Transfer and Business Taxation 3rd week

Estate Tax Lecture

TAXATION
TX-301: ESTATE TAX

A. FORMAT OF COMPUTATION

Exclusive Common Total

Gross Estate xxx xxx xxx
Less: Deductions (xxx) (xxx) (xxx)
Net estate before share of surviving
spouse xxx xxx xxx
Less: Share of surviving spouse - (xxx) (xxx)
Net estate before special deductions xxx xxx Xxx
Less: Special deductions
Family home (xxx)
Standard deduction (xxx)
Taxable net estate xxx
Tax due xxx
Less: Estate tax credit (xxx)
Tax payable xxx

B. ESTATE TAX RATES

6% of taxable net estate

C. GROSS ESTATE
1. Composition of Gross Estate
Resident or citizen decedent Non-resident alien decedent
Real Properties Wherever situated Situated in the Philippines
Personal properties Wherever situated Situated in the Philippines
Family home Situated in the Philippines -0-
Taxable transfers Wherever situated Situated in the Philippines

2. Gross Estate of Married Decedents

Conjugal partnership of gains Absolute community of properties
Exclusive properties of the decedent Included Included
Exclusive properties of the surviving Not included Not included
spouse
Common properties Included Included
D. RULE OF RECIPROCITY (NON RESIDENT ALIEN DECEDENT)
1. Properties covered by Intangible personal property situated in the Philippines owned by non-resident alien
reciprocity decedent.
2. Basic rules When there is reciprocity- The intangible personal property of non-resident alien
situated in the Philippines are not included in the gross estate.

When there is reciprocity- The intangible personal property on non-resident alien

3. Properties considered situated
in the Philippines
E. TAXABLE TRANSFERS
4. Examples of Taxable Transfer
5. Motives that preclude a
transfer from the category of
one made in contemplation of
death
F. OTHER ITEMS
situated in the Philippines are included in the gross estate.
The following shall be considered as situated in the Philippines (among others):
a. Franchise which must be exercised in the Philippines.
b. Shares, obligations or bonds issued by any Corporation or sociedad
anonima organized and constituted in the Philippines in accordance with its law;
c. Shares, obligations or bonds issued by any foreign corporation 85% of the
business of which is located in the Philippines.
d. Shares, obligations or bonds issued by any foreign corporation if such
shares, obligations or bonds have acquired a business situs in the
Philippines.
e. Shares or rights in any partnership, business or industry established in the
Philippines.
a. Transfer in contemplation of death- motivated by thought of death may not be
imminent
b. Revocable transfer- the enjoyment of the property may be altered, amended
revoked or terminated by the decedent.
c. Transfer passing under general power of appointment
d. Transfer with retention or reservation of certain rights
e. Transfer for insufficient consideration
a. To relieve donor from the burden of management;
b. To save income or property taxes;
c. To settle family litigate and un-litigate disputes;
d. To provide independent income for dependents;
e. To see the children enjoy the property while the donor is alive;
f. To protect the family from hazards of business operations and;
g. To reward services rendered

TX-101
 Estate Taxation Page 2 of 7

1. Proceeds of life insurance Generally taxable, except when:

a. A third person is irrevocably designated as beneficiary
b. The proceeds/benefits come from GSIS or SSS
c. The proceeds come from group insurance
When the designation of the beneficiary is not stated or is not clear, the Insurance
Code assumes revocable designation.
2. Claims against insolvent a. The full amount of the claims is included in the gross estate
persons b. The uncollectible amount of the claims is deducted from the gross estate.
3. Amount received by heirs a. R.A No. 4917 is entitled ‘An Act Providing Retirement Benefits of Employees of
under R.A No. 4917 Private Firms Shall Not be Subject to Attachment, Levy, Execution, or Any Tax
Whatsoever,
b. The amount received by heirs from the decedent’s employer as a
consequence of death of the decedent-employee is included in the gross
estate of the decedent
c. The amount above is also allowed as deduction from gross estate.

G. EXEMPTIONS/EXCLUSIONS
1. Exemptions of certain a. The merger of usufruct in the owner of the naked title;
acquisitions and b. The transmission or delivery of the inheritance or legacy by the fiduciary heir or
transmissions legatee to the fideicommissary;
c. The transmission from the first heir, legatee or done in favor of another
beneficiary in accordance with the desire of the predecessor; and
d. All bequest, 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, however that not more than 30% of the said
bequest, devises, legacies or transfers shall be used by such institutions for
administration purposes.
2. Exclusions from gross a. Amount received as war damages;
estate under special laws b. Amount received from US Veterans Administration;
c. Benefits from GSIS and SSS.

H. DETERMINATIO N OF THE VALUE OF THE ESTATE

1. Usufruct In accordance with the latest Basic Standard Mortality Table, to be approved by the
Secretary of Finance, upon the recommendation of the Insurance Commissioner.
2. Properties
I. GROSS ESTATE OF MARRIED DECEDENTS
1. CONJUGAL PARTNERSHIP OF GAINS (RELATIVE COMMUNITY OF PROPERTIES)
Exclusive properties
a. Properties brought into the marriage as
either of the spouse’s own
b. Properties acquired by gratuitous (or
lucrative) title during the marriage
c. Properties acquired by right of
redemption or by exchange with
other property belonging to only one
of the spouses;
d. Properties acquired with exclusive
money of either spouse.
a. Generally- Fair market value at the time of decedent’s death;
b. Real Property- Higher between fair market value, BIR (zonal value) and fair
market value, Provincial and City assessor (assessed value)
c. Personal Properties- Recently purchased- Purchase price
Not recently purchased- Pawn value x 3(if silent)
d. Securities (shares of stock)
1) Traded in the local stock exchange- Mean between the highest and
lowest quotations on valuation date or on a date nearest the valuation
date;
Not traded in the local stock exchange-
a. Common (ordinary) shares- Book value, on valuation date or on a
date nearest the valuation date;
b. Preferred (preference) shares- Par value
Conjugal Properties
a. Properties 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 the spouses;
b. Properties obtained from labor, industry, work or profession of either or
both of the spouses;
c. 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;
d. 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.
e. Properties acquired through occupation such as fishing and hunting;
f. Livestock existing upon the dissolution of the partnership in excess of the
number of each kind brought to the marriage by either spouse;
g. Properties acquired by chance, such as winnings from gambling and
betting.

2. ABSOLUTE COMMUNITY OF PROPERTIES

Exclusive Properties Community Property
a. Properties acquired during the marriage by a. All properties owned by the spouses at the time of the celebration
gratuitous (or lucrative) title by either of marriage or acquired thereafter.
spouse, and the fruits,as well as the income
thereof, if any, unless it is specifically
provided by the donor, testator or grantor
that they shall form part of the community;

TAXATION – ESTATE TAXATION

TX301
 Estate Taxation Page 3 of 7

b. Property for personal and exclusive use of

either spouse, however, jewelry shall form
part of the community property; (but not
jewelry inherited)
c. 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.
3. Exercises:
a. A decedent died leaving the following properties. Determine the gross estate:
Resident or NRA- No NRA- With
citizen Reciprocity Reciprocity
House and lot, USA, FMV, time of death P1,000,000, cost P1,500,000
Condominium unit, Philippines, FMV, time of death, P1,500,000; assessed value, time
of death, P2,000,000
Furniture and appliances, Philippines, FMV time of death, P500,000
Car, USA, purchase price, P800,000; FMV time of death P700,000
Bonds, Philippines, sold for P300,000, FMV, date of sale, P250,000, FMV, date of
death, P350,000
Common shares of stock, foreign corporation, par value, time of death, P500,000;
book value, time of death P600,000
Proceeds of life insurance, Philippines (administrator of the estate is the irrevocable
beneficiary, P800,000)
Total

b. The decedent was married at the time of death. He was survived by his wife and children. The following were
presented to you and you were asked to compute the 1) exclusive and conjugal properties under conjugal partnership of
gains and 2) exclusive and community properties under absolute community of properties.
EXCL- CONJ- EXCL- COMM-
CPG CPG ACP ACP
Cash owned by the decedent before marriage P 5,000,000
Real property inherited by the decedent during the marriage. 6,000,000
Personal property received by the wife as gift before the 400,000
marriage
Property acquired by decedent with cash owned before the 600,000
marriage
Clothes of the decedent purchased with the exclusive money 500,000
of the wife
Jewelry purchased with cash of the surviving spouse 1,000,000
Property unidentified when and by whom acquired 1,200,000
Cash representing income during the marriage 2,000,000
Total
J. DEDUCTIONS ALLOWED TO ESTATE
1. ORDINARY DEDUCTIONS

Items of Deductions Resident or Citizen Decedent Nonresident Alien Decedent

losses, indebtedness, taxes, etc Deductible Deductible:
(LIT) Philippine GE/Entire GE X LIT
a. Transfer for public use Deductible Deductible
b. Property previously taxed Deductible Deductible
(vanishing deduction)
c. Share of surviving spouse Deductible Deductible
2. SPECIAL DEDUCTIONS
Items of Deductions Resident or Citizen Decedent Nonresident Alien Decedent
a. Family home Deductible 10M Not deductible
b. Standard deduction Deductible 5M Not deductible
Deductible Not deductible
c. Amount received under R.A 4917 Deductible Not deductible
K. DEDUCTIONS AMPLIFIED
1. Expenses, Losses, Indebtedness, Taxes, Etc. (ELIT)
Deductions Requisites for deductibility Amount deductible Deducted from
a) Incurred up to the time for internment Actual funeral expenses or 5% of Common
b) Not borne or defrayed by relatives or gross estate whichever is lower, Property
friends. but in no case to exceed
c) Supported by receipts or invoices or other P200,000
evidence.
a) Incurred during the settlement of the estate Expenses incurred in: Common
b) Incurred not beyond the last day prescribed a. Inventory taking of assets property
by law; or the extension thereof, for filing of comprising the gross estate;
estate tax return; b. Their administration
c) Incurred for the benefit of the estate; c. Payment of debts of the
d) Duly substantiated with receipts estate;
d. Distribution of the estate
among the heirs.

TAXATION – ESTATE TAXATION

TX301
Estate Taxation Page 4 of 7

a. Losses a)Incurred during the settlement of the estate; Value of the property lost Common
b)Arising from fires, storms, shipwrecks, or property if
other casualties, or from robbery, theft or connected to
embezzlement common
c) Not compensated for by insurance or
otherwise; Exclusive
d) Not claimed as deduction for income tax property if
purposes in an income tax return; connected to
e) Incurred not later than the last day for the exclusive
payment of the estate tax.
f) 1yr incurred loss after the death
b. Indebtednes a) The liability represents a personal obligation Debts or demands of pecuniary Common
s of the deceased existing at the time of his nature which could have been property if
death; enforced against the deceased in connected to
b) The liability was contracted in good faith his lifetime and could have been common
and for adequate and full consideration in reduced to simple money terms
money or money’s worth Exclusive
c) The claim must be a debt or claim which is property if
valid in law and enforceable in court; connected to
d) The indebtedness must not have been exclusive
condoned by the creditor or the action
collect from the decedent must not have
prescribed.
e) At the time of the indebtedness was
incurred the debt instrument was duly
notarized. Financial insti, not needed
f) If the loan was contracted within 3 years
before the death of the decedent, the
administrator or executor shall submit a
statement showing the disposition of the
proceeds of the loan
c. Unpaid The tax must have accrued before the death of Unpaid taxes that accrued before Common
taxes the decedent the decedent’s death but not property if
including: connected to
a) Any income tax upon common
income received after death
of the decedent, or Exclusive
b) Property taxes not accrued property if
before his death connected to
c) Or any estate tax exclusive
d. Claims a) Value of claims is included in the gross Claims that are not collectible Common
against estate; property if
insolvent b) The incapacity of the debtors to pay their connected to
persons obligation is proven. common

Exclusive
property if
connected to
exclusive
e. Unpaid a) The fair market value of the mortgaged Amount of unpaid mortgage Common
Mortgage property without deducting the mortgage property if
indebtedness has been initially included as connected to
part of the gross estate; common
b) The mortgage indebtedness was contracted
in good faith and for an adequate and full Exclusive
consideration property if
connected to
exclusive

2. Transfer for Public Use

Requisites for deductibility
The transfer must be testatementary in
character or by way of donation mortis
causa executed by the decedent before
his death
Amount deductible Deducted from
Amount of al bequest, legacies, devises Exclusive property
or transfers to or for the use of the
Government of the Philippines, or any
political subdivision for exclusively
public purpose.

TAXATION – ESTATE TAXATION

TX301
Estate Taxation Page 5 of 7

3. Property Previously Taxed (Vanishing Deduction)

Requisites for Deduction Rates (based on time gap) Format of computation
a. The date of death of the present 100%- if not more than 1 year Value to take P xxx
decedent must not exceed 5 years Less: Mortgage paid by present
from the date of death of the prior 80%- if more than 1 year but not decedent Xxx
decedent or date of donation. more than 2 years Initial basis xxx
b. The property can be identified as
the one received from prior 60%- if more than 2 years but not Notes:
decedent, or from the donor, or the more than 3 years 1) Under conjugal partnership of gains
property acquired in exchange for vanishing deduction is a deduction from
the original property so received 40%- if more than 3 years but not exclusive property
more than 4 years 2) Under absolute community of property,
vanishing deduction may be deducted
20%- if more than 4 years but not from exclusive property or community
more than 5 years property.
Exercises:

a. Decedent was a citizen of the Philippines who was single at the time of death. The following information
were made available:
Properties inherited two- and- a- half years before death:
Located outside the Philippines P300,000
Located in the Philippines
FMV, when inherited 650,000
FMV, time of death 700,000
Unpaid mortgage on the property when inherited 150,000
Unpaid mortgage on the property at the time of death 100,000
Property acquired through own labor 2,000,000
Ordinary deductions from the gross estate 390,000

How much is the vanishing deduction?

b. A non-resident alien decedent, single, left the following properties:

Car, Manila (inherited 4 years before he died, FMV, date of inheritance was P700,000) P 500,000
Car, USA 600,000
Shares of Stock, USA 600,000
Shares of Stock, Manila 400,000
House and Lot, USA 800,000
Bank Deposit, PNB-Manila 100,000
Other tangible personal properties, Manila 500,000

The administrator claimed the following deductions:

Actual funeral expenses P40,000
Judicial expenses 30,000
Loss of certain tangible personal properties 25,000
Claims against the estate 20,000
Unpaid taxes, accrued before death 15,000
Transfer for public use 10,000
Medical expenses 50,000

How much was the total deductions from Philippine gross estate in connection with Philippine estate tax?

4. Family home- The family home, constituted jointly by the husband and the wife or by an unmarried head of
the family, is the dwelling house where they and their family reside and the land on which it is situated.
Conditions for the allowance of family deduction Amount deductible
1) The family home must be the actual residential home of the 1) Exclusive property Full value included in
decedent and his family at the time of his death, as certified the gross estate
by the Barangay Captain of the locality the family home is 2) Conjugal/community One-half (1/2) of the
situated property value included in the
2) The total value of the family home must be included as part gross estate
of the gross estate of the decedent; and 3) Partly exclusive property, Exclusive part (full
3) Allowable deduction must be in an amount equivalent to the partly value)
current fair market value of the family home as declared or conjugal/community
included in the gross estate, or to the extent of the property Conjugal/community
decedent’s interest(whether conjugal/community or part
exclusive property), whichever is lower, but not exceeding (1/2 x value)
P1,000,000. Note: In all three (3) cases, the maximum amount of
family home deduction is P1,000,000
5. Standard Deduction
Amount deductible P 1,000,000
6. Medical Expenses
Requisites for deduction Amount deductible
1) Incurred within one (1) year before the death of the All medical expenses incurred (whether paid or unpaid),
decedent. provided the total amount does not exceed P500,000.
2) Duly substantiated with official receipts for services

TAXATION – ESTATE TAXATION

TX301
Estate Taxation Page 6 of 7

rendered by the decedent’s attending physicians,

invoices, statements of account duly certified by the Examples of medical expenses:
hospital and such other supporting documents. 1) Cost of medicines
2) Hospital bills
3) Doctor’s fees
7. Amount received by heirs under R.A No. 4917
Requisites for deduction Amount deductible
The amount of the separation benefit is included as part of Any amount received by the heirs from decedent’s employer
the gross estate of the decedent as consequence of the death of the employee-decedent.
8. Share of the Surviving Spouse
Gross Conjugal/community properties Pxxx
Less: Conjugal/community deductions Xxx
Net conjugal/ community properties (NCP) P xxx
Share of surviving spouse (1/2 x NCP) P xxx
L. Tax Credit for Estate Tax Paid to a Foreign Country
1. Entitled to tax credit Resident or citizen decedents
2. Deducted from estate tax The estate tax imposed in the Tax Code shall be credited with the amounts of any estate tax
due imposed by the authority of a foreign country.
3. Limitations on credit Only one foreign country is involved
Net estate, foreign x Philippine estate tax
Entire net estate
Two or more foreign countries are involved

Limit (a)- Per foreign country

Net estate, per foreign country x Philippine estate tax due
Entire net estate
Limit (b)- By total
Net estate (all foreign countries) x Philippine estate tax due
Entire net estate

4. Exercise: The following data are made available from the estate of a resident citizen decedent:
Net estate, Philippines P1,200,000
Net estate, Country A(after P12,000 estate tax paid) 188,000
Net estate, Country B(before P8,000, estate tax paid) 200,000
Net estate, Country C (100,000)

How much is the allowable estate tax credit?

M. Administrative Provisions
1. Notice of Death
a. Notice of death is required to be filed 1) In all cases of transfer subject to tax
REPEALED 2) Where, though exempt from tax, the gross value of the gross
estate exceeds P20,000
b. Who will file? 1) Executor -court
2) Administrator- heirs
3) Any of the legal heirs
c. When is notice filed? Within 2 months after the decedent’s death, or within like period
after qualifying such executor or administrator.
2. Estate Tax Returns
a. Estate tax returns are 1) In all cases of transfer subject to tax
filed 2) Where the said estate consists of registered or registrable property (regardless of the value
of the gross estate) not app
b. Persons to file returns 1) Executor
2) Administrator
3) Any of the legal heirs
c. Information shown in 1) The value of the gross estate of the decedent at the time of his death, or in case of non-
the returns resident alien of that part of his gross estate situated in the Philippines;
2) The deductions allowed from the gross estate
3) Such part of such information as may at the time be ascertainable and such supplemental
data as may be necessary to establish correct taxes;
d. Time of filing returns Within 6 months after the decedent’s death
e. Returns to be When the estate tax returns show gross value exceeding P5,000,000
supported with
statements certified by
a CPA
f. Contents of the 1) Itemized assets of the decedent with their corresponding gross value at the time of his
statements certified by death, or in case of non-resident alien, of that part of his estate situated in the Philippines;
a CPA 2) Itemized deductions
3) The amount of tax whether paid or still due and outstanding
g. Filing of certified copy Within 30 days after the promulgation of such order.
of the schedule of
TAXATION – ESTATE TAXATION
TX301
Estate Taxation Page 7 of 7

partition and the order

of the court ordering
the same
h. Extension for filing the The commissioner can, in meritorious cases, extend the filing or returns for a period not
returns exceeding 30 days.
i. Place of filing the 1. In case of resident citizen:
returns a) Accredited agent bank;
b) RDO;
c) Collection officer;
d) Duly authorized treasurer of the City or Municipality where the decedent was domiciled
at the time of death.
2. In case of Non-resident decedent:
a) RDO where the executor or administrator is registered;
b) RDO having jurisdiction over the executor or administrator’s legal residence (if executor
or administrator is not registered)
c) Office of the Commissioner (RDO No. 39-South Quezon City) (if the estate does not
have any executor or administrator in the Philippines)

3. Payment of Tax
a. Time of payment At the time the returns are filed
b. Extension of time of payment 1) Estate is settled through the courts- not to exceed 5 years
2) Estate is settled extra-judicially- not to exceed 2 years
c. Extension of payment not allowed When there is negligence, intentional disregard of rules and regulations
and fraud on the part of the tax payer.
d. Liability for payment 1) Estate tax shall be paid by the executor or administrator before the delivery of
the distributive share in the inheritance to any heir or beneficiary;
2) Where there are two or more executors or administrators, all of them are
severally liable for the payment of tax;
3) The executor or administrator of an estate has the primary obligation to pay the
estate tax but the heir or beneficiary has subsidiary liability for the payment of
that portion of the estate tax which his distributive share bears to the value of
the total net asset.

4. Acts requiring Certification from the Commissioner that the Estate Tax has been Paid
Acts Requiring Certifications 1) Delivery of distributive share to the heirs;
2) Registration in the Registry of Deeds of transfer of inherited real property or
rights;
3) Payments of debt by decedent’s debtor to the heirs, legatees, executor or
administrator of the creditor-decedent;
4) Transfer of inherited shares, rights or bonds;
5) Withdrawal from decedent’s bank deposit (except when the amount does not
exceed P20,000 where only an authorization from the Commissioner is required)

N. INTEGRATIVE LONG CASE

Mr. Yan died intestate on September 30, 2008. He was survived by his wife and his two children. He and his wife were under
conjugal partnership of gains. He left the following properties situated in the Philippines:
Land (900 sq. m) inherited from the decedent’s father who died on June 15, 2004; FMV per tax declaration,
P1,900,000; zonal value, P3,000 per sq. m.;
Car inherited from the decedent’s father, FMV, P500,000; Cost, P700,000;
Jewelry acquired before marriage, FMV, P100,000;
House and lot acquired during the marriage (family home), FMV, P4,100,000; assessed value, P3,300,000;
Household furniture and appliances acquired during the marriage, FMV, P500,000;
Other personal properties including cash (mode of acquisition unknown) FMV, P1,800,000.

He and his wife also owned a real property in USA valued at P1,500,000. It had an unpaid mortgage of P300,000 at
the time of death. The estate of Mr. Yan paid P20,000 estate tax to the US Government.

The following were considered as deductions from the gross estate in the Philippines:
Actual funeral expenses (50% paid by the relatives), P480,000; Judicial expenses incurred up to March 31,
2009, P100,000; Unpaid realty tax on inherited land for the last quarter of 2008, P50,000; Jewelry acquired before
marriage, lost on December 24, 2008 due to theft, P30,000; Other claims against the conjugal properties, P500,000;
Claims against insolvent persons, P50,000; Transfer to Quezon City for public purpose, P100,000; Medical expenses,
P520,000.

The estate of the decedent’s father paid the estate on the land at the fair market value of P2,500,000 and on the car
P700,000. During the marriage, Mr Yan mortgaged the inherited land for P700,000 for the benefit of the family. He
paid P350,000 before he died. How much was the Philippine taxable net estate and the estate tax payable after tax
credit?
-END-

“I don’t know why the man above give me the hardest road, but … the man above don ’t put you in
situations that you can’t handle.”

“My belief is greater than your doubt and I will always going to believe”.

TAXATION – ESTATE TAXATION

TX301