CHAPTER FIVE

Estate Tax – Gross Estate

Estate Tax Formula

The computation of the estate tax will depend on the status of the decedent,whether he was single or
married.
 If the decedent was single at the time of his death:

Real properties…………………………. ₱ xx
Personal properties……………………. xx
Gross estate…………………………… xx
Less: Ordinary deductions…………… (xx)
Special deductions……………. (xx)
Net taxable estate……………………. xx
X Tax rate 6%
Estate tax……………………………… xx

 If the decedent was married at the time of his death:

Conjugal/
Exclusive Community Total
Real properties………………………. ₱ xx ₱ xx
Personal properties…………………. xx xx
Gross estate………………………… xx xx
Less: Ordinary deductions………….. (xx) (xx)
Estate after ordinary deduction.……. xx xx ₱ xx
Less: Special deductions…………………………………………….. (xx)
Net estate………………………………………………………………. xx
Less: Share of surviving spouse (net conjugal estate divided 2)… (xx)
Net taxable estate……………………………………………………… xx
X Tax rate 6%
Estate tax……………………………………………………………….. xx

Kinds of Decedents
 Citizen or Resident
Properties included in gross estate: (Sec. 4, RR 2-2003)
 Real property (e.g. land and building) wherever located
 Tangible personal property (e.g. car) wherever located
 Intangible personal property (e.g. receivable) wherever located

 Non-Resident Alien
Properties included in gross estate:
 Real property located in the Philippines
 Tangible personal property located in the Philippines
 Intangible personal property - with a situs in the Philippines suchas:
 Franchise which must be exercised in the Philippines
 Shares, obligations or bonds issued by corporations organized or constituted in the
Philippines
 Shares, obligations or bonds issued by a foreign corporation 85%of the business
of which is located in the Philippines
 Shares, obligations or bonds issued by a foreign corporation if such shares,
 obligations or bonds have acquired a business situs in the Philippines (i.e. they are
used in the furtherance of its business in the Philippines)
 Shares, rights in any partnership, business or industry establishedin the Philippines
Note: Hence, regardless of whether the decedent was a resident or a citizen or a non-resident
alien, any of the mentioned properties shall be included in his gross estate.
Illustration 1
Mr. Abad a citizen of the Philippines died residing in the Philippines. What kind of
decedent is Mr. Abad?
Answer: He is a citizen decedent

Illustration 2
Mr. Laurel a citizen of the Philippines died while residing in Canada. What kind of
decedent is Mr. Laurel?
Answer: He is a citizen decedent

Illustration 3
Mr. Yamamoto a citizen of Japan died while residing in the Philippines. What kind of decedent is Mr.
Yamamoto?
Answer: He is a resident decedent

Illustration 4
Mr. Park a citizen of Korea died in his country leaving properties in the Philippines.
What kind of decedent is Mr. Park?
Answer: He is a non-resident alien decedent.

Table 5-1. Summary of properties included in gross estate

Citizen or Non-resident Alien Non-resident Alien
Classification of Property Resident (no reciprocity) (with reciprocity)
Real property within Yes Yes Yes
Real property without Yes
Tangible personal property within Yes Yes Yes
Tangible personal property without Yes
Intangible personal property within Yes Yes
Intangible personal property without Yes

THE GROSS ESTATE

1. Decedent’s interest
2. Transfer in contemplation of death
3. Revocable transfer
4. Property passing under general power of appointment
5. Transfer for insufficient consideration (1, 2 & 3)
6. Proceeds of life insurance

In numbers (2) to (5), the properties are not actually in the estate. They were the subjects of transfers
by the decedent during his lifetime. In his lifetime, and at his death, the properties were in the hands
of the transferees already. Only values from the properties shall be included in the gross estate and the
properties remain physically with the transferees. These are only paper computations. In the law of
succession, this is called collation.

Decedent’s interest
This shall include all properties, rights and interest which the decedent owns at thetime of death. (Sec.
85 A, NIRC) It shall include:
  Properties owned by the decedent actually and physically present in his estate at the time of
his death such as land, buildings, shares of stock, vehicles, bank deposit, etc.
 The value of any interest in property owned or possessed by the decedent at the time of his
death such as dividends declared before his death but received after his death, partnership
profits which have accrued before his death, usufructuary rights, etc.
 The value of property, right or interest in the property, transferred by the decedent during his
lifetime which, under the law, are in the nature of testamentary disposition such as insurance
proceeds in favor of revocablebeneficiary.

Transfer in contemplation of death

Impelled by the thought of death (i.e., the motivating factor or controlling motive is the thought of
death), regardless of whether the transferor was near the possibility of death or not. (Sec. 85 B, ibid.)

Illustration 5
Mr. Alcala, aged 90 years and suffering from incurable cancer, on August 1 wrote a
will and, on the same day, made several inter-vivos gifts to his children. Ten days later,
he died. In your opinion, are the inter-vivos gifts considered transfers in contemplation
of death for purposes of determining properties to be included in his gross estate?
Answer: Yes. When the donor makes his will within a short time of, or
simultaneously with, the making of gifts, the gifts are considered as having been
made in contemplation of death. Obviously, the intention of the donor in making the
inter-vivos gifts is to avoid the imposition of the estate tax and since the donees are
likewise his forced heirs who are called upon to inherit, it will create a presumption
juris tantum that said donations were made mortis causa, hence, the properties
donated shall be included as part of Mr. Alcala’s gross estate.
Juris tantum is one which holds good in the absence of evidence to the contrary, but may be rebutted.

Revocable transfer
Where the enjoyment of the property transferred may be altered, amended, revoked or
terminated by the decedent. The revocability is not affected by the failure of the decedent to
exercise the power to revoke during his lifetime. If the notice has not been given, the power
to revoke has not been exercised on orbefore the date of his death, such notice shall be
considered to have been given, or the power exercised on the date of his death.
(Sec. 85 C, ibid.)

Illustration 6
Vicente donated real property to Francisco during his lifetime. An item in the deed,
however grants the donor the right to revoke the donation at will. Is the real property
subject to estate or donor’s tax?
Answer: The donation is subject to estate tax. The donor retains rights over the
property until his death.

Property passing under general power of appointment

A power of appointment is the right to designate the person or persons who will succeed to the property
of the prior decedent. (Sec. 85 D, ibid.)

It may be exercised by the decedent:

1. by will; or
2. by deed executed in contemplation of, or intended to take effect in possession or enjoyment
at, or after his death;
3. by deed under which he has retained for his life or any period not ascertainable without
reference to his death or for any period which does not in fact end before his death:
a) the possession or enjoyment of, or the right to the income from, the property; or
b) the right, either alone or in conjunction with any person, to designate the persons
who shall possessor enjoy the property orthe income therefrom; except in case of
 a bona fide sale for an adequate and full consideration in money or money's worth.

A power of appointment may be a general or a limited/special. A general power of appointment is

when it authorizes the donee to appoint any person he pleases, including himself, his spouse, his estate,
his executor or administrator, and his creditor thus having full dominion over the property as though
he owned it. A limited power of appointment is when the donee can appoint only among a restricted
or designated class or persons other than himself.

Illustration 7
Guillermo died living a will whereby it was stipulated that his lot situated in Bulacan
shall go to Roberto, and that should the latter decide to transfer the property, he is free
to transfer it to anybody. Is the power of appointment general or limited?
Answer: The power of appointment is general. It is subject to estate tax. The lot is
includible in the gross estate of the donee (Roberto) when he dies. If special power
the lot is includible in the gross estate of the Donor (Guillermo)

Transfer for insufficient consideration

When the decedent’s property is transferred (Sec. 85 G, ibid.)
1. in contemplation of death,
2. revocable transfers, or
3. passed under a general power of appointment for a consideration inmoney or money's worth

Amount to be included in the gross estate:

 If the transfer is a bona fide sale for adequate and full consideration in money or money’s
worth, no value shall be included in the gross estate. (Case 1)
 If the transfer 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 of the property at the time of deathover the value of the consideration received by the
decedent. (Case 2)
 If an inter vivos transfer of the decedent is proven to be fictitious, the total value of the property
at the time of death shall be included in the gross estate. (Case 3)
Table 5-2. Value of properties includible in the gross estate
Case 1 Case 2 Case 3
a) Consideration received at the time of transfer ₱ 200,000 ₱ 120,000 ₱ -0-
b) Fair market value at the time of transfer 200,000 200,000 200,000
c) Fair market value time of death 360,000 360,000 360,000
Value to be included in the gross estate

Compare: (a) and (b) to determine the adequacy of consideration;

(c) and (a) to determine the value to include in the gross estate.

Illustration 8
Mr. Romulo, during his lifetime made a revocable transfer of property. There was a
consideration of ₱1,400,000 received, when the fair market value of theproperty at the
time of transfer was ₱2,000,000. At the time of Mr. Romulo’s death the property had a
fair market value of ₱1,200,000. How much should be included in the gross estate of
Mr. Romulo?
Answer:
(a) Consideration received at the time of transfer... ₱ 1,400,000
(b) Fair market value at the time of transfer........... 2,000,000
(c) Fair market value, time of death..................... 1,200,000
Value to be included in the gross estate.......... None
There is no excess of fair market value of the property at the time of death over the consideration received.
Proceeds of life insurance
Proceeds of life insurance under policies taken out by the decedent upon his own life shall be included
in his gross estate if the beneficiary is: (Sec. 85 E, ibid.)
1. the estate of the deceased, his executor or administrator, irrespective of whether or not
the insured retained the power of revocation; or
other than the decedent’s estate, executor or administration, when designation of beneficiary
is revocable, that is, when the designation of the beneficiary is not expressly made
irrevocable.

A beneficiary is a person who will receive the proceeds of the insurance when the insured dies. A
designation of beneficiary is revocable if the insured can changethe beneficiary from a person
designated in the policy with another person.

The proceeds of life insurance are not taxable in the following cases:
1. Proceeds of a group insurance policy taken out by the company for itsemployees;
2. Accident insurance proceeds. NIRC specifically mentions only life
insurance policies;
3. Amount receivable by any beneficiary irrevocably designated in the policyof insurance by
the insured;
4. Proceeds of insurance policies issued by the GSIS to the governmentofficial and
employees are exempt from all taxes;
5. Benefits accruing under the SSS law.

Illustration 9
Diego insured his life with Gabriela as beneficiary. The policy states that Diego can
change Gabriela with another person whom Diego may later designate as new
beneficiary. Will the proceeds from the life insurance subject to estate tax?
Answer: Yes, because the beneficiary is a third person revocable.

Illustration 10
Mr. Roco insured his life with Ayala Insurance Corporation with his wife Soniato receive
the proceeds of the insurance when he dies. Will the proceeds fromthe life insurance
subject to estate tax?
Answer: Yes, because the beneficiary is a third person revocable (the policy is silent).

Illustration 11
Mr. Malvar took out a life insurance on his life and designated his estate as revocable
beneficiary. Will the proceeds of the insurance form part of his gross estate?
Answer: Yes, because the beneficiary is the estate whether the designation is
revocable or irrevocable.

Illustration 12
Gregorio took out a life insurance on his life and stated that the revocable beneficiary
is the executor of his estate. Will the proceeds of the insurance form part of his gross
estate?
Answer: Yes, because the beneficiary is the executor whether the designation is
revocable or irrevocable.

Illustration 13
Luis took out a life insurance on his life and designated his wife as irrevocable
beneficiary. Will the proceeds of the insurance form part of his gross estate?
Answer: No, because the beneficiary is a third person irrevocable.
 Illustration 14
SM Corporation the employer of Ferdinand took out a group life insurance on its
employees, paying premiums on the group insurance. Ferdinanddesignated Imelda as
his beneficiary. Ferdinand died. Will the proceeds of theinsurance form part of his gross
estate?
Answer: No, because the life insurance was not taken out by Ferdinand himself on
his own life.

Illustration 15
Vicente was covered by an accident insurance. An accident resulted in his death and
the proceeds of insurance were paid to his designated beneficiary, Ruby. Would the
proceeds of the insurance be included in his gross estate?
Answer: No, because it is an accident insurance.
Note: The proceeds of the insurance will be received

 Valuation of Properties in the Gross Estate

The properties comprising the gross estate shall be valued based on their fairmarket value as of
the time of death. Valuation of: (Sec. 5, RR No. 2-2003)
1. Real property
a) FMV as determined by the Commissioner; or
b) FMV shown in schedule of values fixed by the provincial or cityassessors,
whichever is higher
2. Personal property – FMV at the time of the decedent’s death
3. Shares of stock
a) Listed shares – the arithmetic mean between the highest and lowest quotation at date
of death, or the date nearest the date of death, if none is available on the date of death
itself
b) Unlisted shares
i. Common shares – book value
ii. Preferred shares – par value
4. Usufruct – probable life of the beneficiary in accordance with the latest basic standard
mortality table

Illustration 16
Mr. Ruiz bought a car for ₱1,600,000. When he died two years later, the car had a value
of ₱800,000. How much is the value to be included in the gross estate of Mr. Ruiz?
Answer: ₱800,000 the value to be included in the gross estate

Illustration 17
Mr. Alano bought for ₱1,500,000 a piece of land in Sta. Maria, Bulacan. At thetime of
his death, the property could be sold for ₱2,250,000 (an adjacent piece of land, with the
same area as that of Mr. Alano’s land, was sold one day before Mr. Alano’s death at
that price). Its fair market value in theassessment rolls of the province was ₱1,350,000.
The fair market value of theproperty at the time of Mr. Alano’s death, as determined by
the Bureau of Internal Revenue, was ₱1,875,000. How much is the value to be included
in the gross estate of Mr. Alano?
Answer: ₱1,875,000 is the value to be included in the gross estate of Mr. Alano
(whichever is higher between ₱1,350,000 and ₱1,875,000).

Illustration 18
Mrs. Blanca bought a piece of land in Pasig City on installment terms, with a mortgage
constituted on the property for its unpaid purchase price. At thetime of Mrs.
Blanca’s death, the property had a fair market value of
 ₱2,000,000 in the assessment rolls of Makati City, and a zonal value of
₱3,000,000 as fixed by the Bureau of Internal Revenue. The unpaid mortgageon the land
at the time of Mrs. Blanca’s death was ₱500,000. How much is the value to be included
in the gross estate of Mrs. Blanca?
Answer: ₱3,000,000. The unpaid mortgage of ₱500,000 is a deduction from the gross
estate.

Illustration 19
Ms. Silva died leaving 2,000 shares of stock of Filinvest Inc. a domestic corporation.
On the date of Ms. Silva’s death, the shares were quoted in the Philippine Stock
Exchange at ₱104 as highest and ₱102 as the lowest. How much is the value to be
included in the gross estate of Ms. Silva?
Answer: Answer: ₱206,000 is the value to be included in the gross estate of Ms. Silva
[(₱104 + ₱102) / 2 x 2,000 shares].

Illustration 20
Mr. Rico died leaving 2,000 common shares of stock of Megaworld Inc., a domestic
corporation, not traded in any stock exchange. On the date of the death of Mr. Rico, the
statement of financial position of Megaworld Inc.showed a capital stock issued and
outstanding common of 20,000 shares with an aggregate par value of ₱2,000,000 and
a retained earnings of
₱400,000 so that the stockholders’ equity in the corporation was ₱2,400,000.How much
is the value to be included in the gross estate of Mr. Rico?
Answer: Answer: ₱240,000 (₱120* x 2,000 shares).
*FMV of the CS ₱2,400,000 SE/20,000 shares

Illustration 21
Mr. Yan died leaving a substantial estate. Among the properties that he left were 1,500
preferred shares of stock of Sta. Lucia Inc. The Sta. Lucia Inc.has common and
preferred shares, neither of which is traded in a local stock exchange. There is no
evidence of the fair market value of the share. The common stock has a par value ₱120
per share, although the book value (per company’s books of accounts and financial
statements) is ₱170 per share. The preferred stock has a par value of ₱70 per share.
How much is the valueto be included in the gross estate of Mr. Yan?
Answer: Answer: ₱105,000 is the value to be included in the gross estate of Mr.
Yan (₱70 x 1,500 shares).

Illustration 22
When Mrs. Charito died, she had existing collectibles from various debtors amounting
to ₱750,000. A month after Mrs. Charito’s death, Mr. Solis, one ofthe debtors of the
decedent, was proven and declared by the court insolvent and the ₱150,000 claim
against him could no longer be collected. How much should be the amount to be
included in the gross estate of Mrs. Charito?
Answer: Answer: The entire amount of ₱750,000 collectibles should still be reported
as part of the gross estate of Mrs. Charito. However, the claims against insolvent
person shall be part of ordinary deductions against the gross estate in the
determination of the net taxable estate.
Note: The entire amount of receivable, irrespective whether collectible or not, shall be included as part
of the gross estate.

 Exemption from the Estate Tax

 Benefits received from GSIS (Sec. 33 PD 1146 as amended)
 Benefits received from SSS (Sec. 16 PD 1161 as amended)
 Benefits received from U.S Veterans Administration (RA 360)
  Benefits given by the Philippine government and U.S government due todamages
suffered during the war (RA 227)
 Proceeds of life insurance where the beneficiary is irrevocably appointed
 Proceeds of life insurance under a group insurance taken by employer(not taken
out upon his life)
 Transfer by way of bona fide sales
 Retirement benefits of employees of private firms from private pension plans
approved by the BIR
 Personal Equity and Retirement Account (PERA) assets shall not beconsidered
assets of the Contributor for purposes of estate taxes (RA 9505)
 Bank deposit in the name of the decedent on which the 6% estate tax has been
withheld and remitted by the bank to the BIR upon withdrawal by the heirs

 Exemption of Certain Acquisitions and Transmissions

 The merger of usufruct in the owner of the naked title
Illustration 23
Mr. Perez died testate. The will provides that the usufruct over his land shall be
inherited by his eldest son, Emilio, while the naked title shall go to his youngest son,
Elpidio.

Question 1. Is the transfer of the property from Mr. Perez to his children taxable?
Question 2. What if Emilio dies ahead of Elpidio and the usufruct is transferred to
the latter, is the transfer taxable?

Answer 1: Yes, it is subject to estate tax.

Answer 2: This is a case of a merger of the usufruct in the owner of the naked title,
because Elpidio is now the absolute owner of the property. In this case, the transfer
is exempt from estate tax.

 Fideicommissary substitution - the transmission or delivery of the inheritance or legacy by

the fiduciary heir or legatee to the fideicommissary. (merely holding a property as a trust)
What is fideicommissary substitution? Also known as indirect substitution, it is a substitution by virtue of which the fiduciary or first heir
instituted is entrusted with the obligation to preserve and transmit to a second heir the whole or part of the inheritance.

Note: For its validity and effectivity, such substitution does not go beyond one degree from the heir originally substituted and provided further,
that the fiduciary or first heir and the second heir are living at the time of death of the testator.

Illustration 24
Mr. Palma died testate. He appointed his only son, Jose, as the first heir ofhis
property. His will, however, provides that upon his death, the property shall be
preserved and transmitted to Rafael, his grandson to Jose, upon reaching the age of
maturity or upon the death of his son.
Question 1. Upon the death of Mr. Palma, will the transfer of the property be subject
to estate tax?
Question 2. Is the transfer of the property from Jose to Rafael taxable?

Answer 1: Answer 1: Yes, the first transfer from the testator to the first heir taxable.
Answer 2: The transfer is exempt from estate tax, because this is the portion of the
fideicommissary.

 The transmission from the first heir, legatee or done in favor of another beneficiary, in
accordance with the desire of the predecessor.

 All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which insures to the benefit of any individual:
 Provided, however, That not more than thirty percent (30%) of the said bequests, devises,
legacies or transfers shall be used by such institutions for administration purposes. (Sec. 87,
NIRC)

 Capital of the surviving spouse

The capital of the surviving spouse of a decedent shall not be deemed a part of hisor her gross estate. The
term “capital of surviving spouse” refers to the separate property of the surviving spouse.

The exclusive property of the husband is called capital, while the exclusiveproperty of the wife is called
paraphernal. (Article 136 Civil Code of the Philippines)

However, the share of the surviving spouse in the conjugal/community propertyshall be included in
the computation of the gross estate.