Estate tax introduction | Taxes | Finance & Capital Markets | Khan Academy

Estate tax introduction | Taxes | Finance & Capital Markets | Khan Academy


What I want to do in this video is think a little bit
about the 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 and sometimes you’ll
hear it talk this ways on the news, maybe it’s a little bit derisive. It’s called a death tax. The general idea, let’s say that right now my entire net worth, I am worth $3 million
and then I pass away. This $3 million goes into my estate. This is my estate. So this $3 million could
be all of my savings, could be my stock portfolio, it could be the value of my land, my real estate. Everything I own. My car. Everything combined is worth $3 million. 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 million my daughter is exempt for
inheritance from an individual. The first $5 million are exempt. In this situation where I’m
leaving $3 million for my daughter she actually will get
the entire $3 million. If, let’s say I’m even richer than that. Let’s say that I have $6 million. Let’s say the scenario
where I have $6 million it all goes to my estate after my death and now the first $5 million is exempt. Let me write my daughter over here. 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. For the sake of simplicity I’m going to go with the 35% and that’s actually the rate in 2011. The rest of the 1 million, the 1 million taxed at 35%. The federal government will
tax 35% of the 1 million. They will essentially take
350,000 for themselves and my daughter will be
left with 5,650,000, right? Because of this million
you’d take out 350,000, you have 650,000 left. My daughter in this situation
will be left with $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 that 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 million will be excluded. My daughter will get
the 5 million directly, that will be excluded. Then everything above that
will be taxed at the 35%. In this situation you have
$1 billion taxed at 35%. 1 billion at 35%. In this scenario the federal government will take $350 million and so that would leave of this billion 650 million left my daughter. 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. I wouldn’t feel too bad for her, she should be pretty okay. That’s just how the estate tax works and these examples I
gave with the 5 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. Between my wife and I, we have $1,005,000,000. Let’s say I pass away and we
own everything collectively. She actually gets the
extra joint exemption passed on to her. Then if and when she passes away, this would be $10 million
that will be tax free. In this scenario, if this
is being done as a couple my daughter would get
the entire $6 million. The interesting thing about the estate tax is it’s highly contested. People always debate, is
it wrong or is it right? I’ll talk to you on that a little bit. I’ll let you decide for yourself. But I’ll give, at least, in what I hear is the main arguments for
or against the estate tax. Like most taxes, there’s always someone who will believe that it is unfair. Let me write the for and against. For and against the estate tax. Some people say it’s unfair, “Look. Over the course of my life “I earned all of these 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 able to leave it all to them. “Because obviously $655
million is not enough. “They deserve the entire
$1,005,000,000 for being my child.” So there’s this argument that it is unfair or it’s some 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 stock holders pay taxes again and that’s 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. 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 $5 million or $10 million.” $5 million to $10 million is exempt. The person who’s for the
estate tax would say look, it’s a little disingenuous when you make this
impression that your children are going to suffer. 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
able to get all of that as long as it’s worth
less than $10 million which is not a small amount of money. Even above that, they’re going
to get 65% of everything. It’s not like your children
are going to be left hungry because of the estate tax. It’s actually a very
small number of people that the estate tax will
even hit, really, the rich because even the upper-middle class, very few of them will leave
more than $10 million behind. The other argument is, if you’re going to tax anything. What to tax? Do you tax income? Obviously, you do have to
tax income to some degree to get enough revenue for
the federal government. Isn’t it better to tax someone
who did not work for the money? Someone who’s getting the money, I mean, maybe they already got every
other privilege in life. They went to the best
schools 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
argument someone would make. By the way, they’re sill 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. 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 a broader,
almost a macro view of things of what might be good for society is if you don’t have an estate tax and we know that there’s this
huge fortunes in the world where someone creates
a big business empire and they have billions
upon billions of dollars. If someone has $10 billion, and let’s say they don’t
have that many children that they leave it behind to. Maybe they only have one child and they leave that $10
billion to that one child. Then that one child can
literally just let that income passively earn interest. They’ll never have to work
the rest of their life and through the passive
earnings of just the assets being invested, over the course of that child’s life might grow to $30 billion. It will definitely grow faster
than the economy itself. Then that child, if
they have no estate tax, they’ll pass the $30
billion to their children and then that will grow. What you would have happening
generation after generation is this family, if you
say the person who sets up the empire. Let’s say this is the
entire country’s GDP. Right where the empire sets
up in this person’s lifespan, this is their proportion of the GDP and this is just for simplicity. If you don’t tax it and just
passively over the course of the next lifespan, if there aren’t enough offspring
to split up this fortune, as the GDP grows these
people’s investments will grow even faster passively. Overtime, this family will
grow to own more and more of the nation’s wealth without really having to do anything. It almost creates this nobility class and obviously that’s what, at least many people in the United States view as what’s different about America relative to old Europe,
to what used to happen in terms of the French revolution, and people just inheriting land
generation after generation and never having to work. This right here is a quote
from Winston Churchill on his view of an inheritance tax. He viewed it as a certain corrective against the development of
a race of the idle rich. Anyway, that’s the explanation of it. You can stand for either side of it but hopefully this at
least gives you the tools to think about whether
you’re for or against it.

40 Comments

  1. me2995 says:

    5m tax free, lucky guys over there!

  2. Abd Ul' Raheem Syed says:

    When are you planning to start English Language….I am counting on those vids so much…hopefully the mystery of verb adverb adjective and blah blah will finally be solved for me

  3. Melthornal says:

    @TheDepreso Why should someone who earns a lot of money not be taxed just because their "employer" is their dead parent? Inheritance is no different than a normal income. Why should it not be taxed? The person who initially earned the income paid tax on it. But that person is giving the income to someone else. They are being paid. How is this different than your employer at work paying you? They paid tax on their income, and they pay you to do your job. Should you not have to pay taxes?

  4. annoloki says:

    @johammbass Haha, yep, when Goldman Sachs gets their hands in it, you can kiss it goodbye!!

  5. annoloki says:

    @johammbass Theft is the unlawful taking of somebody's property or possessions, without their permission, with the intent to deprive them of it. When you have a government of the people, tax is simply money that the society club together to spend in a way that benefits the society in a compromised way. Using propaganda etc to corrupt this process to get peoples' money isn't theft. That doesn't make it alright, it's just not what the word "theft" technically means, but the spirit of it is equal.

  6. mrhnm says:

    @annoloki What happens if you don't pay your taxes? You go to jail. What happens if you don't pay the robber with the gun to your head? He shoots you.

    The difference?

    It's okay when the government does it it's not okay when private individual does it.

    Yeah for double standards.

  7. mrhnm says:

    @Melthornal The problem is not with what is taxed. The problem is with taxes period. It is not okay to rob people no matter who does it.

  8. mrhnm says:

    God I shouldn't have clicked on this video I feel so dirty.

    Why taxes are theft period. And saying "your still going to get blipity blipity blu…" Is so asinine.

  9. Melthornal says:

    @mrhnm How then is government paid for? Magic spells?

  10. Melthornal says:

    @mrhnm Also, you pay a fee to your landlord when you rent an apartment, why wouldn't you pay a fee to the government when you live on its land? It is essentially just a form of rent. It is an asset owned by the government, ultimately.

  11. mrhnm says:

    @Melthornal Not if we have property rights. This is a Boolean thing either you have property rights or you don't.

    If you have them then the government doesn't own shit. If we don't then what we have is tyranny.

    Good job for supporting tyranny.

  12. mrhnm says:

    @Melthornal Well you can have citizens who choose to be citizens make a contract, instead of just thrusting the social contract on people. And it is a lump sum not some BS income tax or inheritance tax.

    Plus you get rid of all this nonsense that the government does which it isn't supposed to be doing. You stop empire building and the entitles

    Governments enforce contracts so they get a fee for stamping them.

    So there are ways to do it. The key is to limit what government does, cut out the BS.

  13. Melthornal says:

    @mrhnm And the government charges you a fee for enforcing your rights. Without the government you do not have rights. You can own your house, but the guy who comes over to mow your lawn twice a week gets paid for giving you the service. The government does a whole lot more than mow your lawn.

  14. Melthornal says:

    @mrhnm So basically you want a land owned by corporations, where the individual has absolutely no rights of any kind? You should try out the 1880-1920s. I heard that was a wonderful time in American history.

  15. mrhnm says:

    @Melthornal That's what we have that's not what I want.

  16. mrhnm says:

    @essandee That's the option we have now but I don't think that it is a law of nature.

  17. mrhnm says:

    @Melthornal It shouldn't.

  18. mrhnm says:

    @essandee Certainly but I think you could there are ways to fund without taxes. Or if you must tax without an income tax and inheritance tax.

  19. mrhnm says:

    @essandee I don't like income taxes because then the gov has to be all over your business.

  20. peterK2003 says:

    Does the rate vary by state?

  21. FortNikitaBullion says:

    So what if the family's wealth grows and grows? These people produce goods and services which benefit everyone; everyone's share of the pie might be smaller as a percentage, but the pie as a whole will be bigger.

  22. SimplifyEstate Tax says:

    But the problem is the privately owned companies, that behave better than publicly traded companies.

    If the head of FORD or STARBUCKS dies suddenly – if they were subject to the estate tax – the companies would have to SELL assets to pay the government for the estate tax. People would be outraged if the company had to lay off workers, or fire them.

    Instead, we go after a private business owner, or farmer, who risked it all to create jobs and wealth.

    Why not change the way it's collected?

  23. funkbass says:

    To add to the against argument, a business or estate consisting of mostly illiquid assets (Land, Buildings, Equipment) might be severely impacted depending on the timing of the taxation. Employees may lose their jobs depending on the ability of the estate to pay the tax while continuing a business.

    There is also an argument that the exemption is too low and will impact more middle class estates. Right now 3/13/12 the law is set for the exemption to drop to $1m in 2013 with a 55% tax rate.

  24. Z3rostar says:

    I'd rather see what an individual will do with the 350m than see the government spend it on more wars and oil subsidies.

    The estate tax is unfair, and a more clever society would find a less greedy-looking way to sap wealth from individuals.

  25. Peter Smith says:

    favorite person on youtube

  26. Jerry Callahan says:

    As much as I love your videos Mr. Khan, I think you should do more to counter the estate tax. The estate tax is nothing more than theft of private property, and it destroys capital and destroys businesses.

    If I start a business, and make 1 billion dollars over the course of my lifetime, and I paid TAXES on that 1 billion. Then when I die, shouldn't I have the right to give this 1 billion dollars to my children tax-free? It's my money, why should I have to pay taxes on my money TWICE?

  27. Adam Brower says:

    Probably the most helpful thing on the internet is your videos.

  28. KiDFRANKKK says:

    The video maker is obviously for the death tax.

  29. InstTaxSolutionsLLC says:

    Raw land is one type of asset that can be extremely difficult for one to convert into a cash producing asset. Yet, the estate tax levied against that property can be large.

  30. FortNikitaBullion says:

    What happens if you inherit $10 million from your spouse and then you remarry?  After you die does your new spouse also get exempt?

  31. Mike Sexton says:

    In many circumstances, a person's estate is tied up in a business.  Family farms for instance, can be asset rich, cash poor so they end up having to sell their business and liquidate the assets of the business and that is the most destructive aspect of the estate tax.

  32. Lord McSatan says:

    If your spouse died, you could marry your same sex child and when you died, they wouldn't "inherit" your estate because they'd be married to you, so it's already half theirs. Why is that important? It means the government couldn't get an estate tax out of it. LOL! Prog fails!

  33. Kevin Lerner says:

    I don't see how anyone could be against the estate tax

  34. davideugene says:

    Damn, amazing video!

  35. Abbas Akbar says:

    by how you explained "unfair" I can assume you are for it, lol

  36. tighearn2 says:

    Does the estate tax exception apply to all inheritor's or each inheritor individually? So, I understand that if I have one child, she would get the full $5m.  But what if I have 5 children, is the exception $5m for each child, of only $5m of the estate (so that each child would only receive $1m tax-free)?

  37. av866 says:

    do you have to repeat everything multiple times when you're writing something down? it is really irritating. and for everyone who is going to tell me to not watch if i don't like it, please tell my professor to not substitute these videos in lieu of his own lectures and later quizzing us on it.

  38. GabrielJKF says:

    Irony at its finest: Government: "You can't have all you're parents money- you'll create a nobility class!" The Government then taxes your inheritance. Then the Government uses your inheritance to pay for its re-election campaigns (which keeps its senators in power), debt, etc.- without having to work for it. Now that's a "nobility class".

    Don't you think people should be able to choose what to do with their money when they die, regardless of what the government wants them to do with it? Is it not stealing when the government takes 35% of your inheritance?

    The government was created to protect the people; not steal from it.

  39. Justin says:

    So that's why Billionaires "give away" all their money. (Funnel through nonprofits?)

  40. REF KRIS says:

    Estate Tax is just taxation of money that has already been taxed.

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