ESTATES AND TRUSTS

The rules in taxation of individuals generally to apply estates and trusts. The taxable
income of an estate and trust shall be computed in the same manner and on the same
basis as in the case of an individual. Estates and trusts are allowed a personal exemption
of P20, 000. The income tax rates for individual taxpayers likewise apply. The taxable
year of estates and trusts shall be the calendar year. Just like individuals, estates and
trusts are required to file a declaration of estimated income for the current taxable year on
or before April 15 of the same taxable year.
DEFINITION OF TERMS
Estate or inheritance. Refers to all properties, rights and obligations of a person which are
not extinguished by his death and also those which have accrued thereto since the
opening of the succession.
Trust is an agreement created by will or an agreement under which title to property is
passed to another for conservation or investment with the income there from and
ultimately the corpus or principal to be distributed in accordance with the directives of
the creator as expressed in the governing instrument.
Trustor or grantor is the person who establishes a trust.
Beneficiary is the person whose benefit the trust has been created. A beneficiary has
equitable title to the property transferred to the trust, including, generally, the possession
and use of the property.
Fiduciary is the general term which applies to all persons or corporations that occupy
positions of peculiar confidence towards others, such as trustees, executors, guardians, or
administrators, receivers, or conservators. For income tax purposes, a fiduciary is any
person or corporation that holds in trust an estate of another person/s.
TAXABLE ESTATES
When an individual is alive, income on his/her property (e.g., interest income on bonds,
dividend income on stocks, rental income on an apartment complex) is taxed to that
individual. When the individual dies, future income on that property will be taxed to
those who inherit the property. However, income on property is taxable to the heirs only
after they receive the property. The receipt of the property itself is excluded from income.
Often there is considerable time lag between the time a person dies and when final
settlement of the state occurs. Thus, a relevant question to ask is who is taxed on income
realized from the decedent's property during this interval. The answer provided by the
Code is that the estate itself is taxed. Estates are legal entities that exist for the purpose of
managing and distributing the deceased person's property to the heirs. While this property
is in the estate, the property might earn some income. The income will be taxed to the
estate.
Notice this discussion concerns only income taxation, that is, estate's income, rather than
"estates taxation". Estates taxation has nothing to do with income and applies when the
property passes from the deceased person to the estate. The estate tax is levied on the
transfer and is based on the fair market value of the property being transferred at the time
of death.
Taxable estates are estates of deceased persons under judicial settlement. Taxation of an
estate begins from the time of death. Hence, any income received after the death shall
form part of the income of the estate. Incomes of estates not under judicial settlement are
not taxable to the estate. In this case, the co-ownership is created and the co-owners, after
actual or constructive receipt of the income are the ones liable to income tax in their
individual capacities.

TAXABLE TRUSTS
An individual may want another family member, such as a son or daughter, to become
the owner of some particular piece of the individual's property (e.g., stocks, rental
property). However, the individual may feel that the son or daughter is not capable of
managing the property. In this situation, the individual could transfer the property to a
trustee in order to have the trustee manage the property for the benefit of the son or
daughter. The legal arrangement is known as a trust, and the son or daughter would be
called the beneficiaries of the trust.
Trusts are a unique form of legal entity, being neither pure taxpayer nor pure conduit. For
taxpayers such as corporations, all income is taxed to the income-earning organization.
For conduits such as general professional partnerships, no income is taxed to the income-
earning organization. Rather, income is taxed to the owners of the partnership when
earned, regardless of whether that income is distributed to them. The taxation of trusts
and their beneficiaries falls between these two extremes, having elements in common
with the tax treatments of both taxpayers and conduits.
Pre-tax income earned by a trust may be either retained by the trust or distributed to the
trust's beneficiary. If the income is distributed, the trust is allowed a deduction in
determining its taxable income and the beneficiary must include the receipt of the
distribution as taxable income at the individual level. All of the current income on trust
property is taxed to either the trust or the beneficiary, depending on which party has
current possession of the income.
For a trust to be taxable, it must be irrevocable, meaning it cannot be change by recall or
cancellation, both as to corpus or principal and income.
In a revocable trust where title to income may be revested in the grantor, the trust itself is
not subject to income tax. It is the grantor who is taxable. In case of trust where the
income may be held or distributed for the benefit or the grantor, such income is likewise
taxable directly to the grantor.
GROSS INCOME
The terms of gross income of estates and trusts are the same items of gross income of
individuals as provided in the Tax Code. They include:
1. Income accumulated in trust for the benefit of unborn or unascertained person or
persons with contingent interests, and the income accumulated or held for future
distribution under the terms of the will or trust.
2. Income which is to be distributed currently by the fiduciary to the beneficiaries, and
income collected by a guardian of an infant is to be held or distributed as the court may
direct.
3. Income received by estates of deceased persons during the period of administration or
settlement of the state.
4. Income which, in the discretion of the fiduciary, may be distributed to the beneficiaries
or accumulated.
ALLOWANCE DEDUCTIONS
Estate or trust is allowed a personal exemption of P20, 000. This is regardless of the
number of trusts a beneficiary may receive income from. Aside from the personal
exemption of P20, 000 allowed, income of trust and estate may be deductible from gross
income.
Income which is to be distributed currently by the fiduciary to the beneficiaries; and
income collected by a guardian of an infant to be held or distributed as the court may
direct, are deductible from gross income of the fiduciary. This is so because such income
is taxable directly to the beneficiary, whether distributed or not.
Income received by estates of deceased persons during the period of administration or
settlement of the estate; and income which, in the discretion of the fiduciary, may be
either distributed to the beneficiaries or accumulated, are taxable either to the fiduciary or
beneficiary, depending on the amounts paid or credited to the legatee, heir or beneficiary.
If taxable to the fiduciary (meaning no income has been distributed to the beneficiary),
the income is not deductible from the gross income of the fiduciary. But if taxable to the
beneficiary, such income shall form part of the gross income of the fiduciary and is
deductible from such gross income. The income thus distributed is to be included in the
gross income of the beneficiary. The deductions just discussed shall not be allowed in the
case of a trust administered in a foreign country.
Illustration: Ms. Red Butterfly died on Aug. 14, 2014. Her estate is now under judicial
settlement. The estate had P1, 500,000 gross income from Aug. 14 to Dec. 31, 2014.
Expenses related to this income were P400, 000. There was no distribution of income
among the heirs. How much was the tax due for the year?
Gross Income
P1, 500,000
Less: Deductions P400, 000
 Personal Exemption 20, 000
420, 000
Taxable Income
P1, 080, 000
Tax Due:
On P500, 000 P125, 000
580, 000 at 32% 185, 000
P310,
000
Illustration: Mr. Henry Argos created an irrevocable trust designated his two daughters,
aged 3 and 1 as beneficiaries. Under the terms of the trust, only half of the income shall
distributed when the beneficiaries reach 21 years of age. For the year 2014, income of the
trust was P500, 000. Compute for the tax due.
Gross Income
P500, 000
Less: Deduction (50%) P250, 000
Personal Exemption 20, 000
270, 000
Taxable Income
P230, 000
Tax Due:
On P140, 000 P22,
500
90, 000 at 25% 22, 500

P45, 000

CONSOLIDATION OF INCOME OF TWO OR MORE TRUSTS

When two or more trust are trust are created by the same grantor and the beneficiary in
both trusts is the same, the taxable income of all the trusts shall be consolidated and the
tax computed on such consolidated income.
Consolidated Gross Income xxx
Less: Consolidated Deductions xxx
Consolidated Taxable Income xxx
 Less: Personal Exemption xxx

Taxable Income xxx

Multiply by: Tax rate in Sec. 24(A) x%
Amount of Income Tax on
Consolidated Taxable Income xxx
Each trustee shall compute his share of the income tax on the consolidated taxable
income based on the formula below:
Taxable Income of a trust
Before exemption x Income tax on Consolidated = Income tax
payable
Consolidated taxable Income of taxable income by
each trustee
all trust before exemption
Illustration: Mr. Anilov maintains two irrevocable trusts that name his three children, all
minors, as common beneficiaries. The terms of the trusts provide that no income shall be
distributed to the beneficiaries until the youngest should become should become 25 years
of age. Following are data relative to the trusts:
Trust 1
Trust 2
Gross Income P450, 000 P600,
000
Deductions 150, 000 200,
000
The share of each trust on the income tax on consolidated taxable income in 2014 is
computed below:
Consolidated Gross Income P1, 050, 000
Less: Consolidated Deductions 350, 000
Consolidated Taxable Income P 700, 000
Less: Personal Exemption 20, 000
Taxable Income P 680,
000

Tax Due on Consolidated Taxable Income:

On P500, 000 P125, 000
180, 000 at 32% 57, 000
P185, 000
Trust 1: Trust 2:
P300, 000 P400, 000
X P182, 600 = P78, 257 X P182, 600
= P104, 343
P700, 000 P700, 000

NAME: SCORE:

SECTION: PROFESSOR:
True or False

1. Estates and trusts are allowed a personal exemption of P20, 000 regardless of the number of trusts a

beneficiary may receive income from.

2. The items of gross income of estates and trusts are different from the gross income of individuals as

provided in the Tax Code.

3. The income tax rates of corporate taxpayers apply to taxable estates and trusts.

4. Income received by estates deceased persons during the period of administration or settle of the estates,

and income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or

accumulated, are taxable to the fiduciary.

5. For a trust to be taxable, it must be revocable both as to corpus and income.

6. Income which is to be distributed currently by the fiduciary to the beneficiary, and income collected by

a guardian of an infant which is to be held or distributed as the court may direct, are not deductable from

the gross income of the fiduciary.

7. The taxable year of estates and trusts shall be the fiscal year.

8. Estates and trusts are required to file a declaration of estimated income for the current taxable year on

or before Dec. 31 of the same taxable year.

9. The taxable income of an estates and trusts shall be computed in the same manner and on the same

basis as in the case of a corporate.

10. Taxable estates are estates of deceased persons judicially settled.

NAME: SCORE:

SECTION: PROFESSOR:
Multiple Choice

1. When an individual dies, who is taxed on income from his property between the time of his death until

his estates is finally settled?

A.The individual himself

B.The estates itself after the heirs have received the property

C.Those who inherent the property after they receive the property

D.None of the above

2. When an individual dies, who is taxed on income from his property between the time of his death until

his estates is finally settled?

A.The individual himself

B.The estates itself after the heirs have received the property

C.Those who inherent the property after they receive the property

D.None of the above

3. In which of the following cases is a taxpayer’s required tofile an income tax return?

A.A trust where the fiduciary may accumulate or distribute the income of the trust, at his discretion

B.A trust where the fiduciary must accumulate the income of the trust

C.An estate which is under administration

D.All of the above

4. The general term which applies to all persons or corporations that occupy positions of peculiar

confidence towards others, such as trustees, executors, guardians, or administrations, receivers, or

conservators.

A.Grantor

B.Trustor

C.Fiduciary

D.Beneficiary

5.The person whose benefit the trust has been created

A.Grantor

B.Trustor

C.Fiduciary

D.Beneficiary

6.An agreement created by will or an agreement under which the title to property is passed to another for

conservation or investment with the income there from and ultimately the corpus to be distributed in

accordance with the directives of the creator as expressed in the governing instrument

A.Trust

B.Estates

C.Fiduciary

D.Beneficiary

7.Legal entity that exist for the purpose of the managing and distributing the deceased person's property to

the heirs

A.Estate
B.Estate tax

C.Estate taxation

D.None of the above

8. Gross income for estates and trusts include

A.Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or

accumulated

B.Income received by estates of deceased persons during the period of administrations or settlement of

the estate

C.Income which is to be distributed currently by the fiduciary to the beneficiaries and income collected

by a guardian of an infant which is to be held or distributed as the court may direct

D.Income accumulated in trust for the benefit of unborn or unascertained person or persons with

contingent interests and income accumulated or held for future distribution under the terms of the will or

trust.

E.All of the above

F.None of the above

9.Property, rights and obligation of a person which are not extinguished by his death and also those which

have accured thereto since the opening of the succession.

A.Beneficiary

B.Fiduciary

C.Estates

D.Trust

10.The person who establishes the trust.

A.Beneficiary

B.Fiduciary

C.Grantor

D.Trustor

NAME: SCORE:

SECTION: PROFESSOR:

Problems

1. Mr. Dimitri passed away on June 30, 2014. Which estate, which is under judicial settlement,

accumulated P800, 000 gross income for the remaining half of the year. Deductions attribute to the

income amount of P400, 000. How much was the tax payable by the estate for 2014?

2. Lady Morgana created two irrevocable trusts naming her favorite granddaughter, Alyssa as beneficiary

of both trusts. It is provided in the trust document in starting the year 2014, when Alyssa turns 18, she is

to received 25% of the net income of both trusts for her education. Below are additional information.

Trust 1 Trust 2

Gross Income P600, 000 P900, 000

Deductions 180,000 280,000

How much is consolidated tax due? How much is the share of each trust on the consolidated tax due?

NAME: SCORE:

SECTION: PROFESSOR:

Questions- 2009 Bar Exams

Johnny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming the

trust instrument Santino, Johnny's 10-year old son, as the sole beneficiary. The trustee is instructed to

distribute yearly rentals amounting to P720,000. The trustee consults you if she has to pay the annual

income tax on the rentals received from the commercial apartment.

1. What advice will you give the trustee? Explain.

2. Will your advice be the same if the trustee is directed to accumulated the rental income and distribute
the same only when the beneficiary reaches the age of majority? Why or why not?