NOTES

CHAPTER 1 SUCCESSION AND TRANSFER TAXES

Modes of Acquiring Property
• Occupation
• Law
• Donation
• Tradition
• Intellectual creation
• Prescription
• Succession

SUCCESSION - is 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 either by
will or by operation of law (Article 774, Civil Code)
- The inheritance includes all the property, rights, and obligations of a person which are not extinguished by his
death (Article 776, Civil Code)

Basis of Succession
• First theory, succession is an extension of the right of ownership.
• Second theory, succession is based on family co-ownership
• Third theory, extension of right of ownership as well as family co-ownership

Kinds of Succession
• Testamentary Succession
• Intestate Succession
• Mixed Succession
Testamentary Succession - A type of succession that results from the designation of an heir, made in a will
executed in the form prescribed by law.
Intestate Succession - A type of succession which is effected by operations of law (based on the provisions of
the Civil Code regarding the succession) since the decedent did not execute a will or if the last will and testament
executed by him is void.
Elements of Succession
• Decedent
• Estate
• Heirs
Compulsory Heirs - Those who succeeded by force of law to some portion of the inheritance, in an amount
predetermined by law, known as legitime. They succeeded whether the testator like it or not. They cannot be
deprived by the testator of their legitime except by disinheritance properly effected.

Voluntary Heirs - Those instituted by the testator in his will to succeed to their inheritance of the portion
thereof of which the testator can freely dispose.

Order of Intestate Succession

1. Legitimate child, children, or descendants
2. Legitimate parents or ascendants
3. Illegitimate children or descendants
4. Surviving spouse
5. Brothers and sisters, nephews and nieces
6. Other collateral relatives within the fifth (5th) degree
7. The State

Composition of Gross State

Generally, gross estate consists of all the property owned by a decedent or which the decedent had an interest at
the time of death, such as:
• Real property
• Personal tangible property
• Intangible personal property (shares of stock
Shares of stock
Bank deposit
Dividends declared before his death but received after death partnership profit which have accrued before
his death
Usufructuary & rights

SECTION 85 OF THE TAX CODE ENUMERATES THE COMPOSITION OF THE GROSS ESTATE

1. Property owned by the decedent that are actually and physically present in his estate at the time of his
death such as land, buildings, shares of stock, vehicles, bank deposit, and the like.
2. Property NOT PHYSICALLY IN THE ESTATE but are still subject to payment of estate tax
- These properties have already been transferred during the lifetime of the decedent, however, such
properties shall still form part of his gross estate because the transfers were either intended to take
effect only upon his death or does not actually convey full ownership over the property transferred.

A. Transfers in Contemplation of Death [SEC. 85(B)]

THE GROSS ESTATE SHALL INCLUDE THE VALUE OF PROPERTY TRANSFERRED BY THE
DECEDENT DURING HIS LIFETIME IN ANTICIPATION OF HIS DEATH (TRANSFER IN
CONTEMPLATION OF DEATH) SUCH AS:

1. Transfer of property in favor of another person, but the transfer was intended to take effect only upon the
transferor’s death.
2. Transfer by gift intended to take effect at death, or after death, or under which the donor reserved the
income or the right to designate the persons who should enjoy the income.
3. Transfer with retention or reservation of certain rights. The decedent had transferred his property during
his lifetime, but retained for himself beneficial enjoyment of the thing or the right to receive income from
the same.

B. Revocable Transfers [SEC. 85(C)]

REVOCABLE TRANSFERS - THE TERM OF ENJOYMENT OF THE PROPERTY MAY BE ALTERED,
AMENDED, REVOKED OR TERMINATED BY THE DECEDENT.
Section 85(C) of the Tax Code, as amended, provides:

(1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of
a bona fide sale for an adequate and full consideration in money or money 's worth) by trust or otherwise, where
the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in
whatever capacity exerciseable) by the decedent alone or by the decedent in conjunction with any other person
(without regard to when or from what source the decedent acquired such power), t o alter, amend, revoke, or
terminate, or where any such power is relinquished in contemplation of the decedent's death.
(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date
of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even
though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the
exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the
power has been exercised. In such cases, proper adjustment shall be made representing the interests which would
have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been
given or the power has not been exercised on or before the date of his death, such notice shall be considered to
have been given, or the power exercised, on the date of his death.

C. Transfers under a General Power of Appointment [SEC. 85(D)]

1. Power of appointment refers to the right to designate the person/s who will succeed to the property of the
prior decedent.
2. It may be “general” or “special”
GENERAL POWER OF APPOINTMENT (GPA) When the power of the appointment authorizes the donee
to the power to appoint any person he pleases.
SPECIAL POWER OF APPOINTMENT (SPA) Exist when the donee can appoint only from a restricted or
designated class of persons other than himself.
The power of appointment may be exercised by the donor decedent through the following modes:
A. By will
B. By deed to take effect in possession or enjoyment at or after his death.
B. By deed to take effect in possession or enjoyment at or after his death.
C. By deed under which he has retained for his life or any period not ascertainable without reference to his death.
D. The possession or enjoyment of, or the right to the income from the property.
E. The right, either alone, or in conjunction with any person to designate the persons who shall possess or enjoy
the property or the income therefrom.

D. Transfers for Insufficient Consideration

For this purpose, the following fair market values shall be used: Fair Market Values (FMV):
FMV of the property at the time of sale or transfer.
FMV of the property at the time of death.

3. MISCELLANOUS ITEM
A. Claims against insolvent persons
For estate tax purposes, an insolvent is a person whose properties are not sufficient to satisfy, whether fully or
partially, his debt(s). A judicial declaration of insolvency is not required but the incapacity of the debtor to pay
his obligation should be proven.

B. Proceeds of life insurance [Sec. 85(E)]

Proceeds of life insurance taken out by the decedent on his own life should be included in the gross estate if the
following requisites are present:
1. It must be an insurance on the life of the decedent; and
2. The beneficiary must be either of the following; B. Proceeds of life insurance [Sec. 85(E)]

ESTATE TAX RATE - The transfer of the net estate of every decendent, whether resident or non-resident of the
Philippines, as determined in accordance with the Tax Code, as amended should be subject to the estate tax.
THE LAW THAT GOVERNS THE IMPOSITION OF ESTATE TAX AND ACCRUAL OR ESTATE
TAX
10963 or tax reform for acceleration and inclusion (train) law, which took effect on 01 January 2018.
Before the effectivity of the train law, republic act no. 8424 or the national internal revenue code of
1997 governs the imposition of estate tax.

FILING OF ESTATE TAX RETURN AND PAYMENT OF ESTATE TAX DUE

The Tax Code, as amended, provide that the estate tax shall be paid by the executor/administrator or any of the
legal heirs at the time the return as filed. (Pay as you file system)

FILING AND PAYMENT

A. PRIMARY- EXECUTOR OR ADMINISTRATOR
B. SECONDARY- ANY OF THE HEIRS

1.In cases of transfer subject to Estate Tax: and

2. Where regardless of the gross value, the estate consists of registered or registrable property such as real
property, motor vehicle, share of stocks or other similar property for which a Certificate Authorizing Registration
from the Bureau of Internal Revenue (BIR) is required as a condition precedent for the transfer of ownership
thereof in the name of the transferee, the executor or the administrator, or any of the legal heirs, as the case may
be.

A. Itemized assets of the descendent with their corresponding gross value at the time of his death, or in the case
of nonresident, not a citizen of the Philippines, of that part of his gross state situated in the Philippines
B. Internized deductions allowed from the gross estate under Section 86 of the Tax Code, as amended;
C. The amount of tax due, whether paid or still due and outstanding.

TIME FOR FILING THE ESTATE TAX RETURN

Section 90(B) of the Tax Code, as amended, provides that the estate tax return is required to be filed within one
(1) year from the decedent’s death.
The period allowed to file the estate tax return shall be distinguished from the “accrual” date of the estate tax due.
The accrual of the estate tax is distinct from the obligation to pay the same. [(RR 2- 2003); (Lorenzo vs. Posadas,
64 Phil. 353)].
EXTENSION OF TIME TO FILE THE ESTATE TAX RETURN
• Under sec. 90(c) of the tax code, “the commissioner or any revenue officer authorized by him pursuant to
the nirc shall have the authority to grant, in meritorious cases, a reasonable extension not exceeding thirty
(30) days for filing the return”.

TIME FOR PAYMENT OF ESTATE TAX

As a general rule, the estate tax imposed under the Tax Code shall be paid at the time the return is filed (Pay as
File System) by the executor, administrator, or the heir(s).

EXTENSION OF TIME TO PAY ESTATE TAX

• When a commissioner finds that the payment of the estate tax or of any part thereof would impose undue
hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part
thereof not to exceed five (5) years in case the estate is settled through the courts (judicial settlement), or
two (2) years in case the estate is settled extra judicially (extrajudicial settlement).
Payment of Estate Tax by Installment and Partial Disposition of Estate

1. Cash Installment
A. The cash installments shall be made within 2 years from the date of the filling of the estate tax return,
using the payment form (BIR form 0605) or a payment form dedicated for this transaction for succeeding
installment payment after filing the first payment through the estate tax.
B. The estate tax return shall be filled within 1 year groom the date of the decedent’s death:
C. The frequency deadline and the amount of each installment shall be indicated in the estate tax return ,
subject to the approval by the BIR
D. In case of lapse of two (2) years without the payment of entire tax due, the remaining balance thereof
shall be due and demandable subject to applicable penalties and interest reckoned from the prescribed
deadline for filing the return and payment of estate tax: and
E. No civil penalties or interest may be imposed on the estates permitted to pay the estate tax due by
installment.
2. Partial disposition of estate and application of its proceeds to the estate tax due
A. The disposition for purposes of this option shall refer to the conveyance of the property wheter real
personal or intangible property with the equivalent cash consideration.
B. the estate tax return shall be filled within one (1) year from the date of the decedent’s death
C. The written request for the partial disposition of estate shall be approve by the BIR.
D. The computed estate tax due shall be allocated in proportion to the value each property
E. The estate shall pay to to the BIR, the proportionate estate tax due of the property intended to be
disposed of;
F. An Electronic Certificate Authorizing Registration (eCAR) shall be issued upon presentation of the
proof of payment of the proportionate estate tax due of the property intended to be disposed.
G. In case of failure to pay the total estate tax due out from the proceeds of the said disposition, the estate
tax shall be immediately due and demandable subject to the applicable penalties and interest reckoned.

REQUEST FOR EXTENSION OF TIME, INSTALLMENT PAYMENT AND PARTIAL DISPOSITION

OF ESTATE
Request for extension to file the return, extension to pay the estate tax and payment by installment shall be filed
with the Revenue District Officer (RDO), Where the estate is required to secure its TIN and file the estate tax
return. This request shall be approved by the Commissioner or his duly authorized representative

LIABILITY FOR THE PAYMENT OF ESTATE TAX

*The estate tax imposed is generally paid by the executor or administrator before the delivery of the
distributive share in the inheritance to any heir or beneficiary. Where there are two or more executors or
administrators, all of them are severally liable for the payment of the tax.
PAYMENT BY INSTALLMENT
*For each installment payment, the borrower repays a portion of the principal borrowed and also pays
interest on the loan.
*In case the available cash of the estate is insufficient to pay the total estate tax due, payment by
installment shall be allowed within two (2) years from the statutory date for its payment without civil
penalty and interest upon approved by the concerned BIR Official.

CIVIL PENALTIES AND INTEREST

1. SURCHARGE(CIVIL PENALTIES)
*There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent
(25%) of the amount due
2. INTEREST
*Interest shall be computed on the unpaid amount of tax from the date computed until fully paid (20% prior to
TRAIN Law; 12% upon effectivity of the TRAIN Law)

PAYMENT OF TAX ANTECEDENT TO THE TRANSFER OF SHARES, BONDS OF RIGHTS

There shall not be transferred to any new owner in the books of any corporation. sociedad anonima,
partnership, business, or industry organized or established in the Philippines any share, obligation, bond
or right by way of gift inter-vivos or mortis causa, legacy or inheritance, unless a certification from the
Commissioner that the applicable tax have been paid.