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W13 Income Taxes of Estates and Trusts
W13 Income Taxes of Estates and Trusts
Learning Objectives:
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.
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.
The trust, or beneficiaries or the grantor may pay the tax on income derived from trusts.
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.
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:
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
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
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
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.