Chapter 1: Succession and Transfer Taxes completely as if the ancestor had executed and delivered to them

The modes and mechanics of acquiring ownership and other real a deed for the same before his death.
rights over property are fairly complex. One can gain, transfer and
NATURE OF TRANSFER TAXES
lose ownership on a number of ways.
Transfer taxis an excise tax. The subject matter of a transfer tax is
Under the Civil Code (CC), ownership may be acquired through:
the privilege of the transferor to gratuitously transfer property or
1. Occupation
rights which takes effect at the date of death of the transferor
2. Intellectual creation
(known as transfer mortis causa subject to estate tax) or during
3. Law
the lifetime of the donor and the donee (known as transfer inter
4. Donation
vivos subject to donor's tax). Although the amount of transfer tax
5. Tradition
is based on net estate or net gifts, it shall not be construed as a
6. Contract
property tax. On this basis, transfer tax is classified as “excise tax”
7. Prescription
or privilege tax imposed on the act of passing the ownership - of
8. Succession
property and not on the value of the property or right.
Art. 712 (Civil Code): “Ownership is acquired by occupation and
The Law that Governs the Imposition of Estate Tax
by intellectual creation. Ownership and other rights over property
It is a well settled rule that estate taxation is governed by the
are acquired and transmitted by law, by donation, by testate and
statute in force at the time of death of the decedent. The estate
intestate succession, and in consequence of certain contracts, by
tax _ accrues as the date of death of the decedent and the accrual
tradition. They may also be acquired by means of prescription’’.
of the tax is distinct from the obligation to pay the same. Upon
the death of the decedent, succession takes place and the right of
TRANSFER DEFINED
Transfer taxes are taxes imposed upon the gratuitous disposition the State to the tax the privilege to transmit the estate vests
of private properties or rights. Gratuitous transfer is one that instantly upon death (Section 3, RR 2-2003). In the Philippines,
neither imposes. burden nor requires consideration from succession itself (excluding the tax aspect) is governed by the Civil
transferee or recipient. The transfer of ownership is free because Code.
of the absence of financial consideration. Hence, gratuitous
transfers are essentially donations. The reverse side of gratuitous KINDS OF SUCCESSION (ART. 778)
transfer is onerous, one where the transferee gives consideration Whenever a person dies leaving property (inheritance), a
in return for the property or right(s) received. However, onerous question normally arises as to how his property or estate will be
transfers are subject to business taxes instead of transfer taxes. dealt with by those s/he left behind. The answer depends on
Business taxes are discussed in chapters 7 to 9 of this book: whether or not a decedent left a "will” at the time of his death. -
The definition of “succession” as discussed in page 2, clearly
Types of Transfer Taxes states that the inheritance is transmitted ~ either through last will
1. Estate tax and testament or by operations of law (in the absence of a last
2. Donor’s tax will and testament, the provisions of the Civil Code on Succession
shall apply).
Gratuitous transfer or donation may take effect at the time of
death of the donor or during the lifetime of both the donor and A person is normally said to have died testate if he left a will (refer
the donee. The former is known as “donation mortis causa” to the definition of a “will” in Page 13) at the time of his/her
subject to estate tax while the latter is known as “donation inter death and a person is said to have died intestate if such a person
vivos” subject to donor's tax. Consequently, transfer taxes, which died without leaving a will. To summarize, succession may be
are typically assessed on the net value of the taxable assets classified as:
transferred, fall into two basic categories, namely, estate tax and
donor's tax. Estate tax is discussed in Chapters 1 to 5 of this book 1. Testamentary or testate succession
while donor's tax is discussed in Chapter 6.
2. Legal or intestate succession
SUCCESSION DEFINED
Since donation mortis causa takes effect upon the death of a 3. Mixed succession
decedent, it is appropriate to discuss first the concept of
Succession. Succession is a mode of acquisition by virtue of CAUSES OF LEGAL SUCCESSION OR INTESTACY:
which, the property, rights and obligations to the extent of the 1. If a person dies without a will, or with a void will, or one which
value of the inheritance, of a person are transmitted through his has subsequently lost its validity.
death to another or others either by his will or by operation of
law (Art.774 CC). The inheritance includes all the property, rights 2. When the “will” does not constitute an heir
and obligations of a person which are not extinguished by his
death (Art. 776 CC). The rights to the succession are transmitted 3. Partial institution of heir. Consequently, intestacy takes place as
from the moment of death of the decedent (Art. 777 CC), to the undisposed portion.
notwithstanding the postponement of the actual possession or
enjoyment of the Partial institution, of heir means the entire estate was not
estate by the beneficiary. The “heirs succeed immediately to all disposed of in the last will and testament. Therefore, a mixed
the property of the deceased ancestor at the moment of death as succession exists. Part-of the estate will be disposed of or

Business Taxation 1
Karlen J Fernandez BSACC 3-Y1-1
 distributed to the heirs based on the last will and testament. thereof of which the testator can freely dispose. Free
Nonetheless, since there are properties in the estate that were portion refers to the portion or value left in the estate
not included in the will, such properties shall be disposed of in after deducting the legitime of the compulsory heirs.
accordance with law (only as to the undisposed portion or as to The share of a voluntary heir is determined through the
the portion of the estate not mentioned in the will). last will and testament.
c. LEGAL OR INTESTATE HEIRS - those who succeed to the
4. Other causes of legal succession or intestacy: estate of the decedent by operation of law (decedent
a. When the heir instituted is not capable of succeeding died without a valid will or his estate was not entirely
b. Non-fulfillment of the suspensive condition attached to disposed of by will)
the institution of heir. Suspensive condition is a
condition depending upon the happening of an COMPOSITION OF GROSS ESTATE
uncertain event which must be fulfilled before an The gross estate is divided into two main categories for
obligation arises. succession purposes, the legitime and free portion as shown
c. Preterition (omission in the testator’s will of one, some below: (sa book)
or all of the compulsory heirs in the direct line which
has the effect of annulling the institution of heir). LEGITIME
d. Fulfillment of “resolutory condition’. A resolutory is part of a testator's property which he cannot dispose of
condition refers to a condition whereby, upon because the law has reserved it for certain heirs who are,
fulfillment terminates an already enforceable therefore, called compulsory heirs (Art. 886 CC). The compulsory
obligation. heirs cannot be deprived of their legitime by the testator except
e. Expiration of term or period of institution. by disinheritance properly effected. On the other hand, Free
f. Non-compliance or impossibility of compliance with the Portion is that portion of the estate which the testator can freely
will. dispose of. Hence, anyone may inherit from free portion
g. Repudiation of the instituted heir. (compulsory or voluntary heirs). Nonetheless, voluntary heirs may
inherit only if mentioned in the will. In the absence of a provision
ELEMENTS OF SUCCESSION in the will, voluntary heirs will not inherit anything. In such cases,
1. Decedent is the general term applied to the person whose the free portion shall be disposed of to intestate heirs based in
property is transmitted through succession, whether or not he the order of priority as presented below: (sa book)
left a will. If he left a will, he is called a testator (Art. 775 CC).
The distribution of free portion in intestate succession is based on
2. Inheritance (Estate) - Include all the property, rights and the order of priority because in every inheritance, the relative
obligations of a person which are not extinguished by death and nearest in degree excludes the more distant ones, saving the right
all which have _ accrued thereto since the opening of succession. of representation when it properly takes place. Collateral
Rights which are - purely personal are not transmissible for Mey Relatives Consanguinity is the relation of persons descending
are extinguished by death (Art. 776 CC). from the same stock or common ancestors. These persons are
known as blood relatives, and are said to be related by blood or
3. Successor - An heir or successor is a person who is called to the consanguinity. It may be lineal or. collateral. Lineal consanguinity,
succession either the provision of a will or by operation of law which may be descending or ascending, is that which subsists
(Art. 782 CC). Devisees and legatees are persons to whom gifts of between persons of whom one is descended in a direct line from
real and personal property are respectively given by virtue of a the other. Collateral consanguinity is that which subsists between
will. Successors or heirs are Classified under the law as-follows: persons who have the same ancestors, but who not descend (or
a. COMPULSORY HEIRS — those who succeed by force of ascend) one from the other. Proximity of relationship is
law to some portion of the inheritance, in an amount determined by the number of generations. Each generation forms
predetermined by law, known as the legitime. They a degree. As illustrated below: (sa book)
succeed whether the testator likes it or not. They
cannot be deprived by the testator of their legitime WILLS
except by disinheritance properly effected. A will is an. act whereby a person is permitted, with the.
formalities prescribed by law, to control to a certain degree the
KINDS OF COMPULSORY HEIRS: disposition of his estate to take effect after his death (Art. 783
 Primary — those who have precedence over and CC). It is a document_ whereby a person, called the “testator”,
exclude other compulsory heirs (i-e., legitimate children disposes of his or her properties or “estate” to take effect upon
and descendants). his or her death.
 Secondary — those who ‘succeed only in the absence of The making of a will is a strictly personal act.. It cannot be left in
the primary compulsory heirs; (i.¢.,. legitimate parents whole or in part of the discretion of.a third person, or
and ascendants). accomplished through the instrumentality of an agent or
 Concurring — those who succeed together with the attorney. All persons.who are not expressly prohibited by law
primary or secondary compulsory heirs: (i.e., may make a will. The persons prohibited by law to make a will
illegitimate children and descendants and surviving are those below 18 years old and those who are not of sound
spouse). mind at ite time of its execution.

b. VOLUNTARY HEIRS - those instituted by the testator in

his will to succeed to the inheritance of the portion
Business Taxation 2
Karlen J Fernandez BSACC 3-Y1-1