TRANSFER TAXES AND BASIC SUCCESSION

NATURE OF TRANSFER TAXES

Transfer taxes are excise or privilege taxes. Theses taxes are imposed for gratuitous passing of
private owned properties to the heirs in case of death; or to the done in case of donation.

This tax is imposed on the act of passing the ownership of property and not a tax on the value of
property itself.

The modes of property transfer may be diagramed as follows:

Properties:
1. Real Properties
2. Personal Properties (Tangible/Intangible Properties)

Transfer of Property Through

Onerous transfer Gratuitous transfer

Normal course of business Casual Fact of death Donation

(Sale or Exchange) transfer

Subject to business Subject to Subject to

Capital gains tax
taxes estate tax donor’s tax
(VAT, percentage tax
and excise taxes)

ONEROUS TRANSFER OF PROPERTY

Onerous transfer of property refers to the exchange of property for a monetary consideration or a
transfer of goods or services in return for something of equal value like in sales or barter.

When the transfer is made in the normal course of business, there will be a corresponding
business tax that shall be imposed. Examples of business taxes on onerous transfer of property
are value added tax (VAT), percentage tax and excise tax.

GRATUITOUS TRANSFER OF PROPERTY

Gratuitous transfer of property is a conveyance of property without any consideration involved in
exchange for the property given away.

In other words, it is a transfer of property for free because there is no financial consideration or
no performance of service as payment for the transfer of property.

The taxes, which are imposed on gratuitous transfer of property, are estate tax and donor’s tax.
These taxes are normally called transfer taxes.
Gratuitous transfers
1. Donation Inter Vivos – Subject to donor’s tax
2. Donation Mortis-Causa/Testamentary transfer/Intestate transfer – subject to estate tax

Nature of Donor’s Tax

Donor’s tax is an excise tax imposed on the right to transfer gratuitously, directly or indirectly, real
and personal properties, tangible or intangible out of the owner’s liberality in favor of another that
accepts the gift.

It is also known as gift tax that is imposed on the gratuitous transfers of property during one’s
lifetime. A gift is a property voluntarily transferred without consideration or compensation from the
recipient.

Likewise, donor’s tax is not imposed on the donor, the donee or property donated but upon the
right of the of the donor to donate.

The tax is imposed on the transfer, not on the property transferred. Thus, it applies even though
the property transferred may be exempted from income tax or other taxes.

Purpose of Donor’s Tax

The basic purpose of imposing tax on donation is to prevent the avoidance of estate tax through
lifetime transfers of property which would otherwise transfer by will or through the death of the
done.

Therefore, it is imposed to supplement the estate tax for the loss of the government revenue when
estates are split by donations.

Basis of Estate Tax

The object of estate tax is to tax the transfer of economic benefits and enjoyment of property from
a decedent person to the heir.

The estate protects the rights of individual on his property and supervises its transfer from one
generation to the next. Consequently, the State, in the exercise of its sovereignty, has always
regarded property transfer as appropriate object of taxation.

Justification of Estate Tax

Estate tax is imposed on the properties left by a decedent person not only to augment the revenue
of the government but also to apply the fundamental principles or theories regarding taxation such
as:

a. Redistribution of wealth theory

b. Benefit-received theory
c. Privilege or state partnership theory
d. Ability to pay theory

Redistribution of wealth theory

This theory views that the inheritance received by the heir contributes to the unequal distribution
of wealth and earnings because the heir has not actually worked for it.
The imposition of death taxes helps to distribute some of the economic benefits which should
have been solely enjoyed by the heir.

Benefit-received theory
According to this theory, the government provides services for the transfer of the estate of the
decedent, either by law or by will. Because of these services that result to benefits received by
the estate and the heir, it is therefore fair that the government collects its equivalent compensation
in protecting individual persons and properties or rights.

Privilege or state partnership theory

This theory asserts that the State is a “passive and silent partner” in the accumulation of wealth
as it protects every individual within its territory. Hence, it has the right to collect the share which
is property due to it.

Ability to pay theory

According to this theory, every inheritance received by an heir is in the nature of unearned wealth.
The effect of inheritance increases the wealth of the heir thereby creating an ability to pay the tax
and thus contributing to government income.

Effectivity of the Transfer of Properties

When there are properties left by the decedent, a question may arise regarding the time when to
effect transfer of the decedent’s properties to the successors.

The law provides that the right to succession is effected from the moment of the decedent’s death
(Article 777, Civil Code of the Philippines). It is therefore construed that the properties and rights of the
decedent are transferred to his successor at the time of his death without any interruption.

In other words, the generating source of power to transfer the properties and rights is death. The
transfer accrues at the time of death of the decedent. Consequently, the determination of the tax
on property transferred is traced back to the moment of death.

BASIC CONCEPT OF SUCCESSION

Succession is defined as a mode of acquisition by virtue of which the property, rights and
obligations to the extent of the value inheritance, of a person are transmitted through his death to
another or others either by will (testate) or by operation of law (intestate).

Basis of Succession
The principles that provide for the bases of transferring decedent’s property to the heirs are
following:

1. Family Relation – assumes that the principle of the natural law necessitates a person to
provide for those he would leave behind. As a result, the decedent’s wealth which he
acquired during his lifetime is presumed intended for the benefit of his love ones.
2. Implicit Ownership – refers to the doctrine that as a consequence of death, heirs assumed
ownership of property left by the decedent because they have the primary rights over the
inheritance.
3. Socio-economic – this is based on the theory that wealth left by the decedent should
actively used to provide economic benefit to the community. The successor should
continue to utilize the resources left by the decedent in order that the wealth shall be
preserved.
Elements of Succession

Every succession has a decedent, an estate, and a successor.

A Decedent is the person who died and whose property is transmitted through succession.
“Decedent is the general term applied to the person whose property is transmitted through
succession, whether or not he left a will”.

A 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.

An Estate refers to the properties or property rights of the decedent, which is the subject matter
of succession.

A Successor refers to the heir or the person to whom the property or property rights is to be
transferred.

Persons Authorized to Take Charge of the Estate

The actual transfer of the estate to the successors could not immediately be made because some
formal proceedings should be complied first.

During the transition period, somebody must take charge to gather and distribute the properties
left by the decedent, and as such, the estate has to be taken over by either an executor or an
administrator.

An Executor is a person or trust company named in the will by the testator to carry out its
provisions.

An Administrator is a person or trust company appointed by the court to administer and distribute
the estate of the decedent if there is no will, or if no executor named in the will, or if the person
named in the will does not act or execute its provision.

The properties or the estates of the decedent, which are to be transferred, are also referred to as
Inheritance or the Estate.
The heirs are not liable for the value of the decedent’s obligations existing at the time of death.
The amount of inheritance distributed to the heirs is the net estate after the payment of the
decedent’s obligations and estate tax.

SUCCESSORS

Successors are the parties who have the legal right to receive the estate. The successors to the
inheritance are classified as primary compulsory heirs and secondary compulsory heirs.

They are called compulsory heirs because the testator cannot disregard them to obtain
inheritance. The law has reserved to them a portion of the testator’s property. However,
compulsory heirs shall not be compelled to accept the legitime.

Primary Compulsory Heirs are the successors to whom the legal portion of the estate is first
reserved by the law.
The following are the primary compulsory heirs:

1. Legitimate children and their legitimate descendants;

2. Surviving legitimate spouse; and
3. Illegitimate children and their descendants

Under the New Family Code, there are no more spurious children. Both the natural and the
spurious children are simply called illegitimate children having exactly the same rights.

Illegitimate children are given inheritance because they are considered innocent. However, since
they are born outside marriage, their share on the decedent’s property shall be less than the
inheritance to be received by the legitimate children, which is usually one-half of the share of the
legitimate child.

Secondary Compulsory Heirs are the successors to receive the estate in the absence of the
primary compulsory heirs. The following persons are secondary heirs:

1. Legitimate parents and legitimate ascendants – they inherit only in default of legitimate
children and their descendants.
2. Illegitimate parents (no other descendants) – they inherit only in default of surviving
legitimate spouse and illegitimate children and their descendants.

Absence of Compulsory Heirs

In the absence of any compulsory heirs, the successors would be:

1. The descendant’s relatives up to the 5th degree of consanguinity.

2. If there were no relatives to receive the estate, the government shall inherit the whole
estate.
3. If there is a will, the decedent may name other persons to inherit the free portion of the
net distributable estate.

A Devisee is a person to whom a gift of real property is given by virtue of a will.

A Legatee is a person to whom a gift of personal property (bequest) is given by virtue of will.
Brothers and Sisters are not compulsory heirs neither are strangers.

However, as long as the legitime of the compulsory heirs is not impaired, it is not contrary to the
law in giving them a share of inheritance, if the testator desired. In this case, they may be called
voluntary heirs.

KINDS OF SUCCESSION

Succession may be classified as testamentary, legal or intestate, or mixed.

TESTAMENTARY SUCCESSION

Testamentary Succession is that which results from the designation of an heir, made in a will and
executed in the form prescribed by law. A person who died leaving with a will is said to have died
testate.
Any person who is 18 years old and above and of sound mind may make a valid last will and
testament for the disposition of his properties, which should take effect upon his death.

It may be done through a will or through a codicil which may be notarial or holographic.

A will is an act whereby a person is permitted, with the formalities prescribed by law, to control to
a certain degree the disposition of his estate upon his death.

A Codicil is a supplement or an addition to a will, made after the execution of a will and annexed
to be taken as a part thereof, by any disposition made in the original will is explained, added to,
or altered.

A holographic will is one entirely written, dated and signed by the testator himself and is subject
to no formalities.

Under a testamentary succession, the mass of properties left by the decedent may be classified
into legitime and free portion.

Legitime
Legitime is the portion of the testator’s property which could not be disposed of freely because
the law has reserved it for the compulsory heirs. Specifically, the legitime is ascertained to protect
the children and the surviving spouse from the unjustified distribution of properties.

The testator cannot deprive his compulsory heirs of their legitime, except in cases expressly
specified by law.

Even if the testator does not want to make a compulsory heir to inherit, he cannot do so because
this limitation is imposed upon him directly by law.

Any compulsory heir to whom the testator has left by any title less than the legitime belonging to
him may demand that the same be fully satisfied.

Free Portion

A free portion of the estate is that part of the whole estate which the testator could dispose of
freely through a written will irrespective of his relationship to the recipient. In other words, this is
a portion of the decedent’s estate in excess of the legitime.

TESTAMENTARY DISTRIBUTION OF NET ESTATE

Arts. 888 to 903 of the Civil Code of the Philippines

SUCCESSOR LEGITIME

1. Legitimate children or descendants ½ (Art. 888)

2. Illegitimate children alone ½ (Art. 901)

LC = ½
3. Legitimate children (LC), natural children (NC) and NC = ½ of one LC
illegitimate children (IC) IC = ½ of one LC
(Art. 176 of Family Code)
 LC = ½
4. One legitimate child and surviving spouse (SS) SS = ¼ (Art. 892)

5. 2 or more legitimate children and surviving spouse SS = legitime of 1 LC (Art.

892)

6. Illegitimate children and surviving spouse 1/3; 1/3 (Art. 894)

LC = ½
7. 2 or more legitimate children, natural children & surviving NC = ½ of one LC
spouse Ss = 1 of one LC

8. Parents or ascendants alone ½ (Art. 889)

9. Surviving spouse alone ½ or 1/3 (Art. 900)

As = ½
10. Ascendants (As) and surviving spouse SS ¼ (Art. 893)
As = ½
11. Ascendants, surviving spouse and illegitimate children SS = 1/8
IC = ¼ (Art 899)

To determine the legitime, the value of the property left at the death of the testator shall be
considered, deducting all debts and charges, which shall not include those imposed in the Will.

To the net value of the hereditary estate, shall be added the value of all donations by the testator
that are subject to collation, at the time he made them.

Net PROPERTY LEFT MINUS DEBTS AND CHARGES PLUS VALUE OF

Hereditary COLLATIONABLE DONATIONS
Estate

ILLUSTRATION

The gross available estate is P5,000,000. The debts and expenses related to death including
estate tax to be taken from the gross estate amounted to P600,000. During his lifetime, the
decedent had given donation of P400,000 to his legitimate son.

The net hereditary estate is computed as:

Gross available estate P 5,000,000

Add: donation to heir 400,000
Less: debts and charges (600,000)
------------------------
Net Hereditary Estate P 4,800,000
==============
Below is the table of distribution of estate under legal or intestate succession.

INTESTATE DISTRIBUTION OF NET ESTATE

Arts. 979 to 1011 of the Civil Code of the Philippines

SUCCESSOR LEGITIME

1. Legitimate children (descendants) alone Entire estate, to be shared

equally (Art. 980)

2. Legitimate children and parents 100% to LC

3. Legitimate children and brothers/sisters 100% to LC

SS = share of 1 LC (Art.
4. Legitimate children and surviving spouse (SS) 996)

5. Legitimate and illegitimate children Proportion of 10:5 (Art.

983)

6. Legitimate, illegitimate children and spouse 10:5 and spouse = 1 share

of LC

7. Illegitimate Children alone Entire Estate

8. Illegitimate children and legal parents ½; ½ (Art. 991)

9. Illegitimate children and Surviving spouse ½; ½ (Art. 998)

10. Illegitimate children, legal parents and surviving spouse ¼; ½; ¼ (Art. 1000)

11. Legal parents and surviving spouse ½; ½ (Art. 997))

12. Illegitimate parents and surviving spouse ½; ½

13. Parents and brothers/sisters Entire estate to parents

14. Surviving spouse, brothers/sisters ½; ½ (Art. 1001)

15. Adopted children, legitimate children Equally

16. In case of death of adopted child, with no descendants Parents by blood and
relatives by blood (Art.
984)

17. Surviving relative is beyond fifth degree The State is the heir