INCOME TAXATION

MEMORY AID /FOCUS NOTES

ESTATES AND TRUSTS
Estates and Trusts
1. Definitions
Estate Mass of all property, rights and obligations of a person which are not extinguished by his
death.
Trust Right on property, real or personal, held by one party for the benefit of another.
Administration or Refers to the period when title to the properties left by a decedent is not yet finally
settlement period transferred to the heirs, beneficiaries.

At this period, the executor named by the deceased in his “last will or testament, if any, or the
administrator appointed by the court, as the case may be, is temporarily in-charge of the
administration of the estate until such time that the estate is finally distributed to the rightful
heirs. While under administration, the estate may earn income, thus, the corresponding
income tax should be paid.

2. Important Pointers
Estate as a taxpayer 
An estate is an income taxpayer if under judicial settlements or administration.
An estate under extra-judicial is not a taxpayer. The income of the estate is taxable
to the heirs.
Trust as a taxpayer  A revocable trust is not a taxpayer and is treated as a pass-through entity whose
income is taxable to the grantor-trustor.
 An irrevocable trust is a separate and distinct taxable entity.
Income taxable to an estate 1. Income accumulated in trust for the benefit of unborn or unascertained person or persons
or trust under the NIRC with contingent interests, and 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 which 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 estate; and
4. Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
Treatment of income When an estate or a trust is a taxpayer, a distribution of the year’s income to an
distribution of the year’s heir/beneficiary is:
income to heir or 1. A special item of deduction for the estate/trust
beneficiary 2. A special item of income to the heir / beneficiary
Computation of Taxable Gross income xxx
income of the Estate or Less: Deductions
Trust Business expenses xxx
Distribution of years income
To the heir or beneficiary xxx (xxx)
Taxable income xxx

Tax due (Sec. 24 (a)) xxx

Applicable tax 1. The tax due is based on the graduated rates for individual.
2. Estate is required to adopt the calendar year as its accounting period.
3. Where prior to the settlement of the estate, the executor or administrator sells property of
a decedent’s estate for more than the appraised value place upon it at the decedent’s death,
the excess is income taxable to the estate. Where the heir sells the property after the
settlement, the heir is taxable individually on any profit derived.
The estate of a decedent may settled judicially or extrajudicially. Judicial settlement pertains to settlement of an estate in a
court proceedings while in extrajudicial settlement, the heirs or beneficiaries settle for themselves the distribution of the estate
or their inheritance.

Classification of Estates under Settlement or Administration

Estate under “judicial” administration Fiduciary/trustee (administrator/executor) files the ITR and pays the tax due
thereon.
Estate not under “judicial” Heirs and beneficiaries file the ITR of the estate and pay the tax due thereon.
administration (extrajudicial
settlement)
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Termination of Judicial / Extrajudicial Settlement
 After termination of judicial/extrajudicial settlement of the estate where the heirs still do not divide the property but
instead contribute to the estate money, property, or industry with intention to divide the profits between/among
themselves, an unregistered partnership is created and the estate becomes liable for the payment of corporate
income tax. (Evangelista v. Collector, GR No. L-9996, October 15, 1957)
 If the heirs, without contributing money, property, or industry to improve the estate, simply divide the fruits thereof
between/among themselves, a co-ownership is created and individual income tax is imposed on the income
received by each of the heirs, payable in their separate and individual capacity. (Obillos v. Commissioner, GR No. L-
68118, October 29, 1985)

Rules to be observed:
1. The net income of an estate or trust is computed in the same manner and on the same basis as in the case of an
individual.
2. The income tax rates for individual taxpayers apply.
3. Payment of the income tax shall apply be made by the fiduciary, executor, or administrator.
4. The income tax return shall be filed by the fiduciary, executor, or administrator if the gross income is P20,000 or
more.
5. Where two or more trusts are created by the same grantor and the beneficiary in each instance is the same, the
trustees should each make a separate return for each trust but the income tax liability shall be computed on the
consolidated taxable income of the several trusts, as follows:
Consolidated Gross Income xxx*
Less: Consolidated Expenses (xxx)
Taxable Income Pxxx

Trust Beneficiary
Gross income Xxx Gross income Xxx
Expenses (xxx) Expenses (xxx)
Distribution income (xxx) Distribution income** Xxx

Taxable income Xxx Taxable income Xxx

*The two trusts will not be consolidated if they involve separate beneficiaries.
**Income distribution to beneficiaries of estates and trusts – subject to 8% CWTAX

Several Trust With a Common Grantor and a Common Beneficiary

Filing of separate returns A separate return will have to be filed for each trust by the respective
trustee/fiduciary
Consolidation of the separate returns The separate returns filed by the different fiduciaries shall be consolidated in the
BIR allowing against the consolidated taxable income
Computation of consolidated income An income tax shall be computed on the consolidated income
tax
Apportionment of the consolidated The tax computed on the consolidated income shall be apportioned to the different
income tax to the different trusts trusts, such that each trust shall have a share in the income tax on consolidated
income. The format of computation follows:

Taxable income of the trust x Consolidated income tax

Taxable income of all trust
Tax payable of each trust Each trust shall pay an income tax still due computed as follows:
Income tax apportioned to the trust xxx
Less: Income tax already paid by the fiduciary of the trust (xxx)
Income tax still due xxx

Taxable on Trust’s
 Trust is a right on property, real or personal, held by one party for the benefit of another.
 It may be arrange inter-vivos or created by will under which title to a property is passed to another for conservation or
investment with the income therefrom and ultimately the corpus (principal) to be distributed in accordance with the
directions of the creator as expressed in the government instrument.
 Trust agreement allows individuals to create sustained benefits for an individual or entity. For instances, a parent may
place a sum of money, property or other types of financial assets such as equity and debt instruments in the hands of a
trustee for the benefit of an incapacitated or minor child.

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Parties to a Trust:
Classification of trust
Requisites or Conditions for 1. The employee’s trust must form part of a pension, stock bonus, or profit sharing
Exemption of Employee’s Trust
Filing of Returns and Payment of Tax
Who shall file the return?
Return to be filed if gross income is The return shall be filed if the estate or trust has a gross income of P20,000 or more
P20,000 or more
15. ESTATE AND TRUST
1. Trustor – person who establishes a trust.
2. Trustee – one in whom confidence is reposed as regards property for the benefit
of another person.
3. Beneficiary – person for whose benefit trust is created.
4. Fiduciary – any person or corporation that holds in trust an estate of another
person or persons. A fiduciary may exist only if a legal trust is created.
1. Ordinary trust – the income and corpus of the trust do not revert to the
grantor. The trust income is accumulated and held for distribution to the
beneficiaries. Under the Tax Code, ordinary trust is any of the following trusts:
 A trust where the income is accumulated or held for future distribution
under the terms of a will trust.
 A trust where the income is to be distributed currently by the fiduciary to
the beneficiary.
 A trust where the income is accumulated for the benefit of unborn or
unascertained person or persons with contingent interest.
 A trust where the income collected by a guardian of a infant is held or
distributed as the court may direct; and
 A trust where the income, is at the discretion of fiduciary, may be either
distributed to the beneficiaries or accumulated.
2. Revocable trust (Sec. 63, NIRC) – a trust where at any time, the power to
revest in the grantor, title to any part of the corpus of the trust is vested:
 In the grantor either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus of
the income therefrom; or
 In any person not having a substantial adverse interest in the disposition of
such part of the corpus or the income therefrom.
 The income of such part of the trust shall be included in computing the
taxable income of the grantor (Sec. 63, NIRC)
3. Employee’s trust – income tax shall not apply to employee’s trust which
forms part of pension, stock bonus, or profit-sharing plan of an employer for
the benefit of some or all of his employees. (Sec. 60 [B]-NIRC). The income of an
employee’s trust is likewise exempt from the payment of final taxes as well as
income derived from the sale of real property whose funds are sourced from the
employees trust fund (Miguel J. Ossorio Pensin Foundation, Inc. v. CA and CIR
(G.R. No. 162175, June 28, 2010)
plan of an employer for the benefit of some or all of his employees;
2. Contributions are made to the trust by such employer, or employees or both;
3. The contributions are made for the purpose of distributing to such employees
the earnings and principal of the fund accumulated by the trust in accordance with
such plan;
4. Under the trust instrument, it is impossible at any time prior to the satisfaction
of all liabilities with respect to employees under the trust, for any part of the corpus
or income to be (within the taxable year or thereafter) used for or diverted to,
purposes other than for the exclusive benefit of his employees.
Any amount actually distributed to any employee or distribute shall be taxable to him in the year
of distribution, to the extent that it exceeds the amount contributed by such employee or distributee.
The following persons acting in any fiduciary capacity shall file the income tax
return for an estate or trust:
1. Guardians
2. Trustees
3. Executors
4. Administrators
5. Receivers
6. Conservators
7. All other persons or corporations acting as fiduciary
during the taxable year
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When is the return filed? Quarterly deductions
First Quarter May 15
Second Quarter August 15
Third Quarter November 15
Final adjusted return May 15 of the succeeding year

The tax is paid as the return is filed

In case of two or more joint In case of two or more joint fiduciaries, return filed by one of them shall be a
fiduciaries sufficient compliance with the requirements of the Tax Code.

PROBLEMS
Problem 1: (Income and Deductions of a Deceased Taxpayer) Mr. M died on August 30, 20X4. He was survived by his
wife and his two children. Before his death, he has P800,000 business net income. His estate underwent judicial proceeding.
From August 31, 20X4 to December 31, 20X4, the business posted P400,000 net income.

Required: (Ignored the graduated tax table)

1. From January 1 to August 30, 20X4, How much is taxable income?
2. From August 31 to December 31, 20X4, How much is taxable income?

Notes:

For estates, the status of the taxpayer will depend upon the status of the decedent at the time of his death similar to
the individual taxpayer. So, an estate as an income taxpayer can be a citizen or an alien.
When a person who owns property dies, the following taxes are payable under the provisions of the income tax law:
1. Income tax for individuals - to cover the period beginning January to the time of death.
2. Estate Income Tax- if the property is transferred to the heirs.
3. If no partition is made, individual or corporate income tax, depending on whether there is no settlement of the estate. And, if there is, depending on
whether the settlement is judicial or extrajudicial

Problem 2: (Estate and Trust) Mr. M created two (2) trusts designating Atty. N and the Philippine Trust Company as
trustees. The common beneficiary of the two (2) trusts was his son, Mr. Nelson, married and with two (2) qualified dependent
children. The following data were made available for the year 20X1:

Trust No. 1 Trust No. 2

Gross income P1,600,000 P1,700,000
Business expenses 500,000 600,000
Income distribution to beneficiary 100,000 200,000
Nelson
Gross income P1,800,000
Business expenses 250,000
Income distribution received, gross of 8%
creditable withholding tax 300,000
Income tax paid, previous 3 quarters 40,000
Required: (Ignored the graduated tax table)
1. How much was the tax due from each trust?
2. How much was the tax due on the consolidated income?
3. How much was the tax payable of each trust after their share in the consolidated income?
4. How much was the tax payable of M after tax credits?
5. When is the last day for filing of income tax return?

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