CO-OWNERSHIP,

ESTATE
AND
TRUST
Mr. Mario M. Castro, Cpa, Mba
Tax Consultant
 Co-Ownership

There is co-ownership when two or more heirs or beneficiaries

inherit an undivided property from a decedent, or when the donor makes gifts
of an undivided property in favor of two or more donees. Inheritance is subject
to estate tax while donation is subject to donor’s tax. Both tax are not
income tax but classified as transfer tax (will be taken up in Tax 102)

Co-ownership itself is not taxable for the reason that the activities
of co-ownership are generally limited to the preservation of the common
property and the collection of income there from. When the co-owners
invest the income in business for profit, they would be constituting
themselves into a partnership and such is taxable as a corporation.

When inherited property remained undivided for more than

ten (10) years and no attempt was even made to divide the same
among the co-heirs, nor was the property under administration
proceedings nor held in trust, the property should be considered as
owned by an unregistered partnership, consequently, taxable as
corporation.
Illustration

Case A
Jess and Max bought a parcel of land for the purpose of improving the
same before leasing it out to interested tenants.
Question 1. Is a co-ownership created?

Answer is No

The acquisition is not through gratuitous transfer.

Case B
On Jan. 1, 2019, Mr Fat Tay, a resident citizen taxpayer died leaving
undivided parcel of land to his heirs Al, Boy and Cel valued at P60,000,000.
The property is an income producing property primarily through rentals. In
2019, the property earned gross rentals amounting to P15,000,000 while
expenditures necessary to carry out its operations was P3,000,000.
The heirs who are engaged in business in their own individual
capacity, provided the following data for 2019 taxable year:
Al Boy Cel
Gross business income P6m P5m P8m
Business expenses 3m 2.5m 6m
Income subject to final taxes (net) 200k 320k 500k

Question 1.
Is a co-ownership created?
Answer –
Yes, the property is undivided and acquired through gratuitous transfer
Question 2. What is the applicable tax for inheritance?

Answer - Estate tax

Question 3 How much is the taxable income of the co-ownership?

Answer - None, the co-ownership is not taxable person or entity. The income
if distributed are taxable in their individual capacity.
Question 4.
How much is the taxable income of Al?
Gross income P6,000,000
Answer – Business expenses ( 3,000,000)
Share in net income – co-ownership 4,000,000
P7,000,000 Taxable income P 7,000,000

Question 5. How much is the income tax payable of Al in 2019?

Answer - 1st P2,000,000 P490.000

P 2,090,000 In excess of P2m (x 32%) 1,600,000
Income Tax Payable P2,090,000
Income Tax of the Estate

Income received by the estate during the period of administration or

settlement. “ESTATE” means a mass of property, rights and obligations of the
deceased person which are not extinguished by his death, including those which
accrued thereto since the opening of succession.

“Administrative Settlement Period” refer to the period when title to

the properties left by a decedent is not yet finally transferred to the
heirs/beneficiaries. At this point, the executors named by the deceased in his
“last will or testament”, if any, or the administrator appointed by the court as the
case may be, is temporarily in-charge of the administration of the estate until such
time such that the estate is finally distributed to the rightful heirs. While under
administration, the estate may earn income, thus, the corresponding income tax
should be paid.
 ILLUSTRATION:

A deceased died leaving the following to his lawful heirs:

Cash P 5,000,000
House and lot 15,000,000
Vacant parcel of land 5,000,000
Commercial building 30,000,000
Vehicles 5,000,000
Total @FMV upon death P60,000,000
The properties to be received by his lawful heirs upon his death are not part
of their gross income for purposes of computing the heir’s taxable income
because it does not come within the definition of income.

The estate of a decedent may be settled judicially or extra-judicially.

Judicial settlement pertains to settlement of an estate in a court proceeding
while in extrajudicial settlement, the heirs or beneficiaries settle for
themselves the distribution of the estate or their inheritance.
 Classification of Estate under settlement or administration

•Estate under judicial Fiduciary/trustee

administration (administrator/executor) files the
ITR and pay the tax due thereon.

Heirs and beneficiaries file ITR of

•Estate not under the estate and pay the tax due
judicial administration thereon.

Applicable Tax

The taxable income of the estate is computed in the same manner as

an individual taxpayer. The tax due is therefore computed using the graduated
income tax rate for individual under RA 10963 otherwise known as the “TRAIN
LAW” (same graduated rate as the individual taxpayer)
Illustration:

On Nov. 1, 2018, Mr. Dedo died leaving various property worth

P30,000,000. The property are income producing properties deriving rental
income. The net income from rentals for 2019 amounted to P2,500,000. A
last will and testament was executed by the deceased prior to his death
assigning Mr. Kupit as the executor. In 2019 (will under administration), the
estate earned P4,750,000 (net of 5% creditable withholding tax on rent) and
incurred operating expenses of P2,000,000.
Question 1: How much is the taxable income of the estate in 2018?

Answer: None - under the tax code, when an individual Taxpayer died during
the year, it shall be assumed at closed of the year.

Question 2: How much income tax payable of the estate in 2019?

Answer: P560,000
Gross rental income (P4,750,000/95%) P5,000,000
Allowable deductions 2,000,000
Taxable income P3,000,000
Tax due(using the graduated tax rate)
1st P2,000,000 P490,000
In excess of P1m@ 32% 320,000
Income tax due P810,000
Less: CWTax on rentals 250,000
Income tax payable P560,000
Deductions from Estate’s Gross Income

The same deductions as the individual taxpayers, however, in addition

to usual allowable business expenses, the amount of income of the estate for
the taxable year which is properly paid or credited during such year to any
legatee, heirs, or beneficiary should be deducted (also know as special
deductions) in the determination of the estate’s taxable income. However, such
amount of income distributed shall be included in the determination of the
taxable income of the legatee/heirs/beneficiary.
Shown below are pro-forma computation of the estate and the
heirs/beneficiary: Taxable income of the Estate:
Gross Income Pxxx
Less: Deductions
Business expenses Pxxx
Special deductions:
Distribution of estate’s income to bnfcry xxx xxx
Taxable income of the Estate Pxxx
Tax Due (Graduated Tax Rate) Pxxx
Taxable income of Beneficiary:
Compensation income, if any
Net income of the beneficiary from bus./profession Pxxx
Add:
Amount received from the income of estate xxx
Taxable income Pxxx
Tax due (Graduated tax rate) Pxxx
Illustration:

On Nov. 1, 2017, Mr. Dedo died leaving various properties worth

P30,000,000 to his heirs, Badong, Anong and Luming. The properties are income
producing properties deriving rental income. The net income from rental for
2017 amounted to P2,500,000. The last will and testament was executed by the
decedent prior to his death assigning Mr. Kupit as the executors. In 2018 (while
under administration), the estate earned P4,750,000 (net of 5% creditable
withholding tax on the rent) and incurring operating expenses of P2,000,000.
During 2018, Badong’s (one of the lawful heir) received P200,000 from
the income of the estate. Badong’s other income and expenses are as follows:
Compensation income P800,000
Business income 1,500,000
Business expenses 600,000
Question 1: Assume that the estate is still under administration, how much is
the taxable income of the estate in 2018?

Answer: P2,800,000
Solution:
Gross rental income (4.75m + .25m) P5,000,000
Allowable business expenses ( 2,000,000)
Distribution income to Badong(heir) ( 200,000)
Taxable income P2,800,000
Question 2: How much is the taxable income of Badong?

Answer: P1,900,000 Computed as follows:

Compensation income P 800,000
Business income 1,500,000
Business expenses (600,000)
Amount received from the income of the estate (200,000)
Taxable income P1,900,000

Termination of Judicial/Extrajudicial Settlement

After termination of judicial/extrajudicial settlement of the estate
where the heirs still do not divide the property but instead contribute to the
estate money, property or industry with intention to divide the profit
between/among themselves, an unregistered is created and the estate becomes
liable for the payment of corporate income tax.
On the other hand, if the heirs, without contributing money, property
or industry to improve the estate, simply divide the fruits thereof
between/among themselves, a co-ownership is created, and individual income
tax is imposed on the income received by each of the heirs, payable in their
separate and individual capacity.
Taxation of Trusts

Trust is the right on property, real or personal, held by one party for
the benefit of another. It may be arrange inter-vivos or created by will under
which title to a property is passed to another for conservation or investment
with income there from and ultimately the corpus (principal) to be distributed
in accordance with the direction of the creator as expressed in the governing
instrument.
Trust agreement allows individuals to create sustain benefits for the
individual or entity. For instance the parent may place a sum of money,
property or other type of financial assets such as equity and debt investments
in the hand of a trustee for the benefits of an incapacitated or minor child.

Parties to a Trust:
*Trustor – person who established a trust
*Trustee – one in whom confidence is reposed as regards property for
the benefits of another person.
*Beneficiary – person for whose benefit trust is created.
*Fiduciary – any person or corporation that holds in trust an estate of
another person(s). Exist only if a legal trust is
created.
 Taxability of Income of Trust

The income of a trust may be taxable to the trustee, beneficiary or grantor as

the case may be.
Taxable to the trustee, if:
The income is accumulated or held for future distribution, whether
ordinary or gain from sale of assets included in the corpus of the trust. The
imposition of the tax is not affected by the fact that the ultimate beneficiary
may be a person exempt from tax. The income of the trust administered in the
foreign country is taxable to the trustee.

Taxable to the Grantor/Trustor, if:

*Under the term of the trust, the title to any part of the corpus or
principal of the trust may be revested to the grantor
(Recoverable Trust). The income of the corpus or principal
that may be revested to grantor shall be taxable to the
grantor.
*The income of the trust may be held or distributed for the benefits of
the grantor.
*Under the term of the trust, the income of the trust shall be applied
for the benefits of the grantor.
Special deductions are not allowed in case of a trust administered in a
foreign country
 Computation of Taxable Income

The principles applied in computing the taxable income of the estate is

also applicable in the determination of the taxable income of a trust.
The trust taxable income is likewise computed in the same manner as
an individual taxpayer, except that the basic personal exemption allowed is
limited only to P20,000. The tax due is also based on the graduated rates
provided under section 24(A) of the tax code. Calendar period shall be used as
accounting period for tax purposes. A trust required to adopt the calendar year
as its accounting period.

Pro-forma Computation of the taxable income of a trust and a beneficiary:

Taxable income of a Trust: Taxable income of the beneficiary:

Gross income Pxxx Compensation income, if any Pxxx

Less: Deductions Net income of the beneficiary
Business expenses Pxxx from business/profession xxx
Special deductions: Add: Amount received (income of the trust) xxx
Distribution of trust’s Taxable income of the beneficiary Pxxx
Income to beneficiary xxx xxx Tax due (Graduated tax rate) Pxxx
Taxable income of the trust P xxx
Tax due (Graduated tax rate) Pxxx
 Classification of a Trust

1. Ordinary Trust – the income and corpus of the trust do not revert to the
grantor. The trust income is accumulated and held for
distribution to the beneficiaries. They are:
*A trust where the income is accumulated or held for future distribution
under the terms of a will trust.
*A trust where the income is to be distributed currently by the fiduciary
to the beneficiaries.
*A trust where the income is accumulated for the benefits of unborn or
unascertained person(s) with contingent interest.
*A trust where the income collected by a guardian of an infant is held or
distributed as the court may direct; and
*A trust where the income, is at the discretion of fiduciary, may be
either distributed to the beneficiaries or accumulated.
2. Revocable Trust – a trust where at any time, the power to revest in the
grantor, title to any part of the corpus of the trust is vested.
*In the grantor either alone or in conjuction with any person not
having a substantial adverse interest in the disposition in
such part of the corpus of the income therefrom, or
*In any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income
therefrom

3. Employees’ Trust – income tax shall not apply to employees’ trust which
forms part of pension, stock bonus, or profit-sharing plan of
an employer for the benefits of some or all of his
employees. It is exempt from payment of final taxes as well
as income derive from the sale of real property whose funds
are sourced from the employee’ trust fund.
*The funds must form part of a pension, stock bonus, or profit-sharing plan of
the employer for the benefits of some or all of his employee.
*Contribution are made for the purpose of distribution to such employees
*Contribution are made to the trust by such employer or employee or both.
*It is impossible at any time prior to the satisfaction of all liabilities with
respect to employees
Consolidated Income Tax Returns (two or more trusts)

When two or more trusts is created by the same trustor or grantor and
the beneficiary is the same person, the following rules shall apply:

1. The taxable income of all trusts shall be consolidated and tax computed on
such consolidated income. The tax is computed shall be apportioned to the
different trusts, such that each trust shall have a share in the income tax on
consolidated income.

The format of computation follows (Tax Apportionment):

Tax Taxable income of the trust

= x Consolidated
Apportionment Taxable income of all trusts income tax
to a Trust

2. 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 several trusts. Each trust shall pay an income tax still
due or payable computed as follows:
Income tax apportioned to a trust Pxxx
Less: Income tax already paid xxx
Income tax payable Pxxx
Illustration:

In 2018, Gorge created three trust for his minor daughter. The
following data were furnished by the trusts during the year, 2018:
Trust Gross Income Expenses Net income Income tax paid
1 P5,000,000 P2,500,000 P2,500,000 P 500,000
2 10,000,000 5,000,000 5,000,000 1,200,000
3 15,000,000 7,500,000 7,500,000 2,000,000
Required: Compute the income tax payable of Trust 1, 2 and 3
Solution:
Consolidated income tax due
Consolidated gross income P30,000,000
Consolidated expenses (15,000,000)
Consolidated taxable income P15,000,000
Tax due (Section 24(A)
On 1st P8,000,000 P2,410,000
In excess of P8m @35% 4,450,000
Consolidated income tax due P4,860,000
*Income Tax still Due/Payable of Trust 1:
Tax apportionment to trust 1(2,500/15,000xP4,860,000) P810,000
Less: Income tax already paid 500,000
Income tax still due/payable P310,000
*Income Tax still Due/Payable of Trust 2:
Tax apportionment to trust 2 (5,000/15,000xP4,860,000) P1,620,000
Less: Income tax already paid 1,200,000
Income tax still due/payable P 420,000
*Income Tax still Due/Payable of Trust 3:
Tax apportionment to trust 2 (7,500/15,000xP4,860,000) P2,430,000
Less: Income tax already paid 2,000,000
Income tax still due/payable P 430,000
Filing of income Tax Returns
The following persons acting in In case of 2 or more fiduciaries ITR filed
any fiduciary capacity shall file the by one of them shall be sufficient
ITR for an estate: compliance. ITR may be filed in:
Guardians Authorized agent banks
Trustees Revenue District Officer
Executors/Administrators Collection Agents
Receivers Duly authorized city or
Conservators municipal treasurer
All other person or corp. where taxpayer reside.
***END***