LECTURE 4: ESTATE TAXATION
A transfer may be gratuitous or onerous.
CONCEPT OF TRANSFER TAXATION
Gratuitous
Onerous
1. Donacion inter vivos (during lifetime)
1. Value-added Tax
2. Other Percentage Taxes
2. Donacion mortis causa (death)
3. Excise Taxes
with applicable Documentary Stamp Tax
I.
Gratuitous Transfer: ESTATE TAX
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An estate tax is a tax on the right to transfer certain property at death and on certain transfers which
are made by law equivalent to testamentary disposition (in contemplation of death).
It is an excise tax (a tax impose upon the right or privilege), the object of which is the shifting of
economic benefits and the enjoyment of the property from the deceased to the living.
It accrues as of the time of death of the deceased.
The taxpayer in estate taxation is the estate of the decedent represented by the administrator, executor
or legal heirs.
1. Concept of Succession – a mode of acquisition by virtue of which the property, rights and
obligations to the extent of the value of the inheritance, of a person are transmitted through his
death to another or others by will or by operation of law.
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Will – is an act whereby a person is permitted with the formalities prescribed by law, to control to
a certain degree the disposition of his estate, to take effect after his death. From the moment of
death of the decedent, the rights to the succession are transmitted, and the possession of the
hereditary property is deemed transmitted to the heir.
Kinds of Will:
a. Notarial or Ordinary Will – one which is executed in accordance with the formalities
prescribed by Art. 804 to 808 of the New Civil Code. It is the will that is created for the
testator by a third party, usually his lawyer, follows proper form, signed and dated in front of
the required bumber of witnesses and acknowledged by the presence of a notary public.
b. Holographic Will – is a written will which must be entirely written , dated and signed by
the hand of the testator himself, without the necessity of any witnesses.
c. Codicil – A supplement or addition to a will, made after the execution of a will and
annexed to be taken as part thereof, by which any disposition made in the original will is
explained, added or altered.
2. Elements of Succession
 Decedent – the person whose property is transmitted through succession, whether testamentary,
intestate, or mixed.
 Heir – the person called to the succession either by the provision of a will or by operation of law.
 Estate – refers to all property, rights and obligations of a person which are not extinguished upon
his death.
3. Kinds of Succession
a. Testamentary – results from the designation of an heir, made in a will executed in the form
prescribed by the law.
 The descedent may dispose his properties in his last will and testament in the manner he
wants, however, he must reserve some for certain persons who are called by the law as
compulsory heirs.
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Compulsory heirs are:
i. Legitimate children and descendants, which include legally adopted children
ii. In the absence of legitimate descendants, the legitimate parents or ascendants*
iii. Surviving spouse
iv. Illegitimate child, both natural and spurious
*Note: Legitimate parents or ascendants can only inherit in the absence of legitimate
children or descendants. Brothers and sisters of the decedent are not considered as
compulsory heirs, thus they cannot inherit from the legitime of the decedent
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In the absence of compulsory heirs, the successors would be:
i. Relatives up to 5th degree of consanguinity
ii. If there were no relatives, the government shall inherit the whole estate.
LECTURE 4: ESTATE TAXATION
iii. If there is a will, the decedent may name other persons to inherit the free portion of the
net distributable estate
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Kinds of Successors
i. Legatee – an heir of personal property given by virtue of a will
ii. Devisee – an heir of real property given by virtue of a will
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Under testamentary succession, properties left by the decedent are classified into:
i. Legitime – portion of the testator’s property which could not be disposed freely because
the law has reserved it for the compulsory heirs.
ii. Free portion – part of the whole estate which the testator could dispose of freely through
a written will irrespective of his relationship to the recepient.
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Executor (executrix) is the person nominated by the testator to carry out the directions and
requests in the decedent’s will and to dispose his property according to the decedent’s
testamentary provisions after his death.
b. Legal Intestate Succession – transmission of properties where there is no will, or if there is a
will, such is void or lost its validity, or nobody succeeds the will.
 In the intestate succession, the entire estate of the decedent is distributed to the heirs. The
compulsory heirs in testamentary succession are also the heirs in intestate succession.
However, intestate heirs include brothers and sisters, collateral relatives within the fifth
degree of consanguinity and the state.
 Administrator (administratrix) is the person appointed by the court, in accordance with the
governing statute, to administer and settle intestate estate and such testate estate as no
competent executor designated by the testator.
c.
II.
Mixed Succession – a transmission of properties, which is effected partly by will and partly by
operation of law
Formula in Computing Estate Tax
1. For married decedents (residents and citizens)
Gross Estate
Less: Allowable Deductions
1. Ordinary (ELITE)
Net Estate before Special Deductions
2. Special Deductions
 Family Home
 Medical Expenses
 Standard deduction
 Benefits received under RA 4917
 Share of the Surviving Spouse (1/2 of the
net conjugal/community estate before
special deductions)
Net Taxable Estate
Estate Tax Due
Less: Estate Tax Credit
Estate Tax Payable
Exclusive
Properties
xx
Conjugal/Community
Properties
xx
Total
(xx)
xx
(xx)
xx
(xx)
xx
xx
(xx)
(xx)
(xx)
(xx)
(xx)
xx
xx
(xx)
xx
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As a general rule, obligations contracted during the marriage are presumed to have benefited the
marriage, and are charges againts the community/conjugal property (e.g. funeral expenses,
judicial expenses, claims against the estate).
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Vanishing deduction may be a dedcution against exclusive or community/conjugal property,
depending on the classification of the property to which it is related, if exclusive or
community/conjugal.
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A deduction, whether against exclusive or community/conjugal estate follows the classification of
the property in the gross estate. If the property to which the deductioon is related is exclusive
property in the gross estate, the deduction is against the exclusive gross estate. If the property to
which the deductioon is related is community/conjugal property in the gross estate, the deduction is
against the community/conjugal gross estate.
LECTURE 4: ESTATE TAXATION
2. For single decedents
III.
Gross estate
Less: Ordinary Deductions
Special Deductions
Net Taxable Estate
xx
(xx)
(xx)
xx
Estate Tax Due
Less: Estate Tax Credit
Estate Tax Payable
xx
(xx)
xx
Gross Estate
Residents and Citizens
Non-Resident Aliens
What are included?
How to value?
What are included?
How to value?
1. ALL real properties
wherever situated.
The higher between the
Fair Value or the Zonal
Value.
1.
Real
properties
located ONLY in the
Philippines
The higher between
the Fair Value or the
Zonal Value.
Fair Value at the time of
death
2. Personal properties
located ONLY in the
Philippines:
Fair Value at the time
of death
2.
ALL
properties
situated:
personal
wherever
a. Tangible
b. Intangible
3. Whether real or
personal property:
a. In contemplation
of death
b. Transfer
with
retention
or
reservation
of
certain right
c. Transfer under
general power of
appointment
d. Revocable
transfer
In case of shares of
stocks:
a. If traded in the local
stock exchange, the
MEAN between the
highest and lowest
quotations.
b. If not traded in the
local
stock
exchange:
i. Ordinary shares
– book value
ii. Preferred
shares – par
value
a. If the transfer is a
bona fide sale, no
amount shall be
included in the
gross estate.
b. If the transfer is a
sale but for no or
insufficient
consideration, the
difference
between the FAIR
VALUE at the time
of death and the
consideration
received.
c.
If the transfer is a
sale for no or
insufficient
consideration and
the fair value at
a. Tangible
b. Intangible
properties situated
only
in
the
Philippines unless
exempted on the
basis
of
reciprocity.
The same as residents
and citizens, however,
only for properties
situated
within
the
Philippines.
In case of shares of
stocks, same as
residents and
citizens.
Same valuation as in
the case of residents
and citizens.
LECTURE 4: ESTATE TAXATION
the time of death
is LESS than the
consideration
received,
no
amount shall be
included
in
the
gross estate.
4. Proceeds of life
insurance,
included only if:
a. Whether
REVOCABLE or
IRREVOCABLE,
when
the
beneficiary is
i. The estate
of
the
deceased
ii. His executor
or
iii. His
administrato
r
b. The beneficiary
is
a
third
person, and the
transfer
is
REVOCABLE
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IV.
Amount of proceeds.
Same treatment as in
the case of residents
and citizens, only if
applicable.
What intangible properties are considered as situated within the Philippines?
1. Franchise which must be exercisable in the Philippines;
2. Shares, obligations or bonds issued by domestic corporations;
3. Shares, obligations or bonds issued by any foreign corporation, 85% of business of which is in
the Philippines;
4. Shares, obligations or bonds issued by any foreign corporation, if such shares, obligations or
bonds have acquired business in the Philippines;
5. Shares or rights in any partnership, business or industry established in the Philippines.
Exemptions and Exclusions from Gross Estate
 Under Section 85 and 86 of NIRC
1. Capital or exclusive property of the surviving spouse
2. Properties outside the Philippines of a non-resident alien decedent
3. Intangible personal property of a non-resident alien in the Philippines when the rule of reciprocity
applies.
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Under Section 87 of NIRC
1. Merger of usufruct in the owner of the naked title
2. Transmission or delivery of the inheritance or legacy of the fiduciary heir or legatee to the
fideicommissary
3. Transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance
with the will of the predecessor
4. All bequests, devices, legacies or transfers to social welfare , cultural and charitable institutions,
provided:
i.
No part of the net income of said institution inure to the benefit of any individual;
ii.
Not more than 30% of such transfers shall be used for administration purposes.
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Under Special Laws
1. Proceeds of life insurance and benefits received by members of the GSIS (RA 728)
2. Benefits received by members from SSS by reason of death (RA 1792)
3. Amounts received from Philippine and United States governments for war damages
4. Amounts received from United States Veterans Administration
5. Retirement benefits of officials/employees of a private firm (RA 4917), provided they are
included in the gross estate.
LECTURE 4: ESTATE TAXATION
6. Payments from the Philippines and US governments to the legal heirs of deceased of World War
II Veterans and deceased civilian for supplies/services furnished to the US and Philippine Army
(RA 136)
V.
Property Relationship Between Spouses
Conjugal Partnership
Absolute Community
a. Gratuitous
Exclusive
Communal
b. Onerous
Exclusive
Communal
c.
Exclusive
Exclusive
a. Gratuitous title
Exclusive
Exclusive
b. Onerous Title
Conjugal
Communal
c.
Exclusive
Exclusive
d. In exchange of conjugal/ community
property
Conjugal
Communal
e. Fruits or income from EXCLUSIVE
property
Conjugal
Exclusive
f.
Fruits or income from conjugal/
community property
Conjugal
Communal
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The highlighted rows are the differences between the two systems.
Jewelries shall form part of the communal property (in case of absolute community).
Rules in determining the property of relationship
1. Agreement on marriage settlement
2. If there was no prenuptial agreement and:
i. The date of marriage took place before August 3, 1988, conjugal partnership of gains.
ii. The date of marriage took place on or after August 3, 1988, absolute community of
property.
I. Property acquired BEFORE Marriage
Where the spouse has a legitimate
descendant from a previous marriage
II. Property acquired DURING marriage
VI.
In exchange of EXCLUSIVE property
Deductions
Deductions from gross estate
 Residents and Citizens: ELITE + PP + VD + FH + STD + R + M + Share of the Surviving
Spouse
 Nonresident Aliens: ELITE + PP + VD + Share of the Surviving Spouse
1. Expenses, losses, indebtedness and taxes (please see discussions below).
a. If decedent was a citizen or resident alien, deduct all ELIT.
b. If decedent was a non-resident alien, prorate ELITE as follows:
Phil. Gross Estate
World Estate
x
Total ELITE
2. Transfers for PUBLIC PURPOSE. These are bequests, legacies, devises or transfers for the use of
the government of the Phil. or any political subdivision thereof, exclusively for public purpose.
3. Deduction for property previously taxed (VANISHING DEDUCTION).
4. The family home not exceeding P10,000,000.
5. Standard deduction for citizen or resident alien decedent only of P5,000,000.
6. Retirement benefits received by employees of private firms from private pension plan approved by the
BIR under R.A. 4917.
7. Net share of the surviving spouse in the conjugal partnership property or community property as
diminished by the expenses properly chargeable to such property shall be deducted from the estate.
Expenses, losses, indebtedness, and taxes deductible from gross estate (ELIT)
1. Funeral expenses. Limit is 5% of the gross estate but not exceeding P200,000 (statutory
maximum).
2. Judicial expenses for the testamentary or intestate proceedings.
3. Losses due to fire, storm, shipwreck, or other casualty.
4. Losses due to theft, robbery or embezzlement.
LECTURE 4: ESTATE TAXATION
5. Claims of the decedent against insolvent persons, where the value of the decedent’s interest therein
is included in the gross estate.
6. Claims against the estate, provided that the debt instrument was notarized at the time the
indebtedness was incurred; and, if the loan was contracted within three years before the death of the
decedent, a statement showing the disposition of the proceeds of the loan (or how the proceeds of
the loan was used) must accompany the estate tax return.
7. Unpaid mortgage, where the value of the decedent’s interest, undiminished by the mortgage, is
included in the gross estate.
8. Income tax on income prior to death of the decedent.
9. Property taxes which have accrued prior to death of decedent.
REQUISITES for deduction of losses in Nos. 3 and 4 above
a. The loss is not compensated by insurance or otherwise.
b. The loss is not claimed as a deduction in the estate income tax return.
c. The loss must occur not later than the last day for payment of the estate tax. (The last day for
payment of the estate tax is 6 months from the decedent’s death).
PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION)
1. Purpose - to minimize the effects of a double tax on the same property within a short period of time.
2. Conditions for allowance:
a. There is a property forming a part of the gross estate of the present decedent situated in the
Philippines;
b. The present decedent acquired the property by inheritance or donation within 5 years prior to his
death;
c. The property subject to vanishing deduction can be identified as the one received from the prior
decedent, or from the donor, or can be identified as having been acquired in exchange for the property
so received;
d. The property acquired formed part of the gross estate of the prior decedent, or of the taxable gift of the
donor;
e. The estate tax on the prior transfer or the gift tax on the gift must have been paid; and
f. The estate of the prior decedent has not previously availed of the vanishing deduction.
3. Percentage of vanishing deduction - the rate depends on the interval between the death of present
decedent and death of prior decedent (if the property was acquired by inheritance) or death of present
decedent and date of gift (if the property was acquired by donation), as follows:
More than
Not more than
Percentage
xxx
1 years
100%
1 years
2 years
80%
2 years
3 years
60%
3 years
4 years
40%
4 years
5 years
20%
5 years
Xxx
Xxx
4. Procedures in computing vanishing deduction
a. Determine the initial value by comparing the FMV of the property used in computing the first transfer tax
paid with the FMV of the property in the present decedent. The lower of the two is the initial value.
b. From the initial value taken, deduct any mortgage or lien on the property previously taxed which was
paid by the present decedent prior to his death, where such mortgage or lien was a deduction from the
gross estate of the prior decedent or gross gift of the donor. This is the initial basis.
c. The initial value taken, as reduced by Step (b), shall be further reduced by prorated deductions for
expenses, losses, indebtedness, taxes (ELIT) and transfers for public purpose (PP) only, allocable to
the property previously taxed as follows:
Initial basis
x Deductions = Portion deductible
Gross estate
This is the final basis.
d. Determine the time interval between the death of present decedent and death of prior decedent (if the
property was acquired by inheritance) or death of present decedent and date of gift (if the property was
acquired by donation) to find the applicable percentage of vanishing deduction.
LECTURE 4: ESTATE TAXATION
e. Multiply the final basis by the percentage of vanishing deduction to arrive at the VANISHING
DEDUCTION.
The FAMILY HOME
1. Defined - The family home is the dwelling house where a person and his family reside, and the land on
which it is situated.
2. Value included in the gross estate. The current fair market value or zonal value of the family home,
whichever is higher, shall be included in the gross estate of decedent.
3. Valuation date. The family home shall be valued as of the date of death.
4. Conditions for allowance of deduction:
a. Decedent must have died on or after July 28, 1992.
b. The total value of the family home must be included in the gross estate of the decedent.
c. The family home must be the actual residence of decedent and his family at the time of death, as
certified by the Barangay Captain of the locality where the family home is situated.
d. Deduction cannot exceed the fair market value or zonal value of the family home as included in the
gross estate but not exceeding P10,000,000.
e. It is a deduction from common properties or separate properties of the decedent, as the case maybe.
Tax credit for estate tax paid to a foreign country
1.
2.
Who can claim? Only citizen or resident alien decedent.
Amount Deductible, whichever is lower:
a. Actual estate tax paid abroad
b. Limit
2. Limitations on tax credit:
a. Only one country is involved
Net estate (per Foreign Country)
Total net estate
x
Philippine estate tax
b. Two or more foreign countries are involved
Limit 1: per country
Net estate (per Foreign Country)
Total net estate
x
Philippine estate tax
x
Philippine estate tax
Limit 2: Total Foreign Country
Net estate (all Foreign Countries)
Total net estate
VII.
Compliance Requirements
a. Notice of death shall be given when the value of the gross estate exceeds P 20,000
b. The executor, administrator or any of the legal heirs shall file the notice of death within 2 months after
the decedent’s death or within 2 months after the executor or administrator has qualified.
c. The estate tax return shall be filed within 6 months after the decedent’s death, but may be
extended to not exceeding 30 days if authorized by the BIR Commissioner.
d. When the estate tax return shows a gross value exceeding P 2,000,000, it shall be supported with a
statement duly certified by a CPA.
e. The payment of estate tax shall be made at the time the return is filed. However, the CIR may
allow an extension of until 5 years if settled judicially or 2 years if settled extra-judicially.
LECTURE 4: ESTATE TAXATION