Summary of rules on gross estate

Residents or NRA Without NRA with

Citizens reciprocity reciprocity
Property Location Within Abroa Within Outside Withi Outside
d n
Real Properties √ √ √ x √ X
Personal Properties
 Tangible √ √ √ x √ X
 Intangible √ √ √ x x X

Reciprocity - agreement between two states that allows residents of one

state to request exemption from tax withholding in the other (reciprocal)
state.

Illustration:
A decedent died living the following property:
Location Total
Property Philippine Abroad
s
Real Property 2,000,000. 3,000,000. 5,000,000.
00 00 00
Tangible Personal Property 1,000,000. 500,000.0 1,500,000.
00 0 00
Intangible Personal Property 800,000.0 1,200,000. 2,000,000.
0 00 00
Total 3,800,000. 4,700,000. 8,500,000.
00 00 00

Inventory of Assets

Illustration:
A decedent died on June 30, 2015. An inventory was not immediately prepared because of the funeral of
the decedent. An inventory count of his properties was drawn only on July 15, 2015. On that date, there
were properties which had a total fair value of P5,000,000.00. P100,000.00 of the amount represents
income earned after death while P400,000.00 represents income earned before death. A total of
P500,000.00 was paid for funeral expenses and juridical expenses of the estate and a total of P200,000.00
obligations of the decedent was paid since his death.

Note
1. Income earned before death – form part of the gross estate of the decedent because these were
present at the point of death.
2. Income earned after death-must be excluded since these were not present at the point of death.
3. Expenses or obligations which were paid since death must be added back since these were present
at the point of death

Adjustments to the Inventory

1. Exempt transfer-consist of:
 Properties existing at the date of death but are not owned by the decedent;
 Properties owned by the decedent but are excluded by law from estate tax.

These are referred to as “exclusions in gross estate”. These are removed from the inventory list of the
decedent’s properties

2. Taxable transfers – consists of properties which are absent at the point of death but are owned by the
decedent at the point of death.

It also refers to “inclusions in gross estate” which should be added to the inventory list of the
decedent’s properties.

GROSS ESTATE FORMULA

Inventory of properties at the point of death xxxx

 Less: Exempt transactions
 Properties not owned xxxx
 Properties owned but excluded by law xxxx
Inventory of taxable present properties xxxx
Add: Taxable transfers xxxx
Gross Estate xxxx

EXEMPT TRANSACTIONS:
1. Transfer of properties not owned by the decedent – One cannot transfer properties he or she
does not own. Properties not owned by the decedent are not part of his/her donation mortis
causa.

A donation inter vivos is a gift between living people. The transfer takes place immediately and
irrevocably. A donation mortis causa is a gift made by someone because death seems
imminent. ... If the death does not occur and the donee has already taken possession, then the
donee is obliged to return the gift if requested.

2. Transfers legally excluded – these are properties that are owned by the decedent at the point of
death and form part of his/her donation mortis causa to the heirs, but are exempted but the law
from estate taxation, hence, excluded from gross estate.
TRANSFER OF PROPERTIES NOT OWNED BY THE DECEDENT
1. Merger of the usufruct in the owner of the naked title
Mr. A died in June 201.. In his will, he devised an agricultural land to B who shall use the
property over 10 years and thereafter, to C. Subsequently, B died resulting in the transmission of
the property to C.
Note:
 The transfer of the devise from B to C is referred to in law as the “merger of the usufruct in the
owner of the naked title”
 The transfer from the usufructuary, B, to the real owner C, upon the death of B does not
constitute a donation mortis causa as it is a mere return of the property to the real owner, thus,
excluded from gross estate.
 Note that the transfer from Mr. A. the predecessor, of the usufruct to B and the naked title to C
involves transfer of ownership, hence it is a donation mortis causa of Mr. A subject to estate tax.

2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to
the fideicommissary.

 legatee is more commonly known as a beneficiary or heir to the terms of a will. The term
comes from the word "legacy", meaning inheritance. If a person dies without a will and
has no living relatives, the assets will go to the state.

 fideicommissary a person who is the beneficiary under civil law of a

fideicommissum and who is nearly equivalent to a cestui que trust of common
law

 Cestui-que trust - the beneficiary of a trust

Illustration:
Mr. A died leaving an inheritance consisting of several real estates to his favorites grandson, C. Because
C was a minor, Mr. A appointed B, an older brother of C, as fiduciary of the inheritance. Before
transferring the property to C, B. died.
Note: The delivery of the inheritance upon the death of B (fiduciary heir), to C (fideicommissory) shall
not be included in the gross estate of B because the transfer does not involve a transfer of ownership from
B to C. B is merely a trustee. The delivery is a mere return of the property to the real owner, C.
 3. The transmission from the first heir, legatee, or donee in favor of another beneficiary, in
accordance with the desire of the predecessor.
Illustration
In his will, Mr. A devised a piece of land to B as the first heir and thereafter to C as the second heir. B
subsequently died transmitting the property to C in accordance with Mr. A’s will

Note:
The transfer from B to C is referred to as transfer under a special power of appointment. The same is not
B’s donation mortis causa. The transfer from B to C is merely an implementation of the transfer which
was originally mandated by predecessor A. The same rule applies even if B were given the power, solely
or in conjunction with others, to appoint the second heir to the property from a list drawn by predecessor.
In all previous illustrations, assuming B transferred the property during his lifetime to C, the same shall
not be subject to donor’s tax because there is no gratuitous transfer of ownership.
Gratuitos- given or done free of charge
4. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate, executor
or administrator.

Revocably- capable of being revoked or canceled.

Irrevocable- not able to be changed, reversed, or recovered; final.

Illustration: Mr. Tubod died. His heirs collected the following proceeds life insurance
policies.

AXA, revocably designated to wife 800,000.00

Manulife, irrevocably designated to daughter 600,000.00
Sunlife, recovably designated to Mr. Tubods estate 700,000.00
PhilAm. Irrevocably designated to Mr. Tubods executor 400,000.00

Note:
1. Only the proceeds of insurance policies that are revocably designated are included in gross
estate.
2. However, if the beneficiary is the estate, executor or administrator, the proceeds are included
in the gross estate without regard of the designation of the beneficiary as revocable or
irrevocable.

5. Properties held in trust by the decedent

Illustration: The following properties were identified upon the death of Mr. Ubaldo:

Car, registered in the name of his brother 800,000.00

Merchandise, consigned to Mr. Ubaldo 200,000.00
House and Lot 2,400,000.00
Motorcycle, borrowed from a friend 150,000.00
Boarding house, held as trustee 4,000,000.00
Taxicab 1,000,000.00
Taxicab franchise 600,000.00
Clothes, books, equipment, and other personal belongings 600,000.00

6. Separate properties of the surviving spouse

Common properties-owned jointly by the spouses while separate
Exclusive properties – solely owned by either of them
 Husband’s capital-exclusive properties of the husband
 Wife’s paraphenal-exclusive properties of the husband
Illustration: An inventory of the properties at the point of death of Mr. Cabili revealed the following:

Exclusive properties of Mr. Cabili 2,400,000.00

Exclusive properties of Mrs. Cabili 4,000,000.00
Common properties of Mr. and Mrs. Cabili 8,000,000.00
Total Properties of the spouses 14,400,000.00

7. Transfer by way of bona fide sales.

 Onerous transaction - involving heavy obligations.
 Gratuitous- given or done free of charge.
Note: Properties transferred by way of bonafide sales are excluded in gross estate because the decedent
no longer owns them at the date of his/her death
Mortis Causa - In contemplation of approaching death.
The civil law defines it to be a gift under apprehension of death; as, when any thing is givenupon conditio
n that if the donor dies, the donee shall possess it absolutely, or return it if the donorshould survive, or sh
ould repent of having made the gift, or if the donee should die before the donor.

Inter Vivos -  is a legal term referring to a transfer or gift made during one's lifetime, as opposed to
a testamentary transfer (a gift that takes effect on death) under the subject of trust.