Chapter 5

Estate Tax - Gross Estate

 Estate Tax Formula

The computation of the estate tax will depend on the status of the decedent,
whether he was single or married.
 If the decedent was single at the time of his death:

Real properties…………………………. P xx
Personal properties……………………. xx
Gross estate…………………………… xx
Less: Ordinary deductions…………… (xx)
Special deductions……………. (xx)
Net taxable estate……………………. xx
X Tax rate %
Estate tax……………………………… xx

 If the decedent was married at the time of his death:

Conjugal/
Exclusive Community Total
Real properties………………………. P xx P xx
Personal properties…………………. xx xx
Gross estate………………………… xx xx
Less: Ordinary deductions………….. (xx) (xx)
Estate after ordinary deduction.……. xx xx P xx
Less: Special deductions…………………………………………….. (xx)
Net estate………………………………………………………………. xx
Less: Share of surviving spouse (net conjugal estate divided 2)… (xx)
Net taxable estate……………………………………………………… xx
X Tax rate %
Estate tax……………………………………………………………….. xx

 Kinds of Decedents
 Citizen or Resident (Resident citizen, Non-resident citizen, and Resident alien)
Properties included in gross estate: (Sec. 4, RR 2-2003)
 Real property (e.g. land and building) wherever located
 Tangible personal property (e.g. car) wherever located
 Intangible personal property (e.g. receivable) wherever located
 Non-Resident Alien (Engaged and Not engaged in trade or business in the Philippines)
Properties included in gross estate:
 Real property located in the Philippines
 Tangible personal property located in the Philippines
 Intangible personal property - with a situs in the Philippines such
as:
 Franchise which must be exercised in the Philippines
 Shares, obligations or bonds issued by corporations organized or
constituted in the Philippines
 Shares, obligations or bonds issued by a foreign corporation 85%
of the business of which is located in the Philippines
 Shares, obligations or bonds issued by a foreign corporation if such
shares, obligations or bonds have acquired a business situs in the
Philippines (i.e. they are used in the furtherance of its business in
the Philippines)
 Shares, rights in any partnership, business or industry established
in the Philippines
Illustration 1
Mr. Abad a citizen of the Philippines died residing in the Philippines. What
kind of decedent is Mr. Abad?
Answer: He is a citizen decedent

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Illustration 2
Mr. Laurel a citizen of the Philippines died while residing in Canada. What
kind of decedent is Mr. Laurel?
Answer: He is a citizen decedent

Illustration 3
Mr. Yamamoto a citizen of Japan died while residing in the Philippines. What
kind of decedent is Mr. Yamamoto?
Answer: He is a resident decedent

Illustration 4
Mr. Park a citizen of Korea died in his country leaving properties in the
Philippines. What kind of decedent is Mr. Park?
Answer: He is a non-resident alien decedent

Table 5-1. Summary of properties included in gross estate

Citizen or Non-resident Alien Non-resident Alien
Classification of Property Resident (no reciprocity) (with reciprocity)
Real property within Yes Yes Yes
Real property without Yes
Tangible personal property within Yes Yes Yes
Tangible personal property without Yes
Intangible personal property within Yes Yes
Intangible personal property without Yes

 The Gross Estate

1. Decedent’s interest
2. Transfer in contemplation of death
3. Revocable transfer
4. Property passing under general power of appointment
5. Transfer for insufficient consideration (1, 2 & 3)
6. Proceeds of life insurance

In numbers (2) to (5), the properties are not actually in the estate. They were the
subjects of transfers by the decedent during his lifetime. In his lifetime, and at his
death, the properties were in the hands of the transferees already. Only values
from the properties shall be included in the gross estate and the properties remain
physically with the transferees. These are only paper computations. In the law of
succession, this is called collation.

Decedent’s interest
This shall include all properties, rights and interest which the decedent owns at the
time of death. (Sec. 85 A, NIRC) It shall include: http://www.scribd.com/doc/3914010/Tax2-Ch15-Estate-
Taxes-Reviewer
 Properties owned by the decedent actually and physically present in his
estate at the time of his death such as land, buildings, shares of stock,
vehicles, bank deposit, etc.
 The value of any interest in property owned or possessed by the decedent
at the time of his death such as dividends declared before his death but
received after his death, partnership profits which have accrued before his
death, usufructuary rights, etc.
 The value of property, right or interest in the property, transferred by the
decedent during his lifetime which, under the law, are in the nature of
testamentary disposition such as insurance proceeds in favor of revocable
beneficiary.
Transfer in contemplation of death
Impelled by the thought of death (i.e., the motivating factor or controlling motive is
the thought of death), regardless of whether the transferor was near the possibility
of death or not. (Sec. 85 B, ibid.)

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Illustration 5
Mr. Alcala, aged 90 years and suffering from incurable cancer, on August 1
wrote a will and, on the same day, made several inter-vivos gifts to his
children. Ten days later, he died. In your opinion, are the inter-vivos gifts
considered transfers in contemplation of death for purposes of determining
properties to be included in his gross estate?
Answer: Yes. When the donor makes his will within a short time of, or
simultaneously with, the making of gifts, the gifts are considered
as having been made in contemplation of death. Obviously, the
intention of the donor in making the inter-vivos gifts is to avoid the
imposition of the estate tax and since the donees are likewise his
forced heirs who are called upon to inherit, it will create a
presumption juris tantum that said donations were made mortis
causa, hence, the properties donated shall be included as part of
Mr. Alcala’s gross estate.

Revocable transfer
Where the enjoyment of the property transferred may be altered, amended,
revoked or terminated by the decedent. The revocability is not affected by the
failure of the decedent to exercise the power to revoke during his lifetime. If the
notice has not been given, the power to revoke has not been exercised on or
before the date of his death, such notice shall be considered to have been given,
or the power exercised on the date of his death.
(Sec. 85 C, ibid.)

Illustration 6
Vicente donated real property to Francisco during his lifetime. An item in the
deed, however grants the donor the right to revoke the donation at will. Is the
real property subject to estate or donor’s tax?
Answer: The donation is subject to estate tax.

Property passing under general power of appointment

A power of appointment is the right to designate the person or persons who will
succeed to the property of the prior decedent. (Sec. 85 D, ibid.)
It may be exercised by the decedent:
1. by will; or
2. by deed executed in contemplation of, or intended to take effect in
possession or enjoyment at, or after his death;
3. by deed under which he has retained for his life or any period not
ascertainable without reference to his death or for any period which does
not in fact end before his death:
a) the possession or enjoyment of, or the right to the income from, the
property; or
b) the right, either alone or in conjunction with any person, to
designate the persons who shall possessor enjoy the property or
the income therefrom; except in case of a bona fide sale for an
adequate and full consideration in money or money's worth.
A power of appointment may be a general or a limited/special. A general power of
appointment is when it authorizes the donee to appoint any person he pleases,
including himself, his spouse, his estate, his executor or administrator, and his
creditor thus having full dominion over the property as though he owned it. A
limited power of appointment is when the donee can appoint only among a
restricted or designated class or persons other than himself. http://www.scribd.com/doc/45177293/Tax-2-Tagufa
Illustration 7
Guillermo died living a will whereby it was stipulated that his lot situated in
Bulacan shall go to Roberto, and that should the latter decide to transfer the
property, he is free to transfer it to anybody. Is the power of appointment
general or limited?
Answer: The power of appointment is general. It is subject to estate tax.
The lot is includible in the gross estate of the donee (Roberto)
when he dies. If special power the lot is includible in the gross estate of the Donor
(Guillermo)

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Estate Tax - Gross Estate

Transfer for insufficient consideration

When the decedent’s property is transferred (Sec. 85 G, ibid.)
1. in contemplation of death,
2. revocable transfers, or
3. passed under a general power of appointment for a consideration in
money or money's worth

Amount to be included in the gross estate:

 If the transfer is a bona fide sale for adequate and full consideration in
money or money’s worth, no value shall be included in the gross estate.
(Case 1)
 If the transfer is not a bona fide sale for an adequate and full consideration
in money or money’s worth, there shall be included in the gross estate
only the excess of the fair market value of the property at the time of death
over the value of the consideration received by the decedent. (Case 2)
 If an inter vivos transfer of the decedent is proven to be fictitious, the total
value of the property at the time of death shall be included in the gross
estate. (Case 3)
Table 5-2. Value of properties includible in the gross estate
Case 1 Case 2 Case 3
a) Consideration received at the time of transfer P 200,000 P 120,000 -0-
b) Fair market value at the time of transfer 200,000 200,000 200,000
c) Fair market value time of death 360,000 360,000 360,000
Value to be included in the gross estate None 240,000 360,000

Compare: (a) and (b) to determine the adequacy of consideration;

(c) and (a) to determine the value to include in the gross estate.

Illustration 8
Mr. Romulo, during his lifetime made a revocable transfer of property. There
was a consideration of P1,400,000 received, when the fair market value of the
property at the time of transfer was P2,000,000. At the time of Mr. Romulo’s
death the property had a fair market value of P1,200,000. How much should
be included in the gross estate of Mr. Romulo?
Answer:
(a) Consideration received at the time of transfer… P 1,400,000
(b) Fair market value at the time of transfer……….. 2,000,000
(c) Fair market value, time of death………………… 1,200,000
Value to be included in the gross estate………. None

There is no excess of fair market value of the property at the

time of death over the consideration received.

Proceeds of life insurance

Proceeds of life insurance under policies taken out by the decedent upon his own
life shall be included in his gross estate if the beneficiary is: (Sec. 85 E, ibid.)
1. the estate of the deceased, his executor or administrator, irrespective
of whether or not the insured retained the power of revocation; or
2. other than the decedent’s estate, executor or administration, when
designation of beneficiary is revocable, that is, when the designation of the
beneficiary is not expressly made irrevocable. (For the designation of
beneficiary to be irrevocable, it should be expressly stated in the policy.)
A beneficiary is a person who will receive the proceeds of the insurance when the
insured dies. A designation of beneficiary is revocable if the insured can change
the beneficiary from a person designated in the policy with another person.

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Estate Tax - Gross Estate

The proceeds of life insurance are not taxable in the following cases:
1. Proceeds of a group insurance policy taken out by the company for its
employees;
2. Accident insurance proceeds. NIRC specifically mentions only life
insurance policies;
3. Amount receivable by any beneficiary irrevocably designated in the policy
of insurance by the insured;
4. Proceeds of insurance policies issued by the GSIS to the government
official and employees are exempt from all taxes;
5. Benefits accruing under the SSS law.

Illustration 9
Diego insured his life with Gabriela as beneficiary. The policy states that
Diego can change Gabriela with another person whom Diego may later
designate as new beneficiary. Will the proceeds from the life insurance
subject to estate tax?
Answer: Yes, because the beneficiary is a third person revocable.

Illustration 10
Mr. Roco insured his life with Ayala Insurance Corporation with his wife Sonia
to receive the proceeds of the insurance when he dies. Will the proceeds from
the life insurance subject to estate tax?
Answer: Yes, because the beneficiary is a third person revocable (the
policy is silent).
Illustration 11
Mr. Malvar took out a life insurance on his life and designated his estate as
revocable beneficiary. Will the proceeds of the insurance form part of his
gross estate?
Answer: Yes, because the beneficiary is the estate whether the
designation is revocable or irrevocable.

Illustration 12
Gregorio took out a life insurance on his life and stated that the revocable
beneficiary is the executor of his estate. Will the proceeds of the insurance
form part of his gross estate?
Answer: Yes, because the beneficiary is the executor whether the
designation is revocable or irrevocable.

Illustration 13
Luis took out a life insurance on his life and designated his wife as irrevocable
beneficiary. Will the proceeds of the insurance form part of his gross estate?
Answer: No, because the beneficiary is a third person irrevocable.

Illustration 14
SM Corporation the employer of Ferdinand took out a group life insurance on
its employees, paying premiums on the group insurance. Ferdinand
designated Imelda as his beneficiary. Ferdinand died. Will the proceeds of the
insurance form part of his gross estate?
Answer: No, because the life insurance was not taken out by
Ferdinand himself on his own life.

Illustration 15
Vicente was covered by an accident insurance. An accident resulted in his
death and the proceeds of insurance were paid to his designated beneficiary,
Ruby. Would the proceeds of the insurance be included in his gross estate?
Answer: No, because it is an accident insurance.

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Estate Tax - Gross Estate

 Valuation of Properties in the Gross Estate

The properties comprising the gross estate shall be valued based on their fair
market value as of the time of death. Valuation of: (Sec. 5, RR No. 2-2003)
1. Real property
a) FMV as determined by the Commissioner; or (zonal value)
b) FMV shown in schedule of values fixed by the provincial or city
assessors, whichever is higher (No zonal value: use the FMV in the latest tax
declaration)
2. Personal property – FMV at the time of the decedent’s death
3. Shares of stock (listed or unlisted in the stock exchange)
a) Listed shares – the arithmetic mean between the highest and
lowest quotation at date of death, or the date nearest the date of
death, if none is available on the date of death itself
b) Unlisted shares
i. Common shares – book value
ii. Preferred shares – par value
4. Usufruct – probable life of the beneficiary in accordance with the latest
basic standard mortality table

Illustration 16
Mr. Ruiz bought a car for P1,600,000. When he died two years later, the car
had a value of P800,000. How much is the value to be included in the gross
estate of Mr. Ruiz?
Answer: P800,000 the value to be included in the gross estate

Illustration 17
Mr. Alano bought for P1,500,000 a piece of land in Sta. Maria, Bulacan. At the
time of his death, the property could be sold for P2,250,000 (an adjacent
piece of land, with the same area as that of Mr. Alano’s land, was sold one
day before Mr. Alano’s death at that price). Its fair market value in the
assessment rolls of the province was P1,350,000. The fair market value of the
property at the time of Mr. Alano’s death, as determined by the Bureau of
Internal Revenue, was P1,875,000. How much is the value to be included in
the gross estate of Mr. Alano?
Answer: P1,875,000 is the value to be included in the gross estate of
Mr. Alano (whichever is higher between P1,350,000 and
P1,875,000).

Illustration 18
Mrs. Blanca bought a piece of land in Pasig City on installment terms, with a
mortgage constituted on the property for its unpaid purchase price. At the
time of Mrs. Blanca’s death, the property had a fair market value of
P2,000,000 in the assessment rolls of Makati City, and a zonal value of
P3,000,000 as fixed by the Bureau of Internal Revenue. The unpaid mortgage
on the land at the time of Mrs. Blanca’s death was P500,000. How much is
the value to be included in the gross estate of Mrs. Blanca?
Answer: P3,000,000.

Illustration 19
Ms. Silva died leaving 2,000 shares of stock of Filinvest Inc. a domestic
corporation. On the date of Ms. Silva’s death, the shares were quoted in the
Philippine Stock Exchange at P104 as highest and P102 as the lowest. How
much is the value to be included in the gross estate of Ms. Silva?
Answer: P206,000 is the value to be included in the gross estate of
Ms. Silva [ (P104 + P102) / 2 x 2,000 shares ].

Illustration 20
Mr. Rico died leaving 2,000 common shares of stock of Megaworld Inc., a
domestic corporation, not traded in any stock exchange. On the date of the
death of Mr. Rico, the statement of financial position of Megaworld Inc.
showed a capital stock issued and outstanding common of 20,000 shares
with an aggregate par value of P2,000,000 and a retained earnings of

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P400,000 so that the stockholders’ equity in the corporation was P2,400,000.

How much is the value to be included in the gross estate of Mr. Rico?
Answer: P240,000 (P120* x 2,000 shares). *FMV of the CS P2,400,000 SE/20,000
shares

Illustration 21
Mr. Yan died leaving a substantial estate. Among the properties that he left
were 1,500 preferred shares of stock of Sta. Lucia Inc. The Sta. Lucia Inc.
has common and preferred shares, neither of which is traded in a local stock
exchange. There is no evidence of the fair market value of the share. The
common stock has a par value P120 per share, although the book value (per
company’s books of accounts and financial statements) is P170 per share.
The preferred stock has a par value of P70 per share. How much is the value
to be included in the gross estate of Mr. Yan?
Answer: P105,000 is the value to be included in the gross estate of
Mr. Yan (P70 x 1,500 shares).

Illustration 22
When Mrs. Charito died, she had existing collectibles from various debtors
amounting to P750,000. A month after Mrs. Charito’s death, Mr. Solis, one of
the debtors of the decedent, was proven and declared by the court insolvent
and the P150,000 claim against him could no longer be collected. How much
should be the amount to be included in the gross estate of Mrs. Charito?
Answer: The entire amount of P750,000 collectibles should still be
reported as part of the gross estate of Mrs. Charito.
However, the claims against insolvent person shall be part of
ordinary deductions against the gross estate in the
determination of the net taxable estate.

 Exemption from the Estate Tax

 Benefits received from GSIS (Sec. 33 PD 1146 as amended)
 Benefits received from SSS (Sec. 16 PD 1161 as amended)
 Benefits received from U.S Veterans Administration (RA 360)
 Benefits given by the Philippine government and U.S government due to
damages suffered during the war (RA 227)
 Proceeds of life insurance where the beneficiary is irrevocably appointed
 Proceeds of life insurance under a group insurance taken by employer
(not taken out upon his life)
 Transfer by way of bona fide sales
 Retirement benefits of employees of private firms from private pension
plans approved by the BIR
 Personal Equity and Retirement Account (PERA) assets shall not be
considered assets of the Contributor for purposes of estate taxes (RA 9505)
 Bank deposit in the name of the decedent on which the 6% estate tax has
been withheld and remitted by the bank to the BIR upon withdrawal by the
heirs

 Exemption of Certain Acquisitions and Transmissions

 The merger of usufruct in the owner of the naked title

Illustration 23
Mr. Perez died testate. The will provides that the usufruct over his land shall
be inherited by his eldest son, Emilio, while the naked title shall go to his
youngest son, Elpidio.
Question 1. Is the transfer of the property from Mr. Perez to his children
taxable?
Question 2. What if Emilio dies ahead of Elpidio and the usufruct is
transferred to the latter, is the transfer taxable?
Answer 1: Yes, it is subject to estate tax.
Answer 2: This is a case of a merger of the usufruct in the owner of the
naked title, because Elpidio is now the absolute owner of the
property. In this case, the transfer is exempt from estate tax.

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 Fideicommissary substitution - the transmission or delivery of the

inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary.

Illustration 24
Mr. Palma died testate. He appointed his only son, Jose, as the first heir of
his property. His will, however, provides that upon his death, the property
shall be preserved and transmitted to Rafael, his grandson to Jose, upon
reaching the age of maturity or upon the death of his son.
Question 1. Upon the death of Mr. Palma, will the transfer of the property
be subject to estate tax?
Question 2. Is the transfer of the property from Jose to Rafael taxable?

Answer 1: Yes, the first transfer from the testator to the first heir taxable.
Answer 2: The transfer is exempt from estate tax, because this is the
portion of the fideicommissary.

 The transmission from the first heir, legatee or done in favor of another
beneficiary, in accordance with the desire of the predecessor.

 All bequests, devises, legacies or transfers to social welfare, cultural and

charitable institutions, no part of the net income of which insures to the
benefit of any individual: Provided, however, That not more than thirty
percent (30%) of the said bequests, devises, legacies or transfers shall be
used by such institutions for administration purposes. (Sec. 87, NIRC)

 Capital of the surviving spouse

The capital of the surviving spouse of a decedent shall not be deemed a part of his
or her gross estate. The term “capital of surviving spouse” refers to the separate
property of the surviving spouse.

The exclusive property of the husband is called capital, while the exclusive
property of the wife is called paraphernal. (Article 136 Civil Code of the Philippines)

However, the share of the surviving spouse in the conjugal/community property

shall be included in the computation of the gross estate.