What I want to do in this video is think a little bit about the estate tax.
and as the name of the tax implies
it is a tax on someone's estate.
Or when someone passes away;
it is a tax on what they want to leave behind,
to... whoever they want to leave it to.
Either in their will, or in their family,
or whoever they want to leave their stuff to.
Sometimes it's referred to as an inheritance tax.
and sometimes, you'll hear them talk this way on the news,
maybe it's a little bit derisive,
it's called a death tax.
The general idea, lets say that right now my entire net-worth...
I am worth $3 million.
and then I pass away. So this $3 million goes into my estate.
So this is my estate.
And so this $3 million could be all of my savings,
could be my stock portfolio,
could be the value of my land, my real-estate,
every thing I own, my car...
Everything combined is worth $3 million
it goes into my estate after I pass.
Lets say I leave everything in my estate to my daughter.
So I leave it to my daughter.
It's at this point that the estate tax comes into question;
Of how much money will my daughter get?
It turns out for $3 million, my daughter is exempt.
For inheritance from and individual the first $5 million are exempt.
So in this situation where I'm leaving $3 million for my daughter,
she actually will get the entire $3 million.
Lets say I'm even richer then that,
lets say that i have $6 million.
So lets say that the scenario where I have $6 million,
it all goes into my estate...
It all goes into the estate after my death.
And now the first $5 million is exempt.
So let me write my daughter over here.
So my daughter will get the first $5 million tax free.
And then the increment above that exemption,
the increment above what has been excluded,
will then be taxed at a certain rate.
And that rate is constantly changing
but for the sake of simplicity I'm going with the rate of 35%,
and that's the rate in 2011.
So the rest of the $1 million is taxed at 35%.
So the federal government will tax 35% of the $1 million.
So they will essentially take $350 thousand for themselves,
and my daughter will be left with $5,650,000.
Right, because of this $1 million
you take out $350 thousand and you have $650 thousand left.
So my daughter in this situation will be left with $5.65 million,
the federal government took $350 thousand.
If I am super rich. lets say that I am worth...
Let me make a number to make the math easy
so that I don't have to get a calculator out.
Lets say that I am worth $1,005,000,000.
So this is my net worth.
In this situation the first $5 million will be excluded.
So my daughter will get the $5 million...
directly, that will be excluded
and that eveything above that will be taxed at 35%.
So in this situation you have $1 billion taxed at 35%.
So in this scenerio the federal government...
will take $350 million.
And so that will leave of this $1 billion,
$650 million left for my daughter.
So in total she would get
this $650 million,
plus the $5 million that was excluded.
She would end up with a total of $655 million.
So I wouldn't feel too bad for her, she should be pretty ok.
So that's just how the estate tax works.
And these examples I gave of the $5 million that's excluded
this is for an individual... when they pass away.
If it's being done as a couple,
this exemption is actually $10 million.
So if between my wife and I, we have $1,005,000,000
and lets say I pass away, and we own everything collectively,
she actually gets the extra joint exemption passed onto her.
And if and when she passes away this would be $10 million
that will be tax free.
So in this scenario, if this is being done as a couple,
my daughter would get the entire $6 million.
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