CHAPTER 12

 SUCCESSION (DONATION INTER VIVOS)

o a mode of acquisition by virtue of which the property, rights and obligations to the extent of the value of
the inheritance, of a person are transmitted through his death to another or others by will or by
operation of law
o from the moment of death of the decedent- the rights to the succession are transmitted, and the
possession of the hereditary property is deemed transmitted to the heir.
o It involves only the net properties of the decedent – what remains of the decedent’s property after
satisfying the indebtedness and obligations including estate tax will be inherited by decedent’s heir(s).
o ALWAYS REMEMBER THAT DECEDENT’S DEBT SHALL NOT BE INHERITED BY THE HEIRS.
o KINDS:
1. TESTAMENTARY –designation of an heir, made in a will executed in the form prescribed by the law.
2. LEGAL OR INTESTATE– there is no will, or if there is a will, such is void or lost its validity, or
nobody succeeds the will.
 entire estate of the decedent is distributed to the heirs
 compulsory heirs in testamentary succession are also the heirs in intestate succession but
intestate heirs include brothers and sisters, collateral relatives within the fifth degree of
consanguinity and the state.
 Administrator (administratrix) is the person appointed by the court, in accordance with the
governing statute, to administer and settle intestate estate and such testate estate as no
competent executor designated by the testator

3. MIXED - effected partly by will and partly by operation of law

o Will – is an act whereby a person is permitted with the formalities prescribed by law, to control to a
certain degree the disposition of his estate, to take effect after his death.
- It is the expression of the decedent’s desire as to how his properties will be distributed
after his ofter death
- Stricly a personal act
- TYPES OF WILL
a. Notarial/ Ordinary Will
 It is isgned by the decedent and witnesses
 executed in accordance with the formalities prescribed by law; created for the
testator by a third party (lawyer) follows proper form, signed and dated in front
of witnesses and notarized.

b. Holographic Will – entirely written , dated and signed by the hand of the testator
himself, without the necessity of any witnesses.

c. Codicil – supplement or addition to a will, made after the execution of a will and annexed
to be taken as part thereof, by which any disposition made in the original will is explained,
added or altered
 o ELEMENTS:
a) Decedent – the person whose property is transmitted through succession (A.K.A testator)
b) Estate – refers to all property, rights and obligations of a person which are not extinguished upon
his death. (A.K.A inheritance)
c) Heir – the person called to the succession either by the provision of a will or by operation of law
- Who are the HEIRS?
 They are the so-called “compulsory heirs”
- Types of COMPULSORY Heirs
 Primary heirs: Legitimate children and direct descendants, which include legally
adopted children
 Secondary heirs: Legitimate or illegitimae parents or ascendants
 Concurring heirs: Surviving spouse and illegitimate descendants

NOTE: Generally, primary and concurring heira share in the estate.

 In the absence of primary heirs secondary and concurring will share

 In the absence of compulsory heirs, the successors would be:
a. Relatives up to 5th degree of consanguinity
 Priority is given to the closest degree of consanguinity
b. If there were no relatives, the government shall inherit the whole estate.
c. If there is a will, the decedent may name other persons to inherit the free
portion of the net distributable estate
o Classification of property in testamentary succession
a) Legitime portion –could not be disposed freely ; reserved for the compulsory heirs.
b) Free portion –could be disposed freely through a written will irrespective of his relationship
to the recepient.
 In testamentary disposition: the decedent can name a person as an heir whether
related or not to him as long as he doesn’t violate the legitime.
 In intestate disposition: the heirs will be determined based on Civil code. (If there’s
no compulsory, collateral will inherit)
o Other persons involved in succession:
a) Legatee – an heir of personal property and under the virtue of will
b) Devisee – an heir of real property and under the virtue of will
c) Executor (executrix) is the person nominated by the testator to carry out the
directions and requests in the decedent’s will and to dispose his property according to
the decedent’s testamentary provisions after his death
d) Administrator (administratrix) is the person appointed by the court, in accordance with
the governing statute, to administer and settle intestate estate and such testate
estate as no competent executor designated by the testator

Estate taxation

 Pertains to the taxation of gratuitous transfer of properties of the dedecent to the heirs upon decedent’s
death
 Governed by law in force at tie of decedent’s death
 Estate tax accrues as of the time of death of the deceased.
o A tax on the right to transfer certain property at death and on certain transfers which are made
by law equivalent to testamentary disposition (in contemplation of death)
  Upon death of decedent, succession takes lace and the right of the state to tax the privilege to transmit
the estate vests instantly upon death.
 The taxpayer is the estate of the decedent represented by the administrator, executor or legal heirs.

CHAPTER 13-A

 GROSS ESTATE- all properties, rights & interest w/c the decedent, tangible or intangible,
owns at the time of his date.
o If the decedent is resident or citizen: all of the properties within and without the
Philippines are included
o If the decedent is non-resident alien without reciprocity rule: all of the properties
situated in the Philippines are only included.
o If the decedent is non-resident alien with reciprocity: only the tangible properties
situated in the Philippines are only included.

How to get the gross estate?

 Inventory count of the existing properties at the point of death

o Add the decrease in properties since his death
o Less the increase in properties
o Note: the properties should be establish at the point of decedent’s death.
 Adjustments to the inventory
a. EXEMPT TRANSFERS: it should be subtracted or not included from the inventory of
the properties at the point of decedent’s death.
I. Transfers of properties NOT OWNED by the decedent at the date of death
i. Merger of usufruct in the owner of the naked title
 Usurfruct is the right to enjoy the property of another people.
ii. Transmission or delivery of the inheritance or legacy of the fiduciary heir or legatee to the
fideicommissary(the true heir)
iii. Transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the will of the predecessor. (special power of appointment)
iv. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate,
executor or administrator
v. Properties held in trust by the decedent
vi. Separate properties of the surviving spouse of the decedent
 Wife’s paraphernal should not be included in husband’s gross estate and vice versa.
vii. Transfer by the way of bona fide sales or for an adequate consideration
II. Legal Exclusions
Proceeds of group insurance taken out by a company for the employees
Proceeds of GSIS policy or benefits from GSIS
SSS accruals
USVA benefits – RA 136
War damage payments
 If the properties are acquired using these exempt benefits (from proceeds -
war damage), they are still exempt as long as it can be proven.
Acquisitions/transfers expressly declared as non-taxable by law.
 All bequests, devices, legacies or transfers to social welfare , cultural and charitable
institutions, provided:
a. No part of the net income of said institution inure to the benefit of any individual;
b. Not more than 30% of such transfers shall be used for administration purposes.
NOTE: Transfers to these institutions is initially included in taxable properties of
estate except if they are qualified or accredited non-profit.
b. TAXABLE TRANSFERS: mortis causa transfers in the guise and form of inter-vivos transfers.
 ALL properties, movable or immovable , tangible or intangible if resident or citizen. If NRA,
only properties situated in Philippines.
 Transfer made in contemplation of death
1. Transfer with retention or reservation of certain right
2. Transfer for insufficient consideration (FV at the time of death less consideration
received)

Note: to know if insufficient, there’s a large difference between the fair value at the date
of transfer and the consideration at the date of transfer that the difference will be
considered as gratuitous not onerous portion.

o FV at time of death > Consideration- excess is included in GE.

o FV at time of death < Consideration- no amount shall be included in GE.
o If in the form of bona fide sale – no amount shall be included in gross estate.
 Transfer under general power of appointment
 Revocable transfer, including conditional transfers
 It won’t be included in gross estate when the right to revoke expired prior to
decedent’s death or if the right to revoke has been waived before his death.
 Proceeds of life insurance: INCLUDED only if:
1. Whether REVOCABLE or IRREVOCABLE, when the beneficiary is estate of the
deceased, his executor or his administrator
2. The beneficiary is a third person or other than executor, estate and
administrator, and the transfer is REVOCABLE
 Claims against Insolvent person – Receivables
 The amount included in Gross estate is the CLAIMS.
 Conjugal/ Community Properties -if decedent was married.
 VALUATION OF GROSS ESTATE
o Valuation Rules:
1. FMV OF PROPERTY AT TIME OF DEATH shall be the value to include in GE.
2. Fair value rules set by law must be followed.
3. In default of such rules, Fair value rules under GAAP will be the reference
4. Encumbrances on the property after death shall be ignored.
o Real property - The higher between the assessed value or the Zonal Value
o Personal Property - FMV at time of death.
o Shares of stock: In case of shares of stocks:
 If traded- the closing trading price at the date of death or the nearest trading price at
death. If the two conditions is not present, the mean between the highest and lowest
quotations @ the time (or nearest) of death shall be used.
 If not traded:
i. Ordinary shares – book value under adjusted net asset method
 a. The value of real property shall be the highest between zonal value, assessed
value or independent appraiser value.
ii. Preferred shares – par value
o Annuities and Usurfruct: in usurfruct the amount included in gross estate is the fruits
that was earned on the usurfruct.
o OTHER PROPERTIES
o Newly purchased – purchase price
o Old items – second hand value
o Monetary claims – amount fixed in the contract
o Pawned properties – gross- up amount of loan to appraisal ratio. (amount/loan ratio)

CHAPTER 13-B

Rules in determining the property of relationship

1. Agreement on marriage settlement

2. If there was no prenuptial agreement and:
i. The date of marriage took place before August 3, 1988, conjugal partnership of gains.
ii. The date of marriage took place on or after August 3, 1988, absolute community of property

Conjugal Partnership of Gains – the fruits acquired or earned during marriage shall be considered as common
(prospectivity in nature)

 Exception to prospectivity: Acquisitions by gratuitous title

Absolute Community of Property – all of the properties before and during marriage will be communal property.
(Retrospective and prospective in nature)

 Exceptions to prospectivity feature:

o Properties received by way of gratuitous title during marriage
o Fruits of separate properties during marriage
 Exception to both features:
o Properties for exclusive personal use, except jewelry
 Exceptions to retrospectivity:
o Properties acquired before marriage by a spouse with descendants in a prior marriage.

Conjugal Partnership Absolute Community

I. Property acquired BEFORE Marriage

a. Gratuitous Exclusive Communal

b. Onerous Exclusive Communal

c. Where the spouse has a legitimate descendant from Exclusive Exclusive
a previous marriage
II. Property acquired DURING marriage
a. Gratuitous title Exclusive Exclusive
b. Onerous Title Conjugal Communal

c. In exchange of EXCLUSIVE property Exclusive Exclusive

 d. In exchange of conjugal/ community property Conjugal Communal
e. Fruits or income from EXCLUSIVE property Conjugal Exclusive

f. Fruits or income from conjugal/ community property Conjugal Communal

 The highlighted rows are the differences between the two systems.
 Jewelries shall form part of the communal property (in CPG & ACP)
 Jewelries from exclusive fund such as donation or inheritance is deemed EXCLUSIVE in both features
 Jewelry for personal use is deemed EXCLUSIVE under CPG and deemed CONJUGAL/COMMUNAL
under ACP.

CHAPTER 14

 DEDUCTIONS FROM GROSS ESTATE

 Residents and Citizens: LIT + TPU + VD + FH + STD + RA 4917 + Net Share of the Surviving Spouse
 Nonresident Aliens: Prorate (CLAIMS against insolvent persons and estate + Unpaid Mortgage) +
TPU + STD + Net Share of the Surviving Spouse
 ORDINARY DEDUCTIONS:
1. Losses, indebtedness and taxes (LIT) –
a) Losses due to fire, storm, shipwreck, theft, robbery or embezzlement or other casualty
o exclusive or community
o must not compensated by insurance or otherwise.
o Must not claimed as a deduction in the estate income tax return.
o must occur not later than the last day for payment of the estate tax ( within 1 year from
the decedent’s death)
b) Claims of the decedent against insolvent persons
- exclusive or community
- where the value of the decedent’s interest therein is included in the gross estate –
the deductible amount is the unrecoverable amount of claim.
c) Claims against the estate[INDEBTEDNESS] – community property unless it is indicated as
exclusive
- provided that the debt instrument was notarized at the time the indebtedness was
incurred; and, if the loan was contracted within three years before the death of
the decedent, a statement showing the disposition of the proceeds of the loan (or
how the proceeds of the loan was used) must accompany the estate tax return.
REQUISITES:
1. The liability represents a personal obligation of the deceased existing at the tie of
his death except unpaid funeral and medical expenses.
2. The liability was contracted in good faith and for adequate and full consideration in
money or money’s worth.
3. The claim must be a debt or claim which is valid in law and enforceable in court
4. The indebtedness must not have been condoned by the creitor or the action to
collect from the decedent must not hawve prescribed.

Classification rules for CAE:

1. Family Benefit rule: if the obligation is for the benefit of family – deduction gainst
communal property
2. Property classification rule: the following deduction will follow the classification of
property whether exclusive or communal.
 d) Unpaid mortgage, where the value of the decedent’s interest, undiminished by the mortgage, is
included in the gross estate.
- The deductible amount is the unpaid balance at the date of death.
e) Income tax on income prior to death of the decedent.
f) Property taxes and Business taxes which have accrued prior to death of decedent.

2. TRANSFERS FOR PUBLIC USE- bequests, legacies, devises or transfers for the use of the
government of the Phil. or any political subdivision thereof, exclusively for public purpose.
- Being deducted on exclusive column

3. VANISHING DEDUCTION - deduction for property previously taxed to minimize the effects of a
double tax on the same property within a short period of time.
- Being deducted on exclusive column
1. Requisites:

a. The present decedent acquired the property by inheritance or donation within 5 years prior
to his death;
b. The property acquired formed part of the gross estate of the prior decedent, or of the
taxable gift of the donor;
c. Property must be identified as the same property received from prior decedent or donor or the
one received in exchanged thereof.
d. The estate tax on the prior transfer or the gift tax on the gift must have been paid; and
e. The estate of the prior decedent has not previously availed of the vanishing deduction

2. Percentage of vanishing deduction - the rate depends on the interval between the death of
present decedent and death of prior decedent:
a) Less than 1 year -100%
b) More than 1 year and less than 2 years - 80%
c) More than 2 years but less than 3yrs - 60%
d) More than 3 years but less than 4 years - 40%
e) More than 4 years but less than 5 years -20 %

3. Procedures in computing vanishing deduction for property previously taxed

a) Determine the initial value (Lower of FMV at the time of first transfer & FMV of the
property at the date of present decedent’s death)
b) From the initial value taken, deduct any mortgage or lien on the property previously
taxed which was paid by the PRESENT DECEDENT, where such mortgage or lien was
a deduction from the prior decedent or gross gift of the donor.
c) Prorate the ordinary deductions (LIT + transfers for public purpose)
d) Determine the time applicable vanishing percentage
e) FORMULA: Initial Value
Less: Mortgage Paid
Initial Basis
Initial Basis
Less: x ordinary deductions (LIT-TPU)
Gross Estate
Final Basis
x Vanishing deduction precentage
VANISHING DEDUCTION
  SPECIAL DEDUCTIONS (for citizens & residents only)
1. FAMILY HOME-
o lower of FMV of family home, Decedent’s interest & P10,000,000
o the dwelling house where a person and his family reside, and the land on which it is situated.
o Must be included in the gross estate.
o must be the actual residence of decedent and his family at the time of death, as certified
by the Barangay Captain.
2. STANDARD DEDUCTION - P5,000,000, no need for subtantiation.
3. R.A. 4917- Retirement benefits received by employees of private firms from private pension plan

 NET SHARE OF THE SURVIVING SPOUSE in the conjugal/community property.

 DEDUCTIONS ALLOWED ON NRA

o Claims against Insolvent Persons/Claims against the estate/unpaid mortgage (should

prorate)
o Transfer for Public use
o Standard deduction of 500,000
o Net Share of the Surviving Spouse

CHAPTER 15

 TAX CREDIT FOR ESTATE TAX PAID TO A FOREIGN COUNTRY (citizen or resident)
1. Amount Deductible, whichever is LOWER:
a. Actual estate tax paid abroad
b. Limit
2. Limitations on tax credit:
a. Only one country is involved

Net estate (per Foreign Country) x Philippine estate tax

Total net estate

b. Two or more foreign countries are involved

Limit 1: per country

Net estate (per Foreign Country) x Philippine estate tax

Total net estate

Limit 2: Total Foreign Country

Net estate (all Foreign Countries) x Philippine estate tax

Total net estate
FORMULA IN COMPUTING ESTATE TAX:

A. FOR SINGLE DECEDENTS: Gross estate xx

Less: Ordinary Deductions (xx)
 Special Deductions (xx)
Net Taxable Estate xx
Estate Tax Due xx
Less: Estate Tax Credit (xx)
Estate Tax Payable xx

NOTE: if NRA, foreign tax credit is not deductible

B. FOR MARRIED DECEDENTS(resident/citizen)

Exclusive Conjugal/Community Total
Properties Properties
Gross Estate xx xx xx
Less: Allowable Deductions
Ordinary Deductions
Losses xx xx
Indebtedness xx xx
Claims against Insolvent Persons xx
Unpaid Mortgage xx xx
Transfer for Public Use xx
Vanishing Deduction xx
Estate after Ordinary Deductions (xx) (xx) (xx)
Special Deductions
 Family Home (xx)
 Standard deduction (xx)
 Benefits under RA 4917 xx
Net Estate before Share of the SS xx xx xx
Less: Share of the SS ÷2 xx
NET TAXABLE ESTATE xx
Multiply by 6% X 6%

Estate Tax Due xx

Less: Estate Tax Credit (xx)
Estate Tax Payable xx