GROUP 5

TAXATION ON INCOME OF ESTATE AND TRUST

QUESTIONS

1. WHAT IS A TAXABLE INCOME?

- The term taxable income means the pertinent items of gross income specified in the Code,
less the deductions, if any, authorized for such type of income by the Code or other special
laws.
2. IS THE INCOME DERIVED FROM THE ESTATE OF THE DECEASED TAXABLE?
- Yes, Sec. 56 of R.A. 1983 provides that income received by estates of deceased persons during
the period of administration or settlement of the estate is taxable.
3. WHAT ARE THE RULES THAT GOVERN THE TAXABILITY OF AN ESTATE?
- Income Tax for individuals from January to the time of death (Secs. 24, 25, NIRC).
- Income Tax of the estate, if the estate is under administration or judicial settlement (Sec. 60,
NIRC).
4. HOW DO YOU CLASSIFY ESTATES FOR INCOME PURPOSES?
- For income purposes, estates are classified into:
o Estate under Judicial Administration; or
o Estate not under Judicial Administration.
5. IS ESTATE TAXABLE? EXPLAIN.
- Yes, the estate, as a juridical person is taxable on income received by estates of deceased
person during period of administration and settlement of estate.
6. HOW DO YOU COMPUTE FOR THE TAXABLE INCOME OF ESTATE?
- Gross income minus the allowable deduction is equal to the taxable income.
7. WHAT ARE INCLUDED IN THE GROSS INCOME OF ESTATE?
- INCLUDED in the gross income of an estate are the following:
o Income received by the estate of the deceased person during the period of
administration or settlement of the estate;
o When prior to the settlement of the estate the executor or administrator sells the
property of a decedent’s estate for more than the appraised value placed upon it at
the death of the decedent, the excess is income taxable to estate.
8. WHAT ARE EXCLUDED IN THE GROSS INCOME OF ESTATE?
- Excluded in the gross income of an estate is the gain derived 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.
9. PROVIDE THE RULE GOVERNING SPECIAL DEDUCTIONS IN GROSS ESTATE?
- There shall be allowed as an additional deduction in computing the taxable income of the
estate or trust the amount of the income of the estate or trust for its taxable year, which is
properly paid or credited during such year to any legatee, heir or beneficiary. (NIRC, Section
61(B))
10. HOW DO YOU DEFINE TRUST?
 - A trust is a "fiduciary relationship with respect to property which involves the existence of
equitable duties imposed upon the holder of the title to the property to deal with it for the
benefit of another." A trust is either express or implied. Express trusts are those which the
direct and positive acts of the parties create, by some writing or deed, or will, or by words
evincing an intention to create a trust.
11. WHAT ARE THE RULES IN TAXABILITY OF INCOME TRUST?
- If the income:
o Is distributed to beneficiaries, the beneficiaries shall file and pay the tax.
o Is to be accumulated or held for future distribution, the trustee or beneficiary shall
file and pay the tax.
12. PROVIDE THE EXCEPTIONS TO THE RULES ON TAXABILITY OF INCOME TRUST.
- Exceptions:
o In a revocable trust, the income of the trust will be returned to the grantor (Sec. 63,
NIRC).
o In a trust where the income is held for the benefit of the grantor, the income of the
trust becomes income of the grantor (Sec. 64, NIRC).
o In a trust administered in a foreign country, the income of the trust, administered by
any amount distributed to the beneficiaries shall be taxed to the trustee (Sec. 61 [C],
NIRC).
13. WHAT ARE THE TWO CLASSIFICATION OF TRUST?
- Express or direct trust are created by the direct and positive acts of the parties, by some
writing, deed, will, or by oral declaration in words evidencing an intention to create a trust.
- Implied/indirect/involuntary or trusts by operation of law arise by legal implication based on
the presumed intention of the parties or on equitable principles
14. HOW DO YOU CLASSIFY TRUST FOR TAX PURPOSES?
- Classifications of trust for tax purposes
o Taxable and tax-exempt trust
o Irrevocable trust and revocable trust
o Trust administered in the Philippines and trust administered in a foreign country
15. WHAT ARE THE CONDITIONS FOR EMPLOYEE’S TRUST TO BE EXEMPT FROM TRUST?
- Employee’s trusts are tax-exempt, provided:
o Employee’s trust must be part of a pension, stock bonus or profit sharing plan of the
employer for the benefit of some or all of his employees;
o Contributions are made to the trust by such employer, or such employees or both;
o Such contributions are made for the purpose of distributing to such employees both
the earnings and principal of the fund accumulated by the trust; and
o The trust instrument makes it impossible for any part of the corpus or income to be
used for or diverted to, purposes other than the exclusive benefit of such employees
(Sec. 60[B], NIRC).
16. In the case of the employee’s 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, wherein contributions are
made to the trust by the employer or employees, or both, for the purpose of distributing to
such employees the earnings and principal of the fund accumulated by the trust in accordance
with such plan, what is the tax treatment of
a. The contributions made to the trust by the employer?
 b. The retirement benefit paid to the employee under the retirement trust?
c. The income earned by the employee’s retirement funds which are held in trust?
d. The amount actually distributed to a non retiring employee during the year?

-a. The contribution made to the pension trust by the employer may be allowed as a deduction
against his gross income. (Sec. 34 [J], NIRC).
b. The retirement benefit received by the employee from the retirement fund of the trust shall be
excluded in his gross income and, thus, exempted from the withholding tax. (Sec. 32 [B][6][a],
NIRC).
c. The income earned by the retirement funds of private employees held by the trustor in their
behalf shall be exempted from income tax. (Sec. 60 [B], NIRC).
d. The amount actually distributed to the employee shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount contributed by such employee. (Sec. 60 [B],
NIRC).

17. IS AN INCOME OF PENSION TRUST EXEMPTED FROM TAXATION?

- Yes, Tax exemption is likewise to be enjoyed by the income of the pension trust; otherwise,
taxation of those earnings would result in a diminution of accumulated income and reduce
whatever the trust beneficiaries would receive out of the trust fund (CIR v. CA, G.R. No. 95022,
March 23, 1992).
18. WHEN IS A TAX IMPOSED ON TRUST?
- Tax shall be imposed to any kind of property held in trust, including:
o Income accumulated in trust for the benefit of unborn or unascertained person or
persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;
o Income which is to be distributed currently by the fiduciary to the beneficiaries, and
income collected by a guardian of an infant which is to be held or distributed as the
court may direct;
o Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
19. HOW IS TAXABLE INCOME OF ESTATE AND TRUST COMPUTED IN GENERAL?
- The taxable income of estate and trust shall be computed in the same manner as individuals.
The tax imposed by Title II, Tax on Income, of the NIRC of 1997, upon individuals shall also
apply to income of estates and trusts (Sec. 60 [A], NIRC).
20. HOW DO YOU COMPUTE FOR THE TAXABLE INCOME WHEN THERE ARE TWO OR MORE TRUSTS?
- Where, in the case of two or more trusts, the creator of the trust in each instance is the same
person, and the beneficiary in each instance is the same, the taxable income of all the trusts
shall be consolidated and the tax provided in this Section computed on such consolidated
income, and such proportion of said tax shall be assessed and collected from each trustee
which the taxable income of the trust administered by him bears to the consolidated income
of the several trusts (Sec. 60 [A], NIRC).
21. Mary transferred a valuable 10-door commercial apartment to a designated trustee, Miriam,
naming in the trust instrument Santino, Mary's 10-year old son, as the sole beneficiary. The
trustee is instructed to distribute the yearly rentals amounting to P720,000.00. The trustee
 consults you if she has to pay the annual income tax on the rentals received from the
commercial apartment.
a. What advice will you give the trustee? Explain.
b. Will your advice be the same if the trustee is directed to accumulate the rental income and
distribute the same only when the beneficiary reaches the age of majority? Why or why not?

a. I will advise Miriam that the yearly rental income distributed annually qualifies as a
deduction in computing the net income of the trust. And since net income is zero after
such deduction, there is nothing to be paid as annual income tax due from the trust. (Sec.
61[A], NIRC).

b. NO. The trust may now have net income determined at the end of each year as a result
of accumulating its income instead of distributing the same to the beneficiary. The tax is
payable by the trust, as represented by the trustee, on the basis of such net income. (Sec.
61[A], NIRC).

22. WHO SHALL FILE RETURNS OF ESTATE AND TRUST TAX?

- The following persons acting in any fiduciary capital shall file the income tax return for an
estate or trust:
o Guardians;
o Trustee;
o Executors;
o Administrators;
o Receivers;
o Conservators;
o All other person or corporations acting as fiduciary.
23. Gerry in year 2019 created a trust that covers an income producing property, with Mary as
fiduciary and Alex as beneficiary, It was provided in the trust that Maria was to utilize the
income of the property in the following manner:
1. Income of the property ---- Php 1,000,000.00
2. Pay the life insurance premium of Gerry , the grantor ---- Php 200,000.00
3. Distribute the income to the beneficiary, Alex ---- 100,000.00

How would you compute for the Taxable Income?

Income of the property ---- Php 1,000,000.00

Less: Insurance premium payments ---- Php 200,000.00
Income distribution ---- Php 100,000.00
Taxable income ---- Php 700,000.00
24. HOW MUCH IS THE AMOUNT OF GROSS INCOME REQUIRED TO FILE A RETURN?
- The return shall be filed if the estate or trust has a gross income of PHP 50,000 or more during
the taxable year.
25. WHEN SHALL THE FIDUCIARY FILE A RETURN?
- The fiduciary shall file a return if gross income is at least P20,000 (Sec. 65, NIRC).