Income Taxes of Estates and Trusts

Learning Objectives:

1. Define Estates and Trusts

2. Know the Income Taxes and Tax Rates
3. Apply the necessary theories through illustrations

Estate
It is composed of all properties, rights and obligations including those properties, or obligations
that have accrued thereto since the opening of the succession the estate is to be transferred
from the decent to his successors.

During the period when the title to the properties is not yet finally transferred to the
successors, there may be earnings generated from the estate. These earnings are subject to
income tax.

Taxable Income and Tax Rates

For the taxation purposes, the taxable income of the estate/trust shall be determined in the
same manner and basis as in the case of individual taxpayers. The items composing the taxable
income and tax of the income from estates/trusts are as follows:
1. Gross Income is the same items as the items of gross income of individual taxpayers.
2. Deduction is the same as the items of deduction allowed to an individual taxpayer.
3. Special Deduction is also allowed to deduct the amount of income of the estates during
the taxable year that is paid or credited withholding tax of 15%. The amount so allowed
as a deduction shall be a part of the taxable income of the legatee, heir or beneficiary.
Any portion of the gross estate paid to the heir is not deductible from the gross income
of the estates. In case of a trust administered in a foreign country, this deduction shall
not be allowed. Provided, that the amount of any income included in the return of said
trust shall not be included in computing the income of the beneficiaries.
4. Exemption allowed to Estates and Trusts the absolute exemption allowed to estates
and trusts is 20,000php. For the income of estates, however, the following provision of
the law shall be considered: “if the taxpayer dies during the taxable year, his estate may
still claim the personal and additional exemptions for himself and his dependent(s) as if
he died at the close of the year.”
5. Taxable Income shall be computed in the same manner and on the same basis as in the
case of individual taxpayer.
6. Tax Rate is the tax rate prescribed for individual taxpayers.

Trust
It is an obligation imposed or a right to administer over a property given to a person for the
benefit of another.
This is a legal institution used to administer funds in behalf of individuals or organizations. Trust
device is used frequently to transfer property from one generation to another.

Income derived from Trusts

1. Income accumulated in trust for the benefit of unborn or unascertained persons with
contingent interests, and income accumulated or held for future distribution under the
terms of the will or trust.
2. Income that is to be distributed currently by the fiduciary to the beneficiaries, and
income collected by a guardian of an infant that is to be held or distributed as the court
may direct.
3. Income that, in the beneficiaries of the fiduciary, may be either distributed to the
beneficiaries or accumulated.

The trust, or beneficiaries or the grantor may pay the tax on income derived from trusts.

Computation of Trust’s Income Tax

The computation of the net taxable income of trust shall be in the same manner as that of the
net taxable income of an estate. The net taxable income shall be taxed by using the graduated
tabular (normal) tax.

Two or More Trusts

In the case of two or more trusts created by the same person for the same beneficiary, the
taxable income of all trusts shall be consolidated and the tax shall be computed based on the
consolidated income. The consolidated taxable income is allowed only of one basic personal
exemption.

The proportionate amount of the tax computed based on the consolidated income shall be
assessed and collected from each trustee. The said amount of tax should be proportionate to
the taxable income of the trust administered by the trustee to the consolidated income of the
several trusts.

Trust as a Device to Lower Income Tax

Creating a trust could lower the income tax by splitting the income between two taxpayers, and
consequently lowering taxable income to lower tax bracket.

Revocable Trusts
Generally, revocable trusts exist when the trustor (grantor) reserves the power to change at
any time any part of the terms of the trust.

For tax purposes, the rule is that the grantor is liable for the income of a revocable trust.

Illustrations:
Example 1:

Mr. Mano Baliling, married, died on August 31, 201A, leaving his wife and his four qualified
dependent children.

He left his income generating exclusive real property amounting to 10,000,000 under an
administrator. The results of operation show the following:

Year 201A Year 201B

Jan to Aug Sept to Dec Jan to Dec
Gross income 1,500,000 1,000,000 2,500,000
Itemized deductions 800,000 500,000 1,500,000
Net income 700,000 500,000 1,000,000

In 201A and 201B, the administrator credited 340,000php net of 15% withholding tax, each
year to Mrs. Maria Baliling. The amounts represent the share of the beneficiary.

The net taxable income and income tax due to Mr. Baliling and his estate would be

Jan to Aug Sept to Dec Jan to Dec

Mr. Mano Mano’s Estate Mano’s Estate
Net income 700,000 500,000 1,000,000
Amount for (400,000) (400,000)
beneficiary
(340,000/85%)
Net income before 700,000 100,000 600,000
exemption
Less: Applicable 150,000 20,000 20,000
exemptions
Net taxable income 550,000 80,000 580,000
Tax on 70,000 8,500
Tax on 500,000 125,000 125,000
Tax on excess:
(10,000 x 20%) 2,000
(50,000 x 32%) 16,000
(80,000 x 32%) 25,600
Income tax due 141,000 10,500 150,600
Assuming that Mrs. Maria Baliling, the beneficiary, has no other income during the taxable
years, her income tax would be

201A 201B
Gross income received from 400,000 400,000
income of estate
(340,000/85%)
Less: OSD (400,000 x 40%) 160,000 160,000
Income before exemption 240,000 240,000
Less: personal exemptions
201A: 50,000 50,000
201B: 50,000 + (25,000 x 4) 150,000
Taxable income 190,000 90,000
Tax on 140,000/70,000 22,500 8,500
Tax on excess:
201A: (50,000 x 25%) 12,500
201B: (20,000 x 20%) 4,000
Income tax due 35,000 12,500
Less: creditable withholding 60,000 60,000
tax (400,000 x 15%)
Income tax refund 25,000 47,500

Example 2: One Trust

Mr. Sy Guardo created a Trust assigning Atty. Ver Dugo as trustee. In 201A, the trust’s income,
expense and income distribution are as follows

Rental income 120,000

Related allowable expenses 10,000
Income distributed to Miss Fanie Guardo the 40,000
beneficiary

The related income tax is computed below:

Gross income 120,000

Less: related expenses 10,000
Amount distributed to 40,000 50,000
beneficiary
Income before exemption 70,000
 Less: absolute exemption 20,000
Net taxable income 50,000
Income tax on 30,000 2,500
Excess (20,000 x 15%) 3,000
Total income tax due 5,500

Example 3: Two or More Trusts

Mr. Mar Don created two irrevocable trusts: a trust (Trust A) on his property located in Baguio
for his only son, assigning Atty. Pis as trustee, and another trust (Trust B) on his property
located in La Union, also for his son, but this time naming Atty. Lasap as the trustee.

For the year 201A, the two trustees reported the following income and expenses:
Gross income Expenses Distributed to Quarterly taxes
beneficiary paid
Trust A 140,000 30,000 10,000 10,000
Trust B 260,000 60,000 30,000 20,000
Total 400,000 90,000 40,000 30,000

To compute for income tax still due of the two trusts would be
Trust A Trust B Total
Taxable income 100,000 170,000 270,000
before exemption
Less: absolute 20,000
exemption
Consolidated taxable 250,000
income
Income tax due 50,000
Allocation of 50,000
Trust A (50,000 x 18,519
10/27)
Trust B (50,000 x 31,481 50,000
10/27)
Less: income taxes 10,000 20,000 30,000
already paid
Income tax due 8,519 11,481 20,000
References:
National Internal Revenue Code of 1997. (n.d.). Retrieved from
https://www.bir.gov.ph/index.php/tax-code.html
Aduana, N. L. (2012). Simplified and procedural handbook on income taxation (2nd Edition ed.).
Quezon City: C & E Publishing Inc.
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.). Quezon City: Good
Dreams Publishing.
Valencia, E. G., Roxas, G. F., & author. (2016). Income taxation: principles and laws with
accounting applications. Baguio City: Published and distributed by Valencia Educational Supply.