ESTATE TAXATION Note: The kind property regime is crucial since it will determine the

properties to be included in the gross estate of the decedent.

INTRODUCTION Exclusive property surviving spouse:
Excluded in the gross estate of the decedent
*Small discussion of succession before starting with Estate Taxation Exclusive property of decedent spouse:
INTRODUCTION TO SUCCESSION Included in the gross estate of the decedent
Community/Conjugal Property:
CONCEPT & DEFINITION Included in the gross estate of the decedent however 1/2
Transmission of properties, rights, and obligations at the point of share of the surviving spouse is deducted as allowable
death of the decedent. deductions from the gross estate to arrive at the net
estate.
KINDS
Testamentary Succession ESTATE TAX
Intestate or Legal Succession It is imposed on the transfer of property by the decedent to his heirs
at the point of death. It is not a tax on the property nor on the
SUCCESSION vs. INHERITANCE transferor or the transferee.
Succession is the legal mode by which inheritance is transmitted to
the persons entitled to it It is a tax on the right of a deceased person to transmit his or her
estate to his or her lawful heirs and/or beneficiaries at the time of
Inheritance is the universality or entirety of the property, rights, and death, and on certain transfers which are made by law as equivalent
obligations of a person who dies to testamentary dispositions.

LEGITIMES
Legitimes are what a compulsory heirs must received NATURE OF ESTATE TAX

A compulsory heir must have his own legitime as dictated under the
law and it must be honored upon the distribution of the inheritance
Compulsory Heirs
 Legitimate children and descendants
 Illegitimate children and descendants
 Legitimate parents and ascendants
 Illegitimate parents and ascendants
 Surviving Spouse
Notes:
Parents, whether legitimate or illegitimate, are entitled only to a
legitime in the absence of children.
Surviving spouse is always entitled to a legitime but the portion
allotted to him/her will vary depending on who will inherit with
him/her.
PROPERTIES OF SPOUSES
It is an excise tax or privilege tax and its object is to tax the shifting
of economic benefits and enjoyment of property from the dead to the
living.
PURPOSE OF ESTATE TAX
1. To raise revenue to defray government expenses
2. To facilitate the distribution of wealth
• If there is no transfer of properties from the deceased to the heirs,
the property becomes stagnant and useless, so there is no
economic movement
3. To prevent undue accumulation of wealth
UNDERLYING THEORIES OF ESTATE TAX
1. Benefits Received Theory
• The state facilitates the distribution of the estate, thus it expects to
be paid for the services it has rendered. (Ex. registration of the
properties; maintenance of peace and order)

Property Regimes 2. State partnership theory (Privilege Theory)

-Marriage Settlement • Succession to the property of the deceased person is not a
-Without Marriage Settlement fundamental right but a mere privilege. Since it allowed you to
*Conjugal Partnership of Gains: Married before August 3, exercise the privilege, the State becomes your passive partner in the
1988 accumulation or increase of your wealth. Since it is your silent
*Absolute Community Property: Married on or after August partner, then at the time you receive that wealth, you have to give
3, 1988 something in return.

Conjugal Partnership of Gains 3. Ability to pay

Exclusive Properties:
-Brought to the marriage as his or her own
-Acquired during the marriage by gratuitous title
-Purchased with the exclusive money of the wife or
husband
Conjugal Properties:
-Acquired by onerous title during the marriage at the
expense of the common fund whether the acquisition be
for the partnership, or for only one of the spouses
-Obtained from the labor, work, or profession of either or
both spouses
-Acquired by chance, such as winnings from gambling or
betting. However, losses therefrom shall be borne
exclusively by the loser-spouse
Absolute Community Property
Exclusive Properties:
-Property for personal and exclusive use of either spouse
(however, jewelry shall form part of the community
property)
-Those which each acquired during the marriage by
gratuitous title
Community Properties:
-All properties owned by the spouses at the time of
marriage
-All properties acquired thereafter
• Those who have more properties to transfer to their heirs upon
death shall pay more estate tax.
• The more properties you have at the time of your death, the higher
is your estate tax. It applies the concept of equity.
• Under TRAIN Law, Estate Tax is not anymore a progressive tax
since it is fixed at the rate of 6%. But note that it is still
proportionate to one’s ability to pay. The more estate that you
have, the higher tax you will have to pay.
• Progressive — As the tax base increases, the tax rate also
increases
• Regressive — As the tax base increases, the tax rate decreases
• Digressive — a tax which is progressive up to a certain limit, after
that, it may be charged at a flat rate (eg. from 0%-35% it is
progressive, but 35% going up, it becomes digressive)
• In Tolentino v Secretary of Finance, SC said that VAT is a
regressive tax. What the SC meant there is the effect of VAT is
regressive, but not the VAT itself. The lesser that you have, the more
burdensome
it is for you to pay the VAT.
• SC said no more point ang regressive effect kay may provisions sa
law which mitigate the regressive effect. Provisions such as zero-
rated transactions, exempted transactions, ang vat exempt lang
usually marine and agricultural at original state. The law actually
gave you an option thru the vat exemptions.
4. Redistribution of wealth theory
• This is founded upon the principle of reduction of social
inequality. The estate taxes that are paid are redistributed for
government services.

APPLICABLE LAWS
-NIRC (Sec. 84-97)
Law and Market Value at the Time of Death is Applied
The law in force at the time of death of the decedent governs,
NOT at the time of payment of estate tax or submission of tax return.
The estate tax accrues at the point of death of the decedent because
it is at this time that his personality ceases.
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 the death.
In taxation, once the person dies, the taxability of that person also
dies with him. Another entity will come alive, and that entity is the
estate of the decedent, which has its own TIN.
• Time of death: starting point for the accrual of estate tax liabilities.
*Estate Tax Amnesty – to be further discussed
What to do upon death of decedent?
• Prepare inventory of the properties of the decedent;
• File the estate tax return and pay the tax due thereon;
• Attach the extrajudicial settlement, affidavit of self-adjudication,
judicial settlement or order, as the case may be;
• Attach the decedent’s death certificate;
• BIR examiner will then examine if all requirements in their checklist
are complied with;
• Examiner will then check the valuation of the properties;
• If examiner’s valuation is higher, present the legal basis for your
valuation.
• If examiner’s valuation is lower, still reconcile the difference to
avoid future assessment.
• BIR will then issue a tax clearance or Certificate Authorizing
Registration (CAR)
• CAR – document presented to the Register of Deeds to effect the
transfer of title the name of the decedent to the heirs
KINDS OF DECEDENT
In estate taxation, the primary liability for the burden of tax falls upon
the estate itself. For purposes of taxing the estate, the estate is
classified as to whether the decedent is a:
A. RESIDENT OR CITIZEN
i. Resident: Resident Filipino citizen and Resident Alien
ii. Citizen: Resident and Non-Resident Filipino citizen
• The estate tax will be computed on all properties of the decedent,
within and without the Philippines (personal, real and intangible
properties).
B. NON-RESIDENT ALIEN
• Without regard to whether engaged in trade or business in the
Philippines
• Only those within the Philippines, except intangible properties
which are subject to the principle of reciprocity.
PROPERTIES COVERED BY GROSS ESTATE
General Rule:
RESIDENTS OR
NON-RESIDENT ALIENS
CITIZENS
Within Wtihout Within Without
Real Property Taxable Taxable Taxable Not Taxable
Tangible
Personal
Property Taxable Taxable Taxable Not Taxable
Taxable
(subject to
Intangible reciprocity
Personal rule) Sec.
Property Taxable Taxable 104 NIRC Not Taxable
Exception: RECIPROCITY RULE
No tax shall be imposed with respect to intangible personal property
of the NRA:
1. When the foreign country does not impose transfer tax of any
character in respect of intangible personal property of citizens of the
Philippines not residing in that foreign country, or
2. When the foreign country imposes transfer taxes but grants
similar exemption from transfer taxes in respect of intangible
personal property owned by the citizens of the Philippines not
residing in that foreign country. (Sec. 104)
Is proof of grant of tax exemption necessary before we apply
the reciprocity rule?
No. It is enough that there is a law or regulation in that foreign
country granting that exemption or credit in respect to intangible
personal properties of Filipinos who are not residents therein
INTANGIBLE PERSONAL PROPERTIES
Intangible Personal Properties located within the Philippines
include: Sec 104, NIRC
1. Franchise which must be exercised in the Philippines
2. Shares, obligations, or bonds issued by any corporation or
sociedad anonima organized or constituted in the Philippines in
accordance with its laws
3. Shares, obligations, or bonds issued by any foreign corporation
85% of the business of which is located in the Philippines;
4. Shares, obligations, or bonds issued by any foreign corporation if
such shares, obligations or bonds have acquired business situs (i.e.,
they are used in furtherance of its business in the Philippines by the
foreign corporation) in the Philippines;
5. Shares or rights in partnership, business or industry established in
the Philippines
Why are only intangible properties subject to reciprocity rule?
For real properties, we apply the “lex rei sitae” principle which states
that the governing law will be the “law where the property is
situated”; hence, the property is taxed in the place located.
For Tangible Movable Properties, we apply the “mobilia
sequuntur personam” principle which states that the personal
property held by a person is governed by the same law that governs
that person since movable property follows that person; hence, the
property is taxed according to the domicile or the last place of the
owner.
For Intangible Movable Properties, we apply the reciprocity rule
to make things easier and convenient. If you look at the previously
enumerated intangible properties, we deemed them located within
the Philippines because they are associated with a domestic
corporation or a corporation having situs here in the country; but the
physical presence of the proof of such intangibles (eg. certificate of
stocks for shares of stocks) is not located here in the PH. Hence, it
will be more difficult for the BIR to look for proof of that intangibles.
So to make things easier and friendlier to other countries, we apply
the reciprocity rule.
If somebody dies, do we really have to declare the value of all
the properties and pay the estate tax?
We pay the estate tax because we want to get a Tax Clearance for
us to get the Certificate Authorizing Registration (CAR). This CAR is
used to transfer ownership of property from the decedent to the heirs
to be presented to the Register of Deeds (if land), or LTO (if movable
property), bank (if cash deposits), or corporate secretary (if shares of
stocks).
KMA:
• In practice, we have to pay estate tax and donor’s tax to properties
which are registered or otherwise, registrable properties.
• For non-registrable properties (laptop, cellphone, jewelries), would
you include them in your tax returns? Supposedly yes. But if you will
not, the BIR will just add 10% to the value of the Real Property that
you are declaring to your tax return even if there is no BIR
regulation. It’s more of their internal rules.
• If you want to contest the 10%, then you are giving the BIR the
opportunity to check on WON you have personal properties, which
could then complicate your situation.
Tip in Practice: If I were you, you just have to estimate the value of
your personal properties and if they do not exceed 10% of the value
of the real property declared, you might as well declare them.
Otherwise, if they exceed the 10% threshold, settle with the 10%.
But note that the 10% differs from one RDO to another, and if it’s
higher in one RDO, might as well point out to that RDO that in other
RDOs, it’s only 10%.
VALUATION OF THE GROSS ESTATE
GENERAL RULE: The properties comprising the gross estate shall
be valued based on fair market value (FMV) as of the time of
decedent’s death.
• The FMV refers to those set by law or regulations issued by the
BIR.
• If no FMV is indicated in the law or in any regulation, then there will
be a computation of the FMV in accordance with the accepted
accounting principles.
• In determining the FMV of the property, the encumbrances
attached to the property will NOT be considered. Only the
current value shall be considered.
REAL PROPERTIES
The appraised value thereof as of the time of death shall be,
whichever is HIGHER of:
1. FMV as determined by the Commissioner (Zonal Value)
2. FMV as shown in the schedule of values fixed by the provincial
and city assessors, whichever is hihgher (FV as determined by local
assessor, as determined in tax declaration)
TN: Assessed Value can be determined from the tax
declaration. If there are improvements to the property then the
same must be reflected in the tax declaration.
SHARES OF STOCKS
Ascertain whether it is listed or not.
a. Listed – the FMV on the date of death; or the
arithmetic mean between the highest and lowest quotation at a
date nearest the date of death, if none is available, on the date of
death itself
b. Unlisted common shares – based on their book
value; appraisal surplus shall NOT be considered as well as the
value assigned to preferred shares, if there are any. (The book
value based on the latest available financial statements duly
certified by an independent public accountant prior to the date
of sale, but not earlier than the immediately preceding taxable
year, shall be considered as the prima facie fair market value.
[RR No. 20-2020])
Book Value = (Total Assets – Total Liabilities)/Outstanding Shares
c. Unlisted preferred shares – at par value
The liquidation value, which is equal to the redemption price of the
preferred shares as of balance sheet date nearest to the transaction
date, including any premium and cumulative preferred dividends in
arrears, shall be considered as fair market value. [RR No. 20-2020]
d. In case there are both common and preferred
shares, the book value per common share is computed by
deducting the liquidation value of the preferred shares from the total
equity of the corporation and dividing the result by the number of
outstanding common shares as of balance sheet date nearest to the
transaction date. [RR No. 20-2020]
Illustration in RR No. 20-2020
Assume that Mr. A sold 10,000 shares in X Corporation on June
30, 2020. The corporation’s accounting period is on a calendar
year basis. In this case, the book value as the fair market value of
the shares of stock in X Corporation shall be determined based
on its audited financial statements for year ending December 31,
2019, since the audited financial statements for taxable year
2020 is not yet existent as of the date of the sale of shares.
Assume further that based on the audited financial statements as
of December 31, 2019, the total assets of X Corporation are
Php50,000,000 while its liabilities are Php20,000,000 resulting to
an equity of Php30,000,000. Its outstanding shares are 200,000.
For this purpose, the net book value as the fair market value of
each share call (sic) be computed as follows:
30,000,000(equity)
200,000(outstanding shares)
¿ 150(net book value per share)
In this case, the net book value of the shares of stock in X
Corporation based on its latest audited financial services shall be
Php150 per share. As such, the fair market value of the shares of
stocks in X Corporation shall be Php150 per share.
Units of participation in any association, recreation or
amusement club
The bid price nearest the date of death published in any newspaper
or publication of general circulation.
Right to usufruct, use or habitation, annuity
Take into account the probable life of the beneficiary in accordance
with the latest basic standard mortality table, to be approved by the
Secretary of Finance, upon recommendation of the Insurance
Commissioner.
Newly Purchased Property - Value of the purchase price
Not Newly Acquired/Purchased Personal Property - Second-
hand value
Pawned Property - By grossing up the pawned value by the loan to
value ratio
Property fixed in monetary terms such as loans and receivables
- Amount fixed in the contract adjusted to the accrued interest
Foreign Currencies - Peso value translated at the prevailing
exchange rate at the date of death.
ESTATE TAX FORMULA
Inventory of properties at the time of death P xx
(b) The total amount of the credit shall not exceed the same
Less: Exempt transfers proportion of the tax against which such credit is taken, which the
decedent's net estate situated outside the Philippines taxable
Properties not ow ned P xx under this Title bears to his entire net estate. (Global Limitation)
Properties ow ned but excluded by law xx
Inventory of taxable present properties xx Illustration:
Mr. B, citizen and resident of the Philippines, had the ff data on the
Add: Taxable transfers xx estate he left:
Gross Estate P xx
Net taxable estate:
Philippines P570,000
Gross Estate P xx Malaysia 2,100,000
Indonesia 1,700,000
Less: Deductions (xx)
1/2 share of surviving spouse (xx) Estate Taxes Paid
Malaysia P200,000
Net Estate P xx Indonesia 100,000
Rate 6%
How much is Philippine estate tax due?
Estate Tax Due P xx
Computation:
Tax Credits (xx) Net taxable estate, Philippines P570,000
Estimated Tax Payable P xx Net taxable estate, Malaysia 2,100,000
Net taxable estate, Indonesia 1,700,000
Net taxable estate, World P4,370,000
TN: Only the estate of a RESIDENT OR CITIZEN of the Philippines
can claim a credit for foreign estate tax paid. Estate tax, world (4,370,000 x 6%) P262,200
Tax Credit Allowed (see limitations below) (226,000)
What if there are properties unknown to you at the time of Estate tax still due P36,200
inventory?
You can still pay for the estate tax involving those properties.

Why are taxable transfers not included in inventories existing at

the time of death?
It’s because these transfers include properties not within the control
or possession of the decedent but the latter has a right that has
already accrued over them (e.g. decedent’s interest).

Formulas on foreign estate tax credit

A. Per Country Limitation (Limitation A)

Net Estate ∈foreign country

x
Entire Net Estate
Philippine Estate Tax = Tax Credit
Compare:
Foreign estate tax paid and tax credit allowed, whichever is
LOWER

B. Global Limitation (Limitation B)

Net Estate all foreign country

x
Entire Net Estate
Philippine Estate Tax =Tax Credit GROSS ESTATE COMPOSITION
Compare:
Foreign estate tax paid and tax credit allowed, Limitation A and Section 85, NIRC (DTR-PPP-TCA)
Limitation B, whichever is LOWEST a. Decedent’s interest
b. Transfers in contemplation of death
If the decedent left properties in the Philippines and in one foreign c. Revocable transfers
country, only Formula 1 shall be applied. However, if the decedent d. Property passing under general power of appointment
left properties in two or more foreign countries, both formulas above e. Proceeds of life insurance
shall be applied. f. Prior interests
g. Transfers for insufficient consideration
Sec. 86 (D) Tax Credit for Estate Taxes paid to a Foreign h. Capital of the surviving spouse
Country. - i. Amount received under R.A. 4917 (Retirement Benefits Act)
j. Claims against insolvent persons
(1) In General. - The tax imposed by this Title shall be credited
with the amounts of any estate tax imposed by the authority of a DECEDENT’S INTEREST
foreign country. • All property owned by the decedent has to be included in the gross
estate, to the extent of the value of his interest in such property at
(2) Limitations on Credit. - The amount of the credit taken under the time of his death.
this Section shall be subject to each of the following limitations: • Requires ownership, but not possession
(a) The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax against Kinds of Property Embraced under Decedent’s Interest:
which such credit is taken, which the decedent's net estate 1. Property Owned.
situated within such country taxable under this Title bears to his 2. Interest in property possessed.
entire net estate; and (Per Country Limitation) 3. Property or interest transferred.
Examples:
1. Shares in a partnership — it accrued during your lifetime, but
namatay na lang ka, wala pa nimo nadawat. So basically, you have
already a right over it. But it will not form part of your inventory since
it was not given to you yet.
May the shares of Mr. X in the dissolved partnership be
included in the gross estate even if it was received after his
death?
Yes, because the shares pertained to his shares as a partner during
his lifetime. He already has interest over it during his lifetime.
2. Dividends declared prior to death but not yet distributed.
• There is date of record, date of declaration and date of payment.
Date of declaration and date of payment may not necessarily be of
the same date.
Illustration:
Date of declaration – Dec 31
Shareholder dies – April 1
Date of payment – June 1
Will the dividend form part of the gross estate of the decedent
or will it form part as income of the estate?
It will form part of the gross estate because prior to his death, it
was already declared as dividend. In short, the shareholder
already had interest over said dividends.
Is it required for them to physically exist?
NO. From the word interest, it only refers to the extent of
equity/ownership/participation of the decedent on any property
present with the gross of estate WON it is in his or her physical
possession, control or dominion. Basically, it is anything that the
decedent owns at the time of his death whether physically in his
possession or not.
Properties not in the name of the decedent (not in the estate)
but includible in the estate
Sec. 85
(B) Transfer in Contemplation of Death
(C) Revocable Transfer
(D) Property passing under General Power of
Appointment
TRANSFERS IN CONTEMPLATION OF DEATH
• Those transfers made during the lifetime but are considered as
part of the gross estate.
• The controlling motive is the thought of death which made him
dispose of his property.
• This is a transfer motivated by their thought of death, although
death may not be imminent.
• Under TRAIN, generally, this is disadvantageous to the
government since the estate can avail more deductions as
compared with donor’s tax where there is only P250,000 deduction.
MANIFESTATIONS:
1. Age and state of health of the decedent at the time of gift,
especially where he was aware of a serious illness
2. Length of time between the gift and the date of death.
• A short interval suggests the conclusion that the thought of death
was in the decedent’s mind, and a long interval suggests the
opposite. 3. Concurrent making of a will or making a will within a
short time after the transfer
• This is more common before the TRAIN law. Because before the
train law, donor’s tax is lower than estate tax. But now, I cannot see
any reason nganong mag ingana paka.
What if you transferred your property to someone because gi
AIDS ka. You were given only three months to live. That’s your
motive. But you did not die of AIDS. Instead, you died because
you were ran over.
Is that still considered a transfer in contemplation of death?
Yes. Because what matters is the motive at the time that you made
the mortis causa donation.
REVOCABLE TRANSFERS
• Transfers made during the lifetime of the decedent where the
enjoyment of the thing transferred is subject to change through
the exercise of a power by the decedent to alter, amend, revoke
or terminate.
• It forms part of gross estate because there was no transfer of
absolute ownership.
• It is sufficient that the decedent had the power to revoke,
though he did not exercise the power.
MANIFESTATIONS:
a. If the possession or enjoyment of the property is basically retained
by the owner.
b. If the right to the income of the property is also being withheld
retained, or reserved by the owner.
c. If the right either a loan or the conjunction with any person to
designate the person who shall possess or enjoy the property or the
income therefrom.
Basically, during the lifetime, you are not transferring full
dominion over the property. It becomes absolute only upon
death. So you subject it to estate tax.
Illustration:
• The transferor imposes restrictions such as when he sets a
condition that the income will still be attributable to him or to any
other person he designates
• There’s a condition that when the transferee predeceases, the
property reverts back to the transferor.
• A transferred property to B to be held in trust for C. However, (1)
without taking back the property, A can change B; or (2) without
taking back the property, A can change C; or (3) A can take back the
property anytime he wants.
Exception:
• If there’s a waiver to exercise the power to revoke during the
lifetime of the transferor. The renunciation of the right to revoke must
be express in another document.
• Lapse of the period to revoke and death happened after the
lapse of the period;
• When the transferor becomes incapacitated during his lifetime, his
right to revoke is SUSPENDED until such time he recovers from
such incapacity.
PROPERTY PASSING UNDER GENERAL POWER OF
APPOINTMENT GENERAL POWER OF APPOINTMENT
GENERAL POWER OF APPOINTMENT
• When the power of appointment authorizes the donee to appoint
any person he pleases, including himself, his spouse, his estate,
executor or administrator, and his creditor.
• Ex: The donor donated his house and lot. So in this case, the donor
made a donation to the donee. When the donor is silent, that is
deemed as a GPA.
SPECIAL POWER OF APPOINTMENT
• When the donee can appoint only from a restricted or
designated class of persons other than himself.
• Property transferred under an SPA should be excluded from the
gross estate of the donee because he merely holds the property in
trust.
• The first transferor will be the one subjected to donor’s tax or
estate tax, whatever the case may be.
Example: “Donee, I’m giving to you my house and lot. But the
moment you die, make sure to give that house and lot to Mr. X.” In
that case, the donor specifically mentioned Mr. X as the
recipient of the house and lot, upon the death of the donee.
KMA:
Because basically the question here is to whose estate will these
properties form part. Because this is the usual bitik, kung kinsa ang
patyon, si donor or si donee?
We’ll have to kill the donee. Of course, we don’t kill the donor.
Otherwise, there will be no donation to speak of. In this case, if
donee dies, and the donation is under GPA, the house and lot
will form part of the estate of the donee, because the donor did
not specify to whom the property will go to upon the death of
the donee. In short, upon the transfer under GPA, the donor gave or
transferred absolute ownership over the property to the donee.
But if it is SPA, sa deed of donation gi specify ni donor nga “donee,
mo adto na ang property inig kamatay nimo ni X.” this property will
not form part of the gross estate of the donee because the
donor did not intend to transfer absolute ownership to the
donee. It is as if donee is just being made as a trustee or
administrator lang kumbaga sa property.
Illustration:
K transferred property to D with a provision that if D transfers the
property, such transfer may be in favor of any body. This transfer will
be subjected to donor’s tax if done gratuitously during the
lifetime of K. Now, if D transferred the property to A upon his
death, it shall now form part of D’s GE.
Distinguished from:
K transferred property to D, with a provision that if D transfers the
property, such transfer must be in favor of P or R only. Since D can
only transfer it to a restricted class of persons, what he has is only a
special power of appointment. This first transfer will subject K to
donor’s tax if transferred during his lifetime or estate tax if
transferred upon his death. If D now transfers it to P or R upon
his death, it will not form part of his GE as he merely held such
property as a trustee for P or R.
PROCEEDS OF LIFE INSURANCE
Taxation of the proceeds of life insurance will depend on:
1. Designated beneficiary
2. The manner of designation of such beneficiary (whether
irrevocable or revocable)
3. The period and source of the funds used in paying the
premiums on the insurance contract.
• Life insurance policies must be taken out by the decedent
himself. If it is not taken by the decedent himself, it is not part
of the estate.
• Under insurance law, when it comes to beneficiaries designated
as irrevocable, that property will not anymore form part of the
gross estate of the owner of the insurance policy, because that’s
considered already as separate property.
• Under the Insurance Code of the Philippines, a designation of
beneficiary is revocable, unless stated expressly in the policy that
the designation is irrevocable.
MANNER OF DESIGNATION:
a. Revocable – The insured (deceased) reserves his right to
revoke/change the beneficiary anytime during his lifetime. The
presumption is that upon the death of the deceased, there was
no waiver on his right to revoke the beneficiary. Transfer is only
conditional. (So GR: revocable)
b. Irrevocable – The insured cannot change the beneficiary. It is not
subject to estate tax because there is no benefit on the part of
the insured and that everything goes to the beneficiary without
any condition. There is absolute transfer to the beneficiary.
Beneficiary Estate, Executor, Others
Administrator
Revocable Included Included
Irrevocable Included Excluded
TN: When the estate, executor or administrator of the estate is the
beneficiary, the proceeds will form part of the gross estate.
HOW TO KNOW IF IT WILL FORM PART OF THE GROSS
ESTATE?
Step 1: Ascertain who took out the life insurance. It must be taken
out by the decedent upon his own life. In short, the insured and the
assured is the decedent at the same time.
Step 2: Determine who the beneficiary is and what the designation
of the beneficiary is. If the beneficiary is the deceased, administrator,
executor, or estate, regardless of the designation whether
revocable or irrevocable, it is part of the gross estate.
If the beneficiary is other than the estate, administrator, executor,
and if revocable, then it forms part of the gross estate. If
irrevocable, it will not form part of the gross estate.
WHEN PROCEEDS FROM THE LIFE INSURANCE WILL NOT BE
TAXABLE:
1. Accident Insurance
2. If the beneficiary is other than the estate, administrator, executor
in which the designation is irrevocable
3. Proceeds of the life insurance covered by GSIS or SSS
4. Proceeds of a group insurance policy taken out by the company
for his employees
5. Proceeds of life insurance payable to heirs of deceased members
of military personnel
For the proceeds of life insurance policy, the computation of the
taxable estate will matter if the decedent is married. We have to
identify if the property is conjugal or community property,
because we have to take in consideration the 50% share of the
surviving spouse, or if it is an exclusive property.
You have to check WHEN THE INSURANCE POLICY WAS
TAKEN.
• If the insurance policy is taken BEFORE the marriage - the
presumption is that it was his exclusive property that was used as
premiums. When he dies, the proceeds will also be classified as
exclusive property. (Source of funds determines ownership of the
proceeds of life insurance)
• If the insurance policy is taken DURING the marriage - it is
presumed that the insurance policy is conjugal. Therefore, we need
to take in consideration the one-half share of the surviving
spouse.
PRIOR INTERESTS
SECTION 85. (F) Prior Interests. - Except as otherwise
specifically provided therein, Subsections (B), (C) and (E) of this
Section shall apply to the transfers, trusts, estates, interests,
rights, powers and relinquishment of powers, as severally
enumerated and described therein, whether made, created,
arising, existing, exercised or relinquished before or after the
effectivity of this Code.
Subsection
B- Transfer in Contemplation of Death
C- Revocable Transfer
E- Proceeds of Life Insurance
Prior interest — meaning the decedent, during his lifetime,
retains interest over the particular property. That particular
property will form part of the gross estate.
• Prior to amendments introduced by RA 8424, there is no such thing
as transfer in contemplation of death, revocable transfer or life
insurance proceeds. Thus, if any of the three were made, created,
arising, existing, exercised or relinquished before or after RA 8424,
they will still be subjected to the same rules on estate taxation under
RA 8424 (retroactive application).
TRANSFERS FOR INSUFFICIENT CONSIDERATION
• A case wherein the difference in the selling price and the FMV may
also be subjected to estate tax
• FMV = in an arm’s length transaction, the price that the seller who
is willing to sell, but not compelled to sell; and a buyer not compelled
to buy, but is willing to buy
• GENERAL RULE: If the problem is silent, and it is a transfer for
insufficient consideration and it is not real property classified as
capital asset, you subject it to donor’s tax, because that
presupposes that it happened during the lifetime.
• If the real property is classified as a capital asset, it will no
longer be subjected to estate tax kay di man alkansi ang
government. The higher between the GSP or FMV of the
property has already been subjected to 6% CGT.
For estate tax purposes, there must be:
1. Must be for an insufficient consideration
2. And EITHER of these conditions must be met:
a. If it is made in the contemplation of death
b. If it is a revocable transfer
c. Property Passed under a general power of appointment
TN: If dili mo sulod under these three situations, and there is still
transfer for insufficient consideration, then you subject it to donor’s
tax.
CAPITAL OF SURVIVING SPOUSE
• The capital of the surviving spouse of a decedent shall not be
deemed a part of his or her gross estate.
• You can either have absolute separation of property, conjugal
partnership of gains, or absolute community of properties.
When we talk about capital of surviving spouse, it may pertain to the:
1. Exclusive property of the surviving spouse
• Will not form part of the gross estate
• Capital – Exclusive property of the husband
• Paraphernal – Exclusive property of the wife
2. Common property of the spouses
• Will form part of the gross estate
• However, the ½ portion will have to be deducted later on.
• The inclusion of the common properties is for disclosure purposes
because there are exemptions which require the ascertainment of
certain values.
Note: Other deductions which are deductible only when also
included in the gross estate (The net effect is 0, but this is
necessary for disclosure purposes, as required under the law):
1. Amount received as retirement benefits RA 4917
2. Claims against insolvent persons – the decedent (creditor) has a
receivable. Because debtor is insolvent, such receivable is
deductible, but only if it is included in the gross estate.
AMOUNT RECEIVED UNDER RA 4917 (RETIREMENT BENEFITS
ACT)
• Should be under EE-ER relationship
• included in the gross estate for you to deduct the amount received
for disclosure purposes
REQUISITES:
1. The retiring official or employee has been in the service of the
same employer for at least ten (10) years and is not less than
fifty years of age at the time of his retirement.
2. The benefits granted under this Act shall be availed of by an
official or employee only once.
3. In case of separation of an official or employee from the service of
the employer due to death, sickness or other physical disability or for
any cause beyond the control of the said official or employee.
4. In accordance with a reasonable private benefit plan.
“Reasonable private benefit plan” means a pension, gratuity,
stock bonus or profit sharing plan
maintained by an employer for the benefit of some or all of his
officials and employees, wherein contributions are made by such
employer or officials and employees, or both, for the purpose of
distributing to such officials and employees the earnings and
principal of the fund thus accumulated, and wherein it is provided
in said plan that at no time shall any part of the corpus or income of
the fund be used for, or be diverted to, any purpose other than for
the exclusive benefit of the said officials and employees.
CLAIMS AGAINST INSOLVENT PERSONS
Sec. 86(A)(3)
ACQUISITIONS & TRANSMISSIONS NOT SUBJECT TO ESTATE
TAX (SEC. 87, NIRC)
SEC. 87 Exemption of Certain Acquisitions and
Transmissions. - The following shall not be taxed:
(A) The merger of usufruct in the owner of the naked title;
(B) The transmission or delivery of the inheritance or legacy by
the fiduciary heir or legatee to the fideicommissary;
(C) The transmission from the first heir, legatee or donee in favor
of another beneficiary, in accordance with the desire of the
predecessor; and
(D) All bequests, devises, legacies or transfers to social welfare,
cultural and charitable institutions, no part of the net income of
which inures 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.
Common requisites to the first three exemptions
1. There must be 2 transmissions of the same property or a
portion thereof;
2. The transfer from the prior decedent must be
testamentary in character;
3. The first transfer is subject to estate tax, while the
second transfer is the one exempt.
The merger of usufruct in the owner of the naked title;
There is a merger of the usufruct in the owner of the naked title
when the naked ownership and the usufruct come to be held by the
same person.
• the legal right to use and enjoy the benefits and profits of property
belonging to another.
• Reason why this is not subject of estate tax: there is no transfer of
ownership from the usufructuary to the so-called naked owner.
Owner of the Naked Title
• The person who is vested with the ownership, dominion, or title
of property under the usufruct agreement.
• He is not the absolute owner of the property because he has to
respect the right of the usufructuary over the fruits and use of the
property.
• If you are the owner of the naked title, you do not enjoy the
benefits out of the property transferred under your name.
Reason for the law:
Transfer had been previously subject to estate tax; hence, the
exemption. (to prevent double taxation)
ILLUSTRATION:
• X, in his last will and testament, transferred the possession of his
house and lot to Y (usufructuary), but the title of such properties was
transferred in the name of Z (owner of the naked title).
• Transfer from X (decedent) to Z (owner of the naked title) is
subject to estate tax. Transfer from Y (usufructuary) to Z (naked
title owner) is not subject to estate tax.
• The transmission of Z to his heirs will be subject to estate tax
because this is another kind of transmission of ownership.
The transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the fideicommissary;
Fideicommissary Substitution – is that by virtue of which a
testator institutes a first heir, and charges him to preserve and
transmit the whole or part of the inheritance later on to a second
heir.
Fiduciary Heir – the first heir of the property who is usually a
trustee in relation to a beneficiary. He is a usufructuary and does
not own the property.
Fideicommissary – the second heir who is the beneficiary of the
property. He is the rightful heir upon reaching the age of majority.
His relationship to the fiduciary heir must be one degree of
generation such that of a parent and a child or vice versa. He is the
owner of the naked title.
How is this different from the merger exemption in letter A?

In the first case there is an express will appointing the
usufructuary. While in the second walay appointment.
ILLUSTRATION:
3. Amounts received from the Philippine and the U.S. Governments
from the damages suffered during the last war (RA 227)
4. Benefits received by beneficiaries residing in the Philippines under
laws administered by the US Veterans Administration
TN: Those enumerated above (acquisitions and transmission not
subject to estate tax) is not subject to estate tax because it is either
the property is not owned by the decedent or it is expressly excluded
by the law.

ALLOWABLE DEDUCTIONS

Reason for the exemption: To prevent double taxation, the second Section 85, NIRC
transfer from the fiduciary heir to the fideicommissary should
be exempt from estate tax, since the first transfer from the
predecessor to the fiduciary heir was already taxed.

The fiduciary heir holds the property temporarily while waiting for the
qualifications of the fideicommissary. Ultimately, the property will go
to the fideicommissary. This usually happens when the
fideicommissary is still a minor.

Transmission from the first heir, legatee or donee in favor of

another beneficiary, in accordance with the desire of the
predecessor;

• This contemplates a situation where the heir who receives the

property transfers it to another beneficiary who is also part of
the will. This is a testate succession.
• It has to be in accordance with the will of the predecessor.
• The relationship between the first heir and second heir need not
be 1 degree of relationship. It can be your uncle or auntie. This
situation normally applies to testate succession.

ILLUSTRATION:
• Mr. X devised an agricultural land to Y (first heir) and it was
specified that Y will transfer it to Z upon Y’s death. The
predecessor Mr. X can also say that if Y dies, the property can go to
a list of individuals.
• Estate tax has been paid by the estate of X. When Y dies, the
property will not form part of his estate because he is merely a
trustee of Z. Upon his death, the property will automatically go to Z
and not to his estate.
• This is different from the fideicommissary substitution because
there is the one degree requirement. Here, what is important is the
specification on who will inherit the property when the first heir
dies. This is a case of a special power of appointment where
specific beneficiaries are identified by the predecessor.

All bequests, devises, legacies or transfers to social welfare,

cultural and charitable institutions, no part of the net income of
which inures 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.

REQUISITES:
1. Transfer to a social welfare, cultural and charitable institution.
2. No part of the net income insures to the benefit of private
individuals
3. Not more than thirty percent (30%) of the said bequests, devises,
legacies or transfers shall be used by such institutions for
administration purposes.

TN: Bequest & devise applies to testamentary succession only.

OTHER EXEMPTIONS
1. Proceeds of life insurance, provided that the beneficiary is a third
person designated as irrevocable
2. Bequests to be used actually, directly and exclusively for
educational purposes.
3. Property held in trust by the decedent
4. Separate properties of the surviving spouse
5. Exemptions under reciprocity clauses

EXCLUSIONS UNDER SPECIAL LAWS

1. Proceeds of life insurance benefits received by members of the
GSIS (RA 728) ****
2. Benefits received by members from the SSS by reason of death