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Video transcript

what I want to do in this video is think a little bit about the estate tax estate tax and as the name of the tax implies it is a tax on someone's estate or when someone passes away 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 and sometimes it's referred to as an inheritance tax inheritance tax and sometimes you'll hear talk this way on the news maybe it's a little bit derisive it's called a death tax a death tax and the general idea let's say that right now my entire net worth I am worth three million dollars I am worth three million dollars and then I pass away so this three million dollars goes into my estate so this is my estate and so this three million dollars could be all of my savings could be my stock portfolio could be the value of my land my real estate everything I owned my car everything combined is worth three million dollars it goes into my estate after I after I pass and let's say I leave everything in my estate to my 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 three million dollars my daughter is exempt from a four for inheritance from an individual the first five million dollars are exempt so in the three in this situation where I'm leaving three million dollars for my daughter she actually will get she actually will get the entire three million dollars if let's say I'm even richer than that let's say that I have six million dollars so let's say the scenario we have six million dollars it all goes to my estate it all goes into the estate after my death and now the first five million is exempt so let me write my daughter over here so my daughter will get the first five million tax-free so five million tax-free and then the 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 so the rest of the 1 million the 1 million taxed taxed at 35% so the federal government will tax 35% of the 1 million so they will essentially take 350,000 for themselves 350,000 for themselves and my daughter will be left with 5 million and 650,000 right because of this million you take up 350,000 you have 650,000 left so my daughter in this situation will be left with 5 million 5 million or maybe I could write five point three five point six five million dollars so the federal government took 350 thousand if I am super rich let's say that I am worth 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 billion 1 billion 5 million dollars so this is my net worth in this situation the first 5 million will be excluded so my daughter will get the 5 million will get the 5 million directly that will be excluded and then everything above that will be taxed at the 35% so in this situation you have 1 billion dollars taxed 35% so 1 billion at 35 at 35 percent so in this scenario the federal government the federal government will take 350 million dollars would take 350 million dollars and so that would leave of this billion 650 million left for my daughter so in total she would get this this 650 million plus the 5 million that was excluded she would end up with a total of 655 in dollars so I wouldn't feel too bad for her she should be pretty okay so that's just how the estate tax works and the examples I gave with the five million 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 million so if between my wife and I we have 1 billion 5 million dollars and let's say I pass away and we own everything collectively she actually gets the extra-- joint exemption passed on to her and then if and when she passes away this would be 10 million dollars that will be tax-free so in this scenario if this is being done as a couple my daughter would get the entire six million dollars now the interesting thing about the estate tax is it's highly contested people always debate is it wrong or is it right and I'll touch on that a little bit I don't want to you know I'll let you decide for yourself but I'll give what I at least in what I hear is the main arguments for or against the estate tax so like like most taxes there's always someone who will believe that it is unfair so let me write the let me write the for and against for and against for and against the estate tax so some people say it's unfair look over the course of my life I earned all this money I paid all of these income taxes off of the money I earned and now the stuff that I want to leave behind to my children I am NOT I am NOT able to leave it all to them you know because you know because obviously six hundred fifty five million is not enough they deserve the entire 1 billion five million dollars for being my child and so there's this argument that it is it is unfair or it's some kind of double taxation the money was taxed the first time it was earned and now it's being taxed again once it's being inherited the counter-argument to that is double taxation is everywhere in our society corporations pay taxes and then they give dividends and the owners and the stockholders pay taxes again and that's kind of an exchange for having the limited liability of the corporation you pay taxes on your income and then with that after-tax income you go buy something at the store once again you pay sales tax so double taxation it happens everywhere the for argument and somewhat the counter-argument against the unfairness of it all is that look we're exempting depending on how you view it the first five or ten million dollars so five to ten million is exempt exempt so it's a little bit the person who is for the estate tax would say look it's a little disingenuous when you make this impression that your children are going to suffer because they're not going they're not going to be able to get your house or they're not going to be able to get your car they're going to be getting they're going to be able to get all of that as long as it's worth less than ten million dollars which is not a small amount of money and even above that they're going to get sixty five percent of everything so it's not like your children are going to be left hungry because of the estate tax and it's actually a very small number of people that the estate tax will even hit really the rich because even the the upper-middle class very few of them will leave more than 10 million dollars behind the other argument is if you're going to tax anything so what to tax what to tax do you tax income and obviously you do have to tax income to some degree to get enough revenue for the federal government but isn't it better to tax someone who did not work for the money who's someone who's getting the money I mean maybe they already got every other privilege in life they went to the best schools and and all the rest and through connections maybe good jobs why not tax the person who is already lucky to some degree by virtue of and this is just the the argument someone would make and by the way they're still going to get a lot of that money it's not like they're going to be left poor they're still going to be fine and and to some degree maybe if they have a little bit less it will be more of an incentive for them to work the other argument for the estate tax and this is kind of a broader almost a macro view of things of what might be good for society is is if you don't have an estate tax and we know that there's these huge fortunes in the world where someone creates a big business empire and they have billions upon billions of dollars and if someone has ten billion dollars if someone has ten billion dollars and let's say they don't have that many they don't have that many children that they leave it behind to maybe they only have one child and they leave that ten billion dollars to that one child then that one child can litter just let that income passively earn interest they'll never have to work the rest of their life and through the passive earnings of of just the assets being invested that over the course of that child's life might grow to thirty billion dollars it might it'll definitely grow faster than the economy itself and then that child if they have no estate tax they'll pass the thirty billion dollars to their children and then that will grow and so what you would have happening generation after generation is this family if you say the the the person who sets up the Empire let's say this is the entire country's GDP and right when the Empire sets up in this person's life span this is their proportion of the GDP and this is just for simplicity but if you don't tax it and this just passively over the course of the next lifespan if there aren't enough if there aren't enough offspring to split to split up this fortune as the GDP grows these people's investments will grow even faster passively and so over time this family will grow to own more and more of the nation's wealth without really having to do anything so it almost creates this kind of nobility class and obviously this that's what at least many people in the United States view is what's different about America relative to old Europe to what used to happen in terms of you know the French Revolution and people just inheriting land generation after generation and never having to work and this right here is a quote from Winston Churchill on his on his view of an inheritance tax he viewed it as a certain corrective against the development against the development of a race of the idle rich so anyway that's the explanation of it you can stand for for either side of it but hopefully this at least gives you the tools to think about whether you're for or against it