CHAPTER 11 TAXATION OF ESTATES AND TRUSTS

Imposition of Tax

 Estates and trusts are treated as separate taxable entities.

 The IT imposed upon individuals shall apply to the income of estates or of any kind of property
held in trust.

Taxation of Estates

 Estate – mass of all property, rights, and obligations of a person which are not extinguished by
his death; includes those which have accrued since the opening of succession
 Decedent – person whose property is transmitted through succession, whether or not he left a
will. Testator – if left a will
 Heir – person called the succession either by provision of a will/operation of law
 Devisee – person to whom a gift/real property is given by virtue of a will
 Legatee/distributee - person to whom a gift/personal property is given by virtue of a will

Classification of Estates (for purposes of income tax)

1. Estate under judicial administration – settlement of which is the object of judicial

testamentary/interstate proceedings
2. Estate not under judicial administration - settlement of which is not the object of judicial
testamentary/interstate proceedings

To Whom Income of Estates Shall be taxed

The income of an estate may be taxable to the estate/heirs/ and beneficiaries, as follows:

1. Estate under judicial administration – fiduciary/trustee (executor/administrator) shall file the

return for the estate and pay the IT due thereon until the final settlement of the estate.
2. Estate not under judicial administration – each heirs and beneficiaries shall include in his return
his distributive share of the NI of the estate

Determination of Tax

 Tax computed upon the TI of the estate shall be paid by fiduciary.

o TI shall be computed in the same manner and on the same basis as in the case of an
individual.
 Estate has the status of a self-employed individual.
 Items of GI taxable to individuals are also the same items of GI which are taxable to estates.
 An estate can take up the same items of deduction allowed on an individual taxpayer.
 Estates can also deduct the amount of income of the estate for the taxable year which is
properly paid/credited during such year to any legatee/heir/beneficiary
 Income distributed to beneficiaries of an estate is subject to a 15% CWT to be withheld by the
estate.

Income of Decedent’s Estate

 1. The income of the estate of a decedent shall include the income received by the estate of a
deceased person during the period of administration/settlement of the estate.
 Period of administration/settlement of the estate – period required by the
executor/administrator to perform ordinary duties pertaining to administration
(collection of assets and payment of debts and legacies)
2. No taxable income is realized from the passage of property to the executor/administrator on the
death of the decedent even though the property may have appreciated in value since the
decedent acquired it.
3. Delivery of property in kind to a legatee/distribute – no income is realized
4. Prior to the settlement of the estate, if the executor/administrator sells property of a decedent’s
state for more than its appraised value – excess is income taxable to the estate
5. After to the settlement of the estate, the devisee/legatee/heir sells property of a decedent’s
state for more than its appraised value – devisee/legatee/heir is taxable individually on profit
derived

Deduction of estates

 An estate can take up the same items of deduction authorized and allowed an individual
taxpayer

Special deduction of estates

 Amount of income of the estate for the taxable year which is properly paid/credited
during such year to any legatee/heir/beneficiary
 Income distributed to beneficiaries of an estate is subject to 15% CWT to be withheld by
the estate.

NOTES:
a. The amount allowed as a deduction shall be included in computing the TI of the
legatee, heir, or beneficiary.

However, where no such distribution to the heirs is made during the taxable year
that such income is subjected to IT payments by the estate, the subsequent
distribution thereof is no longer taxable on the part of the recipient hair.

b. Allowance paid to a widow/heir out of the corpus of the estate is not deductible
from GI.

Rates of tax

 Rates of tax which are prescribed for individuals earning purely self-employment/professional
income shall also be used.
A. If GS + NOI exceeds VAT threshold of P3,000,000 – graduated rates on net TI
B. If GS + NOI does not exceed VAT threshold of P3,000,000 – estate’s administrator shall have
the option to be taxed at:
1. 8% of GS + NOI in excess of P250,000 (in lieu of the graduated rates & 3% OPT)
2. Graduated rates
 The estate’s executor/administrator must signify his intention to elect the 8% ITR in 1st
QITR/QPTR or in the initial quarter return of the taxable year the estate is established/formed.
Otherwise, he shall be considered to have availed of the graduated rates.

Once taxed at 8%, such election is irrevocable for the taxable year.

NOTES:

 A beneficiary of an estate has the status of a self-employed individual. Thus, he can claim the
itemized deduction/OSD against the income distributed to him by the estate.

Taxation of Trusts

 Trust – right of property (real/personal) held by one party for the benefit of another; obligation
imposed expressly or by implication of law, whereby the obligor is bound to deal with property
over which he has control, for the benefit of certain persons of whom he may himself be one,
and anyone of them may enforce the obligation

Creation of Trusts

 Either express/implied
 Express trusts – created by the intention of the trustor/parties
 Implied trusts – operation of law

Parties to a Trust

 Trustor/grantor – person who establishes a trust

 Trustee - one in whom confidence is reposed as regards the property for the benefit of another
person
 Beneficiary – person for whose benefit the trust has been created

Fiduciary

 All persons/corporations that occupy positions of peculiar confidence towards others such as
trustees, executors, or administrators.
 Any person/corporation that holds in trust an estate of another person/s
 It is necessary that a legal trust be created.

Classification of Trusts

1. Ordinary trust – trust income is accumulated and held for distribution to the beneficiaries
 Is any of the ff. trusts:
a. A trust where income is accumulated for future distribution under the terms of
a will/trust
b. A trust where income is to be distributed currently by the fiduciary to the
beneficiaries
c. A trust where income is accumulated for the benefit of unborn person/s with
contingent interest
 d. A trust where income is collected by a guardian of an infant is held/distributed
as the court may direct
e. A trust where income, in the discretion of the fiduciary may be either
distributed to the beneficiaries/accumulated
2. Revocable trust – trust in which the power to revest in the grantor title to any part of the
corpus of the trust is vested in the grantor himself/any person not having any substantial
adverse interest in the trust corpus/in its income
 The income of such part of the trust estate title to which may be revested in the
grantor or held/distributed for the benefit of the grantor shall be included in
computing the TI of the grantor.
 In the discretion of the grantor – either alone or in conjunction with any person not
having a substantial adverse interest in the disposition of the part of income in
question
 “In the discretion of the grantor” – in the discretion of the grantor, either alone or in
conjunction with any person not having a substantial adverse interest in the
disposition of the part of the income in question.
 A trust under which the grantor remains in control of the estate and/or income is a
scheme intended to avoid IT payment. Avoidance is no longer possible.
 Check p. 438
3. Employee’s trust – income tax shall not apply to the income of an employees’ trust which
forms part of a pension/bonus/profit-sharing plan of an employer for the benefit of some or
all of his employees
 Requisites for exemption of employees’ trust
1. Employees’ trust must form part of a pension/ stock bonus/profit-sharing plan
of an employer for the benefit of some or all of his employees or their
beneficiaries
2. Contributions to trust are made by such employer/employees/both
3. Contributions are made for the purpose of distributing to such employees the
earnings and principal of the fund accumulated by the trust in accordance with
such plan (retirement, resignation, or separation of service)
4. It is impossible at any time prior to the satisfaction of all liabilities with respect
to employees under the trust, for any part of the corpus/income to be used for
purposes other than for the exclusive benefit of his employees.
 Any amount distributed that exceeds the amount contributed by such employee –
taxable
 Investment earnings of a retirement fund including those from government
securities may be exempt from IT.

Taxability of Income of Trusts

 May be taxable to the trustee/beneficiaries/grantor

A. Income of Trust Taxed to the Trustee
o Income accumulated for future distribution whether consisting of ordinary income/gain
from the sale of assets
 o
Income whether created by will/deed whether for an unascertained person/persons
with contingent interests
o Income under the terms of will/deed, the trustee may, in his discretion, distribute the
income/accumulate it. Imposition of tax is not affected by the fact that an ultimate
beneficiary may be exempt from tax.
o Income administered in a foreign country (not entitled to deductions mentioned in Sec.
61 (A) and (B) of the Tax Code) undiminished by any amounts distributed, paid or
credited to beneficiaries
1. Income included in the return of the trustees is not be included in computing
the income of the beneficiaries
B. Income of Trust Taxed to Beneficiaries
o Income distributed to the each beneficiary must include in his return his distributive
share of the NI of the trust – subject 15% CWT to be withheld by the trust
C. Income of Trust Taxed Directly to the Grantor
1. In case of revocable trust – income of the trust estate title to which may be revested in
the grantor
2. In case of a trust the income of which may be held/distributed for the benefit of the
grantor
3. Part of the income of the trust which may be applied to the payment of premiums upon
policies of insurance on the life of the grantor
4. Income of trusts which are in whole or in part subject to revocation by the grantor

 Tax shall be computed upon the TI and shall be paid by the fiduciary.
o TI is computed in the same manner and basis as in the case of an individual
o Trust has the status of a self-employed individual.
o Items of GI are also the same items of GI which are taxable to individuals
o Trusts can take up the same items of deduction allowed on an individual taxpayer.
o Special deductions:
1. Amount of income which is to be distributed currently to the beneficiaries
2. Amount of income collected by a guardian of an infant which is to be
held/distributed as the court may direct
3. Amount of income properly paid/credited to any beneficiary
o Deductions allowed shall be included in computing the TI of the beneficiaries whether
distributed or not.

Rates of tax

 Rates of tax which are prescribed for individuals earning purely self-employment/professional
income shall also be used.
C. If GS + NOI exceeds VAT threshold of P3,000,000 – graduated rates on net TI
D. If GS + NOI does not exceed VAT threshold of P3,000,000 – estate’s administrator shall have
the option to be taxed at:
3. 8% of GS + NOI in excess of P250,000 (in lieu of the graduated rates & 3% OPT)
4. Graduated rates
 The estate’s executor/administrator must signify his intention to elect the 8% ITR in 1st
QITR/QPTR or in the initial quarter return of the taxable year the estate is established/formed.
Otherwise, he shall be considered to have availed of the graduated rates.

Once taxed at 8%, such election is irrevocable for the taxable year.

Consolidation of Income of 2 or more Trusts

 If created by the same trustor/grantor and the beneficiary is the same person, the TI of all the
trusts shall be consolidated and tax shall be computed on such.
 Such proportion of said tax shall be assessed and collected from each trustee which the TI of the
trust administered by him bears to the consolidated income of the several trusts.
o Formula to determine allocation of tax to be paid by each trustee shall be as follows:

TI of trust
X Tax on consolidated TI
Consolidated TI

 In computing the consolidated TI of the several trusts, only one absolute exemption is allowed.

Liability for Tax on Estates/Trusts

 Executor/administrator - Liability for the payment of tax up to and after his discharge, where
prior to discharge/distribution, he had notice of his tax obligations/failed to exercise due
diligence in determining whether or not such obligations existed.
 Liability for tax also follows the estate itself
 When estate has been distributed, heirs/devisees/legatees/distributees may be required to
discharge amount of tax due and unpaid
 Where tax has been paid on the TI of an estate/trust by the fiduciary – TI on which tax is paid is
free from tax when distributed to beneficiaries

Fiduciary Returns

 Fiduciaries are required to make ITR when the GI of the person, trust, or estate for whom they
act amounts to P20,000 or over during the taxable year
 Return made by 1 or more joint fiduciaries filed in the province where such fiduciaries reside,
under such rules and regulations as the Secretary of Finance, upon the recommendation of the
Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of Sec. 65
of the TC.

Fiduciaries Indemnified Against Claims for Taxes Paid

 Trustees/executors/administrators/other fiduciaries are indemnified against the

claims/demands of every beneficiary for all payments of taxes which they shall be required to
make, and they shall have credit for the amount of such payments against the beneficiary.