ESTATE TAX ‘CONCEPT OF TRANSFER TAXATION. Gratuitous ‘Onerous. T._Danation inter vives (uring Wfetime) T, Value-added Tax 2 Donation mortis causa ( 2. Other Percentage Taxes 3. Excise Tax* Effectivity [type [tax ‘Object of Taxation Nature Donation | Upon death ofthe Gonor | Mortis causa Estate tax | Privilege to transfer | Excise tax" During the lifetime of the [ Inter-vives —] Donor’s tax | gratuitously donor and the cones Note: > #Excise Tax is tax on the production, sale or consumption of a commodity In a country. > **The excise tax imposed on privilege. Definition of Estate Tax + Estate Tax is a tax Imposed on the privilege that a person is given in controlling to a certain extent, the Aisposttion of his property to take effect upon death. + Ibis an excise tax imposed on the act of passing the ownership of property at the time of death and not on the value of the property or right, + Since estate tax accrues as of the time death, the right of the State to tax the privilege to transmit the estate vests instantly upon death Accrual Vs, Due Date of Estate Tax + Accrual: Right upon death of the decedent + Due Date: Within one year from death + The accrual of the tax Is distinct from the obligation to pay the same. Who Is the Taxpayer In Estate Taxation? + The estate as a juridical person Who has the Personal Obligation to File and Pay the Estate Tax? Order of priority 1. The administrator or executor 2. Any of the heirs Law to be applied + The law/statute in force as of the date of death of the decedent Succession 1. Concept of Succession ~ 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 by will or by operation of law, > Will ~ is an act whereby a person is permitted with the formalities prescribed by lav, to control to @ certain degree the disposition of his estate, to take effect after his death, From the moment of ceath of the decedent, the rights to the succession are transmitted, and the possession of the hereditary property is deemed transmitted to the heir. inary Will - one which is executed in accordance with the formalities prescribed by Art. 804 to 808 of the New Civil Code. it is the will that ig created for the testator by a third party, usually his lawyer, follows proper form, signed and dated In front of the required number of witnesses and acknowledged by the presence of a notary publi b, Holographic Will - Is a written will waich must be entirely written, dated and signed by the hand of the testator himself, without the necessity of any witnesses, © Codicil - A supplement or addition to a will, made after the execution of a will and annexed to be taken as part thereof, by which any disposition made in the original will i explained, added or altered, Page |i2. Elements of Succession @. Decedent ~ the person whose property is transmitted through succession, whether testamentary, intestate, or mixed Heir - the person called to the succession elther by the provision of a will ar by operation of law. ©. Estate ~ refers to all property, rights and obligations of a person which are not extinguished upon his death 3. Kinds of Succession 2. Testamentary ~ results from the designation of an heir, made in a will executed in the form prescribed by the law. > The descendent may aispase his properties In his last will and testament in the manner he wants, however, must some for certain persons who are called by the law as compulsory heirs. > Compulsory Heirs = those who succeed by force of law to some portion of the inheritance, in an amount predetermined by law, known as the legitime. They succeed whether the testator lkes it or not. They cannot be deprived by the testator of their legitime except by disinheritance property affected, > Executor (executrix) is the person nominated by the testator to carry out the directions and requests in the decedent's will and to dispose his property according to the decedent's testamentary provisions after his death, b. Legal Intestate Succession - transmission of properties where there is no wil, or if there is a wil, such is void or lest its validity, oF nobody succeeds the will. > Inthe intestate succession, the entire estate of the decedent is distributed to the heirs. The compulsory heirs in testamentary succession are also the heirs in intestate succession. However, intestate heirs include brothers and sisters, collateral relatives within the fith degree of consanguinity and the state. > Administrator (administratrix) is the person appointed by the court, in accordance with the governing statute, to administer and settle intestate estate and such testate estate as no competent executor designated by the testator, & Mixed Succession ~ a transmission of properties, which is effected partly by will and partly by operation of law 4. Kinds of Successors '2. Legatee - an heir of personal property given by virtue of a will b. Devise - an heir of real property given by virtue of a will > Under testamentary succession, properties left by the decedent are classified into: a. Legitime ~ portion af the testator's property which could not be disposed freely because the law has reserved it for the compulsory heirs. b. Free portion - part of the whale estate which the testator could dispose of freely through a written will irrespactve of his relationship to the recipient, Decedent's Estate 7. Legitime 1s the portion of tre testator® property which could not be disposed of Freely because the Taw has reserved it for the compulsory heirs. (Art. 886 CCP) 2. Free portion is that part of the whole estate which the testator could dispose of freely through written will Irrespective of his relationship to the recipient. Page 12‘Compulsory Heirs: Compulsory heirs are: 1. Leghimate children and descendants, which include legally adopted children 2. In the absence of legitimate descendants, the legitimate parents for ascendants* 3. Surviving spouse 4, Illegitimate child, both natural and ‘spurious *Note: Legitimate parents or ascendants can only inherit. in the absence of legitimate chilaren or descendants. Brothers and sisters the decedent are not considered as compulsory ‘heirs; thus they cannot inherit Irom the legitime ofthe decedent. Brothers and sisters of the decedent are not compulsory heirs. + But, its not against the law if they willbe given inheritance as long as Th Goverament the legitime of the compulsory heirs Is not impaired, of > In the absence of compulsory heirs, the successors would be: 1. Relatives up to Sth degree of consanguinity 2! If there were no relatives, 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 DESCENDANT oe a per ‘4 to you who lived ° ro renter teeter) Serer eee ee nee) ee een ee eee por eatery pe pena Great grandparents Ichildren and great Note: What is the difference between ascendant and the descendants are our successors, Page 13TAME DIATE FAMILY MEMEBERS da-2-cnzpv2 Collateral Relatives ‘Consanguinity ‘The relation of persons descending from the same stock or common ancestors, These person are known as blood relatives and are said to be related by blood ‘or consanguinity Tineal Which may be descending or ascending, Is that which subsists between persons consanguinity ‘or whorn ane is descended in a direct line from the other. Collateral Which subsists between persons who have the same ancestors, but who not consanguinity descend (or ascend) one from the other Proximity of Determined by the number of generations, Each generation farms a degree relationship Determining Blood Relationship = + —L & 7 fote: In the Illustration, C and D are siblings, Their common parents are A and 6. G is the daughter of C and &; J's the son of D and F Mis the son of G and K; Nis the daughter of J and L. A.C, G and M, in that order, are relatives in the descending direct line. From A to C is one degree; from Cte G is another degree and G to M is another degree. 1N,3, D and B, in that order, are relatives in the ascending direct line. C; G and M, are relatives of D, and N in the collateral ine, Giis the niece of D, Dis the uncle of G; J is the nephew of C, Cis the aunt of J H and I are first cousins; they are four degrees apart, H to'C, C to AB, AB to D and D to 1 M and N are second cousins; they are six degrees apart. Because of G's marriage to K, K becomes H's brother-in-law, H being G's brother, They become relatives by affinity. Affinity is the connection existing consequence of a marriage between each of the married spouse and the kindred of the other, Kinds of Heirs i. Compulsory Heirs They inherit with or without a will Page l@A._Primary compulsory heirs + Legitimate children and legitimate descendants ‘+ legitimate children (Note: An illeaimate child shares only Ws of the share of a leaitimate child since they are born outsi mariage) + Widow or widower B._ Secondary compulsory heirs = In default of legitimate children and descendants, legitimate parents and ascendant +The secondary compulsory heirs are those who succeed only in the absence of the primary heirs; the legitimate parents and ascencents are secondary compulsory heirs ._Free Portion WK Rule: The suviving sponse takes ofthe dstibuable este. Testamentary Succession Exceptions: aon a 1, When the matings is conceived Legitimate Children or Descendants 5 (Aa 888) ‘or purely financial gin moive. ‘When the marge is made tthe legitimate Chien Aooe san. 901) asaaterqul oka. LegitinateChilden (LC), Natural Children (NC) & Le= Mi; NO= Hof tLe 3. However the surviviag spowse estimate Children (1) Ie= of LC(ARt 176) 53 debe the abave waco the couple had deen living for ‘Ope Legitimate Chi anda Surviving Spoase LCM; SS %4(AR. $92) mow than § yout betes tbh ‘wo rsoreLepinate Child anda Surviving Spouse «LC»; SS*Shae of LCA. 892) filma egitzate Chien and Surviving Spouse Io=13; $8=13 (Ar. 9%) ‘Wo or more lepitnat Clea, Namal Chie, & a IC= Mi NC= Hof tLe Surviving Spouse $81 of LLC(An. 89 Paceas of Ascendant Alooe 45am. 889) * Suryivng Spouse Aloe oe V3 (AR. 990) Ascendant (AS) & Surviving Spouse AS SS=H (Am. 893) Aseemfans, Sursiving Spouse & Teptimate Children AS=: S9=18 TC='<(An. 99) Note: In the absence of compulsory heirs, the successors would be Relatives up to Sth degree of consanguinity 2° If there were na relatives, 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 2. Voluntary Heirs ‘They inherit only if they are in the will 3. Intestate Heirs ‘+ The compulsory heirs in testamentary succession are also helrs in intestate succession. “They are entitled to their legtime, heirs as follows (order of priority): lowever, as fo the free portion of the estate, it shall be distributed to the following intest Page 15Teguimate cnlren Legitimate parents ‘leaitimate children ‘Spouse: Brothers or sisters Relatives by consanguinity up ta 5" civil degree ssfnfens ef ‘State + No Free Portion Order of Succession Guiding Rules ‘+ The nearer excludes the farther. (Art. 962) Surviving spouse ané Hiegitimate chiléren are concurrent heirs with the legitimate descendants. In the collateral line, the right of representation takes place only in favor of the children of brothers or sisters, +The right of representation takes place in direct descending line, but never in the ascending line. + Arenouncer may represent, but may not be represented + An adopted child cannot represent, neither may he be represented whether they be full or half-blood. + Fullblood brothers and sisters share twice or doubl inheritance per capita than that of half-blood brothers and sisters, Should there be more than one ascendant of equal degree belonging to the same line, they will divide the + Should they be of different lines, but of equal degree, one half shall go to the paternal while the other half to ‘the maternal ascendants, INTESTATE DISTRIBUTION SUCCESSOR, Legitimate Children or Descendants alone itimate Children and Parents Legitimate Children and Brothers/Sisters Legitimate Children and a Surviving Spouse Legitimate Children and Illegitimate Children Legitimate Children, Illegitimate Children and Spou Ilegitimate Children (alone) eGITIME Entire estate to be shared equally (Art. 980) 100% to Legitim te Children 100% to Legitimate Children SS = Share of 1 LC (Art. 996) Proportion of 2:1 (Art. 983) 2:1, & Spouse = I share of 1 Page 16INTESTATE DISTRIBUTION SUCCESSOR LEGITIME legitimate Children and Legal Parents 3% (Ar. 991) legitimate Children and Surviving Spouse 4 (Art. 998) Illegitimate ‘Children, Legal Parents and Surviving 4:6: 44 (Art. 1000) Spouse Legal Parents and Surviving Spouse Ys 6 (Art. 997) Illegitimate Parents and Surviving Spouse %: Parents and Brothers/Sisters 100% to Pare! Surviving Spouse and Brothers/Sisters 1/2; /2*(Ant. 1001) Adopted Children & Legitimate Children Equally Decedent is an Adopted Child, with no Parents by blood and Relati descendants by blood (Art. 984) ing relative is beyond 5 degree ‘The State (Arts. 1010 and 1011) Surv Disinheritance Contents. Asticles 915 to 918 General Provisions on Disinheritance ‘ticles 919 Reasons for Disinheritance of Children or Descendants ‘Aticles 920 Reasons for Disinheritance of Parents or Ascendants ‘ticles 921 Reasons for Disinheritance of a Spouse ‘Asticles 922 to 923 Effects of Reconcliation on Disinheritance and Effects on Children of the Disinherted Person Article 915. A compulsory helr may, In consequence of disinheritance, be deprived of his legitime, for causes expressly stated by law. (8482) ‘Atticle 916. Disinheritance can be effected only through a will wherein the legal cause therefor shall be specified. (849) Article 917, The burden of proving the tr Ifthe disinherited heir should deny It. (850) of the cause for disinheritance shall rest upon the other heirs of the testator, ‘Atticle 918. Disinheritance without a specification of the cause, or for @ cause the truth of which, if contradicted, is not proved, or which is nat one of those set forth in this Code, shall annul the institution of heirs insofar as it may prejudice the person disinherited; but the devises and legacies and other testamentary dispositions shall be valid to such extent as vill not impair the legitime. (8518) Articles 919 Reasons for Disinheritance of Children or Descendants Article 919. The following shall be sufficient causes for the disinheritance of children and descendants, legitimate as well 2 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 lew prescribes Imprisonment for sb Years or more, ifthe 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 te change one already made; 5, Arefusal 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 oF disgraceful ie; 8. Conviction of a crime which carries with it the penalty of civil interdiction. (756, 853, 674a Articles 920 Reasons for Disinheritance of Parents or Ascendants Page 17‘Article 920. The following shall be sufficient causes for the disinhert legitimate nce of parents or ascendants, whether legitimate or 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, ifthe accusation has been found to be false; 4. When the parent or ascencant 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; ‘The loss of parental authority for causes specified In this Code; ‘The refusal to support the children or descendants without justifiable cause; ‘An attempt by one of the parents against the life of the other, unless there has been a reconciliation between ‘them, (756, 854, 6742) Articles 921 Reasons for Disinheritance of a Spouse ‘Article 921. The following shall be sufficient causes for disinheriting a spouse: 1. When the spouse has been convicted of an attempt agalnst the life of the testator, his or her descendar 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 lass af parental authority; 16. Unjustifable refusal to support the children or the other spouse. (756, 855, 674a) Articles 922 to 923 Effects of Reconciliation on Disinheritance and Effects on Children of the Disinherited Person Article 922. A subsequent reconciliation between the offender and the offended person deprives the latter of the right to disinhert, and renders ineffectual any disinher'tance that may have been made. (855) ‘Article 923. The children and descendants of the person disinherited shall take his or her place and shall preserve the Fights of compulsory heirs with respect to the legitime; but the disinherited parent shall not have the usufruct or ‘administration of the property which constitutes the legitime. (857) Purpose of Estate Tax ‘The following theories have been used to justify the imposition of estate tax: efit received theory ~ under this theary, the estate tax Is pald on return for the services rendered by state in the distribution of the estate of the decedent and for the Benefits that accrue to the estate ané the hes. 2. State partnership theory ~ the tax is considered the share of the state as a "passive and silent partne-” in the accumulation of property. 3. Ability to pay theory ~ the tax is based on the fact that the receipt of inheritance creates an ability to pay and thus the receipt of inheritance creates an ability to pay and thus to contribute to governmental income, 4, Redistribution of wealth theory ~ the tax is imposed to help reduce undue concentration of wealth in society {to which the receipt of inheritance is a contributing factor. PROBLEMS-COMPULSORY HEIRS Problem 1: (Legitime and Free Portion of the Estate) Mr. X died leaving a net hereditary estate of P50,000,000 to this 5 children. Compute the legitime of each compulsory heir. Required: Compute the Free Portion, Net Hereditary Estate P50,000,000 Legitime of: 5 children (50,000,000 xB) 725,000,000; Free Portion 25,000,000ach child will get P5,000,000 from the legitime (P25,000,000 /5) Problem 2: Mr. X died leaving a net hereditary estate of P50,000,000 to his § chilcren and his wie. Required: Compute the legitime of each compulsory helr. That Hereditary Estate 50,000,000] Legitime of: 5 children (50,000,000 x a) (25,000,000 Wife (25,000,000 /'5 5,000,000) Free Portion I 20,000,000 Each child will get P5,000,000 from the legitime (25,000,000/5). The wife will get equivalent to a share of 1 child Problem 3: Mr. X died leaving a net hereditary estate of 50,000,000 to his § children, his wife, and his illegitimate son Required: Compute the legitime of each compulsory heir Net Hereditary Estate 750,000,000] Legitime of: 5 Children (50,000,000 x V2] (25,000,000) ‘wife (25,000,000 /'5 ) 5,000,000) | legitimate Son (5,000,000 3) 2,500,000) Free Portion I 17,500,000 Each child will get § milion from the legitime (25,000,000 / 5). ‘The wife will get equivalent to @ share of 1 chile Problem 4: Mr. X died leaving a net hereditary estate of P50,000,000 to his 4 children, his wife, 2 illegitimate children, parents and 3 siblings. Required: Compute the Free Portion, Net Hereditary Estate P50,000,000 | Legitime of: | 4 Children (50,000,000 x a) (25,000,000) | The Wife (25,000,000 / 4) (6,250,000) | 2 Megitimate Chilcren (6,250,000 72 x2) (6,250,000) Parents. ° 3 Siting o Remaining Galance (Free Portion) 12,500,000 PROBLEMS-INTESTATE HEIRS Problem 1: Mr. x died intestate leaving a net hereditary estate of P50,000,000 to his 4 children, Required: Compute the inheritance of each compulsory heir. + All four will share the estate equally, P12,500,000 each. + No free portion under intestate succession Problem 2: Mr. X died intestate leaving a net hereditary estate of P50,000,000 to his 4 legitimate children, and 2 legitimate children, Required: Compute the inheritance of each compulsory het “The estate will be divided a follows: ‘Share of the Legitimate Chidren (4 x2) = Share of the illegitimate Children (2 x 1 2 Total 30) “Thus, 50,000,000 / 10 = 5,000,000 ‘+ Each legitimate child (4) will receive P10,000,000, while each illegitimate child will receive PS,000,000 each, Page 19Problem 3: Mr. X died intestate leaving 2 net hereditary estate of P50,000,000 to his 4 legitimate children, 3 legitimate children and his spouse. Required: Compute the inheritance of each compulsory ‘The estate will be divided as follows: Share of the Legitimate Children (4 x2) Share of the Spouse ~ Equivalent to i Child Share of Megitimate Children (3 x 1) Total ‘Thus, P50,000,000 / 13 = P3,846,153.85 1° Each legitimate child (4) will receive P7,692,307.69 + The spouse will receive 27,692,307.69, ‘+ Each illegitimate child will receive P3,846,153.85 Problem 4: Mr. X died intestate leaving a net hereditary estate of P50,000,000 to his 3 legitimate children, 1 ilegitimate child, his spouse, and parents, Required: Compute the inheritance of each compulsory heir ‘The estate will be diviced as follows: Share of the Leaitimate Children (3 x2) ‘Share of the Spouse ~ Equivalent to 1 Chia Share of Mlegitimate Children (1 x 1) Total Thus, P50,000,000/ $ = P5,555,555.56 + Each legitimate child (3) will rece've P11,111,111.21 2 The spouse will receive 212,112,111.12 + Each illegitimate child wil receive P5,555,555.56 + The parents will receive nothing because the children are present. Problem 5: (Degree of Consanguinity) Mr. x died intestate leaving a net hereditary estate of P0,000,000, ‘The only surviving relatives of Juan are Pedro, his Second cousin, and Maria, his great-grand niece. Required: Compute the inheritance of each compulsory heir Maria - Fifth degree Peara - Sixth degree Table of Consanguinity Showing degrees of relationships _ od it | ereree ] Uncles rst Cousin 1 oe nce Removed oan secon fescona coming]