LINCOLN ESTATE & PROBATE ATTORNEY

The state of Nebraska has adopted the Uniform Probate Code (UPC) which established procedures that should be followed to probate (or validate) an Estate. Other states have also adopted the UPC, but this website details only the procedures that are normally followed in Nebraska.

Personal Representative

Someone who is interested in the Estate, usually an heir or nominee in a Will, begins the Probate process by filing a Petition for Appointment of a PERSONAL REPRESENTATIVE and obtaining Letters of PERSONAL REPRESENTATIVE from the County Court. These letters are official notice to the world that the PERSONAL REPRESENTATIVE has authority to work on behalf of the Estate in managing the property and debts of the decedent.

Generally, the Will nominates a PERSONAL REPRESENTATIVE, but in the absence of a Will or if the nominated person declines, then the UPC procedures list those who have priority. Unless waived by the Will or by all heirs, the PERSONAL REPRESENTATIVE must buy an insurance bond equal to the value of the liquid assets of the Estate. Much like any other insurance policy, the cost of this bond can be several hundred dollars, but is an expense that is paid from the assets of the Estate. Sometimes, however, an insurance company refuses to issue such a bond if the PERSONAL REPRESENTATIVE has credit problems or has no assets.

The PERSONAL REPRESENTATIVE has two basic functions:

• Deal with all of the decedent's creditors.
• Convey the Estate property with marketable title to the proper heirs.

THE County Court Clerk will send a Notice of Appointment and a Notice to Creditors to a local newspaper for publication and the attorney involved will send copies of the notice to all interested parties including known creditors.

Interested Parties
INTERESTED PARTIES are defined as:

• all creditors of the decedent
• all persons named in the Will
• all heirs who would have rights by statute if there was no Will

INTERESTED PARTIES, who might not otherwise be known, can demand that they be given notice of each proceeding in the Estate probate.

Creditors' Claims
Secured creditors generally do not need to file a CLAIM to protect their interests. Unsecured creditors, must file their CLAIMS within 60 days after the notice is first published. The Personal Representative may be personally liable for any creditor CLAIMS due if he or she distributes out Estate property without reserving enough money to pay valid claims.

The IRS and the Nebraska Department of Revenue may also protect their CLAIMS for the decedent's income taxes without filing a CLAIM. The Personal Representative is personally liable for any taxes due if he or she pays out property of the Estate before paying such taxes. Therefore, it is important that the Personal Representative ensures that tax returns are prepared and that taxes are paid for any years during which the decedent had income, including the last year of life.

If any CLAIM seems invalid, the Personal Representative can file an objection within four months after the notice was first published. The objected claimant then has 30 days to file a suit on his CLAIM against the Estate. The judge will hold a hearing and determine the validity of the CLAIM.

Taxable Income
The property an heir receives is generally not considered TAXABLE INCOME for the heir. Exceptions to this are IRAs, 401(k) benefits, some government bonds, and other items on which the decedent had not yet paid income taxes. If the Estate receives INCOME (after the date of death of the decedent) such as interest on savings accounts, the Estate can distribute this INCOME to the heirs and thereby avoid paying income tax. But, the heir must then claim that INCOME and pay applicable income tax.

It is recommended that the Personal Representative consider obtaining a Federal tax EIN for the Estate. One is actually necessary if the Estate expects to have TAXABLE INCOME and files a required income tax return, or if it will file a return for Federal Estate Taxes.

While it may seem expedient to avoid filing an income tax return for the Estate (Form 1041), in most cases it is actually better for the heirs if the Estate does claim INCOME and file a tax return. In fact, the Estate may be able to deduct certain expenses that would not otherwise be deductible by the heirs.

Capital Gains tax can be minimized by inheriting appreciated property rather than by receiving the property as a gift from the decedent before death. An heir receives, as his or her basis in assets, the fair market value of the property on the date of death of the decedent. So, if the heir sells the property for the same Fair Market Value, then the heir has no gain and would not have to pay income tax on that property. But, an heir who receives appreciated property as a gift during life, is also given the donor's basis in the property. If the heir then later sells the gifted property, he/she is obliged to recognize any gain and pay applicable Capital Gains Tax. Usually, an owner's basis is the amount the owner paid to purchase the asset.

Inventory
The next step is to prepare an INVENTORY which is a list of all the property (ASSETS) owned by the decedent at the time of death. The property includes real estate (land and anything permanently attached to the land) and personal property (everything else the decedent owns, including cars, bank accounts, rights to sue someone, etc.). The INVENTORY states the value of all these items as of the date of the decedent's death. The INVENTORY must be filed with the court and must be sent to interested parties within three months after the Personal Representative is appointed.

Interestingly, certain rights that the decedent had while alive will dramatically change in value at death. For example, a person's "life estate" (the right to use property until his/her time of death) will be of no value (to the Estate or any heirs) the moment the person dies. On the other hand, some property holds little or no value during a person's life but becomes very valuable at the time of death. For instance, a life insurance policy may have a small actual cash value during a person's life, but may provide for a large death benefit upon that person's death.

Inheritance Tax

After all assets are found and valued, and after all claims have been filed and properly handled, the Personal Representative begins the proceeding to determine INHERITANCE TAXES. INHERITANCE TAX is a lien that is automatically attached to all the property of the Estate. If the Estate does not pay the INHERITANCE TAX, then the heir receiving the property is responsible for this tax. The lien is a "flaw in title" that remains on all of the decedent's real estate titles until it is paid. Interest begins to accrue on the INHERITANCE TAX at the rate of 14% per year starting one year after date of death. And, while the lien itself expires after 10 years, the obligation to pay the INHERITANCE TAX never expires and the interest continues to add on.

For the spouse of the decedent, there is no INHERITANCE TAX. For ancestors and lineal descendants (parents, children, grandchildren, etc.) the INHERITANCE TAX is 1% of the property each receives, after an initial exemption of $40,000 in property per descendant. For more distant relatives like aunts, nephews and cousins, the rate is 13% on property after an exempt amount of $15,000. For friends (non-relatives), the rate is 18% on property after an exempt amount of $10,000.

Please note that the INHERITANCE TAX rates were different for persons who died prior to January 1, 2008.

Federal Estate Tax
Our federal government also charges a tax when a person dies. FEDERAL ESTATE TAX is a tax that is assessed against the decedent's Estate for all property that is passed on to anyone (except the surviving spouse, who is not obliged to pay Estate tax), including life insurance benefits in some cases. Due to recent changes in federal law for decedents dying in 2011 and 2012, a decedent's Estate is exempt from FEDERAL ESTATE TAX for up to $5-million worth of property that is passed in any form to anyone (except the surviving spouse, who can receive any amount without paying Estate tax). However, once the exemption is exceeded, the remaining amounts of the Estate are assessed a tax rate that exceeds 40%. Current federal tax law states that there will be no FEDERAL ESTATE TAX applied for decedents who died during the year of 2010. But, beginning in 2013, the rates will be reinstated on estates exceeding $1-million unless Congress again changes the law.

Nebraska Estate Tax
Nebraska recently repealed its Estate Tax.

Who Gets the Property
Generally, the Will controls who gets PROPERTY from the Estate, but there are certain exceptions. Jointly owned PROPERTY passes to the surviving joint owner(s) no matter what the Will says. Similarly, PROPERTY for which there is a named beneficiary or a named Payee on Death (POD) will pass to that beneficiary or payee. A surviving spouse can claim Probate Property (property owned solely by the decedent or owned as Tenants in Common) even before creditors and other heirs. Of this Probate Property, if the decedent died before January 1, 2011 a surviving spouse can claim $7,500 as a Homestead Allowance, $5000 as Exempt Property, and $9,000 as Family Support. If the decedent died after January 1, 2011 a surviving spouse can claim a $20,000 Homestead Allowance, $12,500 in Exempt Property, and $20,000 as spousal support.  If there is no spouse, then the minor children can share in those exemptions. If the children are adult and not dependent, then the children can share in only the Exempt Property.

Next, creditors are paid to the extent there is enough PROPERTY left to pay them. They are paid in the following order of priority:

• Secured creditors (creditors with a mortgage or lien on the asset)
  - They are paid first, even before the transfers of exempt property
  and the like.
• Administrative fees (for the lawyer and Personal Representative)
• Funeral home expenses
• Federal taxes
• State Taxes, (including reimbursement of certain Medicaid benefits)
• Final medical bills
• All other creditors

However, the State of Nebraska can in some cases claim reimbursement for Medicaid benefits ahead of Exempt Property rights of adult children.

Finally, the donees and recipients of the Will get what is left over, in proportions that are stated in the Will.

Note that a Will cannot entirely cut out a spouse, and the Exempt Property cannot be denied a spouse or children. Children can, however, be cut out of a Will with a clear and specific statement by the Decedent (who is the testator of the Will).

If there is no Will, then UPC procedures determine who gets the PROPERTY, passing to heirs in the following order:

1. Spouse*
2. If no spouse, children
3. If no children, parents of decedent
4. If no parents, THEN siblings, then cousins, etc.

*If the surviving spouse is the parent of all the children, then the spouse gets the first $100,000 and half of the rest. The children then split the other half. If the spouse is not the parent of all of the children then the spouse gets half and the children get the other half. If there is no family whatsoever, then the State gets the PROPERTY. If there are no children but the decedent has a surviving parent, then the spouse gets the first $100,000 and half of the rest.

Distribution Procedures
DISTRIBUTION to the heirs or devisees is generally prefaced with a Schedule of Distribution mailed to interested parties so that anyone who might feel unhappy has an opportunity to seek a hearing in court. This DISTRIBUTION is usually accompanied with an Accounting or report of all of the income and outgo of the Estate, which details what happened to all of the property.

Closing the Estate
When the Personal Representative believes he/she has properly accounted for and distributed the Estate property, he/she can seek to end his/her duties. Generally this is done via informal procedures where the Personal Representative files a statement with the court indicating that he/she has done everything required. A copy of this statement is also mailed to all the interested parties. The statement can be sent no sooner than five months after opening the Estate. Anyone who objects may seek a hearing in court to address any problems. If no one objects, the Personal Representative's obligations end one year from date of the filing.

Alternatively, the Personal Representative can seek a formal order at a hearing in an effort to expedite the termination of his/her duties. The Personal Representative can do so at any time. If the judge rules that the Personal Representative has properly done everything necessary, then the Personal Representative's duties end after 30 days (the time allowed to appeal the judge's order). However, there are additional expenses associated with a formal hearing and so it is seldom done unless potential litigation makes it useful or necessary.

Legal Advice
The lawyer for the Estate is generally the advisor to the Personal Representative. The lawyer has no control over the Personal Representative, but is ethically bound to help the Personal Representative comply with the law and with the obligation to treat everyone fairly as the law provides. Generally, the Personal Representative's advising lawyer is not also an advisor for the heirs. The Personal Representative's advising lawyer is, however, ethically bound to suggest that others who have concerns seek another lawyer.

Legal Fees and Costs
In general, the LEGAL FEES involved in a typical probate proceeding are substantially less than the TYPICAL capital gains taxes that are avoided. However, LEGAL FEES can become substantial when heirs decide to litigate. Litigation can be stimulated by ambiguous terms in the Will, uncertainty of value in items of property distributed in kind, disagreements over the actions taken to protect or sell assets, etc.

It seems that psychology becomes a factor in some cases as well and that a forthright presentation of the facts by the Personal Representative eliminates much distrust and litigation. This is true even when the Personal Representative would prefer to shield an heir from bad news such as information showing the Will's less than favorable treatment of the heir.