Basics of estate tax - YouTube

Voiceover: What I want to do in this video

is think a little bit about the estate tax.

Estate tax.

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.

Inheritance tax.

Sometimes you'll hear it talked this ways on the news.

Maybe it's a little bit derisive.

It's called a death tax.

A death tax.

The general idea, let's say that right now,

my entire net worth, I am worth $3,000,000.

I am worth $3,000,000.

Then I pass away,

so this $3,000,000 goes into my estate.

This is my estate.

This $3,000,000 could be all of my savings;

could be my stock portfolio;

could be the value of my land, my real estate;

everything I own; my car.

Everything combined is worth $3,000,000.

It goes into my estate after I pass.

Let's say I leave everything in my estate

to my daughter.

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 $3,000,000

my daughter is exempt for inheritance.

From an individual, the first $5,000,000 are exempt.

In this situation,

where I'm leaving $3,000,000 for my daughter,

she actually will get the entire $3,000,000.

If, let's say, I'm even richer than that.

Let's say that I have $6,000,000.

Let's say the scenario, where I have $6,000,000.

It all goes to my estate.

It all goes into the estate after my death,

and now the first $5,000,000 is exempt.

Let me write my daughter over here.

My daughter will get the first 5,000,000 tax free.

5,000,000 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 to go with 35%,

and that's actually the rate in 2011.

The rest of the 1,000,000,

the 1,000,000 taxed at 35%.

The Federal Government will tax 35% of the 1,000,000,

so they will essentially take 350,000 for themselves.

350,000 for themselves,

and my daughter will be left with 5,650,000,

because of this 1,000,000 you take out 350,000.

You have 650,000 left.

My daughter, in this situation,

will be left with ...

Maybe I can write "$5.65 million."

The Federal Government took 350,000.

If I am super-rich,

let's say that I am worth ...

let me make a number to make the math easy,

so I don't have to get a calculator out.

Let's say that I am worth $1,005,000,000.

This is my net worth.

In this situation, the first 5,000,000 will be excluded,

so my daughter will get the 5,000,000.

Will get the 5,000,000 directly.

That will be excluded.

Then everything above that will be taxed at the 35%.

In this situation, you have $1,000,000,000 taxed at 35%.

1,000,000,000 at 35%.

In this scenario, the Federal Government

will take $350,000,000.

Would take $350,000,000, and so that would leave,

of this billion, $650,000,000 left for my daughter.

In total, she would get this 650,000,000,

plus the 5,000,000 that was excluded.

She would end up with a total of $655,000,000.

I wouldn't feel too bad for her.

She should be pretty okay.

That's just how the estate tax works.

These examples I gave,

the 5,000,000 that is excluded,

this is for an individual when they pass away.

If it's being done as a couple,

this exemption is actually 10,000,000.

If, between my wife and I,

we have $1,005,000,000,

and let's say I pass away,

and we own everything collectively,

she actually gets the extra joint exemption passed onto her,

and then if and when she passes away,

this would be $10,000,000 that will be tax-free.

In this scenario, if this is being done as a couple,

my daughter would get the entire $6,000,000.