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MODULE 2 Estate Taxation PDF
MODULE 2 Estate Taxation PDF
OVERVIEW:
“Art. 712. Ownership is acquired by occupation and by intellectual creation.
Ownership and other real rights over property are acquired and transmitted by law, by donation,
by estate and intestate succession, and in consequence of certain contracts, by tradition. They
may also be acquired by means of prescription. (609a)”
Under the Civil Code, Article 712, the modes of acquiring ownership over
property are Occupation, Law, Donation, Tradition, Intellectual creation, Prescription and
Succession.
Under Art. 725. Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another, who accepts it. (618a). Two type of Donation,
as to time of taking effect, may be either Donation inter vivos or Donation Mortis-causa.
Donation inter vivos take effect during the lifetime of the donor which is subject to donor’s tax.
Donor’s taxation was already discussed in Module 1. While Donation mortis-causa takes effect
after death of the donor which is subject to estate tax.
Under Art. 774, Succession is a mode of acquisition by virtue of which the
property, rights and obligations to the extent of the value of the inheritance, of a person are
transmitted through his death to another or others either by his will or by operation of law. In
succession, the property (net estate) of a person who died (called decedent) is transmitted to his
heirs, successors or beneficiaries either by will or operation of law. The rights to succession are
deemed transmitted from the moment of the decedent’s death. Acquisition or transfer of
ownership over the net estate or properties of decedent to the heirs / successors, thru
succession, is subject to estate tax as provided by the Tax Code. Under the Tax Code, Sec
84,There shall be levied, assessed, collected and paid upon the transfer of the net estate as
determined in accordance with Sections 85 and 86 of every decedent, whether resident or
nonresident of the Philippines, a tax based on the value of such net estate, as computed in
accordance with Sec 84.
Estate tax is imposed on the privilege to transmit property upon death. It a tax on
the right of the deceased person to transmit his estate to his lawful heirs and beneficiaries at the
time of death.
On this module, we will discuss the difference between estate and donor’s tax,
concepts of succession and its elements, the classes of heirs and the different grounds for
disinheritance. Provided also in this module are the procedures for filing and payment of estate
tax due to BIR which includes the: Date and place of filing and payment of estate tax return, BIR
form for estate tax and others.
MODULE OBJECTIVES:
COURSE MATERIALS:
Under this module, the topic Estate Taxation is subdivided into five (5) lessons as
follows:
Lesson 1; Administrative Provisions and Fundamental Concepts of Estate Taxation.
Lesson 2: Laws / Rules on Taxable net Estate
Lesson 3: Estate Tax Credit and Estate Tax
Return Lesson 4: Laws / Rules Gross Estate
Lesson 5: Allowed Deduction from Gross estate
MODULE 2: ESTATE TAXATION
Lesson 1: Administrative Provisions and Fundamental Concepts of Estate Taxation
Overview:
This lesson will deal with basic ideas, informative data, enumerations,
classifications and definitions of terms related to estate taxation. As introduced, under the civil
code, succession is a mode of acquiring ownership over a property or estate of a decedent. The
gratuitous transfer of property at the decedent’s death to another person called heirs /
successors is subject to a transfer tax called estate tax.
Upon death of decedent, Estate Tax is imposed on the right of the deceased
person to transmit his/her estate to his/her lawful heirs and beneficiaries. The executor or
administrator or any of legal heirs, as the case maybe, shall file estate tax return under oath to
the BIR. This lesson will also deals with certain requirements, guidelines, in matters and
manners
/ procedures for filing the estate tax returns and payment of estate tax dues under the
provisions of the National Internal Revenue Code, also known as the Tax Code, enforced by the
Bureau of Internal Revenue or the BIR.
Module Objectives:
Course Materials:
Estate Tax is a tax on the right of the deceased person to transmit his/her estate
to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are
made by law as equivalent to testamentary disposition. It is not a tax on property. It is a tax
imposed on the privilege of transmitting property upon the death of the owner.
The Estate Tax is based on the laws in force at the time of death notwithstanding
the postponement of the actual possession or enjoyment of the estate by the beneficiary.
DISTINCTIONS BETWEEN THE ESTATE TAX AND THE DONOR’S TAX:
Succession as defined under Art. 774 of the New Civil Code is a mode of acquisition by
virtue of which the property, rights and obligations to the extent of the value of the inheritance, of
a person are transmitted through his death to another or others either by his will or by operation
of law. The rights to succession are deemed transmitted from the moment of the decedent’s
death.
Elements of Succession:
1. Decedent who is the person who died and whose property is transmitted through
succession. It is the general term applied to the person whose property is transmitted
through succession, whether or not he left a will. The testator is the decedent whose
properties are to be transferred to his successor through a written will. A transfer of
property from a decedent without a will is called intestate. The law defined it as:
Art. 775. In this Title, “decedent” is the general term applied to the person whose property is
transmitted through succession, whether or not he left a will. If he left a will, he is also called the
testator. (n)
2. Successor or the heir or person to whom the property or property rights is to be
transferred. They may also be called as heirs, devisees or legatees which is defined by
law as:
Art. 782. An heir is a person called to the succession either by the provision of a will or by
operation of law.
Devisees and legatees are persons to whom gifts of real and personal property are respectively
given by virtue of a will. (n)
Death of the decedent which causes the rights to the succession are transmitted from the
moment of the death of the decedent.
3. Inheritance- refers to the properties or property rights of a decedent, which is the subject
matter of succession. Also known as Inheritance.
Kinds of Successors:
1. Compulsory heirs are those for whom the legitime is reserved by law, and who succeed
whether the testator likes it or not. They cannot be deprived by the testator of their
legitime except by disinheritance properly effected.
They may be primary or those who have precedence over and exclude other Compulsory Heirs
as in the case of Legitimate Children and Descendants (LCD); They may also be secondary or
those who succeed only in the absence of the Primary Compulsory Heirs as in the cases of
Legitimate Parents and Ascendants (LPA); Lastly, they may also be concurring o those who
succeed together with the Primary or Secondary Heirs as in the cases of Illegitimate Children
and Descendants (ICD)Surviving Spouse (SS)
2. Voluntary heirs are those other than the compulsory heirs. The devisee is the person to
whom a gift of real property is given by virtue of a will while a legatee is the person to
whom a gift of personal property (bequest) is given by virtue of a will.
KINDS OF SUCCESSION:
1. Testamentary – succession by will
2. Intestate – succession in default of a will
3. Mixed
Article 919. The following shall be sufficient causes for the disinheritance of children and
descendants, legitimate as well as illegitimate:
(1) When a child or descendant has been found guilty of an attempt against the life of the testator,
his or her spouse, descendants, or ascendants;
(2) When a child or descendant has accused the testator of a crime for which the law prescribes
imprisonment for six years or more, if the accusation has been found groundless;
(3) When a child or descendant has been convicted of adultery or concubinage with the spouse
of the testator;
(4) When a child or descendant by fraud, violence, intimidation, or undue influence causes the
testator to make a will or to change one already made;
(5) A refusal without justifiable cause to support the parent or ascendant who disinherits such
child or descendant;
(6) Maltreatment of the testator by word or deed, by the child or descendant;
(7) When a child or descendant leads a dishonorable or disgraceful life;
(8) Conviction of a crime which carries with it the penalty of civil interdiction
Article 920. The following shall be sufficient causes for the disinheritance of parents or
ascendants, whether legitimate or illegitimate:
(1) When the parents have abandoned their children or induced their daughters to live a corrupt
or immoral life or attempted against their virtue;
(2) When the parent or ascendant has been convicted of an attempt against the life of the
testator, his or her spouse, descendants, or ascendants;
(3) When the parent or ascendant has accused the testator of a crime for which the law
prescribes imprisonment for six years or more, if the accusation has been found to be false;
(4) When the parent or ascendant has been convicted of adultery or concubinage with the
spouse of the testator;
(5) When the parent or ascendant by fraud, violence, intimidation, or undue influence causes
the testator to make a will or to change one already made;
(6) The loss of parental authority for causes specified in this Code;
(7) The refusal to support the children or descendants without justifiable cause;
(8) An attempt by one of the parents against the life of the other, unless there has been a
reconciliation between them. (756, 854, 674a)
Article 921. The following shall be sufficient causes for disinheriting a spouse:
(1) When the spouse has been convicted of an attempt against the life of the testator, his or her
descendants, or ascendants;
(2) When the spouse has accused the testator of a crime for which the law prescribes
imprisonment of six years or more, and the accusation has been found to be false;
(3) When the spouse by fraud, violence, intimidation, or undue influence cause the testator to
make a will or to change one already made;
(4) When the spouse has given cause for legal separation;
(5) When the spouse has given grounds for the loss of parental authority;
(6) Unjustifiable refusal to support the children or the other spouse. (756, 855, 674a)
3. Specific renunciation by an heir, including the surviving spouse, of his/her share in the
hereditary estate left by the decedent, categorically done in favor of identified heirs/ to the
exclusion or disadvantage of the other co-heirs in hereditary estate shall not be subject to
donor’s tax.
Administrator-is appointed by court while Executor is the person named in the will by the testator.
Tax Form
Tax Rates
(The rate applicable shall be based on the law prevailing at the time of decedent’s death)
• Effective January 1, 2018 to present [Republic Act (RA) No. 10963]
There shall be an imposed rate of six percent (6%) based on the value of such NET ESTATE
determined as of the time of death of decedent composed of all properties, real or personal,
tangible or intangible less allowable deductions.
• Effective January 1, 1998 up to December 31, 2017 (RA No. 8424)
The Estate Tax Return (BIR Form 1801) shall be filed in triplicate by:
1. The executor, or administrator, or any of the legal heir/s of the decedent, whether resident or
non-resident of the Philippines, under any of the following situations:
a. In all cases of transfers subject to estate tax;
b. Regardless of the gross value of the estate, where the said estate consists of registered or
registrable property such as real property, motor vehicle, shares of stock or other similar
property for which a clearance from the BIR is required as a condition precedent for the transfer
of ownership thereof in the name of the transferee; or
2. If there is no executor or administrator appointed, qualified, and acting within the Philippines,
then any person in actual or constructive possession of any property of the decedent.
Taxpayers who are filing BIR Form 1801 are excluded in the mandatory coverage from using
the eBlRForms (Section 2 of RR No. 9-2016)
Overview:
Under the Tax Code, there shall be levied, assessed, collected and paid upon the
transfer of the net estate as determined in accordance with Sections 85 and 86 of every decedent,
whether resident or nonresident of the Philippines, a tax based on the value of such net estate,
as computed in accordance with law.
Hereditary estate refers to the amount of decedent’s net estate after deducting the
expenses, losses, indebtedness, taxes and such other allowed deductions from the gross estate
of decedent, which net amount shall be subject of distribution to heirs, successors or beneficiaries
based on decedent’s last will and testament, or if none, by operation of law.
The computation of taxable net estate depends on the kind of decedent whether
resident / citizen or nonresident decedent. On this module, it will discuss the formulas for the
computation of taxable net estate of different decedents and the computation of estate tax due
under the Old and New Tax Code. It will also provide an overview of the allowed deductions from
the gross estate of different decedents.
Module Objectives:
After successful Completion of this module, you should be able to:
1. To determine the tax source and tax bases different classes of decedent.
2. To know the estate tax rates under the Old and New Tax Code for computation of estate tax
due.
3. To understand the formulas in the computation of taxable net estate.
4. To be able to know how to compute for the Estate Tax Due under the Old and New Tax Code.
Course Materials:
SEC. 84. Rates of Estate Tax. - There shall be levied, assessed, collected and paid upon
the transfer of the net estate as determined in accordance with Sections 85 and 86 of every
decedent, whether resident or nonresident of the Philippines, a tax based on the value of such
net estate, as computed in accordance with the following schedule:
(The rate applicable shall be based on the law prevailing at the time of decedent’s death)
Effective January 1, 2018 to present [Republic Act (RA) No. 10963]
There shall be an imposed rate of six percent (6%) based on the value of such NET
ESTATE determined as of the time of death of decedent composed of all properties, real or
personal, tangible or intangible less allowable deductions.
Effective January 1, 1998 up to December 31, 2017 (RA No. 8424)
If the Net Estate is
Estate Tax due (New law; Assuming decedent died after 48,000**
Jan 1, 2018)
**The tax rate is 6% of taxable net estate, thus, 800,000 times 6% is equal to
48,000.
Non resident Alien Taxable Net Estate Old tax Code: based
on Graduated tax rate
(Gross Estate less Estate within the table; 0% to 20%/ first
Allowed Philippines ONLY 200,000 exempt
deductions) Tax rate of 6%
TAXABLE NET ESTATE for RESDIENT CITIZEN, RESIDENT ALIEN AND NON-RESIDENT
CITIZEN DECEDENT;
In case of resident citizen, resident alien and on resident citizen decedent, the
estate tax is imposed on taxable net estate situated in the Philippines and in foreign countries and
computed in accordance with graduated estate tax rates of 0% to 20% OR 6% flat rate under the
TRAIN law.
Taxable net estate is determined by gross estate -world less allowed deduction-world.
GROSS ESTATE:
Gross estate is determined by including in the estate tax return the total fair market value of all
property/ estate at their gross amounts, whether real, personal, tangible or intangible properties,
located in the Philippines and abroad.
However, there are items of assets / properties that are specified by law as exclusion from gross
estate; hence shall be disregarded or excluded in the computation of gross estate. This will be
discussed in detail in Lesson 4 Gross Estate.
ALLOWED DEDUCTIONS:
Allowed deductions is determined by including in the estate tax return the allowed
deductions from gross estate which consist of liabilities, expenses and other charges related to
properties in the Philippines and abroad of the decedent. However, there are deductions that are
excluded or not allowed to be deducted from gross estate. Unless specified by law to be excluded,
such liabilities, expenses and other charges related to properties in the Philippines and abroad of
the decedent shall be included in computation of allowed deductions.
Composition of Allowed Deductions for Resident Citizen, Non-resident citizen and Resident Alien:
A. Ordinary Deductions:
1. Expenses, Losses, Indebtedness and Taxes (ELITE)*
2. Property Transfer for Public Purposes
3. Vanishing Deductions
4. Amount received by Heirs from Decedent’s Employer
B. Special Deductions
1. Medical Expenses*
2. Family Home*
3. Standard Deduction (SD)*
*With amendments from TRAIN law. Pls see lesson 5; Allowed Deductions for details.
Formula:
Conjugal estate- Phil P xxx
Conjugal estate- Abroad Xx
Conjugal Estate-World P xxxx
Less: Conjugal ordinary deductions-Phil X
Conjugal ordinary deductions-Abroad Xx
Net Conjugal Estate World P xxx
Equity of Spouse 50%
Share of Spouse in Net Conjugal Estate World P xxx
Illustration:
In case of Nonresident alien decedents, estate tax is imposed on taxable net estate
situated in the Philippines ONLY and computed in accordance with graduated estate tax rates of
0% to 20% OR 6% flat rate under the TRAIN law.
Taxable net estate is determined by gross estate -Phil only less allowed deduction-Phil
only.
GROSS ESTATE:
Gross estate is determined by including in the estate tax return the total fair market value of all
property/ estate at their gross amounts, whether real, personal, tangible or intangible properties,
located in the Philippines only.
However, there are items of assets / properties that are specified by law as exclusion from gross
estate; hence shall be disregarded or excluded in the computation of gross estate. This will be
discussed in detail in Lesson 4 Gross Estate.
ALLOWED DEDUCTIONS:
Allowed deductions is determined by including in the estate tax return the allowed
deductions from gross estate which consist of liabilities, expenses and other charges related to
properties in the Philippines only of the decedent. However, there are deductions that are
excluded or not allowed to be deducted from gross estate. Unless specified by law to be excluded,
such liabilities, expenses and other charges related to properties in the Philippines only of the
decedent shall be included in computation of allowed deductions.
*With amendments from TRAIN law. Pls see lesson 5; Allowed Deductions for details.
B.Share of Spouse in the Net Conjugal Estate-Phil only (Applicable only if the Nonresident Alien
is married)
This amount is determined as follows: Conjugal Assets-Phil only less Ordinary Conjugal
deductions -Phil only equals net Conjugal estate-Phil only multiplied by 50%.
Formula:
Conjugal estate- Phil P xxx
Less: Conjugal ordinary deductions-Phil X
Net Conjugal Estate -Phil only P xxx
Equity of Spouse 50%
Share of Spouse in Net Conjugal Estate-Phil only P xxx
* Under TRAIN law, Standard deduction is allowed for NRA amounting to P 500,000
Illustration:
Using the same data above, except that the decedent is a Nonresident Alien (married):
Overview:
It is the duty of the decedent’s executor or administrator to file the estate tax return
of the decedent, comply with certain requirements or procedures for filing the estate tax return
and pay the corresponding estate tax payable to the BIR.
As discussed in the previous lessons, estate tax due is computed based on taxable net
estate of decedent using the graduated tax rate table or the flat rate of 6%. After computing the
estate tax due, the decedent’s executor or administrator shall determine how much tax credit can
be deducted directly from the Estate tax due computed to arrive at Estate tax payable after tax
credit.
Estate tax credit composed of Philippines estate tax paid in the original estate tax
return (in case of amended estate tax return) and foreign estate tax paid. The latter is subject to
limitations provided by Sec 86 of the Tax Code. On this module, we will discuss the components
of estate tax credit and how to compute the limits of foreign estate tax paid and determining the
estate tax payable to BIR under the Old and New Tax code.
Module Objectives:
After successful Completion of this module, you should be able to:
1. To learn the laws on estate tax credit under the Tax Code
2. To know how to compute the limits or allowed tax credits on foreign taxes paid on
properties abroad of the decedent
3. To compute the Estate tax payable / still due under the Old and New Tax Code of
different kinds of decedents
Course Materials:
Foreign Country 1
Taxable Net estate x Phil = Formula Vs =
Foreign Country 1 estate Limit Whichever is
Tax Due Lower
Actual
DIVIDED by estate
tax
paid
Taxable net estate
-World (before
Standard
Deduction*)
PLUS
Foreign Country 2
Taxable Net estate x Phil = Formula Vs =
Foreign Country 2 estate Limit Whichever is
Tax Due Lower
Actual
DIVIDED by estate
tax
paid
Taxable net estate
-World (before
Standard
Deduction)
Allowed Tax Credit per LIMIT A =Lower in Foreign Country 1 PLUS Lower Foreign Country
2
Limit B:
Foreign Country 1
Taxable Net estate x Phil = Formula Vs =
Foreign Country 1+ estate Limit Whichever is
Foreign Country 2 Tax Due Lower is
Actual
estate equal to
DIVIDED by tax paid LIMIT B
in
Taxable net estate Country
-World (before 1 and
Standard Country
Deduction) 2
Allowed TAX Credit = Lower between the amounts in LIMIT A and LIMIT B.
*Under the Old Tax Code, Standard deduction allowed for RC, NRC and RA decedent is P
1,000,000. After TRAIN law, the Standard deduction allowed for RC,NRC and RA decedent was
increased to P 5,000,000.
Illustration 1:
In 2019, A, resident citizen, has the following taxable net estate before standard deduction (SD):
Year 2019 Phil Canada USA
Net Estate 6,000,000.00 3,000,000.00 1,000,000.00
Estate Tax Paid 12,000.00 82,000.00 35,000.00
Compute the Estate tax payable of A for 2019.
Solutions:
The estate tax payable of A is as follows:
Taxable net estate-Phil before SD 6,000,000
Taxable net estate-Canada before SD 3,000,000
Taxable net estate-USA before SD 1,000,000
Taxable Net Estate-World before SD 10,000,000
Less: Standard Deduction (SD) 5,000,000
Taxable Net Estate 5,000,000
USA
Limit Actual Lower
1M / 10M * 300,000=30,000 vs 35,000 30,000
LIMIT A: 112,000
LIMIT B:
Canada and USA
Limit Actual Lower
4M / 10M * 300,000=120,000 vs 117,000 117,000
Overview:
One of the functions of the executor / administrator is to gather and make a list of
inventories of the decedent’s property or estate on the date of the latter’s death. This is to
determine the Gross estate of decedent for the purpose of computing the estate tax due. Gross
estate consists of all properties owned by decedent at the time of his death excluding the exclusive
properties of the surviving spouse. It also includes the assets deemed owned by the decedent at
the time of his death.
On this module, we will discuss the composition of gross estate for purpose of
computing the taxable net estate subject to estate tax, valuation of properties of decedent and
those assets that are exempted, excluded and included in the computation gross estate. Included
on this module is the discussion of two regimes / property relations between spouses to determine
the classification of property as to ownership (conjugal or exclusive property)
Module Objectives:
After successful Completion of this module, you should be able to:
1. To know the applicable rules on the properties included on the Gross Estate of a
decedent
2. To determine the properties / estate excluded on the Gross estate of decedent.
3. To learn the Valuation of the Properties of the Estate of decedent.
4. To be able to identify the classification of properties as to ownership (Exclusive or
Conjugal)
5. To understand the rules applicable in determining the Conjugal Assets and
Exclusive assets of a married decedent and be able to apply the 2 regimes
(Conjugal Partnership of Gains and Absolute Community of Properties.
6. Determine the value of Gross Estate
Course Materials:
2. In the case of shares of stocks, the fair market value shall depend on whether the shares are
listed or unlisted in the stock exchanges.
Unlisted common shares are valued based on their book value while unlisted
preferred shares are valued at par value. In determining the book value of common
shares, appraisal surplus shall not be considered as well as the value assigned to
preferred shares, if there are any. On this note, the valuation of unlisted shares
shall be exempt from the provisions of RR No. 6-2013, as amended.
For shares which are listed in the stock exchanges, the fair market value shall be
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.
3. The fair market value of units of participation in any association, recreation or amusement club
(such as golf, polo, or similar clubs), shall be the bid price nearest the date of death published in
any newspaper or publication of general circulation.
4. To determine the value of the right to usufruct, use or habitation, as well as that of annuity,
there shall be taken 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.(Sec. 5, RR No. 12-2018)
5. Other property- The Measured at fair value at the time of death.
GROSS ESTATE:
GROSS ESTATE -WORLD FOR RESDIENT CITIZEN, RESIDENT ALIEN AND NON RESDIENT
CITIZEN DECEDENTS:
For resident alien decedents/citizens, gross estate shall include:
• Real or immovable property, wherever located
• Tangible personal property, wherever located
• Intangible personal property, wherever located
The composition of gross estate shall be to the extent of decedent’s interest, the total fair market
value of all properties, whether personal, real, intangible, whether exclusive asset of decedent or
conjugal asset of couple (in case the decedent is married) whether Assets still owned, or Assets
deemed owned located in the Philippines and in foreign countries..
However, there are properties or property transfer which under the provisions of estate tax laws
are exempt from estate tax and therefore shall be excluded from taxable gross estate -world.
However, in respect of intangible personal property situated in the Phil of nonresident alien
decedent, no estate tax shall be collected if the following conditions have been complied with;
1. If the foreign country of which he is a citizen and resident at the time of his death, did
not impose death tax of any character in respect to intangible personal property of
citizens of the Philippines not residing in that foreign country.
2. If estate tax laws of foreign country of which the decedent is citizen and a resident at
the time of his death, allows a similar exemption from death tax of any character in
respect to intangible personal property owned by citizen of the Philippines not residing
on that foreign country.
Intangible personal property with a situs in the Philippines such as:
1. franchise which must be exercised in the Philippines;
2. Shares of stock, obligations or bonds issued by corporations organized or
constituted in the Philippines;
3. Shares, obligations or bonds issued by a foreign corporation 85 percent of the
business of which is located in the Philippines;
4. Shares of stock, obligations or bonds issued by a foreign corporation if such
shares, obligations or bonds have acquired a business situs in the Philippines, that
is, they are used in the furtherance of its business in the Philippines; and
5. Shares, rights in any partnership, business or industry established in the
Philippines.
Transfer in Contemplation of Death. - 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; except in case of a bona fide
sale for an adequate and full consideration in money or money's worth.
c. Property transfer passing under a general power of appointment- refers to any gift or property
transfer by a donor-decedent during his lifetime, the ownership of which passing from the actual
owner through him (decedent -transferor) to another person-donee under a general power of
appointment given to and exercised by the donor-decedent.
Example; Mr Xin is the owner of building. He issued a general power of appointment to King,
authorizing him to gratuitously transfer the building to anyone he likes. King donate the building
to Wei as donation mortis causa. Later, Xin and King died. Thus, the transfer of building will be
part of King’s gross estate although the building has new possessor or owner which cannot be
taken away by others.
Transfers for Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or
powers (enumerated and described in Subsections (B), (C) and (D) of Section 85 of Tax Code) 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.
Proceeds of Life Insurance. - 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, irrespective of whether or not the insured retained the power of revocation, or
to the extent of the amount receivable by any beneficiary designated in the policy of insurance,
except when it is expressly stipulated that the designation of the beneficiary is irrevocable.
Non taxable life insurance proceeds (excluded in gross estates) are as follows:
If beneficiary is third person and irrevocably designated under private insurance
policy
Insurance proceeds from GSIS or SSS
If coming from the employer’s group of insurance plan taken out by employer on
employee’s life, whoever is the beneficiary, whether designated as revocable or
irrevocable
If designation of the beneficiary is not stated as revocable or irrevocable, the insurance law
presumes it to be revocable.
Conjugal Exclusive
Overview:
The executor or administrator make a list or inventory of all liabilities, expenses
and charges related to decedent’s property / estate on the date of the latter’s death. The factors
needed n the determination of gross estate which was presented in previous lesson shall likewise
be observed in knowing the proper amount of allowed deductions from the gross estate.
After the value of the gross estate has been established, the total amount of
allowed deductions (expenses, liabilities and charges) must be known that will be deducted from
the gross estate (real, personal, tangible and intangible) to arrive at the taxable net estate. Based
on the taxable net estate, we can now determine the estate tax due of the decedent.
Module Objectives:
After successful Completion of this module, you should be able to:
1. To be able to know the provisions of Tax Code on Allowed deductions from Gross Estate.
2. To identify all the components of allowed deductions from Gross estate.
3. To determine the nondeductible expenses/charges and liabilities from the Gross estate.
4. To determine the requisites for the deductibility of each allowed deductions from Gross Estate
5. To compute the allowed vanishing deductions.
6. To compute the taxable net estate and the estate tax due under the Old and New Tax Code.
Course Materials:
In the case of resident/ citizen decedent, the composition / inclusion in their allowed
deductions shall be, to the extent of their interest at the time of their deaths, the total value of the
liabilities, expenses and charges incurred within and without the Philippines, related to decedent’s
deaths, or to their properties.
However, there are liabilities, expenses and charges which under the provisions
of tax law are disallowed or nondeductible and therefore are excluded from the allowed
deductions-world.
The following are deductions within and without the Philippines that can be claimed
by estate of citizen or resident decedent:
3. Share of spouse in the Net Conjugal estate-World: Computed by the following formula:
= (Conjugal Assets -world LESS Ordinary Conjugal deductions-world*) x 50%
**With amendments from TRAIN law. For details, please see the subsequent discussions on
INCLUSION TO ALLOWED DEDUCTIONS.
RULE II: ALLOWED DEDUCTIONS- Phil only FOR NON RESIDENT ALIEN:
In the case of non resident alien decedent, the composition / inclusion in their
allowed deductions shall be, to the extent of their interest at the time of their deaths, the total
value of the liabilities, expenses and charges incurred within the Philippines only, related to
decedent’s deaths, or to their properties.
However, there are liabilities, expenses and charges which under the provisions
of tax law are disallowed or nondeductible and therefore are excluded from the allowed
deductions-Phil only.
The following are deductions within and without the Philippines that can be claimed
by estate of citizen or resident decedent:
2. Special Deductions
a. Standard Deductions (SD)
a.1. Under the Old Tax Code, No allowed standard deduction
a.2. Under the New Tax Code, allowed SD is P 500,000
3. Share of spouse in the Net Conjugal Estate-Phil only: Computed by the following formula:
=(Conjugal Assets -Phil only LESS Ordinary Conjugal deductions-Phil only*) x 50%
These are the items of liabilities, expenses and charges related or not to the
decedent’s death or properties which under the tax law are disallowed or non deductible:
If there are no breakdown or details on ELITE, such as when the amount is given in
total, then in case of married decedent, this item is deemed conjugal deduction. However,
if the items of the ELITE are given, the items no “a” and “b” are deemed conjugal
deductions; whereas the item “c” to “g” maybe classified as either conjugal or exclusive
depending on the problem data.
Funeral Expenses:
For actual funeral expenses or in an amount equal to five percent (5%) of the gross
estate, whichever is lower, but in no case to exceed Two hundred thousand pesos (P200,000) –
Under the Old tax Code.
The term "FUNERAL EXPENSES" is not confined to its ordinary or usual meaning. They include:
1. The mourning apparel of the surviving spouse and unmarried minor children of the
deceased bought and used on the occasion of the burial;
2. Expenses for the deceased’s wake, including food and drinks;
3. Publication charges for death notices;
4. Telecommunication expenses incurred in informing relatives of the deceased;
5. Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In case
the deceased owns a family estate or several burial lots, only the value corresponding to the plot
where he is buried is deductible;
6. Interment and/or cremation fees and charges; and
7. All other expenses incurred for the performance of the rites and ceremonies incident to
interment.
Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are
not deductible. Any portion of the funeral and burial expenses borne or defrayed by relativesand
friends of the deceased are not deductible. Actual funeral expenses shall mean those which are
actually incurred in connection with the interment or burial of the deceased. The expenses must
be duly supported by official receipts or invoices or other evidence to show that they were actually
incurred. (Sec 6 (A)(1) of RR 2-2003)
Under the New Tax Code, Funeral Expenses is no longer allowed as deductions
from the gross estate
Judicial Expenses
For judicial expenses of the testamentary or intestate proceedings. (Allowed
deduction under the Old tax Code).
Expenses allowed as deduction under this category are those incurred in the
inventory-taking of assets comprising the gross estate, their administration, the payment of debts
of the estate, as well as the distribution of the estate among the heirs. In short, these deductible
items are expenses incurred during the settlement of the estate but not beyond the last day
prescribed by law, or the extension thereof, for the filing of the estate tax return. Judicial expenses
may include:
1. Fees of executor or administrator;
2. Attorney’s fees;
3. Court fees;
4. Accountant’s fees;
5. Appraiser’s fees;
6. Clerk hire;
7. Costs of preserving and distributing the estate;
8. Costs of storing or maintaining property of the estate; and
9. Brokerage fees for selling property of the estate.
Any unpaid amount for the aforementioned cost and expenses claimed under “Judicial Expenses”
should be supported by a sworn statement of account issued and signed by the creditor. (Sec 6
(A)(2) of RR 2-2003)
Under the New Tax Code, Judicial Expenses is no longer allowed as deductions
from the gross estate
Claims against the estate
Refers to financial obligations / indebtedness due from the estate / decedent
payable to the creditor.
For claims against the estate: Provided, That at the time the indebtedness was
incurred the debt instrument was duly notarized and, if the loan was contracted within three (3)
years before the death of the decedent, the administrator or executor shall submit a statement
showing the disposition of the proceeds of the loan
Requisites for Deductibility of Claims against the Estate –
• The liability represents a personal obligation of the deceased existing at the time of death;
• The liability was contracted in good faith and for adequate and full consideration in
money’s worth;
• The claim must be a debt or claim which is valid in law and enforceable in court; and
• The indebtedness must not have been condoned by the creditor or the action to collect
from the decedent must not have prescribed.
2. VANISHING DEDCUTIONS
Refers to ordinary deductions related to a property which was previously subjected
to transfer tax during the decedent’s lifetime. This deductible item is given as a relief or consolation
for having to pay a death tax on his property which has been recently and previously subjected to
Philippine tax or donor’s tax within a relatively short period of time.
Under Sec 86 of the Tax Code, provides the following:
Property Previously Taxed. - An amount equal to the value specified below of any
property forming a part of the gross estate situated in the Philippines of any person who died
within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within
five (5) years prior to his death, where such property can be identified as having been received
by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or
inheritance, or which can be identified as having been acquired in exchange for property so
received:
One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to
the death of the decedent, or if the property was transferred to him by gift within the same period
prior to his death;
Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more
than two (2) years prior to the death of the decedent, or if the property was transferred to him by
gift within the same period prior to his death;
Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more
than three (3) years prior to the death of the decedent, or if the property was transferred to him by
gift within the same period prior to his death;
Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more
than four (4) years prior to the death of the decedent, or if the property was transferred to him by
gift within the same period prior to his death;
Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not
more than five (5) years prior to the death of the decedent, or if the property was transferred to
him by gift within the same period prior to his death;
These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title
was finally determined and paid by or on behalf of such donor, or the estate of such prior
decedent, as the case may be, and only in the amount finally determined as the value of such
property in determining the value of the gift, or the gross estate of such prior decedent, and only
to the extent that the value of such property is included in the decedent's gross estate, and only if
in determining the value of the estate of the prior decedent, no deduction was allowable under
paragraph (2) in respect of the property or properties given in exchange therefor. Where a
deduction was allowed of any mortgage or other lien in determining the donor's tax, or theestate
tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then
the deduction allowable under said Subsection shall be reduced by the amount so paid. Such
deduction allowable shall be reduced by an amount which bears the same ratio to the amounts
allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise
deductible under said paragraph (2) bears to the value of the decedent's estate. Where the
property referred to consists of two or more items, the aggregate value of such items shall be
used for the purpose of computing the deduction.
Illustration:
A resident decedent had the following data on the date of his death in Nov 14, 2013:
The amount of all the bequests, legacies, devises or transfers to or for the use of
the Government of the Republic of the Philippines, or any political subdivision thereof, for
exclusively public purposes.
Amount Received by Heirs Under Republic Act No. 4917. - Any amount received
by the heirs from the decedent - employee as a consequence of the death of the decedent-
employee in accordance with Republic Act No. 4917: Provided, That such amount is included in
the gross estate of the decedent.
SPECIAL DEDCUTIONS:
a. Medical expenses
Under the Old Tax Code, medical expenses is allowed deductions from gross
estate.
Medical Expenses incurred by the decedent within one (1) year prior to his death
which shall be duly substantiated with receipts: Provided, That in no case shall the
deductible medical expenses exceed Five Hundred Thousand Pesos (P500, 000).
All medical expenses (cost of medicines, hospital bills, doctor’s fees, etc.) incurred
(whether paid or unpaid) within one (1) year before the death of the decedent shall be
allowed as a deduction provided that the same are duly substantiated with official
receipts. For services rendered by the decedent’s attending physicians, invoices,
statements of account duly certified by the hospital, and such other documents in
support thereof and provided, further, that the total amount thereof, whether paid or
unpaid, does not exceed Five Hundred Thousand Pesos (P500,000).
Under the New Tax Code (TRAIN Law), medical expenses is no longer allowed
deductions from gross estate.
b. Standard Deductions
Under the Old tax Code, a deduction in the amount of One Million Pesos
(P1,000,000.00) shall be allowed as an additional deduction without need of
substantiation
Under the New tax Code, a deduction in the amount of Five Million Pesos
(P5,000,000.00) shall be allowed as an additional deduction without need of
substantiation
Under the Old tax Code, no deduction is allowed. (No standard deduction is
allowed for Nonresident alien decedent)
Under the New tax Code, a deduction in the amount of Five Hundred Pesos
(P500,000.00) shall be allowed as an additional deduction without need of
substantiation.
Under the New Tax Code, The Family Home. - An amount equivalent to the current
fair market value of the decedent’s family home: Provided, however, That if the said current
fair market value exceeds Ten million pesos (₱10,000,000), the excess shall be subject to
estate tax.
Case 1 Case 2
FMV of family home 800,000 3,000,000
Book value 500,000 4,000,000
Maximum limit 1,000,000 1,000,000
Deductible family home allowance 800,000 1,000,000
Illustration A: Married
decedent Old tax Code:
Case 1 Case 2
FMV of family home 1,800,000 3,000,000
Book value 1,500,000 4,000,000
Maximum limit 1,000,000 1,000,000
Deductible family home allowance 900,000 1,000,000