Co-ownership, Estates and Trusts

Co-ownership
- Two or more beneficiaries inherit an undivided property from a decedent or when a donor
makes a gift of an UNDIVIDED property in favor of two or more donees.

- Properties inherited is subject to estate tax and properties donated is subject to donor’s tax.
- Income from such properties is subject to income tax.

Take note of the following:

1. There are only two ways in which a co-ownership may exists. One is through donation and the
other is through inheritance.

2. It is generally limited to the PRESERVATION of the COMMON PROPERTY and the collection of
the income therefrom. Otherwise, if the intention of the co-owners is for the investment of this
property to a common fund and to distribute the profit derive therefrom, it will now be considered as
unregistered general partnership and consequently taxable as a corporation.

3. When inherited property remained undivided for more than 10 years and no attempt was
ever made to divide the same among the co-heirs, nor was the property under administration
proceedings not held in trust, the property should be considered as owned by an unregistered
partnership, consequently, taxable as corporation.

4. Co-owners are taxed individually on their distributive share in the income of the co-
ownership. The CO-OWNERSHIP ITSELF IS NOT TAXABLE.

Illustration

A, B, and C, are the heirs of Don Miguel who (Don Miguel) died on April 25, 2019, due to the dreadful
disease of SARS. The properties of Don Miguel comprised solely of real property located in Imus Cavite,
valued at P 50,000,000 as the highest of the acquisition cost in 1990, zonal value and fair market value, at
the time of his death. The property is primarily deriving its net rental income of P 10,000 per each tenants
per month. The property holds 150 tenants. In February 25, 2020, the property remained undivided.

Questions:

1. For income tax purposes, the heirs will be tax on net rental income from the inherited property for
the year 2020 as?

ANS: Co-ownership. Because, here there are three beneficiaries who inherit an undivided property from
a decedent. Hence, there exist a co-ownership.

2. Assuming there exists a co-ownership, what amount should be reported as taxable income of the co-
ownership?

ANS: NIL or ZERO. Because, The CO-OWNERSHIP ITSELF IS NOT TAXABLE. The rationale behind is that, It
is generally limited to the PRESERVATION of the COMMON PROPERTY and the collection of the income
therefrom and not for profit. Therefore, the element of gain is wanting here.

3. What amount should each heir report in their individual returns for the year 2020, assuming that it
was only February 25, 2020 that the accumulated net rental income is distributed, as their share in the
net rental income of the property they inherited?
ANS: P 5,000,000. Because, when we speak of “Co-ownership” it means the co-owners owned the
property “equally” therefore, it is but proper to say that, in dividing their income, the income must be
divided “equally” among them.

Here, the total net rental income from April 25, 2019 up to February 25, 2020 is P 15,000,000 (P10,000
per tenants of 150 = P 1,500,000 x 10 months (April 2019-February, 2020) = P 15,000,000. P 15,000,000
/3 (three heirs) = P 5,000,000 represents the share of each heirs in the distribution of the net rental
income of the property.

Estate Period of actual settlement

or if the estate was already
settled
Death

Period of
Period of administration or
enjoyment of life
settlement (before actual
settlement)

- Income tax of an estate refers to the tax on income received by the estate during the period of
administration or settlement.

-The properties AND the income which accrues from the such, from the time of period of
enjoyment of life UP TO the death, will form part of the GROSS ESTATE of the deceased person subject
to Estate Tax (you may read RR-12-2018, if you are interested to know more about estate tax and donor’s
tax)

- Income from the properties of the deceased person, from the period of administration or
settlement up to the period of actual settlement or if the estate was already settled, will form part of
the GROSS INCOME of the ESTATE.

-Administration or settlement period refers to the period when the properties left by a decedent
is not yet finally transferred to the heirs/beneficiaries.
-While under administration, the estate may earn income, thus, the corresponding income tax
should be paid.

rationale why estate is taxed: there are some properties which generates income even after the death of
a person. Like for instance, a property which is leased for a 5 yr period. In between the year, the owner of
the property died. Since, there is a valid contract of lease for five years, the contract of lease is not
terminated or extinguished by the death of the owner. Hence, the rental income continues even after the
death of the owner. Basically, here in the Philippines, it is really hard to settle estates, because there were
many factors that affects the settlement of the estate. Such as, the discovery of an illegitimate
brothers/sisters, the inventory listing of the properties of the deceased and the payment of the estate
tax. In order to avoid tax evasion, the tax code gives personality to an “estate” of the deceased, since the
settlement between heirs will basically take time and the rental income continues to accrue. Hence, it is
proper to give personality for the estate to continue its payment of taxes while the heirs are still settling
for the estate.

Applicable tax
The taxable income of the estate is computed in the same manner as the individual taxpayer.
Consequently, the tax due is therefore computed using the graduated income tax rates for individuals.
Deduction from estate’s gross income.
Are the same items of deductions (business expenses) allowed for individual taxpayers. However
in addition to the usual allowable business expenses, income properly paid or credited during such year
to any legatee, heir or beneficiary should be deducted in the determination of estate’s taxable income.

Such amount of income distributed shall be included in the determination of the taxable income
of the legatee/heir/beneficiary.

Computation

Gross income PXXX

Less: Deductions
Business expenses XXX
Special Deduction:
Distribution of the estate’s income to the beneficiaries XXX XXX
Taxable income of the Estate XXX
Tax Due PXXX

Illustration

Covid died two years ago leaving an undivided property deriving income from rentals. His heirs were Koko
and Aling Maring. The property is under administration through the decedent’s executor. The following
data were provided in 2019:

Rental income of the estate (gross of 5% withholding tax) P 800,000

Deductible operating expenses – estate 420,000

Question:

1. How much is the Income tax due and payable of the estate?

ANS: P26,000 Tax due and (P14,000) excess tax payment

Gross income P 800,000

Less: Deductions
Business expenses 420,000
Taxable income of the Estate 380,000

P 250,000 – P 400,000
In excess of P 250,000 = 130,000 x 20%
Tax Due 26,000
Less: WTX (5% of P 800,000 rent income) (40,000)
Tax payable/excess tax payment (14,000)

Trust
- It is a BIG word. Hard to give but easy to break.
- right on property, real or personal, held by one party for the benefit of another.
-Trust agreements allows individuals to create sustained benefits for an individual or entity.

Parties to a trust
• Trustor/Grantor – Person who establishes a trust
• Trustee – One in whom confidence is reposed as regards property for the benefit of
another
 • Beneficiary – Person for whose benefit trust is created.
• Fiduciary – Any person or corporation that holds in trust an estate of another person or
persons. A fiduciary may exist only if a legal trust is created.

Taxability of the income of Trusts

The income of a trust may be taxable to the trustee, beneficiary or grantor, as the case may be.

Taxable to:

1. Trustee if:
- the income is to be accumulated or held for future distribution whether ordinary income or gain
from sale of assets included in the corpus of the trust.
- income of a trust administered in a foreign country is taxable to the trustee.
2. Grantor/Trustor if:
- if it is a revocable trust.
- the income of the trust, shall be applied for the benefit of the grantor.

3. Beneficiaries
- if the income is to be distributed to the beneficiaries and is irrevocable trust.
- the distribution of the year’s income to an heir or beneficiary is a special item of deduction for
the trust.
- at the same time, special item of income to the heir/beneficiary.

NOTE: Special deduction is not allowed in case of a trust administered in a foreign country.

Computation of Taxable income

Gross income P XXX

Less: Deductions
Business expense XXX
Special Deduction:
Distribution of trust’s income to beneficiaries XXX XXX
Taxable income of the Trust P XXX
Tax Due (Graduated Tax Rate) XXX

Classification of Trust

1. Ordinary trust
- the income and corpus of the trust do not revert to the grantor. The trust income is accumulated
and held for distribution to the beneficiaries.

2. Revocable Trust
- a trust where at any time the power to revest in the grantor, title to any of the corpus of the
trust is vested.

3. Employees’ Trust
- income shall not apply to employee’s trust which forms part of pension, stock bonus, or profit-
sharing plan of an employer for the benefit of some or all of his employees.

Additional Note from Banggawan’s book: [TAKE NOTE OF THIS]

1. Revocable trust is not a taxpayer and is treated as a pass-through entity whose income is taxable to
grantor-trustor.

2. Irrevocable trust (Ordinary Trust) is a separate and distinct taxable entity. A taxable trust is treated as
an individual taxpayer and is allowed P 20,000 personal exemption.

Consolidated Income tax return (Two or more trusts)

1. The taxable income of all the trusts shall be consolidated and the tax computed on such consolidated
income. The tax computed on the consolidated income shall be apportioned to the different trusts, such
that each trust shall have a share in the income tax on consolidated income.

Tax Apportioned = Taxable income of the trust x Consolidated

to a Trust Taxable income of all trusts Income tax

2. Such proportion of said tax shall be assessed and collected from each trustee which the taxable income
of the trust administered by him bears to the consolidated income of the several trusts. Each trust shall
pat an income tax still due or payable computed as follows:

Income tax apportioned to a trust P XXX

Less: Income tax already paid XXX
Income tax payable P XXX

Illustration
In 2019, Mr. Roa created two trusts for his minor son, Bong. During the year, the two trusts earned net
income as follows:

Trust 1 P 4,000,000
Trust 2 P 6,000,000
Each trust filed their own income tax return and paid the corresponding income tax due as computed in
their separate returns.

Questions

Determine the following:

1, Consolidated tax due of the Trust

2. Additional income tax payable Trust 1
3. Additional income tax payable of Trust 2

1.
Consolidated Trust:
Taxable Net income P10,000,000
Tax Due (Consolidated):
1st P8,000,000 P2,410,000
Excess @ 32% 700,000
Total Consolidated TAX DUE P3,110,000
Less Paid:
Trust 1 (1,130,000)*
Trust 2 (1,770,000)**
Consolidated Income Tax Payable 210,000

Share in the Consolidated Tax due:

Trust 1
(4M/10M) x P3,110,000 1,244,000

Trust 2
(6M/10M) x P 3,110,000 1,866,000
2. TRUST 1
Taxable Net income P4,000,000
Tax due::
1st P2,000,000 P490,000
Excess @ 32% 640,000
Tax due/paid 1,130,000
Versus allocated tax due 1,244,000
Income Tax Payable-Trust 1 P114,000

2. TRUST 2
Net income P6,000,000
Tax due:
1st P2,000,000 P490,000
Excess @ 32% 1,280,000
Tax due/paid 1,770,000
Versus Share 1,866,000
Income Tax Payable-Trust 2 P96,000

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