May 2021

TAXATION OF ESTATES AND TRUSTS

Atty. C. Llamado

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.1

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.2

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.3

Heir Defined

An heir is a person called to the succession either by the provision of a will or by

operation of law.4

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.

Classification of Estates

Estates, for purposes of the income tax, are classified into:5

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).

1
Art. 776, Civil Code.
2
Art. 781, Civil Code.
3
Art. 775, Civil Code.
4
Art. 782, Civil Code.
5
Secs. 209 and 210, Rev. Reg. No. 2-1940.
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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.

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 to estates.

Excluded from Gross Income of an Estate:

The passage of property to the executor or administrator on the death of the decedent,
even though the property may have appreciated in value since the decedent acquired it.

Included in Gross Income of an Estate

1. Income received by the estate of a deceased person during the period of

administration or settlement of the estate.

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.

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Notes:

1. In the event of delivery of property in kind to a legatee or distributee, no income is

realized by the legatee or distributee.

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

Estates 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.

Notes:

(a) The amount so allowed as a deduction shall be included in computing the taxable
income of the legatee, heir, or beneficiary.6

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.

(b) An allowance paid to an heir out of the corpus (i.e. property) of the estate is not
deductible from gross income.7

6
Sec. 61(B), NIRC.
7
Sec. 211, Rev. Reg. No. 2-40.
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May 2021

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 ₱3,000,000 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 ₱3,000,000, 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
(₱250,000);

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 - (a) Taxable net income or
(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)

TRUSTS
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.

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May 2021

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.8

Classification of Trusts

Trusts may be classified into the following categories:

(1) Ordinary trust;
(2) Revocable trust; and
(3) Employee’s trust.

Ordinary Trust

In an ordinary trust9, 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.

Revocable Trust

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.10

8
Sec. 207, Rev. Reg. No. 2-40.
9
Ordinary trust is any of the following trusts:
i. A trust where the income is accumulated or held for future distribution under the terms of a will or
trust;
ii. A trust where the income is to be distributed currently by the fiduciary to the beneficiaries;
iii. A trust where the income is accumulated for the benefit of unborn or unascertained person or persons
with contingent interest;
iv. A trust where the income collected by a guardian of an infant is held or distributed as the court may
direct; and
v. A trust where the income, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated (Sec. 60 (A), NIRC).
10
Sec. 63, NIRC; Sec. 207, Rev. Reg. No. 2-40.
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May 2021

“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.11

Employee’s Trust

Income tax shall not apply to employee’s trust which forms part of a pension, stock
bonus, or profit-sharing plan of an employer for the benefit of some or all of his
employees.12

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 distributee 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.13

11
Sec. 64(A), NIRC.
12
Sec. 60(B), NIRC.
13
Sec. 60(B), NIRC.
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May 2021

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 Trustee14

(1) The income of a trust which is to be accumulated or held for future distribution,
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 interests
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 Beneficiaries

The income of a trust for the taxable year which is to be distributed to the beneficiaries
must be returned (i.e. 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 Grantor15

(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 or
distributed for the benefit of the 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.

14
Sec. 207, Rev. Reg. No. 2-40.
15
Sec. 64(A), NIRC.
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May 2021

Determination of the Tax

The tax shall be computed upon the taxable income of the trust and shall be paid by the
fiduciary.16

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.17

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.

Deduction 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.18

Special Deduction of Trusts19

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 not.

16
Sec. 60(C)(1), NIRC.
17
Sec. 61, NIRC.
18
Sec. 61, NIRC.
19
Sec. 61(A) and (B), NIRC.
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May 2021

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 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 ₱3,000,000 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 ₱3,000,000, 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
(₱250,000);

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 Income Tax of Trusts

Accounting Period - Calendar year

Tax Base - (a) Taxable net income or
(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)

Consolidation of Income of Two or More Trusts20

Where 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.
20
Sec. 60(C)(2), NIRC.
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May 2021

Formula

The formula to determine the allocation of tax to be paid by each trustee shall be as
follows:

Taxable income of
Tax allocated
trust Tax on consolidated
X = or to be paid
Consolidated taxable taxable income
by trustee
income

Author’s 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 trusts.
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.

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