CHAPTER 11: TAXATION OF ESTATES AND TRUSTS

Imposition of Tax

 Estates and Trusts are treated as separate taxable entities under the Tax Code
 Income tax imposed upon individuals
o Shall apply to the income of estates or of any kind of property held in trust
A. TAXATION OF ESTATES
 Estate defined
o Estate
 Mass of all property, rights and obligations of a person which are not
extinguished by his death
 Includes not only the property and transmissible rights and obligations existing
at the time of his death, but also those which have accrued thereto since the
opening of the succession
 Decedent defined
o Decedent
 General term applied to the person whose property is transmitted through
succession, whether or not he left a will
 If he left a will
 Testator
 Heir defined
o Heir
 A person called to the succession either by provision of a will or by operation of
law
 Devisee defined
o Devisee
 Person to whom a gift of real property is given by virtue of a will
 Legatee defined
o Legatee
 Person to whom a gift of personal property is given by virtue of a will
 Classification of Estates
o Estates for the purposes of income tax
 Estate under judicial administration
 Settlement of which is the object of judicial testamentary or intestate
proceedings
 Estate not under judicial administration
 Settlement of which is not the object of judicial testamentary or
interstate proceedings
 To whom income of estates shall be taxed
o Income of an estate may be taxable to the estate or heirs and beneficiaries as follows:
 Where the estate is under judicial administration
 Income of the estate shall be taxable to the fiduciary or trustee
o Fiduciary or trustee shall file the return and pay the income tax
due thereon until the final settlement of the estate
  Where the estate is not under judicial administration
 Income of the estate shall be taxable to the heirs and beneficiaries
 Each heir and beneficiary shall include in his return his distributive share
of the net income of the estate
 Determination of the Tax
o Computed upon the taxable income of the estate and shall be paid by the fiduciary
 Taxable income of estates
o Computed in the same manner and on the same basis as in the case of an individual
o Estate can never be an employee
 It has the status of a self-employed individual
 Gross income of Estates
o Items of gross income taxable to individuals
 Same items of gross income which are taxable to estates
 Income of Decedent’s Estate
o Income of the estate of a decedent shall include the income received by the estate of a
decease person during the period of administration or settlement of the estate
 Period of administration/settlement of estate
 Period required by the executor/administrator to perform the ordinary
duties pertaining to administration, such as collection of assets and
payment of debts and legacies
 Estates curing the period of administration have but one beneficiary
 Beneficiary is the estate
o No taxable income is realized from the passage of property to the executor or
administrator on the death of the decedent
 Even though the property may have appreciated in value since the decedent
acquired it
o In the event of delivery of property in kind to a legatee or distribute
 No income is realized
o Where prior to the settlement of the estate, executor or administrator sells property of
a decedent’s estate for more than the appraised value placed upon it at the death of the
decedent
 Excess income is taxable to the estate
o Where the property is sold after the settlement of the estate by the devisee, legatee, or
heir at a price greater than the appraised value placed upon it at the inherited the
property from the decedent
 The devisee, legatee or heir is taxable individually on any profit derived
 Deduction of Estate
o Can take up the same items of deduction authorized under Sec. 34 of the Tax Code and
allowed an individual taxpayer.
 Special deduction of Estates
o Estates can also deduct, in addition to the deduction authorized under Sec. 34 of the Tax
Code
 The amount of income of the estate for the taxable year which is properly paid
or credited during such year to any legatee, heir or beneficiary
  The income distributed to beneficiaries of an estate
 Subject to 15% CWT to be withheld by the estate
o Notes:
 Amount so allowed as a deduction shall be included in computing the taxable
income of the legatee, heir or beneficiary
 However, where no such distribution to the heirs is made during the
taxable year that such income is subjected to income tax payments by
the estate
o Subsequent distribution thereof is no longer taxable on the part
of the recipient heir
 An allowance paid to a widow or heir out of the corpus of the estate is not
deductible from the gross income
 Rates of Tax
o Estate shall thus have the ff. tax rates:
 If the estate’s gross sales/receipts plus other non-operating income exceeds the
VAT threshold of 3,000,000
 Taxed on its net taxable income using the graduated rates under Sec. 24
of the Tax Code
 If such estate’s gross sales/receipts plus other non-operating income does not
exceed the VAT threshold of 3,000,000, the estate’s executor/administrator
shall have the option for the estate to be taxed at
 8% of gross sales/receipts plus other non-operating income in excess of
250,000
o This 8% tax on gross sales/receipts plus other non-operating
income shall be in lieu
 Of the progressive tax rates
 3% Other Percentage Tax (OPT)
 The graduated progressive rates
o Notes:
 Estate’s executor/administrator must signify his intention to elect the 8%
income tax rate in 1st quarter ITR or in the 1st Quarter Percentage Tax Return or
in the initial quarter return of the taxable year estate is established or formed
 Once taxpayer elects to be taxed at 8% tax rate
 Such election is irrevocable for the taxable year
 No amendment of the option shall be made for the said taxable year
 Computation of Tax
o Accounting period – Calendar year
o Tax Base
 Net taxable income or
 Gross sales/receipts plus non-operating income
o Rate of tax
 Progressive rates (on net taxable income) or
 8% tax rate (on gross sales/receipts plus non-operating income)
o Notes:
  Beneficiary of an estate has the status of a self-employed individual
 He can claim the itemized deduction or optional standard deduction
against the income distributed to him by the estate
 If heir or beneficiary is under the 8% income tax regime
 Amount he receives will be included in the base in computing the tax
B. TAXATION OF TRUSTS
 Trust defined
o Right of property, real or personal, held by one party for the benefit of another
o Obligation imposed either expressly/by implication of law
 Whereby the obligor is bound to deal with property over which he has control,
for the benefit of certain persons of whom, he may himself be one, and anyone
of them may enforce the obligation
 Creation of trusts
o Either express or implied
o Express trusts
 Created by the intention of the trustor or of the parties
o Implied trusts
 Come into being by operation of law
 Parties to a Trust
o Trustor/grantor
 Person who establishes a trust
o Trustee
 One in whom confidence is reposed as regards the property for the benefit of
another person
o Beneficiary
 Person for whose benefit the trust has been created
 Fiduciary Defined
o Applies to all persons/corps. That occupy positions of peculiar confidence towards
others, such as trustees, executors or administrators
o For income tax purposes
 Any person or corp. that holds in trust an estate of another person or persons
 In order that a fiduciary relationship may exist
 Necessary that a legal trust be created
 Classification of Trusts
o Ordinary trust
 Income and corpus of the trust do not revert to the grantor
 Trust income is accumulated and held for distribution to the beneficiaries
 Any of the ff. trusts
 Trust where income is accumulated or held for future distribution under
the terms of a will or trust
 A trust where income is to be distributed currently by fiduciary to
beneficiaries
 A trust where income is accumulated for the benefit of unborn or
unascertained person or persons with contingent interest
  Trust where the income collected by a guardian of infant is held or
distributed as the court may direct
 Trust where the income, in the discretion of the fiduciary may be either
distributed to the beneficiaries or accumulated
o Revocable trust
 Trust in which the power to revest in the grantor to any part of the corpus of
trust is vested in the grantor himself or any person not having any substantial
adverse interest in the trust corpus or its income
 Any time, the power to revest in the grantor title to any part of the corpus of
the trust is vested –
 In the grantor alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus
or income therefrom
 In any person not having substantial adverse interest in the disposition
of such part of the corpus or the income therefrom
 The income of such part of the trust estate title to which may be revested in the
grantor or held or distributed for the benefit of the grantor
 Shall be included in computing the taxable income of the grantor
 Income for the benefit of the Grantor
 Trust income is considered for the benefit of the grantor where any part
of the income of the trust
o Is or in discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be held or accumulated for future distribution of
the grantor
o May or in the discretion of the grantor or of any person not
having a substantial adverse interest in the disposition of such
part of the income, be distributed to the grantor
o Is or in the discretion of the grantor or of any person not having
substantial adverse interest in the disposition of such part of the
income may be applied to the payment of premiums upon
policies of insurance on the life of the grantor
 Such part of income of trust shall be included in computing the taxable
income of the grantor
 Meaning of “In the Discretion of the Grantor”
 In the discretion of the grantor, either alone or in conjunction with any
person not having a substantial adverse interest in the disposition of the
part of the income in question
 Trust, under which the grantor remains in control of the estate and/or
income
o A scheme intended to avoid payment of income tax
o Avoidance is no longer possible
o Employee’s trust
  General rule: income of any kind of property held in trust is subject to income
tax
 Exception: income tax shall not apply to the income of an employees’ trust
which forms part of a pension, stock bonus, or profit-sharing plan of an
employer for the benefit of some or all of his employees
 Requisites or conditions for exemption of Employees’ trust
 Employee’s trust must form part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or all of its
employees or their beneficiaries
 Contributions are made to the trust by such employer, or employees or
both
 Contributions are made for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the
trust in accordance with such plan (ex. In case of retirement, resignation
or separation of service)
 Under the trust instrument, it is impossible at any time prior to the
satisfaction of all liabilities w/ respect to employees under the trust, for
any part of the corpus or income (to be w/in the taxable year or
thereafter) used for, or diverted to purposes other than for the
exclusive benefit of employees
o However any amount actually distributed to any employee or
distribute shall be taxable to him in the year in w/c so
distributed to the extent that it exceeds the amount
contributed by such employee or distribute
o Note: investment earnings of a retirement fund, including those
from gov’t securities, may be exempt from income tax if all
requisites of an employees’ trust are met
 Taxability of Income of Trusts
o Income of a trust may be taxable to the trustee, or to the beneficiaries or to the grantor
 Income of trust taxed to the trustee
 Income of a trust w/c is to be accumulated or held for future
distribution, whether consisting of ordinary income or gain from the
sale of assets included in the corpus of the trust must be returned by
and will be taxed to the trustee
 Income of a trust whether created by will or deed, for accumulation of
income, whether for an unascertained person or persons with
contingent interests or otherwise, shall be taxed to trustee
 Income of a trust, where under the terms of a will or deed, the trustee
may in his discretion, distribute the income or accumulate it, the
income is taxed to the trustee, irrespective of the exercise of his
discretion
o Imposition of tax – not affected by the fact that an ultimate
beneficiary may be a person exempt from tax
  Income of a trust administered in a foreign country (which is not
entitled to deductions – Sec. 61 (A) and (B) of Tax Code)
o Undiminished by any amounts distributed, paid or credited to
beneficiaries will be taxed to the trustee
o Income included in the return of the trustees is not to be
included in computing the income of the beneficiaries
o Income of trust taxed to beneficiaries
 Income of trust for the taxable which is to be distributed to the beneficiaries
 Must be returned by and will be taxed to respective beneficiaries
 Each beneficiary must include in his return
o His distributive share of the net income of the trust
 Income distributed to beneficiaries of a trust
o Subject to a CWT of 15% to be withheld by trust
o Income of trust taxed directly to the grantor
 Revocable trust
 Income from such part of the trust estate title to which may be revested
in the grantor
o Income included in the grantor’s return
 In case of a trust the income of w/c, in whole or in part, may be held or
distributed for the benefit of grantor
 That part of income which may be held or distributed for the benefit of
the grantor
o Included in the return of grantor
 Such part of the income of the trust which may be applied to the payment of
premiums upon policies of insurance on the life of the grantor
 Included in computing the taxable income of the grantor
 In case of trusts which are in whole or in part subject to revocation by the
grantor, or which are for the benefit of the grantor
 Income of the trust shall be included in computing the taxable income
of the grantor
 Determination of the Tax
o Computed upon the taxable income of the trust and shall be paid by the fiduciary
 Taxable income of trusts
o Computed in the same manner and on the same basis as in the case of an individual
o Trust can never be an employee
 It has to be a self-employed individual
 Gross income of trusts
o Same as to the items of gross income taxable to individuals
 Deduction of trusts
o Can take up the same items of deduction authorized under Section 34 of the Tax Code
and allowed an individual taxpayer
 Special deduction of trusts
 o Amount of the income of the trust for the taxable year which is to be distributed
currently to the beneficiaries
o Amount of income collected by a guardian of an infant which is to be held or distributed
as the court may direct
o Amount of income of the trust for the taxable year which is properly paid or credited to
any beneficiary
- Amount so allowed as a deduction
o Shall be included in computing the taxable income of beneficiaries, whether distributed
to them or not
 Rates of tax
o Prescribed for individuals earning purely self-employment or professional income
 Used in computing the income tax for trusts
o Trust shall thus have the ff. tax rates:
 If the trust’s gross sales/receipts plus other non-operating income exceeds the
VAT threshold of 3,000,000
 It shall be taxed on its net taxable income using the graduated rates
 If such trust’s gross sales/receipts plus other non-operating income does not
exceed the VAT threshold of 3,000,000, the trust’s trustee/fiduciary shall have
the option for the trust to be taxed at:
 8% of gross sales/gross receipts plus other non-operating income in
excess of 250,000 or
 Graduated progressive rates of the Tax Code
 Same rules as estates
 Computation of Income Tax of Trusts
o Accounting period – calendar year
o Tax base
 Net taxable income
 Gross sales/receipts plus non-operating income
o Rate of tax
 Progressive rates (net taxable income) or
 8% tax rate (gross sales/receipts plus non-operating income)
 Consolidation of Income of 2 or more trusts
o When two or more trusts are created by the same trustor or grantor and in each
instance the beneficiary is the same person
 Taxable income of all trusts shall be consolidated and tax computed on such
consolidated income
o Such proportion of said tax
 Assessed and collected from each trustee w/c the taxable income of the trust
administered by him bears to the consolidated income of several trusts
o In computing the consolidated taxable income of several trusts
 Only one absolute exemption shall be allowed
o Formula
 Taxable income of trust/Consolidated taxable income X Tax on consolidated taxable income =
tax allocated or to be paid by trustee

 Liability for Tax on Estates or Trusts

o Liability for payment of tax attaches to the person of an executor/administrator up to
and after his discharge
 Where prior to distribution and discharge he had notice of his tax obligations or
failed to exercise due diligence in determining whether or not such obligations
existed
o Liability for the tax
 Also follows the estate itself and when the estate has been distributed
 Heirs, devisees, legatees and distributes may be required to discharge
the amount of tax due and unpaid, to the extent of and in proportion to
any share received
 Same consideration applies to other trusts
o Where the tax has been paid on the taxable income of an estate/trust by the fiduciary
 Taxable income on w/c the tax is paid is free from tax when distributed to the
beneficiaries
 Fiduciary returns
o Fiduciaries
 Required to make income tax returns, in duplicate, when the gross income of
the person, trust or estate for whom or which they act amounts to 20,000 or
over during the taxable year
 Will be subject to all provisions of law which apply to individuals
o Return made by or for one or two or more joint fiduciaries filed in the province where
such fiduciaries reside
 Shall be a sufficient compliance with the requirements of Sec. 65 of the Tax
Code
 Fiduciaries Indemnified Against Claims for Taxes Paid
o Trustees, executors, administrators and other fiduciaries
 Indemnified against the claims or demands of every beneficiary for all payments
which they shall be required to make
 And they shall have credit for the amount of such payments against the
beneficiary or principal in any accounting which they make as such
trustees or fiduciaries