TAXATION ON ESTATES AND TRUSTS

A. TAXABILITY OF ESTATES

An estate pertains to all the property, rights and obligations of a deceased person, including those that accrue since
the opening of succession.

Taxability: An estate is taxable DURING judicial settlement, that is, during the time the estate is the subject of
judicial testamentary or intestate proceedings.

Estates are taxed similar to an individual, so the rules on taxable income, those subject to final tax, capital gains
tax, the deductions and the rates are similar, EXCEPT:
1. An estate is required to obtain its own Tax Identification Number (TIN).
2. Distribution of the INCOME to the heirs shall be deductible for purposes of computing taxable income.
Such distribution shall be subject to a 15% withholding tax and will be reported by the heir as part of his
personal taxable income.

Period to start: The estate is taxed only on its income from the death of the decedent. Any income for the year which
was earned prior to death is reported separately in the individual’s income tax return for the year.

Not under JUDICIAL settlement: An estate NOT under judicial settlement shall be treated as a co-ownership for tax
purposes or if the heirs actively participated in its management or invested additional capital thereto, it may be
considered a partnership, taxable as such.

Liability to pay the income tax: the administrator or executor will be liable to pay the income tax liability of
the estate.
-

Estates

Estate Defined
 Estate refers to the mass of all the property, rights, and
obligations of a person which are not extinguished by his
death.
 It includes not only the property and transmissible rights
and obligations existing at the time of his death, but also
those which have accrued thereto since the opening of
the succession.

Decedent Defined
 Decedent is the general term applied to the person whose
property is transmitted through succession, whether or
not he left a will. If he left a will, he is also called the
testator.

Heir Defined
 An heir is a person called to the succession either by the
provision of a will or by operation of law.

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

Legatee Defined
 A legatee is a person to whom a gift of personal property
is given by virtue of a will.

Administration or settlement period Defined

 Refers to the period when title to the properties left by a decedent is not yet finally transferred to the heirs,
beneficiaries.
 At this period, the executor 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 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.

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Classification of Estates

Estates, for purposes of the income tax, are classified

into:
1. Estate under judicial administration (the
settlement of which is the object of judicial
testamentary or intestate proceedings); and
2. Estate not under judicial administration (the
settlement of which is not the object of
judicial testamentary or intestate
proceedings).

To Whom Income of Estate Shall be Taxed

The income of an estate may be taxable to the estate or heirs and beneficiaries, as follows:
1. Generally, the income of the estate shall be taxable to the fiduciary or trustee.

The fiduciary or trustee (executor or administrator) shall file the return for the estate and pay the income
tax due thereon.

2. Where the estate is not under judicial administration and there is no executor or administrator, the income of
the estate shall be taxable to the heirs and beneficiaries.

Each heir and beneficiary shall include in his return his distributive share of the net income of the estate.

Note: An estate is an income taxpayer if under judicial settlements or administration.

An estate under extra-judicial is not a taxpayer. The income of the estate is taxable to the heirs. As a general rule, taxed as mere
co-ownership or general professional partnership.
Estate under judicial administration Fiduciary/trustee (administrator/executor) files the ITR and pays the tax due
thereon
Estate not under judicial administration Heirs and beneficiaries file the ITR of the estate and pay the tax due thereon.
(extrajudicial settlement)

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
profits between/among themselves, an unregistered partnership is created and the estate becomes
liable for the payment of corporate income tax. (Evangelista v. Collector, GR No. L-9996, October 15,
1957)
 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.
(Obillos v. Commissioner, GR No. L-68118, October 29, 1985)

Taxable Income of Estates

The taxable income of the estate shall be computed in the same manner and on the same basis as in the case of a
self-employed individual.

Gross Income of Estates

The items of gross income taxable to individuals (as defined in Section 32(A) of the Tax Code) are also the same items
of gross income which are taxable of estates.

Excluded from Gross The passage of property to the executor or administrator on the death of the
Income of an Estate decedent, even though the property may have appreciated in value since the
decedent acquired it.
Included in Gross Income 1. Income received by the estate of a deceased person during the period of
of an Estate administration or settlement of the estate.

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 The “period of administration or settlement of the estate” is the period
required by the executor or administrator to perform the ordinary duties
pertaining to administration, such as the collection of assets and payment of
debts and legacies.

Estates during the period of administration have but one beneficiary and that
beneficiary is the estate.

2. Where, prior to the settlement of the estate, the executor or administrator

sells property of a decedent’s estate for more than the appraised value placed
upon it at the death of the decedent, the excess is income taxable to the
estate.

Note:
1. In the event of delivery of property in kind to a legatee or distribute, no income is realized by the legatee or
distribute.
2. Where the property is sold after the settlement of the estate by the devisee, legatee, or heir at a price greater
than the appraised value placed upon it at the time he inherited the property from the decedent, the devisee,
legatee or heir is taxable individually on any profit derived.

Deduction of Estates

An estate can take up the same items of deduction authorized under Section 34 of the Tax Code and allowed an
individual taxpayer.

Special Deduction of Estates

Estate can also deduct, in addition to the deduction authorized under Section 34 of the Tax Code, the amount of
income of the estate for the taxable year which is properly paid or credited during such year to any legatee,
heir, or beneficiary.

The income distributed to beneficiaries of an estate is subject to a 15% CWT to be withheld by the estate.

Note:
1. The amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir,
or beneficiary.

However, where no such distribution to the heirs is made during the taxable year that such income is
subjected to income tax payments by the estate, the subsequent distribution thereof is no longer taxable on
the part of the recipient heir.

2. An allowance paid to an heir out of the corpus (i.e. property) of the estate is not deductible from gross
income.

Rates of Tax

The rates of tax under Section 24(A)(2) of the Tax Code, which are prescribed for individuals earning purely self-
employment or professional income, shall be used in computing the income tax of estates. An estate shall thus have
the following tax rates:
a. If the estate’s gross sales/receipts plus other non-operating income exceeds the VAT threshold of P3,000,000
as provided in Section 109(BB) of the Tax Code, it shall be taxed on its net taxable income using the
graduated rates under Section 24(A)(2)(a) of the Tax Code.
b. If such estate’s gross sales/receipts plus other non-operating income does not exceed the VAT threshold of
P3,000,000, the estate’s executor/administrator shall have the option for the estate to be taxed at:
1. Eight percent (8%) of gross sales or gross receipts, plus other non-operating income in excess of Two
Hundred Fifty Thousand Pesos (P250,000).
OR
2. The graduated (progressive) rates under Section 24(A)(2)(a) of the Tax Code.

Computation of Tax

Accounting Period Calendar year

Tax Base a. Taxable net income or

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 b. Gross sales/receipts + non-operating income, if 8% income tax
rate is availed of.
Rate of Tax a. Graduated rates or
b. 8% Income tax rate (if qualified and elected)

B. TAXABILITY OF TRUSTS

A trust is the arrangement created by will or an arrangement under which title to property is passed to another for
consideration or investment with the income therefrom and ultimately the corpus to be distributed in accordance with the
directions of the creator as expressed in the governing instrument.

Parties to a trust include the trustor, the one who establishes the trust; the trustee, the one in whom confidence is
reposed as regards the property for the benefit of another person; and the beneficiary, for whose benefit the trust has
been established.

Kinds of trust:

1. Revocable – one where at any time the power to revest (return) in the grantor title to any part of the corpus of the
trust is vested; the trust is not considered a separate taxable entity and the income from the corpus forms part of the
taxable income of the grantor.

2. Irrevocable – where no such right exists or cannot be exercised after an agreed period; Here, the trust itself is
considered a separate taxable entity from the grantor, and is taxed similar to an estate under judicial settlement.

Rules on Taxability:
1. If the income is distributed regularly, such will form part of the taxable income of the beneficiary.
2. If the trust is revocable, the income of the trust forms part of the taxable income of the trustor.
3. Only when the trust is irrevocable and the income is kept in the trust, would there be a need to compute for the
income tax liability of the Trust.
4. If the Trust is treated as a separate taxable unit, the rules on individuals are the same, except that the
Distribution of INCOME to the beneficiary shall be deductible for purposes of computing the taxable income of the
Trust subject to 15% withholding tax, and the amount distributed (gross of the withholding tax) will form part of the
beneficiary’s taxable income.

Note: Two or more Trusts: In the event that a Fiduciary holds two or more trusts from the same grantor with the same
beneficiary, the income tax shall be consolidated for such trusts. Accordingly, the gross income and deductions are
consolidated as if they are from one property.

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Trust

Trust defined
 A trust is a right of
property, real or personal,
held by one party (trustee)
for the benefit of another
(beneficiary).
 A trust is an obligation
imposed either expressly or
by implication of law,
whereby the trustee is
bound to deal with property
over which he has control,
for the benefit of certain
persons of whom he may
himself be one, and anyone
of them may enforce the
obligation.

Parties to a Trust

A person who establishes a trust is called the Trustor or Grantor. The one in whom confidence is reposed as regards the
property for the benefit of another person is known as the Trustee (or Fiduciary), and the person for whose benefit the
trust has been created is referred to as the Beneficiary.

Fiduciary Defined
 A fiduciary, for income tax purposes, is any person or corporation that holds in trust an estate (or properties) of
another person or persons. In order that a fiduciary relationship may exist, it is necessary that a legal trust be
created.

Note:

An irrevocable trust is a separate and distinct taxable entity. Irrevocable both as to corpus and income. They are
taxed exactly in the same way as estates under judicial settlement, including rule of accrual.

A revocable trust is not a taxpayer and is treated as a pass-through entity whose income is taxable to the grantor-
trustor. Revocable trust is one where at any time the power to revest (return) in the grantor title to any part of the
corpus (body) of the trust vested. Revocable trusts render the trustor not the trust itself, subject to the payment of the
income tax. Thus, the income of the property subject to a revocable trust shall not be included in the income of the
trust for tax purposes, but shall instead be included in computing the net income of the grantor.

If the trust created is a revocable trust, both the trustor (grantor) and the beneficiary are subject to tax.
Thus, Trustor and Beneficiary are subject to tax on the income of the trust.

If what is created is an irrevocable trust only the beneficiary is liable because the annual income goes entirely
to the trust.

Classification of Trusts

Trusts may be classified into the following categories:

1. Ordinary trusts;
2. Revocable trust; and
3. Employee’ trust.

1. Ordinary Trust – In an 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.
The trust income is accumulated and held for distribution to the beneficiaries. Under the Tax Code, ordinary trust
is any of the following trusts:
 A trust where the income is accumulated or held for future distribution under the terms of a will trust.

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  A trust where the income is to be distributed currently by the fiduciary to the beneficiary.
 A trust where the income is accumulated for the benefit of unborn or unascertained person or persons
with contingent interest.
 A trust where the income collected by a guardian of a 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. A Revocable trust is a trust in which the power to revest in the grantor title to any part of the corpus of the trust is
vested in the grantor himself or any person not having any substantial adverse interest in the trust corpus or in its
income.

The income of such part of the trust estate title to which may be revested in the grantor, or held or distributed for the
benefit of the grantor shall be included in computing the taxable income of the grantor.

Income For the Benefit of the Grantor

A trust income is considered for the benefit of the grantor where any part of the income of the trust-
1. Is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income may be held or accumulated for future distribution to the grantor;
or
2. May, or in the discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income, be distributed to the grantor; or
3. Is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income may be applied to the payment of premiums upon policies of
insurance on the life of the grantor.

Such part of the income of the trust for the benefit of the grantor shall be included in
computing the taxable income of the grantor.

3. Employee’s trust – income tax shall not apply to employee’s trust which forms part of pension, stock bonus, or
profit-sharing plan of an employer for the benefit of some or all of his employees. (Sec. 60 [B]-NIRC). The income of
an employee’s trust is likewise exempt from the payment of final taxes as well as income derived from the sale of real
property whose funds are sourced from the employees trust fund (Miguel J. Ossorio Pension Foundation, Inc. v. CA
and CIR (G.R. No. 162175, June 28, 2010)

Requisites or Conditions For Exemption of Employee’s Trust

1. The employee’s trust must form part of a pension, stock bonus, or profit-sharing plan of an employer for the
benefit of some or all of his employees;
2. Contributions are made to the trust by such employer, or employees, or both;
3. The contributions are made for the purpose of distributing to such employees the earnings and principal of the
fund accumulated by the trust in accordance with such plan;
4. Under the trust instrument, it is impossible, at any time prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter)
used for, or diverted to, purposes other than for the exclusive benefit of his employees.

Any amount actually distributed to any employee or distribute shall be taxable to him in the year in which
so distributed to the extent that it exceeds the amount contributed by such employee or distribute.

Taxability of Income of Trusts

The income of a trust may be taxable to the trustee, or to the beneficiaries, or to the grantor.

A. Income of Trust Taxed to the Trustee

1. The income of a trust which is to be accumulated or held for future distributions, whether consisting of
ordinary income or gain from the sale of assets included in the corpus of the trust, must be returned by and
will be taxed to the trustee.
2. The income of a trust, whether created by will or deed, for accumulation of income, whether for an
unascertained person or persons with contingent interest or otherwise, shall be taxed to the trustee.
3. The income of a trust, where under the terms of a will or deed, the trustee may, in his discretion, distribute
the income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his discretion.

B. Income of Trust Taxed to the Beneficiaries

The income of a trust for the taxable year which is to be distributed to the beneficiaries must be returned (i.e.

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 included in the ITR) by and will be taxed to the respective beneficiaries

Note: Income distributed to beneficiaries of a trust is subject to a CWT of 15% to be withheld by the trust.

C. Income of Trust Taxed Directly to the Grantor

1. In case of a revocable trust, income from such part of the trust estate title to which may be revoked by
the grantor or revested in the grantor.

The income should be included in the grantor’s return.

2. In the case of a trust the income of which, in whole or in part, may be held for distributed for the benefit
of grantor. That part of the income which may be held or distributed for the benefit of the grantor should
be included in the income tax return of the grantor.

3. Such part of the income of the trust which may be applied to the payment of premiums upon policies of
insurance on the life of the grantor. Such part of the income shall be included in computing the taxable
income of the grantor.

Determination of the Tax

The tax shall be computed upon the taxable income of the trust and shall be paid by the fiduciary.

Taxable Income of Trusts

The taxable income of the trust shall be computed in the same manner and on the same basis as in the case of an
individual

Gross Income of Trusts

The items of gross income taxable to individuals are also the same items of gross income which are taxable to trusts.

Deductions of Trusts

A trust can take up the same items of

deduction authorized under Section 34 of the
Tax Code and allowed an individual taxpayer.

Special Deductions of Trusts

A trust can also deduct, in addition to the

deductions authorized under Section 34, the
following:
1. The amount of the income of the
trust for the taxable year which is to
be distributed currently to the
beneficiaries;
2. The amount of income collected by a
guardian of an infant which is to be
held or distributed as the court may
direct; and
3. The amount of the income of the
trust for the taxable year which is
properly paid or credited to any
beneficiary.

Note: The amount so allowed as a deduction shall be included in computing the taxable income of the
beneficiaries, whether distributed to them or note.

Rates of Tax

The rates of tax under Section 24(A)(2) of the Tax Code, which are prescribed for individuals earnings purely self-

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employment or professional income, shall be used
in computing the income tax of trusts. A trust
shall thus have the following tax rates:
A. If the trust’s gross sales/receipts plus
other non-operating income exceeds the
VAT threshold of P3,000,000 as provided
in Section 109 (BB) of the Tax Code, it
shall be taxed on its net taxable income
using the graduated rates under Section
24(A)(2)(a) of the Tax Code.
B. If such trust’s gross sales/receipts plus
other non-operating income does not
exceed the VAT threshold of P3,000,000,
the trustee shall have the option for the
trust to be taxed at:
1. Eight percent (8%) of gross sales or
gross receipts, plus other non-
operating income in excess of Two
Hundred Fifty Thousand Pesos
(P250,000);

Note: This 8% tax on gross

sales/receipts plus other non-
operating income shall be in lieu of
(a) the progressive income tax rates
under Section 24(A)(2)(a) of the Tax
Code, and (b) the 3% Other
Percentage Tax (OPT) under Section
116 of the Tax Code.

OR

2. The graduated (progressive) rates

under Section 24(A)(2)(a) of the Tax
Code.

Computation of Tax

Accounting Period Calendar year

Tax Base c. Taxable net income or
d. Gross sales/receipts + non-operating income, if 8% income tax
rate is availed of.
Rate of Tax c. Graduated rates or
d. 8% Income tax rate (if qualified and elected)

Consolidation of Income of Two or More Trusts

Filing of A separate return will have to be filed for each trust by the respective trustee/fiduciary
separate
returns Trust Beneficiary
Gross income xxx Gross income xxx
Expenses (xxx) Expenses (xxx)
Distribution income (xxx) Distribution income** xxx

Taxable income xxx Taxable income xxx

**Income distribution to the beneficiaries– On income distributed to the beneficiaries of

estates and trust is subject to Fifteen percent (15%) creditable withholding tax.

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 Consolidation The separate returns
of the filed by the different
separate fiduciaries shall be
returns consolidated in the
BIR allowing against
the consolidated
taxable income

Note: The two trusts

will not be
consolidated if they
involve separate
beneficiaries.

Computation An income tax shall be computed on the consolidated income

of
consolidated Consolidated Gross Income xxx
income tax Less: Consolidated Expenses (xxx)
Taxable Income Pxxx
Apportionment The tax computed on the consolidated income shall be apportioned to the different trusts, such
of the that each trust shall have a share in the income tax on consolidated income. The format of
consolidated computation follows:
income tax to
the different Taxable income of trust ____ x Tax on consolidated taxable income
trusts Consolidated taxable income

= Tax allocated or to be paid by trustee

Tax payable of Each trust shall pay an income tax still due computed as follows:
each trust Income tax apportioned to the trust xxx
Less: Income tax already paid by the fiduciary of the trust (xxx)
Income tax still due xxx

When two or more trusts are created by the same trustor or grantor, and in each instance the beneficiary is the
same person, the taxable income of all the trusts shall be consolidated, and the tax computed on such consolidated
income.

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 the several trusts.

Filing of Returns and Payment of Tax

Who shall file the The following persons acting in any fiduciary capacity shall file the income tax return for an
return? estate or trust:
1. Guardians
2. Trustees
3. Executors
4. Administrators
5. Receivers
6. Conservators
7. All other persons or corporations acting as fiduciary
When is the return Quarterly deductions
filed? First Quarter May 15
Second Quarter August 15
Third Quarter November 15
Final adjusted return April15 of the succeeding year

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 The tax is paid as the return is filed

Train Law: The return shall be filed in triplicate by the executor/administrator of an

estate, or any person acting in any fiduciary capacity for any person, where such trust,
estate, minor, or person is engaged in trade or business regardless of amount of gross
income.

Note:

Under Section 116 of R.A. No. 11232 (the Revised Corporation Code of the Philippines), an estate or trust may form a
corporation with a single stockholder called a One Person Corporation.

It may therefore be argued that an estate or trust which is constituted as a One Person Corporation should be taxed
like a corporation. However, Section 60(A) of the Tax Code provides that the tax imposed upon individuals shall apply
to the income of estates or trust. The same section does not make any qualification or distinction as to the juridical
personality of an estate or trust.

The author therefore submits that until Section 60(A) of the Tax Code is otherwise repealed or amended by new
legislation, or until the BIR issues regulations/rulings subjecting estates and trusts constituted as One Person
Corporations to the corporate income tax, the income tax imposed upon individuals should still apply to the income of
estates and trusts.

SUMMARY

ESTATE AND TRUST INCOME TAXATION

Estate – the totality of the property left by a deceased person, whether real, personal or intangible. An estate is
considered a separate taxpayer only when it is subject to court proceeding (i.e. under judicial settlement).

Trust – the totality of the property conveyed by a person, trustor, to another, trustee, for the purpose of enabling the
latter to safeguard the property for the benefit of another person, the beneficiary. A trust is considered a separate
taxpayer only when it is irrevocably designated. A revocable trust is considered to be an extension of the grantor and;
hence, taxable upon the grantor.

The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the
case of individuals.

However, the following additional deductions shall be allowed:

1) The amount of the income of the estate or trust for the taxable year which is to be distributed currently by
the fiduciary to the beneficiaries; and
2) The amount of the income collected, by a guardian of an infant, which is to be held or distributed as the
court may direct.

NOTE:
1) The above additional deductions allowed shall be taxable (basic tax) to the beneficiaries.
2) In case of a trust administered in a foreign country:
a. The above mentioned additional deductions are not allowed;
b. The income distributed to beneficiaries is not taxable.

FORMULA:

Gross Income PXXX

Expenses/Losses (XXX)
Income from current year distributed to beneficiaries (XXX)
Taxable Income PXXX
Rate XX%
Income Tax Due PXXX

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 A. ESTATES
JUDICIAL VS. EXTRAJUDICIAL SETTLEMENT
JUDICIAL EXTRAJUDICIAL
Taxable as a separate entity Not taxable as a separate entity.

The income of the estate is to be declared by the

beneficiaries.

Fiduciary/trustee files the ITR and pays the tax thereon Heirs and beneficiaries file the ITR of the estate and pay
the tax due thereon

B. TRUSTS
KINDS TAXATION
1) Irrevocable Trust Taxable as a separate entity.

2) Revocable Trust - is a trust where title can revert back - Not taxable as a separate entity
to the grantor anytime.
3) Trust in which Income is for the benefit of the Grantor - The income of the trust is to be declared and taxed on
the GRANTOR

CONSOLIDATION OF TWO OR MORE TRUSTS

REQUISITES FOR CONSOLIDATION:

1) There are two or more trusts which derive income;
2) The creator of the trust in each instance is the same person, and the beneficiary in each instance is the
same.

REVIEW QUESTIONS

Problem 1: (Income earned before and after death of decedent) Caloy died on August 15, 20x5. His income from
January 1, 20x5 until his death was P2,250,000. From August 16 to December 31 of the same year, the undistributed
estate earned an income of P1,175,000. Children Eloy and Romy were in disagreement as to how the estate will be
distributed among them. Hence, a case for the settlement of the estate of Caloy was filed in court.

Required:
a. Is the P2,250,000 taxable to Caloy or his estate?

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b. Is the estate subject to income tax? Why?
c. Is the P1,175,000 taxable to Caloy, to Eloy and Romy or to his estate?

The income of P2,250,000 is taxable to Caloy because it was earned prior to his death. Only income earned after
death are taxable to the estate.

The estate is subject to income tax because it is under judicial settlement.

The P1,175,000 is taxable to the estate because it is under judicial settlement. If the estate is not under judicial
settlement, it will not be subject to income tax because it shall be treated as a co-ownership. A co-ownership is not
subject to income tax.

Problem 2: (Trust) Vicky created a trust for her daughter, Daph, a property worth P5,000,000 with Marcy as the
trustee. The property is earning an income of P300,000 annually which goes to Daph. Who is required to pay income tax
on the P300,000?

Assuming that the trust created is a revocable trust, both the trustor and the beneficiary are subject to tax. Thus,
Vicky and Daph are subject to tax on the income of the trust. (Grantor/Trustor –Vicky)

However, if what is created is an irrevocable trust only the beneficiary is liable because the annual income of
P300,000 goes entirely to the trust. (DAPH)

Problem 3: (Estate) Pao died two (2) years ago leaving an undivided property deriving income from rentals. His heirs
were Luis and Florentino. The property is under administration through the decedent’s executor. The following data were
provided in 20x8:
Rental income of the estate P1,000,000
Deductible operating expenses (estate) 500,000
Income distributed to Luis 50,000
Income distributed to Florentino 50,000
Dividend income from domestic corporation 100,000
Interest income from U.S. $deposit in the Philippines 200,000
Interest income from Peso deposits 100,000

Personal income/expenses of the heirs:

Luis Florentino
Gross business income P325,000 P380,000
Deductible business expenses 117,000 105,000
Dividend from domestic corporation 25,000 30,000
Dividend from foreign corporation 12,000 8,250
Prize 15,000 7,500
Royalty, books 10,000 18,000

Additional information:
Luis is married with 2 dependent children while Floyd is single without dependent children.

Required: Determine the following:

1. Income tax payable of the estate
2. Income tax payable of Luis
3. Income tax payable of Floyd

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Problem 4: (Trust) Mr. Mario created a trust in favour of Paolo. A large sum of money was enstrusted to BDO
(Trustee), the income of which is accumulated in favour of Paolo. The following data were provided:

Gross income of the trust P3,000,000

Deductible business expenses of the trust 1,800,000
Income distributed to Paolo during the year 200,000
Dividend income from domestic corporation 100,000
Dividend income from resident foreign corporation 100,000
Interest income from US $ deposits in the Philippines 200,000
Interest income from peso deposits 100,000

Personal income and expenses of Paolo:

Compensation income P800,000
Rental income (net of creditable withholding tax) 475,000
Rental expenses 80,000
Royalty income, books 300,000
Other royalty income 120,000
Dividend from domestic corporation 30,000
Dividend from foreign corporation 8,250
Prize 15,000
Lotto winnings 10,000,000
Tax payments (Quarter 1-3) 120,000

Required: Determine the following:

1. Income tax payable of the trust
2. Income tax payable of Paolo

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Problem 5: (Trust) Mr. M created two (2) trusts designating Atty. N and the Philippine Trust Company as trustees. The
common beneficiary of the two (2) trusts was his son, Mr. Nelson, married and with two (2) qualified dependent children.
The following data were made available for the year 20X1:

Trust No. 1 Trust No. 2

Gross income P1,600,000 P1,700,000
Business expenses 500,000 600,000
Income distribution to beneficiary 100,000 200,000
Nelson
Net sales P4,000,000
Gross income 1,800,000
Business expenses 250,000
Income distribution received, gross of 15%
creditable withholding tax 300,000
Income tax paid, previous 3 quarters 40,000
Required:
1. How much was the tax due from each trust?
2. How much was the tax due on the consolidated income?
3. How much was the tax payable of each trust after their share in the consolidated income?
4. How much was the tax payable of Nelson after tax credits/creditable withholding tax?
5. When is the last day for filing of income tax return?
6. Assuming Mr. Nelson used OSD, how much is the taxable net income?

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 Trust 1 Trust 2 Consolidated
Gross income 1,600,000 1,700,000 3,300,000
Business expenses (500,000) (600,000) (1,100,000)
Distribution income (100,000) (200,000) (300,000)
1,000,000 900,000 1,900,000
130,000
(1,900,000-800,000)x.30 330,000
460,000
130,000 130,000
(1,000,000-800,000)x30% 60,000 30,000 (900,000-100,000)30%
190,000 160,000

1,000,000 242,105 217,895

900,000 460,000 52,105 57,895 still due
1,900,000

Nelson
1,800,000
(250,000)
300,000 1,850,000
130,000
(1,850,000 - 800,000 x 30%) 315,000
Basic tax due 445,000
CWTax 15% (45,000)
Previous payment (40,000)
Tax still due 360,000

PREPARATION OF INCOME TAX RETURN OF AN ESTATE

Use the following data for the next two (2) questions

Namahinga Nah died leaving an estate worth P10,000,000. The estate is under administration. In 2020, the properties
in the estate earned a gross income of P1,200,000 and the estate incurred expenses of P600,000. Felipe, the only heir,
received P200,000 from the income of the estate.

1. How much is the income tax due of the estate?

A. P30,000 B. P40,000 C. P50,000 D. P60,000

2. Assuming that Felipe also earned net income of P500,000 from his trading business. What amount should Francis
report as his taxable income for the year?
A. P200,000 B. P500,000 C. P530,000 D. P700,000

Gross income 1,200,000

OPEX (600,000)
Income of the estate distributed to Felipe (200,000)
Estate's taxable net income 400,000
Income Tax Due
(Tax Table for individuals - Train Law) 30,000

Gross income from trading business 500,000

Amount received from the inocme of the estate 200,000
Taxable net income of Francis 700,000

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 PREPARATION OF INCOME TAX RETURN OF AN ESTATE

Use the following data for the next four (4) questions

On January 1, 2020, Pedro established a trust fund for the benefit of his daughter, Ana. Pedro appointed Mr. Abugado as
the trustee. The properly transferred to the trust is a piece of land with a dormitory earning rental income. During the
year, the trust earned P40,000,000 revenues and incurred expenses of P10,000,000. Out of the trust’s income, Mr.
Abugado transferred P10,000,000 to Ana. During the year, Ana earned compensation income of P2,500,000.

1. How much is the taxable income of the trust?

A. P30,000,000 B. P29,980,000 C. P19,980,000 D. P20,000,000

Gross income - trust 40,000,000

Expenses (10,000,000)
Income of the trust given to Ana (10,000,000)
Net Taxable Income - Trust 20,000,000

2. How much is the taxable income of Ana?

A. P2,950,000 B. P12,950,000 C. P13,000,000 D. P11,450,000

C ompensation income 2,500,000

Income of the trust distributed to Ana 10,000,000
Net Taxable Income - Ana 12,500,000

3. The taxable income of the trust if it is administered abroad is

A. P30,000,000 B. P29,980,000 C. P19,980,000 D. P21,480,000

Gross income - trust 40,000,000

Expenses (10,000,000)
Income of the trust given to Ana -
Net Taxable Income - Trust 30,000,000

In case of a trust administered in a foreign country, the amount of the income of the estate or trust for the taxable year
which is distributed currently by the fiduciary to the beneficiaries is not deductible from the gross income of the estate or
trust.

4. Based on the preceding number, the taxable income of Ana should be

A. P2,950,000 B. P2,500,000 C. P11,500,000 D. P11,450,000

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