• Underestimating what your heirs may owe in inheritance tax
• Leaving no cash or liquid assets in the estate to pay the county inheritance tax
• Forcing the sale or partition of farmland so beneficiaries can raise the money

Planning considerations:

• Understand which beneficiaries may face higher inheritance tax rates or lower exemptions than others under Nebraska law.
• Consider balancing bequests (cash, life insurance, and non-farm assets) so that taxes can be paid without selling land.
• Coordinate beneficiary designations on life insurance, pay-on-death accounts, and retirement assets with your overall inheritance tax strategy.

Trap 2: Ignoring How Fast Farmland Values Can Trigger Tax Issues

Nebraska agricultural land values have increased significantly over time in many regions. Federal data show that agricultural land values in the Plains states have risen over the long term, sometimes substantially (USDA NASS, Land Values 2023 Summary). A farm that once looked too small to create any tax issues can, over a generation, grow into an estate large enough to raise serious tax and liquidity concerns, especially when you add:

• Appreciated land
• Mineral interests or wind/solar lease rights
• Grain inventories and livestock
• Machinery, equipment, and farm entities

Common mistakes:

• Relying on old appraisals or county valuations when estimating the tax impact
• Assuming “we’re just a family farm” so we’ll never hit a taxable threshold
• Failing to adjust the plan after acquiring more land or expanding operations

Planning considerations:

• Obtain updated valuations of land and key assets periodically.
• Revisit your estate plan after major purchases, land acquisitions, or structural changes to the operation.
• Consider strategies that spread ownership and future growth among family members in a controlled way.

Trap 3: Planning Only With the Deed, Not the Operation

Many Nebraska farm families focus solely on who gets which parcels of land. But in reality, the success of the next generation depends on transferring the operation as well as the real estate.

Risks of planning only with deeds and simple wills include:

• Splitting a contiguous farm among multiple heirs with no plan for how they will co-own or farm it
• Leaving operating assets (equipment, livestock, grain contracts) out of the discussion
• Creating deadlock between farming and non-farming siblings

This can lead to:

• Forced buyouts at difficult times
• Partition actions or pressured sales of land
• Loss of economies of scale and damage to family relationships

Planning considerations:

• Use operating entities (such as LLCs or corporations) to separate land ownership from the day-to-day farming business.
• Establish buy-sell or transfer agreements that outline how ownership changes will be handled on death, disability, or retirement.
• Coordinate lease arrangements between land-owning entities and the operating entity.

Trap 4: Co-Ownership Without Rules

Leaving farm ground to multiple children in undivided shares is common, but without structure and rules it can create serious long-term problems.

Potential issues with unmanaged co-ownership:

• Disagreements on whether to sell, rent, or keep land in the family
• Conflicts over rent amounts and which tenant gets the lease
• Unequal contributions to taxes, insurance, and improvements
• Difficulty financing improvements or expansions when title is fractured

These problems often show up in the second or third generation, when cousins may not share the same vision for the property. When co-owners cannot agree, Nebraska law allows a co-owner to ask a court to partition the property, which can ultimately result in a court-ordered sale (Neb. Rev. Stat. § 25-21,185 et seq.).

Planning considerations:

• Use an LLC, limited partnership, or other entity to hold the land and spell out voting, transfer, and buyout provisions.
• Establish a written co-ownership or operating agreement addressing buy-sell terms, valuation methods, and dispute resolution.
• Consider giving farming heirs an option or first right to purchase, coupled with a fair valuation process to protect non-farming heirs.

Trap 5: Overlooking Basis Planning and Capital Gains

Tax focus is often on estate and inheritance taxes, but income tax and capital gains can quietly take a large slice of agricultural wealth.

If land is sold or transferred during lifetime without careful planning, family members may:

• Receive a carryover basis and face large capital gains on a later sale
• Lose the opportunity for a basis adjustment at death under federal tax law

On the other hand, holding everything until death without planning can:

• Create liquidity problems for the estate
• Concentrate risk in a single owner and complicate succession

Planning considerations:

• Balance lifetime gifts and entity transfers with the potential benefits of a basis adjustment at death under federal law.
• Coordinate your estate plan with your accountant to understand both transfer tax and income tax implications.
• Keep accurate records of acquisition costs, improvements, and prior transactions to support basis calculations.

Trap 6: Not Using Farm-Specific Federal Tax Relief Provisions

Federal law contains provisions that can help farm families reduce estate tax exposure or spread out tax payments. These can be especially important for Nebraska farm operations that are land-rich and cash-poor.

For example, federal tax law allows:

• Special-use valuation for qualifying real property used in farming, which can reduce the taxable value of the land if strict requirements are met (26 U.S.C. § 2032A).
• Installment payment of certain federal estate taxes for closely held businesses, allowing taxes to be paid over time in qualifying cases (26 U.S.C. § 6166).

If these tools are overlooked or not properly planned for, the estate may:

• Miss opportunities to value farm property in a way that better reflects its actual use
• Lose eligibility for extended payment options because of technical mistakes or ownership structures that do not qualify
• Face sudden tax bills that require liquidation of land or assets

Planning considerations:

• Work with counsel and tax advisors familiar with agricultural provisions of federal estate and income tax law.
• Structure ownership and operations so that the estate can demonstrate that the farm is an active trade or business, not just a passive investment.
• Keep records of farming activity, participation, and management decisions to support any elections your executor may need to make.

Trap 7: Failing to Coordinate Estate Planning With Farm Succession

Estate planning answers who owns what at death. Succession planning addresses who runs the operation, when, and on what terms. Treating these as separate conversations is a common and costly mistake.

Without coordinated succession planning, families may see:

• No clear path for a younger generation to gradually assume management
• Retirement needs of the senior generation competing directly with business capital needs
• Friction between farming and non-farming heirs over compensation, decision-making, and risk

Planning considerations:

• Use tools like gradual buy-ins, sweat equity arrangements, or profit-sharing to transition operational control over time.
• Align your will, trusts, and entity documents so that management and ownership changes are consistent, not contradictory.
• Put expectations in writing—job descriptions, compensation structures, and decision-making authority.

Trap 8: Medicaid, Long-Term Care, and the Farm

Long-term care costs can undermine the best-laid farm succession and estate tax plans if they are not addressed early. Medicaid estate recovery is required under federal law (42 U.S.C. § 1396p(b)) and implemented in Nebraska through Neb. Rev. Stat. § 68-919, which authorizes the state to seek reimbursement from a recipient’s estate for certain Medicaid expenditures after death.

Depending on the situation, these rules can affect:

• Whether and how farm property is considered for eligibility purposes
• Whether the state may seek reimbursement from the estate, potentially impacting what passes to heirs

Common mistakes:

• Transferring land or assets shortly before needing care without understanding Medicaid look-back rules
• Assuming that placing assets in a simple revocable trust shields them from long-term care costs
• Leaving no clear plan for how to pay for care while preserving the operation if possible

Planning considerations:

• Discuss long-term care insurance, savings strategies, and Medicaid planning options well before care is needed.
• Coordinate any farm transfers with legal advice about eligibility rules and potential penalties.
• Make sure powers of attorney and health-care directives are in place so trusted individuals can act if you cannot.

Trap 9: Relying on Out-of-State or Generic Forms

Nebraska farm families sometimes use online forms or documents drafted under another state’s laws. This can be especially risky when Nebraska-specific rules on inheritance tax, property, and probate are involved.

Risks include:

• Documents that are not executed correctly under Nebraska law
• Trusts or wills that do not address Nebraska inheritance tax and local administration practices
• Entity documents that conflict with your estate plan or are unclear about transfer restrictions

Planning considerations:

• Work with advisors who understand Nebraska law and the realities of farm and ranch operations in this state.
• Review existing out-of-state documents to confirm they still function as intended under Nebraska law.
• Update old plans after major life changes—marriage, divorce, death of a spouse, birth of children or grandchildren, or significant changes in your operation.

First Steps for Nebraska Farm Families

You do not need to solve everything at once. Useful first steps include:

1. Inventory your farm assets – land, leases, entities, equipment, livestock, grain, and non-farm assets.
2. Identify your goals – who should own and who should run the operation in 5, 10, and 20 years.
3. Gather existing documents – wills, trusts, deeds, operating agreements, beneficiary designations, and prior appraisals.
4. Meet with qualified advisors – an estate planning attorney experienced with Nebraska farm families, your accountant, and, if helpful, your lender.

A tailored, Nebraska-specific farm estate and succession plan can reduce tax surprises, avoid forced sales, and help preserve both the land and the family relationships that make your operation possible.

Contact our Nebraska farm estate planning team to discuss how these issues apply to your operation and to begin building or updating a comprehensive plan.

Frequently Asked Questions

Does Nebraska have an estate tax on farms?

Nebraska does not currently impose a separate state estate tax, but counties charge an inheritance tax that depends on the beneficiary’s relationship to the person who died. Farm estates still need to plan for this county-level tax, along with any federal estate tax exposure.

Will putting my Nebraska farm in an LLC avoid inheritance tax?

Transferring land into an LLC may help with succession and management, but it does not by itself eliminate Nebraska inheritance tax or federal estate tax. The value of your LLC interests and who receives them will still matter for tax purposes.

How often should a Nebraska farm family update its estate plan?

As a rule of thumb, review your plan every three to five years, and sooner after major events such as buying or selling land, forming an entity, a marriage or divorce, the birth of a child or grandchild, or a significant health change.

Can lifetime gifts of farmland help reduce taxes for my heirs?

Lifetime gifts can shift future appreciation and may reduce transfer taxes in some situations, but they can also affect income tax basis and eligibility for certain farm-specific tax provisions. Work with Nebraska counsel and your tax advisor before making large gifts.

When should Nebraska farmers start planning for long-term care?

It is usually best to discuss long-term care and potential Medicaid planning well before care is needed, often in your 50s or early 60s. Early planning provides more options to balance care needs with preserving the farm when possible.

Important Disclaimer

This blog post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading this article does not create an attorney-client relationship with any law firm or attorney. Laws and regulations change, and how they apply to your situation may vary based on specific facts. You should consult with a qualified Nebraska attorney and other professional advisors about your particular circumstances before making any decisions related to estate, tax, or farm succession planning.