ESTATE TAX

Submitted by:

Culanculan, Joseph Jordan

Padao, Inez Monika

Zerrudo, Ariane Joy

Submitted to:

Mr. Leonido T. Basilio

Basic Concepts of Succession and Will

Gross Estate

Deductions from the Estate

The Estate Tax Table

Net Taxable Estate

Administrative Provisions

BASIC CONCEPTS OF

SUCCESSION AND WILL

Succession

- Mode of acquisition by virtue of which the property, rights and obligations to the

extent of value of the inheritance, of a person are transmitted through his death to

another or others either by will or by operation of law (Art. 774, Civil Code of the

Philippines).

Elements of Succession

1. Decedent – the person whose property is transmitted through succession,

whether or not he left a will.

2. Heir/Successors – the person called to succession either by the provision of

a will or by operation of law.

3. Estate/Inheritance – refers to all the property, rights and obligations of a

person are not extinguished by his death.

4. Acceptance – manner of acquiring or refusing the inheritance. The

acceptance or repudiation of the inheritance is an act which is purely voluntary and free.

Kinds of Succession

1. Testamentary – succession which results from the designation of an heir,

made in a will executed in the form prescribed by law.

2. Legal or intestate – transmission of properties where there is no will or if

there is a will, the same is void or nobody succeeds in the will.

3. Mixed – transmission of properties which is effected partly by will and partly by

operation of law.

Kinds of Successors in a Testamentary Succession

1. Legatee – heir to a particular personal property given by virtue of a will.

2. Devisee – heir to a particular real property given by virtue of a will.

Persons Authorized to Manage the Estate

1. Executor – is the person nominated by a testator to carry out the directions

and requests in his will and to dispose of his property according to his testamentary

provisions after his death.

2. Administrator – is a 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.

Time of Succession

- The rights to the succession are transmitted from the moment of death of the

decedent.

Institution of Heir

- An act by virtue of which a testator designates in his will the person or persons

who are to succeed him in his property and transmissible rights and obligations.

Legitime

- Is that part of the testator’s property which he cannot dispose of because the

law has reserved it for certain heirs who are, therefore, called compulsory heirs. The

rules on legitime safeguard the rights of the compulsory heirs with respect to their

legitimes.

The following are compulsory heirs:

1. Legitimate children and descendants, with respect to legitimate parents and

ascendants.

2. In default of the foregoing, legitimate parents and ascendants, with respect to

the legitimate children and descendants.

3. The widow or widower.

4. Acknowledged natural children and natural children by legal fiction.

5. Other illegitimate children.

Capacity to Succeed by Will or by Intestacy

- Persons not incapacitated by law may succeed by will or ab intestato. In order

to be capacitated, they must be living at the moment the succession opens, except in

the case of representation, when it is proper.

- Child already conceived at the time of death of the decedent is capable of

succeeding provided it is born later.

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.

- It is strictly a personal act.

Disqualifications to Make a Will

a. Person below 18 years of age.

b. Those who are not of sound mind at the time of execution.

c. Two or more persons cannot make a will jointly.

Persons Disqualified from Being Witnesses to a Will

a. Any person not domiciled in the Philippines.

b. Those who have been convicted of falsification of a document, perjury or false

testimony.

Notarized Will

- A will acknowledged before a notary public by the testator and the witnesses.

Holographic Will

- A will written entirely by the testator with his own hand and not witnessed or

attested.

- The testator’s handwriting is deemed a sufficient assurance of the will’s

authenticity.

Advantages and Disadvantages of a Holographic Will

Advantages:

a. Easier to make.

b. Easier to revise.

c. Easier to keep secret.

Disadvantages:

a. Easier to forge by expert falsifiers.

b. Easier to misunderstand since the testator may have been faulty in expressing

his last wishes.

c. No guaranty that there was no fraud, force, intimidation, undue influence, and

no guaranty regarding the testators sound of mind.

Revocation of Will; Codicil

- A will may be revoked by the testator at any time before his death. Any waiver

or restriction of this right is void.

- If a second will is made and expressly revoking the first, the revocation of the

second will does not revive the first will, which can be revived only by will or codicil.

- A codicil is an instrument that amends (i.e. changes, modifies, or supplements)

the provisions of a will.

- Probate of a will is the court procedure by which a will is proved to be valid or

invalid. It involves collection a decedent’s estate, liquidating liabilities, paying necessary

taxes (e.g. estate tax), and distributing properties to heirs.

No will shall be revoked except in the following cases:

1. By implication of law; or

2. By some will, codicil or other writing executed as provided in the case of wills;

3. By burning, tearing, canceling, or obliterating the will with the intention of

revoking it, by the testator himself, or by some other person in his presence, and by his

express direction.

Disinheritance

- A person that expects or is expected to inherit, but does not, the person is said

to be disinherited. Disinheritance can be affected only through a will wherein the legal

cause therefore shall be specified.

Legal or Intestate Succession

- A person dies without leaving a will is said to have died intestate, a status

known as intestacy. The government provides a default estate plan for it to be

succeeded by the heirs.

- Takes place under the following circumstances:

a. If the decedent has no will, void, or one which has subsequently lost its

validity.

b. When the will does not institute an heir to, or disposition of all the

property belonging to the testator. In such case legal action shall take place only

with respect to the remaining property.

c. If the condition attached to the institution of heir does not happen or is

not fulfilled, or if the heirs die before the testator, or repudiates the inheritance,

there being no substitution, and no right of accretion takes place.

d. When the heir instituted is incapable of succeeding, except in cases

provided by the Civil Code.

When Distribution of Hereditary Estate Takes Place

- The executor or judicial administrator has the task of making sure that the

estate tax has been paid before he delivers a distributive share to any party interested

in the estate.

- Once the estate is closed and a final distribution of assets is made to the

beneficiaries, the executors transfer the assets to be held in trust to the trustee.

GROSS ESTATE

Estate Tax

excise tax on the right of the deceased person to transmit his/her estate to

his/her lawful heirs and beneficiaries at the time of death, and on certain

transfers which are made by law as equivalent to testamentary disposition

Theories Justifying the Imposition of Estate Tax

1. Benefit-received Theory

o The state collects tax because it renders services in the distribution of the

decedent’s estate

2. Privilege theory (State Partnership Theory)

o The state is a “silent and passive partner” in the accumulation of property

that can collect the share which is due to it

3. Redistribution of Wealth Theory

o The imposition of estate tax results to more equitable distribution of wealth

in the society

4. Ability to Pay theory

o The heirs are able and capable to pay taxes due the state because of the

inheritance they received

Computation of Estate Tax

- depends on the status of the decedent, whether he was single or married

If decedent was single at the time of his death:

Gross Estate Pxx

Less: Deductions

Ordinary Pxx

Special xx xx

Net taxable estate xx

Multiply by the applicable rate xx

Estate tax due xx

If decedent was married at the time of death:

Conjugal/

Community Exclusive Total

Real properties xx xx

Personal properties xx xx

Gross estate xx xx xx

Less: Deductions

Ordinary xx xx (xx)

Special (xx)

Net estate xx

Less: Share of surviving spouse in the

net conjugal/community property (xx)

Net taxable estate xx

Multiply by the appropriate tax rate xx

Estate tax due xx

GROSS ESTATE

Gross Estate – Total value of property owned by a decedent at the time of his or her

death, before any deductions are made

Composition of the Gross Estate

A. Real and personal property, whether tangible or intangible or mixed

B. Decedent's interest in property

C. Taxable transfers

1. Transfer in contemplation of death

2. Revocable transfer

3. Transfers of property under general power of appointment

4. Transfers for insufficient consideration

A. Real and Personal Properties

Real Property - “immovable”

- consists of land, building or anything attached to the soil with

permanence

Personal Property – “movable”

o Tangible personal property – personal property that can be seen and

touched

o Intangible personal property – cannot be seen and touched and has no

physical forms

B. Decedent’s Interest in Property

- includes:

1. Dividends declared by a corporation before death of stockholder

although paid after death, if the decedent was living on the record date

2. Partnership profits even if paid after death of partner

3. Proceeds of life insurance payable to a revocable beneficiary (and if the

appointed beneficiary is the estate, executor, or administrator).

4. Right of usufruct if transferable to the heirs.

C. Taxable Transfers

1. Transfer in contemplation of death

- the thought of death is the motivating factor for the transfer although

death may not be imminent

- there is a transfer in contemplation of death when:

a. the decedent transferred the possession or enjoyment of his property to

another, but this transfer was intended to take effect only upon his death

b. the decedent transferred title to the property but retained for his lifetime the

right to possess or enjoy the property or the income therefrom, or the rights to

designate whom shall possess or enjoy the same.

2. Revocable Transfer

- a transfer by trust or otherwise where the decedent may revoke, alter,

amend, or terminate the terms of enjoyment of the property

Trust – the legal relationship created when a grantor know as the trustor,

transfers property with the intention that it be managed by a trustee for the

benefit of a beneficiary or beneficiaries.

3. Transfer under general power of appointment

Power of appointment – the right to designate by will or deed the person or

persons who will succeed to the property of a prior decedent

- may be:

a. General – one which authorizes the donee of the power to appoint any

person to possess or enjoy the property

b. Limited (Special) – one which authorizes the donee of the power to

appoint only from a designated class or group of persons other than

himself

4. Transfer for insufficient consideration

- if any of the transfers, trusts, interests, rights, or powers mentioned is

created for an adequate consideration in money or money’s worth, there shall be

included in the gross estate only the excess of the fair market value, at the time

of death, over the value of the consideration received

Properties Included In Gross Estate

1. Citizen or resident alien decedents:

a) Real or immovable property, wherever located

b) Personal property, tangible or intangible, wherever located

2. Non-resident alien decedents:

a) Real or immovable property located in the Philippines.

b) Tangible personal property located in the Philippines.

c) Intangible personal property with situs in the Philippines subject to the rule of

reciprocity exemption. The following are considered situated in the Philippines:

o Franchise which must be exercised in the Philippines

o Shares, obligations or bonds issued by corporations organized or

constituted in the Philippines

o Shares, obligations or bonds issued by a foreign corporation 85% of the

business of which is located in the Philippines

o Shares, obligations or bonds issued by a foreign corporation if such

shares, obligations or bonds have acquired a business situs in the

Philippines (i.e. they are used in the furtherance of its business in the

Philippines)

o Shares, rights in any partnership, business or industry established in the

Philippines

Rule of Reciprocity

- applies only to nonresident citizens, particularly mortis causa donations when

properties are intangible personal which are located within the Philippines

- No estate tax shall be collected in respect of intangible personal property in the

following instances:

If the decedent at the time of his death was a citizen and resident of a

foreign country which at the time of his death did not impose a transfer tax

on intangible personal property of the citizens of the Philippines not

residing in that country.

Summary: When Properties Are Included in Gross Estate

Classification of

Property

Citizen or resident

alien

Nonresident alien

(no reciprocity)

Nonresident alien

(with reciprocity)

Real property

Within Yes Yes Yes

Without Yes No No

Personal property

Tangible within Yes Yes Yes

Tangible without Yes No No

Intangible within Yes Yes No

Intangible without Yes No No

Situs of Property

Real property – place or country where it is situated

Tangible personal property – place or country where it is actually located at the

time of decedent’s death

Intangible personal property – domicile or residence of the owner

1. Accounts receivable – residence of the debtor

2. Bank deposit – location of the depository bank

3. Copyright, trademark, patent, & franchise – place or county where the

intangible is exercised

Valuation of Property

- the values of the gross estate are based on the values at the time of the

decedent’s death

Real property:

The appraised value of the real estate shall be whichever is higher of the

fair market value, as determined by the Commissioner (zonal value) or the

fair market value, as shown in the schedule of values fixed by the

Provincial or City Assessor.

If there is no zonal value, the taxable base is the fair market value that

appears in the latest tax declaration.

If there is an improvement, the value of improvement is the construction

cost per building permit or the fair market value per latest tax declaration.

Personal property – also appraised at its fair market value, whether it is tangible

or intangible

Fair market value – the price which a property will bring when it is offered

for sale by one who desires, but is not obliged to sell, and is bought by one who

is under the necessity of buying it

Stocks, Bonds, or other securities:

If traded in the stock exchange, the fair market value shall be the mean between

the highest and the lowest quotation of the security on the valuation date, on the

date nearest the valuation date

If not traded in he stock exchange, the fair market value shall be the book value

of the security on the valuation date, or on the date nearest the valuation date

Notes and accounts receivables:

appraised on the basis of the amount of principal and interest due and unpaid at

the time of decedent’s death

Gross Estate (Property Relations Between Spouses)

The property relations between spouses shall be governed in the following order:

1. By marriage settlements executed before the marriage;

2. By the provisions of the Family Code; and

3. By the local customs.

The future spouses may, in the marriage settlements agree upon any of the following

regimes:

A. Absolute Community of Property

B. Conjugal Partnership of Gains

C. Complete Separation of Property

D. Any Other Regime

1. Property Regimes of Unions without marriage

2. Property Regime in Cohabitations of Spouses Who are Incapacitated to

Marry Each Other

In the absence of marriage settlements, or when the regime agreed upon is void:

1. the system of conjugal partnership of gains shall govern marriages contracted

before August 3, 1988; or

2. the system of absolute community of property shall govern marriages

contracted on or after Aug. 3, 1988, the effectivity of the Family Code.

A. Absolute Community of Property

The gross estate of a married decedent under this regime shall be composed of:

1. Exclusive property of the decedent; and

2. Absolute community (communal property)

Exclusive Property of Each Spouse

1. Property acquired during the marriage by gratuitous title by either spouse,

and the fruits as well as the income thereof; if any, unless it is expressly

provided by the donor, testator or grantor that they shall form part of the

communal property;

2. Property for personal and exclusive use of either spouse; however, jewelry

shall form part of the communal property

3. Property acquired before the marriage by either spouse who has legitimate

descendants by a former marriage, and the fruits as well as the income, if

any, of such property.

Communal Property

Unless otherwise provided in the Family Code or in the marriage settlements,

communal property shall consist of:

1. all the property owned by the spouses at the time of the celebration of the

marriage; or

2. acquired thereafter.

B. Conjugal Partnership of Gains

Under this regime, the spouses place in a common fund the proceeds, products

fruits and income from their separate property and those acquired by either of both

spouses through their efforts or by chance. Upon dissolution of the marriage or the

partnership, the net gains or benefits obtained shall be divided equally between them,

unless otherwise agree in their marriage settlements.

The gross estate of a married decedent under this regime shall be composed of:

1. Exclusive property of the decedent; and

2. Conjugal property

Exclusive Property of Each Spouse

The following shall be the exclusive property of each spouse:

1. That which is brought to the marriage as his or her own;

2. That which each acquired during the marriage by gratuitous title;

3. That which is acquired by right of redemption, by barter or by exchange with

property belonging to only one of the spouse; and

4. That which is purchased with exclusive money of the wife or of the husband.

Conjugal Partnership Property

All property acquired during the marriage, whether the acquisition appears

to have been made, contracted or registered in the name of one or both spouses,

is presumed to be conjugal unless the contrary is proved.

The following are conjugal partnership property:

1. Those acquired by onerous title during the marriage at the expense of the

common fund, whether the acquisition be for the partnership, or for only one

of he spouses.

2. Those obtained from the labor, industry, work or profession of either or both

of the spouses;

3. The fruits, natural, industrial, or civil, due or received during the marriage from

the common property, as well as the net fruits from the exclusive property, of

each spouse.

4. The share of either spouse in the hidden treasure which the law awards to the

finder or owner of the property where the treasure is found;

5. Those acquired through occupation such as fishing or hunting;

6. Livestock existing upon the dissolution of the partnership in excess of the

number of each kind brought to the marriage by either spouse; and

7. Those which are acquired by chance, such as winning from gambling or

betting. However, losses therefrom shall be borne exclusively by the loser-

spouse.

Classifications of Properties under Conjugal Partnership of Gains and Absolute

Community of Property Regime

I. No agreement on marriage settlement

Date of Marriage Regime

Before August 3, 1988 Conjugal Partnership of Gains

On or after August 3, 1988 Absolute community of property

II. Acquisition by gratuitous title (Donation/Inheritance)

Regime Before marriage During marriage

1. Conjugal partnership

a. Principal Exclusive Exclusive

b. Fruits Conjugal Conjugal

2. Absolute community

a. Principal Community Exclusive

b. Fruits Community Exclusive

III. Properties brought into/acquired during the marriage

Regime Brought into marriage Acquired during marriage

1. Conjugal Partnership

a. Principal property Exclusive Conjugal

b. Fruits Conjugal Conjugal

2. Absolute community

a. Principal property Community Community

b. Fruits Community Community

Dissolution of Absolute Community and Conjugal Partnership Regime

1. Upon the death of either spouse;

2. When there is a decree of legal separation

3. When the marriage is annulled or declare void; or

4. In the case of judicial separation of property during the marriage under Art.

134 to 138 of the New Family Code.

C. Regime of Complete Separation of Property

The spouses shall be governed by complete separation of property if the future

spouses agree in the marriage settlements that their relations during the marriage shall

be governed by regime of separation of property

Each spouse shall claim all earning from his or her profession and all fruits due

or received during the marriage from his or her separate property.

D. Other Regimes

1. Property Regime of Unions Without Marriage

When a man and a woman are capacitated to marry each other, live

exclusively with each other as husband and wife without the benefit of marriage

or under a void marriage:

- wages and salaries shall be owned by them in equal shares

- the property acquired by both of them through their work or

industry shall be owned by them in equal shares

2. Property Regime in Cohabitations of Spouse Who are Incapacitated to

Marry Each Other

When common-law spouses suffer from legal impediments to marry or

when they do not live exclusively with each other as husband and wife:

- only the property acquired by both of them through their actual

joint contribution shall be owned in common and in proportion in

their respective contributions.

Exclusions and Exemptions from the Gross Estate

Exempted under the Tax Code:

1. Merger of usufruct in the owner of the naked title.

Usufruct – a real right, temporary in nature, which authorizes its holder to

enjoy all the benefits which results from the normal enjoyment of another’s

property, with the obligation to return, at the designated time, either the same

thing or, in special cases, its equivalent

2. Transmission or delivery of the inheritance or legacy by the fiduciary heir or

legatee to the fideicommissary.

Fideicommissary Substitution – is that by virtue of which a testator

institutes a first heir, and charges him to preserve and transmit the whole or part

of the inheritance later on to a second heir

3. Transmission from the first heir, legatee or donee in favor of another beneficiary

in accordance with the desire of the predecessor.

4. All bequests, devises, legacies or transfers to social welfare, cultural and

charitable institutions, no part of the net income of which inures to the benefit of

any individual, provided that not more than 30% of which shall be used for

administration purposes

Exempted under special laws:

1. Benefits received by members from GSIS and SSS because of death

2. Amounts received from the Philippine and U.S. governments for damages during

the last war

3. Benefits received from the U.S. Veterans Administration

4. Proceeds of life insurance under a group insurance taken by employer

DEDUCTIONS FROMTHE ESTATE

THE ESTATE TAXTABLE

NET TAXABLE ESTATE

ADMINISTRATIVE PROVISIONS

Notice of Death

1. When required:

a) In all cases of transfer subject to tax; or

b) Where, though exempt from tax, the value of the gross estate exceeds

P20,000.00

2. Time of filing:

a) Within two (2) months after the decedent's death, or

b) Within two (2) months after the executor or administrator has qualified.

3. Who shall file notice of death:

a) Executor

b) Administrator

c) Any of the legal heirs

Estate Tax Return

1. When required:

a) In all cases of transfer subject to tax; or

b) Where, though exempt from tax, the gross value of the estate exceeds

P200,000.

c) Regardless of the gross value of the estate, where the said estate consists of

registered or registerable property.

2. Contents:

a) The value of the gross estate of the decedent at the time of his death, or in the

case of a nonresident alien, of that part of his gross estate situated in the Philippines;

b) The deductions allowed from gross estate in determining the estate tax;

c) Such part of such information as may at the time be ascertainable and such

supplemental data as may be necessary to establish the correct taxes

3. Statement duly certified by a CPA (when gross value exceeds P2,000,000) shall

include:

a) Itemized assets of the decedent with their corresponding gross value at the

time of his death, or in the case of a nonresident alien, of that part of his gross estate

situated in the Philippines;

b) Itemized deductions from gross estate; and

c) The amount of tax due whether paid or still due and outstanding

4. Persons required to file:

a) Executor

b) Administrator

c) Anyone of the legal heirs

5. Time for filing:

a) Within six (6) months after decedent's death

6. Extension to File Return:

a) Not exceeding thirty (30) days in meritorious cases.

7. Place of Filing:

a) Office of the Commissioner of Internal Revenue

b) Office of the Revenue District Officer, Collection Officer or authorized treasurer

of the Municipality in which the decedent was domiciled at the time of death.

Documentary Requirements:

1. Notice of Death duly received by the BIR, if gross estate exceeds P20,000 for

deaths occurring on or after Jan. 1, 1998; or if the gross estate exceeds P3,000

for deaths occurring prior to January 1, 1998

2. Certified true copy of the Death Certificate

3. Deed of Extra-Judicial Settlement of the Estate, if the estate is settled

extrajudicially

4. Court Orders/Decision, if the estate is settled judicially;

5. Affidavit of Self-Adjudication and Sworn Declaration of all properties of the

Estate

6. A certified true copy of the schedule of partition of the estate and the order of the

court approving the same, if applicable

7. Certified true copy(ies) of the Transfer/Original/Condominium Certificate of

Title(s) of real property(ies) (front and back pages), if applicable

8. Certified true copy of the latest Tax Declaration of real properties at the time of

death, if applicable

9. "Certificate of No Improvement" issued by the Assessor's Office declared

properties have no declared improvement or Sworn Declaration/Affidavit of No

Improvement by at least one (1) of the transferees

10. Certificate of Deposit/Investment/Indebtedness owned by the decedent and the

surviving spouse, if applicable

11. Photo copy of Certificate of Registration of vehicles and other proofs showing

the correct value of the same, if applicable

12. Photo copy of certificate of stocks, if applicable

13. Proof of valuation of shares of stocks at the time of death, if applicable

For listed stocks - newspaper clippings or certification from the Stock

Exchange

For unlisted stocks - latest audited Financial Statement of issuing

corporation with computation of book value per share

14. Proof of valuation of other types of personal property, if applicable

15. Proof of claimed tax credit, if applicable

16. CPA Statement on the itemized assets of the decedent, itemized deductions

from gross estate and the amount due if the gross value of the estate exceeds

two million pesos, if applicable

17. Certification of Barangay Captain for claimed Family Home

18. Duly notarized Promissory Note for "Claims against the Estate" arising from

Contract of Loan

19. Accounting of the proceeds of loan contracted within three (3) years prior to

death of the decedent

20. Proof of the claimed "Property Previously Taxed"

21. Proof of claimed "Transfer for Public Use"

22. Copy of Tax Debit Memo used as payment, if applicable

Payment of Estate Tax

1. Time of payment:

a) Estate tax is payable at the time the return is filed (Within six (6) months after

death)

b) Extension to pay estate tax

Two (2) years - Estate is settled extrajudicially

Five (5) years - Estate settled judicially.

2. Place of filing of return and payment of tax:

a) Commissioner of Internal Revenue, or

b) Regional Director, Revenue District Officer or Collection Officer of the city or

municipality in which the decedent was domiciled at the time of his death.

3. Person liable to pay estate tax:

a) Executor or administrator before distribution of estate.

b) Heir or beneficiary subsidiarily liable to the extent of his distributive share.

Civil Penalties:

1. 25% penalty in case of failure to

a) File the return and pay the tax on time

b) File the return with the proper person

c) Pay on time the full amount of tax shown on any return or full amount of tax in

case no return is required to be filed

2. 50% penalty in case of

a) Willful neglect to file the return on time

b) False or fraudulent return is willfully filed