ESTATE TAX (ET): GROSS ESTATE

Main Topics:
1. Intro
2. Gross Estate (GE)
3. Property Relationship between spouses 4. Deductions
5. ETCredit
6. Compliance Requirements

Concept Map: Estate Tax

Gross Estate Property
Relations

Ordinary
Deductions
Estate Taxation
Special
Topics Estate Tax
Credit

Compliance
Requirement
s

GROSS ESTATE
-all properties of the decedent, tangible or intangible, real or personal, and wherever situated at the point of death.
In the case of a non-resident alien decedent, gross estate includes only properties situated in the Philippines except
intangible personal property when the reciprocity rule applies.

Summary of rules on Gross Estate

Residents or Citizens NRA without reciprocity NRA with reciprocity
Property location Within Abroad Within Outside Within Outside
Real properties ✓ ✓ ✓ X ✓ X
Personal properties
Tangible ✓ ✓ ✓ X ✓ X
Intangible ✓ ✓ ✓ X X X
Illustration
A decedent died leaving the following property:
Location
Philippines Abroad Total
Real properties 2M 3M 5M
Tangible personal property 1M 500K 1.5M
Intangible personal property 8OOK 1.2M 2M
Total 3.8M 4.7M 8.5M

Gross Estate:
If the decedent is as
a) Resident citizen, non-resident citizen or resident alien - P8,500,000
b) Non-resident alien without reciprocity-P 3,800,000
c) Non-resident alien with reciprocity-P 3,000,000

PROCEDURES IN ESTABLISHING GROSS ESTATE

1. Inventory count of existing properties at the point of death
2. Adjustments for exempt transfers and taxable transfers

Inventory of Properties
To establish the amount of the gross estate, an inventory of the properties of the decedent and their fair values at the point
of death shall first be established.
Date of death

(Inventory count)

If the list of properties existing at the point of death is known, the list is simply drawn directly.
However, if the inventory is prepared as of a later date after the decedent's death, the inventory must be worked back to
establish the list of properties present at the point of death
Illustration
A decedent died on June 30, 2019. An inventory was not immediately prepared because of the funeral of the decedent. An
inventory count of his properties was drawn only on July 15, 2019.

On July 15, there were properties which had a total fair value of P5,000,000. P100,000 of this represents income earned
after death while P400,000 represents income earned before death
A total of P500,000 was paid for funeral expenses and judicial expenses of the estate. A total of P200,000 obligations of
the decedent was paid since his death.

The gross estate shall be recomputed as:

Properties as of July 15, 2019 P 5,000,000
Less: Increase in properties since death 100.000
Add: Decrease in properties since death (P500K+ P200K) 700.000
Properties existing at the date of death (Gross Estate) P.5.600.000

Note:
1. Properties representing income earned before death properly form part of the gross estate of the decedent because
these were present at the point of death.
2. Properties representing Income accruing after death must be excluded since these were not yet present at the point
of death.
3. Expenses or obligations which were paid since death must be added back since these were present at the point of
death.

THE GROSS ESTATE FORMULA:

Inventory of properties at the point of death P xxx,xxx
Less: Exempt transfers
Properties not owned xxx,xxx

Properties owned but excluded by law P xxx,xxx xxx,xxx

Inventory of taxable present properties P xxx,xxx

Add: Taxable transfers xxx,xxx
GROSS ESTATE P xxx,xxx
EXEMPT TRANSFERS
1. Transfers of properties not owned by the decedent
-One cannot transfer properties he or she does not own.
-Properties not owned by the decedent are not part of his/her donation mortis causa
-These properties must be excluded in gross estate even if they transfer to other persons at the point of death.

2. Transfers legally excluded

-There are properties that are owned by the decedent at the point of death
-These properties naturally form part of his/her donation morts causa to the heirs, but are exempted by the law
from estate taxation Hence,
-these are excluded from gross estate.

These referred to as exclusion in gross estate.

Transfer of properties not owned by the decedent
1. Merger of the usufruct in the owner of the naked title
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary
3. The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the
desire of the predecessor
4. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate, executor or
administrator
5. Properties held in trust by the decedent
6. Separate properties of the surviving spouse of the decedent
7. Transfer by way of bona fide sales

The merger of usufruct in the owner of the naked title

Illustration
Mr. A died in June 2011. In his will, he devised an agricultural land to B who shall use the property over 10 years and
thereafter, to C. Subsequently, B died resulting in the transmission of the property to C.

Predecessor Current decedent

A B C
(Usufructuary) (Owner of naked title)

The transfer of the devise from B to C is referred to in law as the "merger of the usufruct in the owner of the naked title."
The transfer from the usufructuary, B, to the real owner, C, upon the death of B does not constitute a donation mortis
causa as it is a mere return of the property to the real owner. Hence, it is excluded from gross estate. Note that the transfer
from Mr A, the predecessor, of the usufruct to B and the naked title to C involves transfer of ownership. It is a donation
mortis causa of Mr. A subject to estate tax
The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary
Illustration

Mr. A died leaving an inheritance consisting of several real estates to his favorite grandson, C from his favorite son, B.
Because C was a minor, Mr. A appointed B. as fiduciary of the inheritance. Before transferring the property to C, B died.

Predecessor Current decedent

A B C
(Fiduciary heir) (Fideicommissary)
The delivery of the Inheritance upon the death of B (fiduciary heir), to C (fideicommissary) shall not be included in the
gross estate of B because the transfer does not involve a transfer of ownership from B to C. B is merely a trustee The
delivery is a mere return of the property to the real owner, C

The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the
desire of the predecessor
Illustration
In his will, Mr. A devised a piece of land to B as the first heir and thereafter to c as the second heir. B subsequently died
transmitting the property to Cin accordance with Mr. A's will.

Predecessor Current decedent

A B C
(1 heir) (2nd heir)

The transfer from B to C is referred to as transfer under a special power of appointment. The same is not B's donation
mortis causa. The transfer from B to is merely an implementation of the transfer which was originally mandated by
predecessor A
The same rule applies even if B were given the power, solely or in conjunction with others, to appoint the second heir to
the property from a list drawn by predecessor A

In all previous illustrations, assuming 8 transferred the property during his lifetime to C, the same shall not be subject to
donor's tax because there is no gratuitous transfer of ownership.
Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate, executor or administrator

The proceeds of life insurance policies which are irrevocably designated by the decedent to the beneficiary are no longer
owned by the decedent at the point of his/her death. They are owned by the beneficiary designated by the decedent.
Hence, these shall not be included in gross estate
The proceeds of life insurance policies which are revocably designated by the decedent to any beneficiary are owned by
the decedent at the point of his/her death. Hence, the proceeds are included in gross estate.
If the decedent named a beneficiary without indicating whether the designation is revocable or irrevocable, the
designation is presumed to be revocable. However, if the decedent did not replace the beneficiary until his death, the
designation shall be deemed irrevocable exempt from estate tax.

Estate, executor or administrator as beneficiary

If the beneficiary designated is the estate, executor or administrator, the proceeds of life insurance is included in gross
estate regardless of the designation of the beneficiary because these beneficiaries are considered. extensions of the interest
of the decedent

Summary of Rules: Proceeds of Life Insurance

Designation of Beneficiary
Beneficiary Revocable Irrevocable Include
Estate, administrator, or executor Include Include
Other parties Include Exclude

Illustration
Mr. Tubod died. His heirs collected the following proceeds of life insurance policies:
AXA, revocably designated to wife P 800,000
Manulife, irrevocably designated to daughter 600,000
Sunlife, revocably designated to Mr. Tubod's estate 700,000
PhilAm, irrevocably designated to Mr. Tubod's executor 400,000

The proceeds of insurance policies to be included in gross estate shall be:

AXA, revocably designated to wife P800,000
Sunlife, revocably designated to Mr. Tubod's estate 700,000
PhilAm, irrevocably designated to Mr. Tubod's executor 400,000
Total P1,900,000
Note:
1. Only the proceeds of insurance policies that are revocably designated are included in gross estate
2. However, if the beneficiary is the estate, executor or administrator, the proceeds are included in gross estate
without regard of the designation of the beneficiary as revocable or irrevocable
Properties held in trust by the decedent
Properties held in trust by the decedent at the point of his death are not owned by him. These are excluded in gross estate
because these will not form part of the decedent's donation mortis causa to the heirs.

Illustration
The following properties were identified upon the death of Mr. Ubaldo

Car, registered in the name of his brother P 800,000

Merchandise, consigned to Mr. Ubaldo 200,000
House and lot 2,400,000
Motorcycle, borrowed from a friend 150,000
Boarding house, held as trustee 4,000,000
Taxicab 1,000,000
Taxicab franchise 600,000
Clothes, books, equipment, and other personal belongings 400,000

The gross estate of the decedent shall consist of the following:

House and lot P 2,400,000
Taxicab 1,000,000
Taxicab franchise 600,000
Clothes, books, equipment and other personal belongings. 400,000
Gross Estate P 4.400.000

Gross estate shall not include properties held in trust by the decedent including other properties he does not own. Hence,
the following shall be excluded from gross estate.

Car, registered in the name of his brother P 800,000

Merchandise, consigned to Mr. Ubaldo 200,000
Motorcycle, borrowed from a friend 150,000
Boarding house, held as trustee 4,000,000
Total exclusions in gross estate P5,150,000
Separate properties of the surviving spouse
Spouses have their separate properties and common properties. Common properties are owned jointly by the spouses
while separate or exclusive properties are solely owned by either of them.
The separate or exclusive properties of the husband are referred to as "husband's capital" while that of the wife is referred
to as "wife's paraphernal."
The wife's paraphernal shall not be included in the gross estate of the husband upon his death since these will not form
part of his donation mortis causa. Similarly, the husband's capital shall not be included in the gross estate of the wife upon
her death on the same basis.
The gross estate of a married decedent includes the separate properties of the decedent and their common properties with
the surviving spouse.

Illustration
An inventory of the properties at the point of death of Mr. Cabili revealed the following:

Exclusive properties of Mr. Cabili P 2,400,000

Exclusive properties of Mrs Cabili 4,000,000
Common properties of Mr. and Mrs. Cabili 8,000,000
Total properties of the spouses P14.400.000

The gross estate of Mr. Cabili shall be:

Exclusive properties of Mr. Cabili P 2,400,000
Common properties of Mr. and Mrs. Cabili 8,000,000
Gross estate P10.400,000

Note:
1. The boundary between exclusive and common properties of the spouses is a question of property relations which
will be discussed in the following chapter.
2. The common properties are jointly owned by the spouses. The share of the surviving spouse in the net common
properties is not an item of exclusion but an item of deduction. Hence, it is initially included in the gross estate
then later removed as an item of deduction from the gross estate

Transfer by way of bona fide sales

Transfers by way of bona fide sales are onerous transactions rather than gratuitous transactions; hence, they are not
subject to estate tax. Moreover, ownership over properties sold normally passes on to the buyer immediately at the point
of sale
Hence, properties transferred by way of bona fide sale or for an adequate consideration are excluded in gross estate
because the decedent no longer owns them at the date of his/her death.
Legal exclusions
The following are the list of properties owned by the decedent at the point of death which naturally forms part of the
hereditary estate but are not subjected to estate tax by law

1. Proceeds of group insurance taken out by a company for its employees

2. Proceed of GSIS policy or benefits from GSIS
3. Accruals from SSS
4. United States Veterans Administration (USVA) benefits - RA 136
5. War damage payments
6. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of net
income of which inures to the benefit of any individual; provided, however, that not more than 30% of the said
bequest, devises, legacies or transfers shall be used by such institutions for administration purposes
7. Acquisitions and/or transfers expressly declared as non-taxable by law
8. Bank deposits withdrawn from the decedent account during the settlement of the estate
These properties must be removed from the gross estate of the decedent.

Note on property acquisitions using exempt benefits

Properties acquired using GSIS benefits, SSS accruals, USVA benefits proceeds of group insurance and war damage
payments are still exempt so long as the heirs or administrators can prove that the properties were acquired using these
exempt properties.

Note on bequests, device, or legacies to social welfare, cultural, and charitable institutions
The conditional exclusion applies if the donee institution uses not more than 30% of the bequest, device, or legacies for
administration purposes.
The 30% conditional exclusion is deemed satisfied if the donee is an accredited non-profit donee institution. If the donee
is a qualified non-profit donee institution, the same is excluded in gross estate.
It must be noted that one of the primary requirements for the accreditation of donee institutions is that their income does
not inure to the benefit of any private individual and that the level of their administration expenses does not exceed 30%
of their total expenses. Transfers to these institutions are initially included in the inventory list of taxable properties, but
are removed from the list if the donee is verified as a qualified donee institution.
If the transfer qualifies for exclusion, the same is not reflected in both gross estate and deduction. It must be noted that
there is no item of deduction for such transfer under the Tax Code and in the estate tax return.
Despite this, bequests, devises or legacies which are restricted by the decedent for administrative expenses of the donee
institution (whether accredited or non-accredited) shall be included in gross estate.
Illustration
A decedent had the following properties:
Family home P 5,000,000
Truck 1,200,000
Cash 200,000
Commercial land 800,000
Other properties 600,000
In his will, the decedent designated the cash to be given to a public elementary school. The commercial land was also
devised to a non-profit charitable institution restricted to be used for program expenses of the latter.

The gross estate shall be computed as:

Family home P 5,000,000
Truck Cash 1,200,000
Other properties 600.000
Gross estate P 7.000.000

Note:
1. Only bequests, devises or descent to social welfare, cultural and charitable institutions are exempt.
2. Transfers to the government and its instrumentalities are not items of exclusion but items of deduction.
They are included in gross estate and then separately presented as deductions from gross estate in the estate tax
return.

Deposits withdrawn from the decedent's bank account

Previously under the NIRC, withdrawal from the bank account is prohibited except withdrawal of up to P20,000 for the
funeral expenses of the decedent.
The TRAIN law allows unlimited withdrawal from the decedent's bank account but requires bank with knowledge of the
decedent's death to withhold 6% final withholding tax upon the withdrawal if made within one year form the decedent's
death (RRB-2019). The 6% withholding tax is a final tax and is non-creditable. As such, amounts subjected to the 6%
final tax must be excluded in gross estate. However, if such withdrawal is not subjected to the 6% final tax, the amount of
withdrawal must be included in gross estate.
Illustration 1
The following withdrawals were made from the bank account of the decedent who died July 8, 2019:

July 7, 2019 P 200,000 -For payment of medical expense

July 9, 2019 300,000 -For payment of funeral expense

July 10, 2020 500,000 -For payment of claims against the estate

Ending balance P4.000.000

The P300,000 shall be excluded in gross estate. The amount of cash in bank to be reported in gross estate shall be
P3,500,000.
Note:
1. The P200,000 withdrawal is not part of gross estate as it is expended before the death of the decedent. This is not
subject to 6% final tax since the decedent is not yet dead
2. 2. Assuming that the bank is informed about the decedent's death, the P300,000 shall be subjected by the bank to
69% final tax and shall be excluded in gross estate by the estate administer, executor or heirs
3. The P500,000 shall no longer be subjected to 6% final tax since it is beyond the 1-year requirement. The estate
tax might have even been paid by that time.

Illustration 2
Mr. Jo and Mr. Kang has a joint account with BPI for their business venture where they share equal interest. Mr. Jo died
in an accident. A withdrawal of P100,000 is being made against the account.
Since half of the bank interest will effectively be included in the gross estate of Mr. Jo, the bank shall withhold the 6%
final tax only on 1/2 of the P100.000 withdrawal

Illustration 3
Assume the same data in the foregoing illustration except that Mr. Liam Mado died and that the account is a joint account
with Ms. Mado.

The bank shall withhold the 6% final tax upon the total P100,000 balance since the entire amount will be reflected in
halves under separate and common properties columns of the gross estate.
It must be noted that withdrawal which were not subjected by the bank to the 6% final tax must be included in gross
estate.
The 6% final tax treatment should be a caveat to heirs or estate administrators. Withdrawal from the decedent's accounts is
not advisable if the decedent is projected to have a zero or negative net taxable estate.

TAXABLE TRANSFERS
Taxable transfers are mortis causa transfers of properties in the guise and form of inter-vivos transfers. These are referred
to as inclusions in gross estate.
Types of Taxable Transfers
1. Transfer in contemplation of death
2. Revocable transfers, including conditional transfers
3. Property passing under general power of appointment

Transfers in contemplation of death

These are donations made by the decedent during his lifetime which are motivated by the thought of his death. These
transfer inter-vivos are usually made by the decedent in a stage of terminal illness or under belief of an imminent death
Analogous to testamentary disposition, transfers in contemplation of death are treated by the tax law as donation mortis
causa subject to estate tax not, to donor's tax.
Transfer in contemplation of death may include:
a) Transfers of property to take effect in possession or enjoyment at or after death
b) Transfer of property with retention of the right of possession or enjoyment or right over income of the property
until death
c) Transfer of property with retention of the right to designate, alone or in conjunction with any person, the person
who shall enjoy the property or the income there from

Revocable transfer- transfers of possession over property during the lifetime of the decedent, but not transfer of
ownership over said property. At the point of death, the decedent owns the property; hence, it must be included as part of
his gross estate since the same is part of his donation mortis causa.
In revocable transfers, ownership transfers only when the transferor waives the right to revoke the transfer. If the
transferor dies without waiving his right of revocation, he owns the property at the point of his death. Hence, it should be
included in his gross estate.

Illustration 1: Revocable donation

In January 2017, Mr. Bala transferred a car with a fair value of P1,200,000 to Mr. Subas. The car shall be revocable by
Mr. Bala until July 30, 2020. Mr. Bala died on May 30, 2020 when the car had a fair value of P1,100,000.
The car shall be included in the gross estate of Mr. Balo at its fair value of P1,100,000
The transfer shall be subject to donor's tax when the right to revoke expired prior to Mr. Bala's death or when Mr. Bala
waived the right to revoke before his death. In this case, the property shall not be included in gross estate

Illustration 2: Conditional donation

Mrs. Mulondo transferred a house and lot to his son, Masiu. The transfer of ownership is conditional upon Masiu's passing
of the October 2020 CPA Board Exam. On June 15, 2020, Mrs. Mulondo died.
The house and lot shall be included in the gross estate of Mrs. Mulondo at its fair value on June 15, 2020 since she still
owned the property at her death. Assuming Masiu passed the October 2020 CPA Board Exam before Mrs. Mulondo's
death, the transfer shall be subject to donor's tax at the fair value of the property on October 2020.
Assuming further that Mrs. Mulondo waived the condition before her death; the transfer becomes a transfer inter-vivos
which is subject to donor's tax. In both instances, the house and lot shall no longer be included in the gross estate of Mrs.
Mulondo upon her death
Transfer with retention of certain rights
If properties are transferred by the decedent prior to his death but retains the possession or enjoyment of, or right to
income from, the property, the same shall be included in gross estate to the extent of the decedent's interest therein.

Illustration
Mr. transferred an agricultural land in favor of his son. He, however, reserved for himself the enjoyment of a quarter of
the land until his death. The land was worth P2,000,000.
The P500,000 (ie. P2,000,000 x 4) portion of the land which was reserved by Mr. Ozamis for himself until his death shall
be included in his gross estate.

Transfer under general power of appointment

Properties subject to a general power of appointment by the decedent shall be included in the gross estate of the decedent.
The presence of the general power enables the holder of such power to do with the property anything which he could do
as if the property were his own.

Illustration
Don Kulot died. In his will, he gave Mama Sang a house and lot with the right to designate the property to whomever heir
she wants. Mama Sang eventually died and appointed Bebe as heir to the property. Mama Sang had a general power over
the property. The same shall be included in her gross estate. If Mama Sang had limited power, the same shall not be
included in her gross estate

COMPOSITION OF GROSS ESTATE

1. Properties, movable or immovable, tangible or intangible
2. Decedent's interest on properties
3. Proceeds of life insurance:
a) Designated as revocable to any heir
b) Designated to estate, administrator or executor as beneficiary
4. Taxable transfers

PRESENTATOIN OF GROSS ESTATE IN THE ESTATE TAX RETURN

In reporting gross estate under BIR Form 1801, the composition of the gross estate shall be classified as follows:
1. Real properties - all immovable properties of the decedent, excluding family home
2. Family home
3. Personal properties - all movable properties of the decedent, except rights or interest in any business
4. Business interests
INTEGRATIVE ILLUSTATIONS
Integrative Illustration 1
A resident decedent died with the following properties at the point of death:
Cash in bank account P 1,000,000
Receivables from friends and relatives 200,000
Borrowed car from a friend 120,000
House and lot 2,000,000
Motorcycle, registered in the name of his youngest son 80,000
Total - P 4.400.000

The gross estate shall be computed as:

Inventory of present properties P 4,400,000
Less: Not owned
Borrowed car P 120,000
Motorcycle 80.000 200.000
Gross estate P 4.200.000

Integrative Illustration 2
Mr. A, a citizen decedent, died leaving the following properties:
Cash proceeds of life insurance designated to
a brother as revocable beneficiary P 1,000,000
Building properties held as usufructuary 4,000,000
Cash in bank 2,400,000
Agricultural land 3,000,000
House and lot, from Mr. A's industry 7,000,000
Benefits from GSIS 500.000
Total properties P17.900.000
Additional information:
1. The agricultural land was designated by Mr. A's father in his will to be transferred to D, Mr. A's son, upon Mr. A's
death.
2. Mr. A made a revocable donation involving a residential lot to his brother E. Mr. E paid P 400,000 when the lot was
worth P1,000,000. The lot was currently valued at P2M zonal value upon Mr. A's death.
3. The heirs withdrew P376,000 cash from the decedent's bank account for Mr. A's wake, net of 6% final tax deducted by
the bank.
The gross estate shall be computed as:
Inventory of present properties P17,900,000
Less:
Properties not owned
Building, held as usufructuary P 4,000,000
Agricultural land, under special power 3.000.000
Total P 7,000,000
Properties exempted by law
GSIS benefits 500,000
Bank withdrawal (P376,000/94%) 400,000 7.900.000
Taxable present properties P 10,000,000
Add: Taxable transfers (P2M-P400K) 1.600.000
Gross estate P11.600.000

VALUATION OF THE GROSS ESTATE

Properties subject to estate tax shall be appraised at their fair value at the point of death. Conceptually, "fair value" refers
to the amount at which two willing independent buyers and sellers could transact an exchange.

Valuation rules
1. The fair value of the property as of the time of death shall be the value to include in gross estate.
2. Fair value rules set by law or revenue regulations must be followed.
3. In default of such fair value rules, reference may be made to fair value rules under generally accepted
accounting principles.
4. Encumbrances on the property or decrease in value thereof after death shall be ignored.
The following sections discuss fair value rules for the following assets:
1. Real properties
2. Shares of stocks
3. Usufruct and annuities
4. Other properties
5. Taxable transfers

Real properties
Under the NIRC, the appraisal value of real property shall be whichever is higher of:
a. The value as determined by the Commissioner of Internal Revenue (zonal value), or
b. The value fixed by the Provincial or City Assessor.

If there is no zonal value, the taxable base shall be the fair market value that appears in the latest tax declaration. Note that
the TRAIN law points to the fair value listed in the schedule of market value-not the assessed value.
If there is an improvement, the value of the improvement shall be the construction cost per building permit or the fair
value that appears in the latest tax declaration.
Illustration 475

Shares of stocks
The fair market value of stocks shall depend on whether the stocks are listed or unlisted in the stock exchanges.

 Preferred shares are valued at par value.

 Unlisted common shares shall be valued at their book value.
 For this purpose, RR12-2018 reinstated the financial statement method which ignores appraisal surplus. The
Adjusted Net Asset Method under RR6-2013 is no longer followed.
 For shares which are listed in the stock exchange, RR12-2018 also reinstated the use of arithmetic mean of
highest and lowest quotation at a date nearest the date of death.
Illustration

Usufruct and annuities

A decedent may transfer usufructuary right to income over property or right to receive amounts of annuities to his/her
heirs. The fair value of such usufruct or annuities must be included in gross estate.
To determine the value of the right to usufruct, use, or habitation, as well as that of annuity, there shall be taken into
account the probable life of the beneficiary in accordance with the latest basic standard mortality table, to be approved by
the Secretary of Finance, upon recommendation of the Insurance Commissioner.
Illustration 1: Annuity contract
Mr. Mairugin, 60 years old, sold his company under a condition that the acquirer shall pay his 35-year-old wife and their
child P300,000 yearly support payment for 30 ears. Mr. Mairugin died after the fifth payment was made by the acquirer.
Assuming that the appropriate discount rate is 12%, the annuity shall be included in the gross estate of Mr. Mairugin at the
present value of the 25 remaining future payments to be received under the contract.

The present value of an annuity is mathematically computed as follows:

Value of annuity Annuity payments

Where:

i= interest rate or discount rate per period =12%

n=number of periods = 30years-5 years = 25 years
Value of annuity = (1-(1+12%) ) x P 300,000

Value of annuity = 7.843139 x P300,000= P2.352.941.73

The annuity contract shall be included in the gross estate of Mr. Mairugin at its value Jf 2,352,941.73 .
compute for the annuity factor, press the following in your scientific calculator:

Illustration 2: Usufruct
Don Midas transferred to Aurelius and his heirs usufructuary right over a P50,000,000 property for 10 years. After 10
years, the property shall be given to Marcus who was designated as the owner of the naked title. Aurelius died just after
the end of the sixth year of the usufruct
The property earns P1,000,000 annual income. Assume that the applicable discount rate is 12%. Upon the death of
Aurelius, the usufruct will be transferred to his heirs for the four years (10 yrs - 6 yrs.) remaining unexpired term of the
usufruct.

The fair value of the usufruct to be included in the gross estate of Aurelius shall be the present value of the annual income
on the property for 4 years:

Value of usufruct =

Value of usufruct =3.037349P X 1,000,000=P3,037,349

Note:
1. The transfer of the property from Aurelius to his heir for the remainder of the usufruct is not a merger of the
usufruct to the owner of the naked title.
2. Assuming Don Midas granted Aurelius' heir a life usufruct, the fair value of the usufruct to be included in the
gross estate of Aurelius shall be determined by taking into consideration the life expectancy of the heir.
3. The subsequent transfer of the property from the heir upon his death to Marcus (l.e. merger of the usufruct in the
owner of the naked title) is exempt from transfer tax.
Other properties
For properties which the law or revenue regulations has not fixed valuation rules, valuation shall take into consideration
fair value rules under generally accepted accounting principles (GAAP).
Additional Guidelines in Determining Fair Values
For newly purchased property, the fair value may be its purchase price. If not newly acquired, the fair value shall be its
second-hand value.
For pawned properties, the fair value may be reestablished by grossing-up
the pawn value by the loan-to-value ratio. For property fixed in monetary terms such as a loan or receivable, the fair value
is the amount fixed in the contract including accrued income thereto. For foreign currencies, the fair value shall be its
Peso value translated at the
prevailing exchange rate at the date of death..

Illustration 1: Used properties

Mr. Bantay died leaving a used car as part of his estate. Mr. Bantay bought the

car at P400,000. Brand new units of the same car model sell at P500,000. The

car sells at P250,000 if sold as is at the point of death.

The used car shall be included in the gross estate at P250,000.

Illustration 2: Pawned jewelry

At the point of death, Mr. X has a piece of jewelry which was pawned with Munting Pawnshop for P90.000. Munting
Pawnshop maintains a 60% loan-to appraisal value.

The fair value shall be computed as P90,000/60% = P150,000. The P150,000 fair value shall be included in the gross
estate. The P90,000 loan shall not be offset with the value of the jewelry but should be presented as an item of deduction
from gross estate.
Illustration 3: Loans receivables On June 30, 2020, Mr. Bombay died with the following outstanding receivables:

P 50,000 non-interest bearing loan to Mr. A. given April 1, 2020 and is due in 3 months

P 300,000 loan, bearing 10% interest to Mrs. B, given January 1, 2020 and is

due in one year AP 20,000 non-interest bearing loan to Mr. C, due March 30, 2020 but still unpaid
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The foregoing loans shall be included in gross estate as:

Loan to Mr. A

Loan to Mrs. B

Accrued interest on loan to Mrs. B at the date of death Overdue loan to Mr. C

Amount to include in gross estate

50,000

15,000 20.000

385.000

Note: 1.

Interest receivables accrued on the loan to Mrs. B from January 1, 2020 to the date of death, on June30, 2020. This is
computed as P 300,000 x 10% x 6 months/12 months 2. Overdue claims, even if due from insolvent persons, are included
in gross estate. In estate taxation, claims proven to be worthless are still included in gross estate then separately presented
as deductions.
Taxable transfers

Taxable transfers made without consideration are included in gross estate at the fair value of the transferred property at the
date of death.

Taxable transfers made for a consideration are valued as: Fair value at the

date of death less consideration paid at the date of transfer.

Illustration

Before her death, Mrs. Power made the following mortis causa transfers during

her lifetime:

At the date of transfer

Fair value

Fair value Consideration

at death

To Alexander

P 300,000 P

0P

200,000

To Bee Jay
200,000

195,000 300,000

To Cedric To Donnie

40,000 120,000

150,000

80,000

70,000

The amount of taxable transfers to be included in gross estate shall be:

FV at death Consideration

To Alexander

P 200,000 P

0 P 200,000

To Bee Jay

To Cedric

120,000

40,000 80,000 80,000

To Donnie
70,000

P 280.000

Note:

The transfer to Bee Jay is for an adequate consideration. This is bona fide sales not subject to estate tax but to income tax
at the date of sale. 2. The transfer to Donnie decreased in fair value below the consideration. This transfer is simply
ignored. 1.

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