CHAPTER ONE: SUCCESSION AND TRANSFER TAXES
OWNERSHIP MAY BE ACQUIRED THROUGH: (OILDTCPS)
1. Occupation
2. Intellectual creation
3. Law
4. Donation
5. Tradition
6. Contract
7. Prescription
8. Succession
TRANSFER TAXES
- Taxes imposed upon GRATUITOUS disposition of
private properties or rights
- Exercise of a privilege or a right
- Estate and Donor’s Tax
CHARACTERISTICS: (NPGDAE)
- National
- Proportionate
- General
- Direct
- Ad Valorem
- Excise
BUSINESS TAXES
- Taxes imposed upon ONEROUS transfers
DONATION MORTIS CAUSA
- Take effect AT THE TIME of death of donor
- Subject to ESTATE TAX
DONATION INTER VIVOS
- Take effect DURING the lifetime of both donor
and done
- Subject to DONOR’S TAX
CAUSES OF LEGAL SUCCESSION OR INTESTACY:
(IWPWO)
1. If a person dies without a will, or with a void will,
one or which has subsequently lost its validity.
2. When the “will” DOES NOT institute an heir.
3. Partial institution of heir. Consequently, intestacy
takes place as to the undisposed portion. (Mixed)
4. When the heir instituted is INCAPABLE of
succeeding.
5. Other causes such as: (NPFENR)
a. Non-fulfillment of the suspensive condition
b. Preterition – omission of compulsory heir
which has the effect of annulling the
institution of an heir
c. Fulfillment of resolutory condition
d. Expiration of term or period of institution
e. Non-compliance
or
impossibility
of
compliance with the will
f. Repudiation of the instituted heir
ELEMENTS OF SUCCESSION: (DIS)
- ALL must be present, if one is absent there will be
NO succession.
1. Decedent
o Person whose property is transmitted
through succession
o TESTATOR – if he left a will
o EXECUTOR – designated in the will to
carry out the provisions
o ADMINISTRATOR – appointed by court
in lieu of an executor
2.
Inheritance (ESTATE)
o Property, Rights and Obligations NOT
extinguished by death
NOTE: Rights which are purely personal are NOT
transmissible
3.
SUCCESSION
- Gratuitous; Estate taxation
- Mode of acquisition where property, rights and
obligations (NOT extinguished by death) are
transmitted through death to another by will or
law.
- Transmitted FROM THE MOMENT OF DEATH of
decedent notwithstanding the postponement of
actual possession
- Governed by the New Civil Code
Successors (HEIR)
o DEVISEES AND LEGATEES – inheritance
given by virtue of will
o
NOTE: The amount of obligations acquired by an heir
SHOULD NOT BE MORE THAN the combined value of what
he inherited.
SUBJECT MATTER OF TRANSFER TAX: Privilege or Right
AMOUNT: Based on net estate or net gifts
ESTATE TAX
- Accrues AS OF the death of decedent and is
distinct from the obligation to pay.
KINDS OF SUCCESSION
1. TESTAMENTARY OR TESTATE
o Made in a will
2. LEGAL OR INTESTATE
o By law because there is NO will or if the
will is VOID
3. MIXED
o Partly by will and partly by law
COMPULSORY HEIRS – succeed by force
of law to some portion of inheritance in
an amount predetermined by law
(LEGITIME) even without the consent of
testator
§ PRIMARY – have precedence
over
and
exclude
other
compulsory heirs
§ SECONDARY – those who
succeed ONLY in the absence of
the primary
§ CONCURRING
–
succeed
together with the primary and
secondary (illegitimate children
and surviving spouse)
TABLE 1-1
PRIMARY COMPULSORY
A.
Legitimate Children and their
Legitimate Descendant
B.
Surviving Spouse
C.
Illegitimate Children and their
descendants, Legitimate or
Illegitimate
SECONDARY COMPULSORY
D.
Legitimate
Parents
and
Legitimate Ascendants (They
inherit ONLY in default of “A”)
E.
Illegitimate Parents - No other
descendants (They inherit ONLY
in default of “A” AND “C”)
NOTE: Brothers and Sisters are neither compulsory heirs nor strangers.
However, they may be voluntary heirs.
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o VOLUNTARY HEIRS
– instituted by the testator in his will
– entitled to the FREE PORTION
è the value left AFTER deducting legitime
o LEGAL OR INTESTATE HEIRS – by operation of
law
COMPOSITION OF GROSS ESTATE
WILL
-
a strictly personal act whereby a person is
permitted to control to a certain degree the
disposition of his estate
KINDS OF WILL: (NH)
1. NOTARIAL/ORDINARY/ATTESTED WILL (NOA)
o Requisites for a VALID will:
§ MUST BE in writing and in a
language known to the testator
§ MUST BE subscribed at the end
by the testator himself or by his
name
§ MUST BE attested or subscribed
by 3 or more credible witnesses
2.
LEGITIME
- CANNOT be disposed by the testator because the
law has reserved it for certain heirs
- Compulsory heirs CANNOT be deprived of their
legitime except by disinheritance properly
effected
NOTE: The FREE PORTION must be disposed to intestate
heirs based in the following:
TABLE 1-2 (ORDER OF PRIORITY)
1.
2.
3.
4.
5.
6.
7.
Legitimate Children or Descendants (LC)
Legitimate Parents or Ascendants (LP)
Illegitimate Children or Descendants (IC)
Surviving Spouse (SS)
Brother and Sisters, Nephews and Nieces
Other collateral relatives within the 5th degree
State
COLLATERAL RELATIVES
- CONSANGUINITY is the relation of persons
descending from the same stock or common
ancestors
o LINEAL – descended in a direct line
o COLLATERAL – same ancestors
-
AFFINITY is the connection in consequence of
marriage.
HOLOGRAPHIC WILL
o Made by hand of the testator himself
o NO specific form, can be made anywhere
and DOES NOT need witnesses
o CODICIL – supplement or addition to a
will made after execution and annexed to
be taken as a part thereof
o PROBATE OF A WILL – court procedure
by which a will is proved to be valid or
invalid
o INTESTATE PROCEEDINGS – takes place
in absence of a will
FOREIGN WILLS – will of an alien
REVOCATION OF WILLS AND TESTAMENTARY
DISPOSITIONS
- Revoked by testator himself any time before his
death
- Any waiver of this right is VOID
MODES OF REVOKING: (LWCB)
1. Law
2. Will, Codicil
3. Burning, tearing, cancelling, etc. by testator
himself
INSTITUTION OF HEIR – an act where testator designates
in his will the person to succeed him
DISINHERITANCE
- can be effected ONLY through a will wherein the
legal cause shall be specified
- a testamentary disposition by which a
compulsory heir is deprived of inheritance to
which he has a right
- this is NOT applicable to voluntary heirs
REQUISITES: (EFCCUTH)
1. Effected ONLY through a valid will
2. For a cause expressly stated by law
3. Cause MUST BE stated in the will itself
4. Cause MUST BE certain and true
5. Unconditional
6. Total
7. Heir disinherited MUST BE designated specifically
- If without a specific valid cause it shall ANNUL the
institution of the heir
- The children/descendants of persons disinherited
shall take his place with respect to the legitime
which cannot be impaired
COMMON CAUSE FOR DISINHERITANCE: (GAUR)
1. The heir is Guilty of an attempt against the life of
the testator, his/her descendants and spouse
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2.
3.
4.
The heir Accused the testator of a crime with 6
years or more imprisonment and accusation is
found groundless
By fraud, violence, intimidation or Undue
influence causes the testator to make or change
the will
Refusal without justifiable cause
NOTE: The situs of Franchise SHOULD NOT BE based on
the domicile of owner but the place where Franchise is
exercised.
INTANGIBLE ASSETS WITH SITUS “WITHIN” THE PHILIPPINES SECTION 104 OF THE TAX CODE
INTANGIBLE PERSONAL PROPERTY
NOTES:
1.
Franchise
MUST BE exercised in the
Philippines
ACT 2601 – the first estate tax law in the Philippines
RA 8424 – “Tax Reform Act” NIRC
2.
Shares, Bonds, and
Obligations (SBO) issued by
any corporation
Constituted
in
the
Philippines in accordance
with its law
ESTATE TAX
- An excise tax imposed on the privilege to
gratuitously dispose his property upon death
3.
Shares, Bonds, and
Obligations (SBO) issued by
any FOREIGN
CORPORATION
Shares, Bonds, and
Obligations (SBO) issued by
any FOREIGN
CORPORATION
Share or Rights in any
Partnership
85% of the business
located in the Philippines
CHAPTER TWO: GROSS ESTATE
JUSTIFICATION FOR THE IMPOSITION OF ESTATE TAX:
(BPAR)
1. BENEFIT RECEIVED THEORY – the law considers
the service rendered by the government
2.
PRIVILEGE OR STATE PARTNERSHIP THEORY –
inheritance is NOT a right but a privilege granted
by the state
3.
ABILITY TO PAY THEORY – receipt of inheritance
is unearned wealth
4.
REDISTRIBUTION OF WEALTH THEORY –
imposition of tax promotes equitable distribution
of wealth in society
CLASSIFICATION OF TAXPAYERS AND COMPOSITION OF
GROSS ESTATE
RECIPROCITY CLAUSE
- The Tax Code excludes INTANGIBLE PERSONAL
PROPERTY within the Philippines from Gross
Estate of a NRA if there is reciprocity.
INTANGIBLE ASSETS
- Identifiable non-monetary assets without
physical substance
- Exist by legal fiction
- Value from intellectual; or legal rights
- CASH IN BANK and RECEIVABLE are TAXED as
intangible assets
MOBILIA SEQUNTUR PERSONAM
situs is the domicile of the owner; it is NOT
applicable if it has a situs elsewhere
4.
5.
is
Have acquired a business
situs in the Philippines
Established
Philippines
in
the
VALUATION OF GROSS ESTATE:
1. IN GENERAL: FMV @ time of death
2.
REAL PROPERTY: HIGHER between
o FMV determined by Commissioner (zonal
value)
o FMV shown in schedule of city assessors
3.
PERSONAL PROPERTY: FMV @ time of death
4.
SHARES OF STOCK:
o UNLISTED COMMON SHARE – Book
value per share (appraisal surplus SHALL
NOT BE considered)
o UNLISTED PREFERENCE SHARE – Par
value per share
o LISTED SHARE – FMV shall be arithmetic
mean between the highest and lowest
quotation at a date nearest death, if none
is available on the date of death itself
5.
UNITS OF PARTICIPATION IN ANY ASSOCIATION:
Bid price nearest date of death published in any
newspaper or publication
6.
RIGHT TO USUFRUCT: Basic Standard Mortality
Table
EXEMPTIONS AND EXCLUSIONS FROM GROSS ESTATE:
A. EXCLUSIONS UNDER SECTIONS 85 AND 86 OF
THE TAX CODE: (EPI)
1. Exclusive property of the surviving spouse
o CAPITAL – exclusive property of husband
o PARAPHERNAL – exclusive property of
wife
2. Property outside of PH of NRA decedent
3. Intangible personal property in PH of NRA
under the Reciprocity Law
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B. EXCLUSIONS UNDER SECTION 87 OF THE TAX
CODE: (MTTA)
1. The MERGER of the usufruct in the owner of
the naked title.
2. The Transmission or delivery of the
inheritance or legacy by the fiduciary heir (1st
heir/trustee)
or
legatee
to
the
fideicommissary (2nd heir).
o FIDEICOMMISARY SUBSTITUTION:
§ MUST NOT GO beyond one
degree, the 1st and 2nd heir MUST
both be living at time of death of
decedent.
3. The Transmission from 1st heir, legatee or
done in favor of another beneficiary, in
accordance with the desire of the predecessor
(SPECIAL power of appointment)
4. All BEQUEST devises, legacies or transfers to
social welfare, cultural and charitable
institutions, provided that NOT MORE THAN
30% shall be used for administration
purposes.
NOTE: included in the GROSS estate then later taken up as
deduction)
C.
SPECIAL
EXCLUSIONS
UNDER
LAWS:
(GSLLWWUBPTP)
1. GSIS
2. SSS
3. Life insurance proceeds taken out by the
decedent himself upon his own life where the
beneficiary is a 3rd person.
4. Life insurance proceeds in group insurance
taken out by decedent’s employer
5. War damage
6. WWII veterans
7. US veterans
8. Bona fide sales
9. Properties held in trust by decedent
10. Transfers expressly declared as non-taxable
11. Personal Equity and Retirement Account
INCLUSIONS IN THE GROSS ESTATE: (PDP)
A. Property of decedent actually & physically
present in his estate
B. Decedent’s interest – ex: accrued dividends,
partnership profit, usufructuary and rights
C. Property NOT physically in the estate such as:
(CRRGICP)
1. Transfer in Contemplation of death
(testamentary disposition)
2. Transfer with Retention of certain rights
3. Revocable transfers
4. Transfers under a GENERAL power of
appointment
o POWER OF APPOINTMENT – right to
designate who will succeed to the
property of the prior decedent
o GENERAL – when it authorizes the donee
to appoint any person he pleases
o SPECIAL – can only appoint from a
restricted class
5. Transfer for Insufficient consideration
o Sale made for the price LESS THAN its
FMV
o FMV AT TIME OF SALE – to determine
whether or NOT sale was full/adequate
o FMV AT TIME OF DEATH – use to
determine the amount included in the
gross estate
TABLE 2-3 (RULES ON INSUFFICIENT CONSIDERATION)
§
Consideration ³
FMV at the time of
transfer
BONA FIDE SALE. Excluded from the
decedent’s gross estate
§
Consideration <
FMV at the time of
transfer
INSUFFICIENT
CONSIDERATION.
Include in the gross estate the excess of
FMV @ the time of death over the
consideration received.
§
Sale was made in
the ORDINARY
COURSE of trade
BONA FIDE SALE regardless of the
amount of consideration
§
NO consideration
received
EITHER DONATION MORTIS CAUSA subject to estate tax, or DONATION
INTER-VIVOS - subject to donor’s tax
6.
Claims against insolvent persons
o Insolvent person – Assets < Liabilities
NOTE: Condoned debts are considered as DONATION
INTER VIVOS
o The deduction is only the uncollectible
portion
nopqrs t u vuuoqu
Collectible Portion = nopqrs tu wxypxzxqxou 𝑋 𝑪𝒍𝒂𝒊𝒎𝒔
If there are unpaid taxes, SUBTRACT it
from assets and liabilities
Proceeds of Life Insurance taken out by the
decedent on his own life should be INCLUDED
in gross estate if REQUISITES are met: (IBP)
a. It MUST BE an insurance on the life
of the decedent
b. The Beneficiary MUST BE either of
the following:
§ Estate, Executor, Administrator
(revocable or NOT)
§ Any
third
person
whose
designation is REVOCABLE
c. If the Problem is SILENT it is a
REVOCABLE transfer
o
7.
TAX RATE: 6%
NOTICE OF DEATH: was REPEALED by the TRAIN Law,
hence no longer required
TIME FOR FILING: One year from date of death
EXTENSION: NOT exceeding 30 days
TIME FOR PAYMENT: generally PAY AS YOU FILE
EXTENSION: NOT exceeding 5 years (judicial) and
2 years for (extrajudicial)
CHAPTER THREE – DEDUCTIONS FORM THE GROSS
ESTATE
Gross Estate
xxx
LESS: Allowable Deductions
xxx
TAXABLE ESTATE
xxx
è Basis for determining applicable estate tax due
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If NRA, executor/ administrator
will submit the duty notarized
declaration certified by country
of Non-resident Alien
A Statement under oath
§
d.
IF UNPAID OBLIGATION AROSE FROM PURCHASE:
(PDCW)
a. Pertinent documents that serves as evidence of
purchase/ contract
b. Duly notarized certification from creditor of
unpaid balance including interest at the of death.
(same as in simple loan)
c. Certified true copy of latest audited Balance Sheet
d. Where the settlement is made through Court in a
testate or intestate proceeding
TWO CLASSIFICATION OF DEDUCTIONS:
1. ORDINARY
A. LOSSES, INDEBTEDNESS, TAXES, CLAIMS
AGAINST INSOLVENT PERSON (LITe)
è LOSSES
- casualty losses: storms, robbery, etc.
- amount deductible is the value of the
property lost
REQUISTES: (ANNI)
1. Arising exclusively form acts of God/ man
2. NOT compensated by insurance
3. NOT claimed as deduction in Income tax return
(ITR)
4. Incurred during the settlement
UNPAID MORTGAGE/ INDEBTEDNESS ON PROPERTY
- To be allowed as deduction, his gross estate MUST
include Fair Market Value of property
- Amount allowed as deduction would be the
outstanding debt or mortgage
- Verification MUST BE made as to who is
beneficiary of loan proceeds
NOTE: If accommodation loan (other person), the value of
the unpaid loan MUST BE included as a receivable of the
state
In all instances mortgage property to the extent
of the decedent’s interest therein should
ALWAYS form part of the gross estate.
è
TAXES
è
OTHER DEDUCTIONS SUCH AS CLAIMS AGAINST
INSOLVENT PERSON
- These are claims of decedent that are
uncollectible
NOTE: SETTLEMENT PERIOD is the period prescribed by
the law to file and pay the estate tax
è
INDEBTEDNESS or CLAIMS AGAINST THE ESTATE
- Personal obligation existing at the time of
death
- includes mortgage payable
- may arise out of the following sources:
(CTL)
o Contract
o Tort
o Operation of Law
Should be unpaid prior to death
The following should NOT be allowed as
a deduction:
o Income tax on income received
AFTER death
o Property taxes accrued AFTER
death
o Estate Tax
REQUISITES: (IFP)
1.
2.
Incapacity of debtor
Full amount is first included to Gross Estate and
the amount UNCOLLECTIBLE is included in the
Allowable Deductions
3. If PARTIAL PAYMENT, full amount is first
included to Gross Estate and the amount
UNCOLLECTIBLE is included in the Allowable
Deductions
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡𝑠
𝐂𝐎𝐋𝐋𝐄𝐂𝐓𝐈𝐁𝐋𝐄 𝐏𝐎𝐑𝐓𝐈𝐎𝐍 =
𝑥 𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
REQUISITES: (PGVD)
1. Personal obligation existing at the time of death
2. Good faith and for adequate consideration
3. Valid in law and enforceable in court
4. Death MUST NOT have been condoned/ action to
collect prescribed
SUBSTANTATION REQUIREMENTS:
- ALL unpaid obligations are allowed as deduction
provided that the following documents/
requirements are compiled:
1. SIMPLE LOAN (including advances) (DDIS)
a. Debt instrument notarized except for
loans granted by financial institutions
b. Duly notarized certification from creditor
of unpaid balance including interest at
the of death.
NOTE: The one who certifies MUST NOT BE a relative of
the borrower within the 4TH DEGREE
c. In accordance with requirements
prescribed, proof of financial capacity of
the creditor.
-
,
B. TRANSFER FOR PUBLIC USE
- In favor of the government for
exclusively public purposes
- Included first on the Gross Estate then
include Allowable Deductions
- MUST BE acquired GRATUITIOUSLY
C.
VANISHING DEDUCTIONS
- These are deductions for property
previously taxed amount allowed to
reduce taxable estate where the property
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reserved by him from a PRIOR decedent
or donor by: (GRD)
o Gift
o Request
o Device or Inheritance that has
been object of PREVIOUS
transfer
taxation
(remedy
against DOUBLE TAXATION)
REQUISITES: (DILIPN)
1. Death
- Must be WITHIN 5 years of property
received
2. Identity of the property
3. Location (Philippines)
4. Inclusion of the property of PRIOR decedent or
donor WITHIN 5 years
5. PREVIOUS taxation of the property
6. NO previous vanishing deduction on the property
2. SPECIAL DEDUCTIONS
A. STANDARD DEDUCTIONS
ALLOWABLE AMOUNT:
Citizen/ Resident – 5 000 000
NRA
è
–
500 000
The only Special Deduction allowed to NRA
B.
FAMILY HOME
- Whichever is LOWER of 10 000 000 or
Fair Market Value
- Limitation: only 1 family home
NOTE: CONJUGAL MARRIED FAIR MARKET VALUE is
divided by 2 comm property (land exclusive) - must note
these statements
C.
AMOUNTS RECEIVED BY HEIRS UNDER
REPUBLIC ACT 4917
From decedent’s employer as a consequence of
death NOT taxed provided it is included in the
Gross Estate
NET SHARE OF THE SURVIVING SPOUSE
MUST BE in the conjugal partnership property
Equivalent to 50% of the conjugal property
AFTER deducting the obligations chargeable to
such property.
DEDUCTIONS FROM THE GROSS ESTATE OF A NONRESIDENT ALIEN
DISTINGUISHMENT OF ALLOWABLE DEDUCTIONS:
(ETVFSMR)
1. ELITE (FJCUCTL)
a. Funeral Expenses
o Train Law
b. Juridical Expense
o Train Law
c. Claims Against the Estate (CATE)
d. Unpaid Mortgage
e. Claims Against Insolvent Person
f. Taxes
g. Losses
2. TRANSFER FOR PUBLIC USE
3. VANISHING DEDUCTIONS
4. FAMILY HOME
- Before Train Law – 1 000 000
- After Train Law – 10 000 000
5. STANDARD DEDUCTION
- Before Train Law – 1 000 000
- After Train Law – 5 000 000; 500 000
6. MEDICAL EXPENSE
- Train Law
7. REPUBLIC ACT 4917
REQUISITES: (MBFFTA)
1. Married or Head of the family
2. Beneficiaries MUST BE dwelling at Family Home
3.
4.
5.
6.
Family Home and Land is owned by decedent
- Include Fair Market Value in Gross Estate
Family Home is the actual residential home
Total Value MUST BE included in the Gross Estate
of the decedent
Allowable Deductions of 10 000 000 or Fair
Market Value (Whichever is LOWER)
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