GENERAL PROVISIONS AND RECIPROCITY

Estate Tax – tax on the privilege of the decedent to transmit his estate upon death to his lawful heirs or
beneficiaries.

Governing Law:

R.A 10963 or Tax Reform for Acceleration and Inclusion Act (TRAIN) (beginning January 1, 2018)

Rate of estate – 6%, basis the net estate of every decedent, whether resident or non-resident of
the Ph.

R.A 8424 or the National Internal Revenue Code of 1997 (January 1, 1998 – December 31, 2017)
- Graduated tax rates
Governing Law on Imposition of Tax – Law enforce at the time of death is the one that prevail in the
imposition of tax. The estate tax accrues as of the death of the decedent (upon death of the decedent,
the estate tax accrues) and the accrual of the tax is distinct from the obligation to pay the same (the
estate has one year to pay). Upon the death of the decedent, succession takes place and the right of the
State to tax the privilege to transmit the estate vests instantly upon death.
Net Taxable Estate – Computation for the Estate tax Due

Net Distributable Estate – Distributable Estate for the Heirs.

Types of Properties

1. Real Properties – immovable properties

2. Tangible Personal Properties – movable properties
3. Intangible Personal Properties
a. Franchise which must be exercised in the Philippines.
b. Shares, obligations or bond issued by any corporation or Sociedad anonima organized
and constituted in the Philippines in accordance with it law.
c. Share, obligation or bonds issued by any foreign corporation, 85% of the business of
which is located in the Philippines.
d. Shares, obligation or bonds issued by any foreign corporation if such shares, obligation
or bonds have acquired business situs in the Philippines.
e. Shares or rights in any partnership, business or industry established in the Philippines.

Rule on Reciprocity

No tax shall be collected in respect of intangible personal property

a. If the decedent at the time of his death or the donor at the time of the donation was a citizen
and resident of a foreign country which at the time of his death or donation did not impose a
transfer tax of any character, in respect of intangible personal property of citizens of the
Philippines not residing in that foreign country, or
b. If the laws of the foreign country of which the decedent or donor was a citizen and resident at
the time of his death or donation allows a similar exemption from transfer or death taxes of
 every character or description in respect of intangible personal property owned by citizens of
the Philippines not residing in that foreign country.

APPLICATION:
GROSS ESTATE: INCLUSION, EXCLUSION, EXEMPTIONS

Composition of Gross Estate Under the Tax Code

1. Decedent’s Interest
2. Transfer in Contemplation of Death Real
3. Revocable Transfer Property
4. Property Passing Under the General Power of Appointment
Personal
5. Proceed of Life Insurance
Property
6. Transfer for insufficient Consideration
7. Claims Against Insolvent Persons* Intangible
8. Value of Mortgaged Property* Personal
9. Property Previously Taxed* Property
10. Family Home
11. Amount Received by Heirs Under R.A 4917*

(* - Part of Deductions from Gross Estate)

Decedent’s Interest

 To the extent of the interest therein of the decedent at the time of his death. This refers to the
value of any interest in property or rights in favor of the decedent on or before his death which
was accrued and received only after decedent’s death.

Examples:

1. Dividends declared on or before the death or stockholder, and received by the estate after
death.
2. Partnership’s profit earned prior to death of the partner, received by the estate after the
partner’s death.
3. Accrued interest and rents on or before the time of death, but collection was made after death

Transfer in Contemplation of Death

 General Rule: To the extent of any interest therein of which the decedent has at any time made
a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or
enjoyment at or after death, or of which he has at any time made a transfer, by trust or
otherwise, under which he has retained for his life or for any period which does not in fact end
before his death (1) the possession or enjoyment of, or the right to the income from the
property, or (2) the right, either alone or in conjunction with any person, to designate the
person who shall possess or enjoy the property or the income therefrom.
 Exception In case of a bonafide sale for an adequate and full consideration in money or money’s
worth, the transfer is NOT in contemplation of death.
Examples:

1. The donor made the donation concurrently with the execution of a will.
2. The donation was made due to the decedent’s advanced age and/or the decedent’s known
serious illness at the time of the gift.

Revocable Transfer

 To the extent of any interest therein, of which the decedent has at any time made a transfer by
the decedent alone or by the decedent in conjunction with any other person, to alter, amend,
revoke, or terminate, or where any such power is relinquished in contemplation of the
decedent’s death.

Note: the power to alter, amend or revoke shall be considered to exist on the date of the decedent’s
death and shall be considered to have been given, or the power exercised, on the date of his death.

Examples:

1. Transfer with the retention of interest (no full conveyance of ownership of property)
2. Revocable trusts

Property Under the General Power of Appointment

 General Rule: To the extent of any property passing under a general power of appointment
exercised by the decedent through the following modes:
o By will, or
o By deed executed in contemplation of, or intended to take effect in possession or
enjoyment at, or after his death, or.
o 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
 The possession or enjoyment of, or the right to the income from, the property, or
 The right, either alone or in conjunction with any person, to designate the persons who shall
possess or enjoy the property or the income therefrom
 Exception: In case of a bona fide sale for an adequate and full consideration in money or
money’s worth, it won’t pass under the general power of appointment.

Note: GPA is simply the right to designate the person who will succeed to the property of the prior
decedent, in favor of anybody including himself, his estate, his creditors or the creditors of his estate.
Proceeds of Life Insurance

 General Rule: TO the extent of the amount receivable by the estate of the deceased, his
executor, or administrator, as insurance under policies taken out by the decedent upon his own
life
 Exceptions
o When the designation of the third person (not the estate, executor or administrator)
beneficiary is irrevocable)
o The proceeds or benefits are from SSS and GSIS
o The proceeds are from a group insurance taken by the employer
 Include in the gross estate if the beneficiary is:
o Revocable
o Estate, his administrator or his executor

Notes:

 When the designation of the beneficiary is not stated or is not clear, the Insurance Code
assumes revocable designation. In addition, proceed of life insurance taken out by the decedent
on his own life, when included in the gross estate shall be an exclusive property if the premiums
were paid out of exclusive funds and shall be a conjugal property if the premiums were paid out
of conjugal funds.
 If the beneficiary who was irrevocably designated caused the death of the insure, the
designation is considered revocable unless acted in self-defense.
 Proceeds from property insurance are part of the gross estate (considered as interest – non-life)

Transfer for Insufficient Consideration

 If any one of the transfers, trusts, interest, rights or powers is made, created, exercised or
relinquished for a consideration in money or money’s worth, but 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, at the time of death, of the property
otherwise to be included on account of such transaction, over the value of the consideration
received therefor by the decedent.

Notes:

 If the transfer is a bona fide sale for an adequate and full consideration in money or money’s
worth, not part of the gross estate.
 If there was no consideration, the value to be included in the gross estate shall be fair value of
the property at the time of decedent’s death.
 If consideration is less than the FMV, include in the gross estate the excess of FMV at the time of
death over the consideration (BUT also include as part of the gross estate the consideration
received)
Other Items of Gross Estate

1. Claims of the deceased against Insolvent Person – a claim against an insolvent person must be
reported as part of the gross estate in the full amount of the receivable. This should be reported
as an exclusive or a conjugal property depending on whether the claim is derived from an
exclusive or a conjugal property.
2. Value of Mortgaged Property (undiminished by mortgaged or indebtedness)
3. Property Previously Taxed
4. Family Home
5. Amount Received by Heirs under R.A. No. 4917 - This amount received from decedent’s
employer as a consequence of the death of the decedent-employee shall be included in the
gross estate of the decedent which will be deducted from gross estate

Exemption of Certain Acquisitions and Transmissions

1. The merger of usufruct in the owner of the naked title

2. The transmission from the first heir. Legatee or done or in favor of another beneficiary in
accordance with the desire of the predecessor

3. The transmission or deliver of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary
 4. All bequests, devises, legacies or transfers to social welfare, cultural, and charitable institutions,
no part f the net income of which goes to the benefit of any individual; provided, however, that
not more than 30% of the said bequests, devises, legacies, or transfers shall be used by such
institutions for administrative purposes.

Other Exemptions and Exclusion from Gross Estate

1. Bequests to be used actually, directly, and exclusively for educational purposes.

2. Proceeds of life Insurance
a. Beneficiary is irrevocably appointed
b. Under a group insurance taken by the employer in favor of the employee
3. Transfer by way of bona fide sales
4. Properties held in trust by the decedent
5. Separate property (capital of husband or paraphernal of wife) of the surviving spouse.
6. Exemptions due to reciprocity.

Exemptions from Special Laws

 Benefits received from SSS or GSIS

 Benefits received from U.S Veterans Administration
 War benefits given by the Philippine government and U.S government due to damages suffered
during the war.
 Grants and donations to the Intramuros Administration
 Personal Equity and Retirement Account (PERA) assets of the contributor.
VALUATION OF GROSS ESTATE
DEDUCTION FROM GROSS ESTATE

Deductions

1. Losses
2. Claims Against the Estate
3. Claims of the Deceased Against Insolvent Persons
4. Unpaid Mortgages or Indebtedness of the Property
5. Unpaid Taxes
6. Transfer for Public Use
7. Vanishing Deduction or property Previously Taxed
8. Standard Deduction
9. Family Home
10. Amount Received by the Heirs Under R.A. 4917
11. Share of Surviving Spouse

Losses

- There shall also be deducted losses incurred during the settlement of the estate arising:
1. From fires, storms, shipwreck, or other casualties, or
2. From robbery, theft, or embezzlement
- Such losses are:
1. Not compensated for by insurance or other forms of indemnity
2. At the time of the filing of the return such losses have not been claimed as a deduction
for income tax purposes in an income tax return
3. Incurred not later than the last day for the payment of the estate tax

Claims Against the Estate

- The word “claims” is generally construed to mean debts or demands of a pecuniary nature
which could have been enforced against the deceased in his lifetime and could have been
reduced to simple money judgements. Claims against the estate or indebtedness in respect of
property may arise out of:
1. Contract
2. Tort
3. Operation of Law
- Requisites of Claims against the Estate (CPA-PEG)
1. The liability represents a personal obligation of the deceased existing at the time of his
death, except: unpaid obligations incurred incident to his death such as unpaid funeral
expenses and unpaid 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 creditor or the action to collect
from the decedent must not have been prescribed
Claims Against Insolvent Persons

- Claims of the deceased against insolvent persons as define under R.A. 10142 otherwise known
as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010 and other existing laws, where
the value of the decedent’s interest therein is included in the value of the gross estate.
- Essential Requirements
1. The amount of said claims has been initially included as part of his gross estate
2. The incapacity of the debtor to pay his debt is proven not merely alleged

Note: Under the Rule of Preference of Credits, the Government has preference over the asset of an
insolvent person, any residual amount would be distributed to Employees and the remaining to the
Creditors.

Unpaid Mortgages or Indebtedness of Property

- To be deductible, the property mortgaged must be part of the gross estate at fair market value
gross of any unpaid mortgage. However, if the decedent owns less than all of the property
covered by a mortgage, only a proportionate amount is deductible.

Unpaid Taxes

- General Rule: Taxes which have accrued as of the death of the decedent which were unpaid as
of the time of death
 - Exceptions:
1. Income tax upon income received after death
2. Property taxes not accrued before his death
3. Estate tax due from the transmission of his estate

Transfer for Public Use

- The amount of all bequests, legacies, devises, or transfers to or for the use of the Government
of the Republic of the Philippines, or any political subdivision thereof, shall be deductible from
gross estate as long as the said amount is used exclusively for public purposes.
- Transfer of Property made by a married decedent must have a written consent from the other
spouse, however, if the property transferred is not conjugal/absolute the said TPU is deductible
from the exclusive portion of the estate.

Note: The transfer of property for Public Use should be through a testamentary succession not merely
oral.

Vanishing Deduction (Property Previously Taxed)

- If the same property is included in the gross estate of the present decedent its value may be
deducted in computing the net taxable estate, subject to the following conditions:
a. The present decadent died/donor made the donation within five years from receipt of
the property (transfers though gratuitous transfer).
b. The property from which a vanishing deduction that is being claimed must be located in
the Philippines
c. An estate or donor’s tax must have been actually paid on such property
d. The property on which vanishing deduction s being claimed must be identified as the on
received from the prior decedent or donor
e. No similar deduction must have been allowed for same property in the estate of the
prior decedent
- Rates:
o 100% - if not more than 1 year
o 80% - if more than 1 year but not more than 2 years
o 60% - if more than 2 years but not more than 3 years
o 40% - if more than 3 years but not more than 4 years
o 20% - if more than 4 years but not more than 5 years
- Formula:
Standard Deduction

- A deduction in the amount of Php 5,000,000 shall be allowed for either a citizen or resident
(RCD, NRCD, RAD) without the need of substantiation.

Note: Standard deduction is sometimes not given in the problem, you should always remember that this
is an automatic deduction.

Family Home

- The amount is equivalent to the current fair market value of the decedent’s family, provided
that if the said current FMV exceeds Php 10,000,000, the excess shall be subject to estate tax

Note: RR 2-2003 and RR 12-2018 defines “Family Home” as the dwelling house, including the land on
which it is situated, where the husband and wife, or a head of the family, and members of their family
reside, as certified by the Brgy Captain of the locality. The family home is deemed constituted on the
house and lot from the time it is actually occupied as a family residence and is considered as such for as
long as any of its beneficiaries actually resides therein

- FH is characterized by permanency. Actual occupancy is not considered interrupted or

abandoned in case of temporary absence due to travel or studies or work abroad.
- A person may constitute only one family home.
a. Husband and wife- legally married man and woman
b. Unmarried head of a family – an unmarried or legally separated with one or both
parents, siblings, or with natural or legally adopted children living with and dependent
upon him/her for chief support, where the sibling are not more than 21 years old,
unmarried and not gainfully or where such siblings or children regardless of age are
incapable of self-support because of mental or physical defect
- Conditions for the Allowance of FAMILY HOME as deduction
1. The family home must be the actual residential home of the decedent and his family at
the time of his death, as certified by the Barangay Captain of the locality where the
family is situated;
2. The total value of the family home must be included as part of the gross estate of the
decedent; and
3. Allowable deduction must be in an amount equivalent to the current fair market value
of the family home as declared or include in the gross state, or the extent of the
decedent’s interest (whether conjugal/community or exclusive property), whichever is
lower, but not exceeding P10,000,000.
Amount Received by the Heirs Under R.A. 4917

- Any amount received by the heirs from the decedent-employee as a consequence of the death
of the decedent-employee in accordance with the R.A. No. 4917: Provided, that the amount of
the separation benefit is included in the gross estate of the decedent.
- The following items refer to the amount received by the heirs which are not subject to any tax
under this special law:
1. Retirement benefits received by official and employees of private firm
2. Separation pay of official or employee due to death, sickness or other physical disability
or for any cause beyond control of the said official.

Deductions to Non-Resident Alien Decedent

- Standard deduction in the amount of Php 500,000

- The proportion of the total losses and indebtedness which the value of such part bears to the
value of his entire gross estate wherever situated.
1. Claims against the estate
2. Claims against insolvent person
3. Unpaid mortgages, taxes and casualty losses
 Formula:

Phil Gross Estate

World Gross Estate * (pro rate CaE, CaIP, UMTCL) = Allowable Deduction

- Property previously taxed

- Transfer for public use
- Net share of the surviving spouse in the conjugal property or community property

TAX CREDITS ILLUSTRATIVE CASES IN COMPUTING ESTATE TAX

Tax Credit for Estate Tax Paid to a Foreign Country

- Only citizens and resident aliens can be claim foreign tax credits
- The deductible tax credit shall be whichever is lower of the amounts as computed by the
following statutory formula (Limit A or Limit B)
ADMINISTRATIVE PROVISIONS ON ESTATE TAX