TRANSFER TAXATION: ESTATE TAX

REX B. BANGGAWAN, CPA MBA

TRANSFER TAXATION: Estate Tax

REX B. BANGGAWAN, CPA MBA

ESTATE TAXATION

• Taxation of mortis causa transfer or succession

Succession – a mode of transmission of the ownership, rights, interests and

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obligations over property by reason of death of the owner in favor of certain persons
designated by the owner himself or by operation of law.

Elements:

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1. Decedent – the person who died whose properties, rights and obligations are transmitted
2. Successor – the person to whom the property, rights and obligations of the decedent will pass
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3. Estate – the properties, rights and obligations of the decedent (inheritance)
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Kinds of succession:

1. Testate (Voluntary) – succession is carried out according to the wishes of the testator expressed in
a will executed in the form prescribed by law
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2. Intestate (Involuntary) – succession without a will or with one invalid, succession will took effect
by operation of law
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Estate Tax – tax on the privilege of the decedent to transmit his estate at death to his lawful heirs or
beneficiaries
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GROSS ESTATE
General Principles:

1. The properties of citizens and resident aliens located within or outside the Philippines shall be
included in gross estate
2. The properties of non-resident alien located within the Philippines shall be included in gross
estate; however, intangible properties within the Philippines shall be subject to reciprocity.

There is exemption reciprocity only when:

1. the foreign country of the non-resident alien do not impose estate tax
2. the foreign country of the non-resident alien to which he or she is a resident allows the same
exemption for intangible properties for non-residents

GROSS ESTATE COMPUTATION

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REX B. BANGGAWAN, CPA MBA

Properties existing at the point of death XXX

Taxable transfers XXX

Exempt transfers (XXX)

Exclusion by law (XXX)

Gross estate XXX

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Taxable Transfers – transfers with insufficient considerations
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1. transfer in contemplation of death as distinguished from motives associated with life
2. revocable transfers
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3. properties passing under a general power of appointment

Exclusion in the gross estate of a citizen or resident alien decedent by law: 1. Not owned by the
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decedent:

a. the merger of usufruct in the owner of the naked title

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b. the transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicomissary
c. the transmission from the first heir, legatee, or donee in favor of another beneficiary, in
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accordance with the desire of the predecessor (special power of appointment)

d. Separate property of the surviving spouse
e. Proceed of irrevocable life insurance policy payable to beneficiary other than the estate, executor
or administrator
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(Note: revocable designation becomes irrevocable upon the death of the decedent. See Section 11,
Insurance Code.) 2. Exempted properties:

a. All bequest, devises, legacies or transfers to social welfare, cultural and charitable institution, no
part of 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
b. Proceeds of group insurance taken out by a company for its employees
c. Proceed of GSIS policy or benefits from GSIS
d. Benefit received from SSS
e. Personal Equity Retirement Account

Valuation of the Estate:

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REX B. BANGGAWAN, CPA MBA

1. Usufruct – consider into account the probable life of the beneficiary in accordance with the latest
Basic Standard Mortality Table. (same rule apply with annuity)
2. Properties – the estate shall be appraised at its fair value as at the time of death. However, the
appraised value of the property as of the time of death shall be whichever is higher of:
1. Fair market value as determined by Commissioner
2. Fair market value as shown in the schedule of values fixed by the Provincial or City
Assessors

Fair Value – the price at which property would change hands between a willing seller and a
willing buyer, neither of whom is under compulsion to sell or to buy

MARRIED DECEDENTS A. ABSOLUTE COMMUNITY OF PROPERTY Exclusive Property:

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1. property acquired before the marriage by either spouse who has legitimate descendants by a
former marriage, and the fruit of such property
2. property acquired during the marriage by gratuitous title by either spouse and the fruits thereof;
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unless, it is expressly provided by the donor or testator that they shall form part of the community
property
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3. property for personal and exclusive use of either spouse, except jewelry.

Community Property - all other properties owned by the spouses after marriage or acquired thereafter
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B. CONJUGAL PARTNERSHIP OF GAINS Exclusive Property:

1. that which one already owns before his or her marriage, except fruit of such property
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2. that which one acquired after the marriage by gratuitous title (e.g. donation or inheritance) or by
exchange with an exclusive property, except the fruits of such property.
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Conjugal Property – all other properties are presumed to be conjugal (gains from labor and fruits of
exclusive property)
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DEDUCTIONS FROM GROSS ESTATE

1. Losses, Indebtedness and Taxes (LIT)

a. citizen or resident alien – deductible fully
b. non-resident alien – the deductible amount shall be the prorated total world LIT by which
the Philippine gross estate bears with the total world gross estate
2. transfer for public purpose (government or any political subdivisions)
3. deductions for properties previously taxed (vanishing deductions)
4. family home with maximum value deductible not to exceed P10,000,000.00
5. standard deduction for citizen or resident alien decedent only of P5,000,000.00
6. retirement benefit received by employees of private firms form private pension plan approved by
the BIR under RA 4917
7. net share of the surviving spouse in the conjugal partnership property or community property as
diminished by the expenses properly chargeable to such property shall be deducted from the estate

Deductible Amount of Losses, Indebtedness, and Taxes:

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REX B. BANGGAWAN, CPA MBA

1. Losses due to fire, storm, shipwreck or other casualty

2. Losses due to theft, robbery, or embezzlement
Requisites for deductibility of losses:
a. the loss is not compensated by insurance or otherwise
b. the loss is not claimed as a deduction in the estate income tax return
c. the loss must occur not later than the last day for payment of the estate tax (1 year from
the decedent’s death)

3. claims of the decedent against insolvent person, where the value of the decedent’s interest therein
is included in gross estate
4. claims against the estate:

Debt instrument – notarization at the time of incurrence; if contracted within three years before the

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death of the decedent, a statement showing the disposition of the proceed must accompany the
estate tax return.

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5. unpaid mortgage, where the value of the decedent’s interest, undiminished by the mortgage, is
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included in the gross estate
6. income tax on income prior to the death of the decedent
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7. property taxes which have accrued prior to death of decedent

Vanishing Deduction Requisites:

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1. property is part of the gross estate of the present decedent situated in the Philippines
2. the present decedent acquired the property by inheritance or donation within 5 years prior to his
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death;
3. the property subject to vanishing deduction can be identified as the one received from the prior
decedent, or from the donor, or can be identified as having been acquired in exchange for the
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property so received;
4. the property acquired form part of the gross estate of the prior decedent, or of the taxable gift of
the donor;
5. the estate tax on the prior transfer or the gift tax on the gift must have been paid; and
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6. the estate of the prior decedent has not previously availed of the vanishing deductions

Percentage of Vanishing Deduction:

• based on the interval of the death of the present decedent and the time of death of the prior
decedent or the date of gift whichever is relevant

More than Not more than Percentage

- 1 year 100%
1 year 2 year 80%
2 year 3 year 60%
3 year 4 year 40%
4 year 5 year 20%
5 year - 0%

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How to compute Vanishing Deductions?

1. Determine the initial value which is whichever is lower between the fair market value of the
property used in computing the first transfer tax paid (estate or donor’s tax) and the fair market
value of the property in the present decedent.
2. Compute initial basis by deducting from initial value any encumbrances or liens on the property
that are paid by the present decedent where such lien or encumbrances are deductions on the prior
decedents gross estate or on the donor’s taxable gift.
3. Compute the final basis by reducing the initial basis by an amount representing what the initial
basis bears with the gross estate to the expenses, losses, indebtedness and taxes (ELIT) and
transfer for public purpose. To illustrate:

ELIT

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plus
Initial Basis transfer Prorated deduction

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=
Gross Estate for to initial basis
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4. Determine the vanishing deduction by multiplying the final basis by the corresponding rate that
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apply for the time period from the point the property was transferred by the prior decedent (i.e.:
point of death) or by the donor (i.e.: date of gift).
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Family Home

• composed of the land and the dwelling house to which the decedent and his family resides
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• shall be included in gross estate at whichever is higher between its zonal value and assessed value
at the point of death of the decedent
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Requisites:

1. death of the decedent shall be after July 28, 1992

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2. total value of the family home must be included in gross income

3. the family home must be the actual residence of the decedent and his family at the time of death,
as certified by the Barangay Captain of the locality where the family home is situated
4. deduction cannot exceed whichever is higher between the zonal or assessed value at the time of
death and P10,000,000.00
5. it is a deduction from either common or personal property or separate properties of the decedent

NET TAXABLE ESTATE Unmarried decedent

Real Properties P xx,xxx,xxx-

Personal Properties xx,xxx,xxx-
Gross Estate P xx,xxx,xxx-
Ordinary Deductions:
Other Deductions xxx,xxx ( xxx,xxx)
Special Deductions:

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Family Home P xxx,xxx

Standard Deductions xxx,xxx x,xxx,xxx-
Net Taxable Estate P xx,xxx,xxx-

Married Decedent

Separate Common Total

Real property P x,xxx,xxx.xx P x,xxx,xxx.xx- P xx,xxx,xxx.xx
Personal property xxx,xxx.xx xxx,xxx.xx- xxx,xxx.xx
Gross Estate P x,xxx,xxx.xx P x,xxx,xxx.xx P x,xxx,xxx.xx
Ordinary Deductions:

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Other Deductions xxx,xxx.xx x,xxx,xxx.xx ( x,xxx,xxx.xx)
Net Estate after OD P x,xxx,xxx.xx P x,xxx,xxx.xx P x,xxx,xxx.xx

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Special Deductions
Family Home ev ( xxx,xxx.xx)
Standard Deductions ( xxx,xxx.xx)
Net Estate Px,xxx,xxx.xx
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Less: Share of surviving spouse x½ ( x,xxx,xxx.xx)
Taxable net estate Px,xxx,xxx.xx
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ESTATE TAX RATE: 6% ESTATE TAX RATE: 6% Tax Credit for Estate Tax Paid to a Foreign
Country:
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• claimable only by individual whose taxable estate comprise of properties within and outside the
Philippines (citizens and resident alien)
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• the deductible tax credit shall be whichever is lower of the amounts as computed by the following
limits (A and B) similar to deductible tax credit in income taxation:

A. Total tax credit per foreign country The deductible amount per foreign country shall be whichever is
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lower between the actual estate tax paid to the foreign country and the amount representing what the net
foreign estate on that country bears to the total net estate multiplied by the Philippine estate tax

To illustrate:

Net estate on a foreign country Philippine estate

x vs. Actual amount paid
Net world estate tax due

B. Total prorated tax credit for all foreign country

Total foreign net estate

x Philippine estate tax
Net world estate

Where to file?

1. Authorized Agent Bank

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2. Revenue District Office

3. Collection Agent
4. Duly authorized Treasurer of the City/Municipality with which the decedent was domiciled at the
time of death
5. Office of the Commissioner, if there is no legal residence in the Philippines

Filing of an Estate Tax Return is now required regardless of the value of the estate:

Registrable Properties includes, but is not limited, to:

1. real property
2. motor vehicle

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3. shares of stock

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CPA Certification is required only when the value of the gross estate exceeds P5,000,000.00. Such
certification to include:

1. itemized asset of the decedent with valuation

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2. itemized deductions
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3. tax due and payable
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Extension of Filing

• The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not
exceeding thirty (30) days for filing the return.
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• The estate tax return may be paid in installment over two years.
• Where the taxes are assessed by reason of negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no extension will be granted by the
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Commissioner.
• If an extension is granted, the Commissioner may require the executor, or administrator, or
beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the
amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon
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the payment of the said tax in accordance with the terms of the extension.

Beneficiary shall to the extent of his distributive share of the estate, be subsidiarily liable for the payment
of such portion of the estate tax as his distributive share bears to the value of the total net estate.

Banks with knowledge of the decedent’s death shall subject withdrawal from the decedent’s account to a
6% final withholding tax. The requirement does not apply if the property is included in the gross estate
and the estate tax have been paid.