Valuation of Properties in the

Gross Estate
-The gross estate shall be valued at its Fair Market Value
(FMV) at the time of the decedents death.

-The valuation rules in gross estate are the same as the

valuation rules in gross gifts.
1.)Real Property whichever is
higher between the FMV
a. As determined by the Commissioner (
zonal value ); or
b. As shown in the schedule of values
fixed by the provincial and city assessors
(NIRC, Sec.88)
2.)Personal Property
General Rule: FMV at the time of death
Exception: Shares of stock
If listed FMV is the arithmetic mean
between the highest and lowest quotation at a
date nearest the date of death itself;
If Unlisted FMV is the par value in case of
preferred shares, and book value in case of
common shares (R.R. 02-2003, Sec.5).
3.) Right to usufruct, Use
or Habitation, and
Annuity
The probable life of the beneficiary in
accordance with the latest basic standard
mortality table is to be taken into account, to be
approved by the Secretary of Finance, upon
recommendation of the Insurance
Commissioner (R.R. 02 2003, Sec.5).
4.) Improvement
a. the construction cost per building
permit or
b. the FMV per latest tax declaration
 Inclusions in the Gross
Estate

1.) Decedents interest at the time of his death

(NIRC, Sec. 85[A]).

It includes any interest having value or capable of

being valued, transferred by the decedent at the time
of his death.
2.) Transfer in contemplation of
death (NIRC, Sec.85[B])
is
a transfer motivated by though of death, although death may not be
imminent.
General Rule: The transfer shall be considered as transfer in contemplation of
death if, during the lifetime of the decedent, he still retained in the property in
any of the following:
1. The possession or enjoyment thereof,
2. Receipt of the income or the fruits notwithstanding the transfer
3. The right, either alone or in conjunction with any person, to designate
the person who shall possess or enjoy the property or the income
therefrom.

Exception: Bona fide sale for an adequate and full consideration in

money or money's worth.
 Note: when it comes to transfer done during
the lifetime of a decedent, there is a
disputable presumption that the transfers are
in contemplation of death if the recipients
are his compulsory heirs. (INGLES)
Illustration: Mr. D is in very poor state of health.
Suffering from an ailment with complications, he
transferred all his properties to his heirs under the
law.
Illustration: Mr. E, at an advanced age of 120years,
transferred all his properties to his son, Mr. F, his
only heir under the law.
3.) Revocable transfer (NIRC, Sec.85[C]).
General Rule: A transfer is a revocable transfer where:
a. There is a transfer by trust or otherwise: and
b. The enjoyment thereof was subject at the date of his death to any
change through the exercise of a power by:
1.The decedent alone;
2.The decedent in conjunction with any other person without regard to
when or from what source the decedent acquired such power, to alter,
amend, revoked or terminate; or
3.Where any such power is relinquished in contemplation of the
decedents death.

Exception: Bona fide sale for an adequate and full consideration in

money or money's worth.
M transferred property to to
N to be held in trust for O

Without taking back the property, M can change N;

or Without taking back the property, M can change
O; or M can take back the property.

Note: it is sufficient that the decedent had the power to

revoke, though he did not exercise the power to revoke.
(INGLES)
4.) Property passing under a
general power of appointment
(NIRC, Sec.85[D]).

General Rule: Property over which the decedent

held a power of appointment is not includible in
his gross estate unless such power is general.
Exception: Bona fide sale for an adequate and full
consideration in money or money's worth.
Power of appointment The right to designate the
person or persons who shall enjoy and possess certain
property from the estate of a prior decedent

General power of appointment when it authorizes

the done (decedent) to appoint any person he pleases,
including himself, thus having full dominion over the
property as though he owned it.

P Q R
P transferred property to Q, with a provision that
should Q transfer the property, such transfer may be
in favor of anybody. Q transferred the property to R.
the value of the property shall be included in the gross
estate of Q.
Specific power of appointment when the done
(decedent) can appoint only among a restricted or
designated class or persons other than himself.

S T U

S transferred property to T, with a provision that should T

transfer the property, such transfer should be in favor of
U. T transferred the property to U. the value of the
property shall not be included in the gross estate of T.
5.) Proceeds of Life Insurance
(NIRC, Sec.85[E]).
Requisites to be included in the Gross Estate:
1.Policy taken out by the decedent upon his own life,

2.The amounts are receivable by:

a.the estate, executor, administrator irrespective whether or not
insured retained the power of revocation or;
b.the beneficiary designated as revocable
note: life insurance proceeds are always excluded from gross
income of the recipient whether the designation of the
beneficiary is revocable or irrevocable.
6.) Property transfers for
Insufficient Consideration
Transfers for insufficient consideration are
those transfers that are not bona fide sales of
property for an adequate and full consideration in
money or moneys worth.
The excess of the fair market value at the
time of the death over the value of the
consideration received by the decedent shall form
part of his gross estate.
 Formula:

FMV of the property at the date of decedents death

Less: Actual consideration received by decedent

= Amount includible in decedents gross estate

Illustration: Mr. J sold to Mr. K for P100,000 property

which had a fair market value of P1,000,000. There was a
donation of P900,000.
 Deductions from Gross
estate

1.) Ordinary
2.) Special
Allowed deductions for Citizens
or Residents of the Philippines:
1. Expenses, Losses, Indebtedness, and Taxes (ELIT)

2. Property Previously Taxed (PPT or Vanishing deductions)

3. Transfers for Public Use

4. The Family Home

5. Standard Deduction

6. Medical Expenses

7. Amounts Received by Heirs Under RA 4917

 Allowed deductions for
Nonresident Aliens:

1. Expenses, Losses, Indebtedness, and Taxes

2. Property Previously Taxed

3. Transfers for Public Use

 Ordinary Deductions
1.) Funeral expenses
The amount deductible for funeral expenses is the amount
whichever is lower of:
a. Actual funeral expenses; or
b. An amount equal to five percent (5%) of the gross
estate;
c. But not to exceed two hundred thousand pesos.

Note: the cut-off point for funeral expenses to be claimed as

deduction is internment (R.R. 2-2003, Sec.6)
 Case 1 Case 2 Case 3

Gross estate P3, 000,000 P3, 000,000 P9, 000,000

Actual funeral 120,000 160,000 350,000
expenses
5% of gross estate 150,000 150,000 450,000
Statutory maximum 200,000 200,000 200,000

Allowed 120,000 150,000 200,000

2.) Judicial Expenses

Must be incurred during the settlement of the estate

but not beyond the last day prescribed by law (i.e.,
within six (6) months from the date of death of the
decedent), or the extension thereof (in meritorious
cases, the Commissioner may grant reasonable
extension not exceeding thirty (30) days) for the
filing of estate tax return
 Illustration
Date of Death

6 months

Judicial expenses here: Judicial expenses here: Not

Deductible Deductible
 Judicial expenses include the
following:
a. Fees of executor and administrator
b. Attorneys fees
c. Court fees
d. Accountants fees
e. Appraisers fees
f. Clerk hire
g. Cost of preserving and distributing the estate
h. Costs of storing or maintaining property of the estate
i. Brokerage fees for selling property of the estate. Any
unpaid amount for the aforementioned costs and expenses
should be supported by a sworn statement of account issued
and signed by the creditor. (Sec (A)(2), RR 2-2003)
3.) Claims against the estate

The following must concur to be deductible:

1. At the time the indebtedness was incurred the
debt instrument was duly notarized; and
2. If the loan was contracted within three (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.
 Illustration
Mr. C, during his lifetime, executed a promissory note that was
not notarized. He died with the note still unpaid. Can there be a
claim against his estate arising out of the promissory note?

- None, for the instrument was not notarized.

Mr. D, during his lifetime, executed a notarized promissory note,

payable within sixty days from the date of issue. He died the day
after he executed the promissory note. The proceeds of the note
were certified by the administrator of the estate as used for family
expenses.

- The obligation is a claim against the estate.

 Requisites for Deductibility of Claims against the
Estate:
1. The liability represents a personal obligation of the deceased existing
at the time of his death except:

A. Unpaid obligations incurred incident to his death such as

unpaid funeral expenses

B. Unpaid medical expenses which are classified under a

different category of deductions pursuant to these regulations
(RR 2-2003)

2. The liability was contracted in good faith and for adequate and full
consideration in money or moneys worth;

3. The claim must be a debt or claim which is valid in law and

enforceable in court; and

4. The indebtedness must not have been condoned by the creditor or the
action to collect from the decedent must not have prescribed.
Date of Death Valuation Rule

The rule provides that the appropriate deduction is

the value that the claim had at the date of the
decedents death.

Post death developments should not be considered in

determining the net value of the estate.

See Dizon vs CTA G.R. No. 140944, April 30, 2008

 Substantiation Requirements:

All unpaid obligations and liabilities of the decedent at the

time of his death are allowed as deductions from gross estate.
Provided, however, That the following
requirements/documents are complied with/ submitted:

a. In case of Simple Loan (including advances)

1. Debt Instrument
2. Notarized Certification
3. Proof of Financial Capacity
4. Undertaking
b. If unpaid obligation arose from Purchase of Goods and
Services:

1. Documents or contracts

2. Notarized certification

3. Certified true copy of the latest audited balance

sheet of the creditor with a detailed schedule of its
receivable showing the unpaid balance of the
decedent-debtor.
c. Where the settlement is made through the Court in a
testate or intestate proceeding, pertinent documents filed
with the Court evidencing the claims against the estate, and
the Court Order approving the said claims, if already issued,
in addition to the aforementioned documents. (Sec (A)(3),
RR 2-2003).
 4.) Claims against Insolvent
Persons
Requisites for deductibility:

1. The amount thereof has been initially included as

part of his gross estate;

2. The incapacity of the debtors to pay their

obligation is proven.
 Illustration:

Mr. G died leaving an estate, in which receivables from

debtors are included, as follows:
a. P10, 000 from a brother who died without
property whatsoever; and
b. P15, 000 from a friend whose properties are not
sufficient to pay preferred creditors.
The deduction for claims against insolvent persons shall be
P25,000.
 5.) Unpaid Mortgages

When a person leaves property encumbered by a mortgage or indebtedness, his

gross estate shall include the fair market value of the property, undiminished by
mortgage or indebtedness. The mortgage or indebtedness shall be claimed as a
deduction from the gross estate. It shall be wrong to include in the computation
for the gross estate only the equity of the decedent on the property.

Illustration: Miss I died leaving real property with a fair market

value of P1,000,000, but subject to a mortgage in favor of Miss J in
the amount of P600,000. While the equity of Miss I is P400,000, the gross
estate shall include the fair market value of P1,000,000, and the
mortgage of P600,000 shall be claimed as a deduction from gross estate.

If the loan is merely an accommodation loan, where the proceeds of the loan
went to another person, the value of the unpaid loan shall be included in the
receivable of the estate.
 6.) Unpaid Taxes

Taxes are deductions from the gross estate if

such taxes accrued prior to the decedents death.
Taxes that accrued after decedents death are not
deductions from gross estate.
 Illustration:

Mr. J died on March 5, 2013 before he was able to file his income
tax return for the calendar year 2012. The tax accrued before his
death. The tax shall be a deduction from his gross estate.

Illustration:

The real property tax of Mr. K for 2013 was P20, 000. He died on
June 30, 2013 after paying two of four equal installments on the
tax. The deduction from his gross estate shall be P10, 000. The
real property tax accrues at the beginning of a calendar year,
although allowed to be paid in installments. The unpaid amount
of P10, 000 accrued already on January 1, 2013.
7.) Losses
Requisites for Deductibility:
a. Arising from Fire, storms, shipwreck, or other casualties, or
from robbery, theft, or embezzlement;
B .Not compensated for by Insurance or otherwise;
c. Incurred not later than the Last day for the payment of estate
tax as prescribed by law;
d. At the filling of the estate tax return, such losses have not been
claimed as a Deduction for income tax purposes in an income tax
return; and
e. Incurred during the settlement of the estate. (NIRC, Sec.86
(A)(1).
 Illustration:
Date of Death

6 months

Loss incurred here: Loss incurred here: Not

Deductible deductible
 Vanishing Deduction
(property previously taxed)

Is the deduction allowed from the gross estate of

citizens, residents aliens and non-resident aliens for
properties which were previously subject to donors or
estate tax. The deduction is called vanishing deduction
because the deduction allowed diminishes over a period
of five (5) years.
 Illustration:

Mr. A gave property by gift or inheritance to Mr. B. two

years, after, Mr. B died giving the property to Mr. C by
inheritance. The transfer of property by Mr. A was subject to
a transfer tax (donors tax or estate tax). The transfer of the
same property by Mr. B shall be subject to a transfer tax
(estate tax). This same property shall be heavily burdened by
two transfer taxes within a short period of time - to provide
a relief, vanishing deduction is allowed to reduce the estate
on the second transfer.
 Requisites:

1.)The present decedent died within five years from receipt of the property
from a prior decedent or donor;

2.)The property on which vanishing deduction is being claimed must be

located in the Philippines;

3.)The property must have formed part of the taxable estate of the prior
decedent, or of the taxable gift of donor;

4.)The estate tax on the prior succession or donors tax on the gift must have
been finally determined and paid;

5.)The property on which vanishing deduction is being claimed must be

identified as the one received from prior decedent, or from the donor, or
something acquired in exchange therefor;

6.)No vanishing deduction on the property was allowable in the prior

decedent.
Should there be two deaths in order
that there may be a vanishing
deduction?
- Yes, if the property was acquired by
the present decedent by inheritance.
- No, if the property was acquired by
donation. The donor may still be alive.
Formula for Computing Vanishing
Deduction (VD):

Step 1: Computation of Initial Basis

Value of the property subject to VD
Less: Any mortgage paid on that property
= Initial basis
Step 2: Computation of 2nd Deduction

Initial basis x ELIT + TPP = 2nd deduction

Value of Gross estate

Step 3: computation of final basis

Initial basis
Less: 2nd deduction
= final basis
Step 4: Computation of Vanishing Deduction

Final basis
x
percentage provided under Sec. 86 (A)(2) of NIRC
= Vanishing Deduction
Period of time between the % of the value of the
death of prior decedent or time property allowed as
of donation and the death of deduction
the decedent
Within the year prior to the 100%
death of decedent
More than 1 year but less than 2 80%
years
More than 2 years but less than 60%
3 years
More than 3 years but less than 40%
4 years
More than 4 years but less than 20%
5 years
Illustration:

A died leaving his house and lot and van to B, his only
son. The estate tax corresponding to the transmission of these
properties were paid. Within the year after As death, B died. His
gross estate including the house and lot and van were declared at
P9.6M while deductions (for expenses, losses, indebtedness, taxes
etc. and transfer for public purpose) amounted to P1.8M.

The following are relevant data: the FMV of the house

and lot and van at the time of As and Bs death are P2.4M and
P360,000, and P2.55M and P210,000 respectively. B also paid
P210,000 of mortgage debt.
1. Value of property
(2,400,000 + 210,000) P2, 610,000
Less: Mortgage debt paid 210,000
Initial basis P2, 400,000

2. P2, 400,000 x P1, 800,000 450,000

P9, 600,000

3.Initial basis P2, 400,000

Less: 2nd deduction 450,000
Multiply by rate 100%
Vanishing deduction P1, 950,000

*the rate is 100% because B died within the year after As death.
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