4 GROSS ESTATE  Proceeds of irrevocable life insurance policy payable to

beneficiary other than the estate, executor or administrator

 Gross estate – consists of all properties of the decedent, tangible,
real or personal and wherever situated at the point of death Designation of
beneficiary
4 PROCEDURES IN ESTABLISHING GROSS ESTATE Beneficiary Revocabl Irrevocable
1. Inventory count of existing properties at the point of death e
2. Adjustments for exempt transfers and taxable transfers Estate, administrator, or executor Include Include
Other parties Include Exclude
P Properties representing income earned before death - INCLUDED
- properly form part of the gross estate of the decedent because P Presumed Revocable – if the decedent named a beneficiary
these were present at the point of death without indicating whether the designation is revocable or
irrevocable
P Properties representing income accruing after death – EXCLUDED However, if the decedent did not replace the
P Expenses or obligations which were paid since death – ADDED beneficiary until his death, the designation is:
IRREVOCABLE (Hence not included in gross estate)

4 TRANSFER OF PROPERTIES NOT OWNED BY THE DECEDENT P Estate. Administrator, executor = INCLUDED regardless\ of the
designation because these are considered extensions of the
 Merger of usufruct in the owner of the naked title interest of the decedent.
Predecessor Current decedent
 Properties held in trust by the decedent
A B C – Not owned by the decedent
(Usufructuary
(Owner of – Excluded in gross estate
the naked
)
 Separate properties of the surviving spouse
Merger of usufruct in the owner – Common properties : Owned by both spouses
of the naked title – Separate/Exclusive properties: Solely owned by either of
B: NOT included in the gross them
estate  Husband’s capital – separate and exclusive
A: INCLUDED in gross estate property of husband
 Wife’s paraphernal – separate and exclusive
properties of the wife
 Transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the fideicommissary
Should NOT form part of the GROSS
Predecessor Current decedent ESTATE of any of them

GROSS ESTATE of a Married Decedent:

A B C (+) Respective Separate and exclusive properties
(Fiduciary heir) (Fideicommissary  If Husband is decedent: Husband’s
))
Capital
 If Wife is decedent: Wife paraphernal
Delivery of the inheritance upon
the death of B to C: (+) Common properties
B: NOT included in the gross
estate- because there’s no
transfer of ownership
A: INCLUDED in gross estate
 Transfer by way of bona fide sales
P Onerous transactions rather than gratuitous transactions
P NOT subject to ESTATE TAX
 Transmission from the first heir, legatee or done in favor of
another beneficiary, in accordance with the desire of the
predecessor 4 LEGAL EXCLUSIONS

 Note on property acquisitions using exempt benefits

Predecessor Current decedent
- Properties acquired using:
 GSIS benefits EXEMPT:
A B C  SSS accruals As long as the heirs
(1st Heir) (2nd Heir)  USVA benefits can prove that the
 Proceeds of group insurance properties were
Transfer under the special
 War damage payments acquired using these
exempt benefits
power of appointment from B
to C:
B: NOT included in the gross  Note on bequest, device or legacies to social welfare, cultural
estate- because it is merely an and charitable institutions
implementation of the transfer - If:
which was originally mandated
 Bequest P 30% or more is used in administration
by A
A: INCLUDED in gross estate
 Device purposes = INCLUDE GROSS ESTATE
 Legacies P Less than 30% = EXCLUDE GROSS ESTATE
 REQUIREMENTS FOR ACCREDITATION OF DONEE INSTITUTION:
1. Does not inure to the benefit of any private individual
2. The level of their administration expenses does not exceed 30% of
their expenses (Admin expense <30%)
ILLUSTRATION 2:
Mr. Jo and Mr Kang has a joint account in 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.

P If transfer qualifies foe 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.
P Bequest, devises, legacies which are restricted by the decedent
for administrative expenses of the done institution (whether
accredited or non-accredited) = INCLUDED IN GROSS ESTATE
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 the ½ of
the P100,000 withdraw.
P100,000/2 = P50,000 subject to 6% FT (NOT INCLUDED in Gross Estate)
= P50,000 not subject to FT (INCLUDED in Gross Estate)

 Deposits withdrawn from the decedent’s bank account

P Allows unlimited withdrawal
P But requires the knowledge of
from the decedents
the decedent’s death
bank account
P Withholds 6% final withholding
tax upon the withdrawal if
made within one year from the
decedent’s death
 Amounts subjected to the 6%
final tax = EXCLUDED IN GROSS
ESTATE
 If withdrawal is not subjected
to 6% final tax = INCLUDED IN
GROSS ESTATE
 If withdrawal is beyond the
one-year period from the
decedent’s death = INCLUDED
IN GROSS ESTATE
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.
4 TAXABLE TRANSFERS
 Transfers in contemplation of death
- made by the decedent during his lifetime which are
motivated with the thought of death
- treated by the law as donation mortis causa subject to
estate tax

EXAMPLES:
 Transfers of property to take effect in possession
or enjoyment at or after death
 Transfers of property with retention of the right of
ILLUSTRATION 1: possession or enjoyment or right over income of
the property until death
The following withdrawals were made from the bank account of the  Transfer of property with retention of the right to
decedent who died July 8, 2019: designate, alone or in conjunction with any person,
the person who shall enjoy the property or income
Beg Balance P3,000,000 there from.
July 7, 2019 200,000 For payment of medical expenses
July 9, 2019 300,000 For payment of funeral expenses  Revocable Transfers and Conditional Transfers
July 10, 2020 500,000 For payment of claims against the estate - transfer of possession but not transfer of ownership of the
Ending Balance P 4,000,000 property
- at the point of death, decedent owns the property; hence
The P300,000 shall be excluded in gross estate. The amount of cash in bank included as part of the gross estate
to be reported is:
P3,000,000 Beg Balance
If the decedent DIED
500,000 For payment of claims against the estate
before this happen:
P3,500,000 Included in GROSS ESTATE
P Waives his right TAXABLE:
P Lapse of revocation period/ ESTATE TAX
NOTE:
1. The 200,000 withdrawal is not part of the gross estate as it is condition period
expended before the death of the decedent. This is not subject P Fulfillment of the condition
to 6% FT since decedent id not yet dead.
If the decedent DID NOT DIED
2. Assuming that the bank is informed about the decedent’s
and this happen:
death, the 300,000 shall be subjected to 6% FT and excluded in TAXABLE:
P Waives his right
the gross estate DONOR’S
P Lapse of revocation period/
3. The 500,000 shall no longer be subjected to the FT since it is TAX
beyond the 1-year requirement . The estate tax might have condition period
been paid by that time. P Fulfillment of the condition
P
If the decedent DID NOT DIED
and this DID NOT happen:
P Waives his right NOT
P Lapse of revocation period/ TAXABLE
condition period
P Fulfillment of the condition
  Transfer under general power of appointment
- included in the gross estate of the decedent Real The appraisal value of real Property shall be:
- enables the holder of such power to do with property anything Properties
which he could do as if the property were his own
P Zonal Value (Value as determined by the
General Power of Appointment = INCLUDE in taxable estate of Commissioner of Internal Revenue)
HIGHER
decedent
P FV per Assessor (Value fixed by the Provincial
Special Power of Appointment = EXCLUDE in taxable estate of or City Assessor)
decedent

 IF NO ZONAL VALUE – Taxable base shall be the

ILLUSTRATION FMV that appears in the latest tax declaration
 NOTE: FV listed in the schedule of market value-
Don Kulot died. In his will, he gave Mama Sang a house NOT ASSESSED VALUE
and lot with the right to designate the property to  IF THERE IS IMPROVEMENT – Value of
whomever heir she wants. Mama Sang eventually died improvement:
and appointed Bebe as heir to the property. Construction cost per building permit
FV that appears in the latest tax declaration
Mama Sang had a general power over the property. The Shares of P Preferred Shares = Par Value
same shall be included in her gross estate. If she has Stocks P Unlisted common shares = Book Value
limited power, the same shall NOT be included in her P Listed common shares = Use arithmetic mean
gross estate. Usufruct P Must take into account the probable life of the
and beneficiary in accordance with the latest basic standard
annuities mortality table approved by the Secretary of Finance,
4 VALUATION OF GROSS ESTATE upon recommendation of the Insurance Commissioner
Other Purchased P FV = Purchase Price (For new
P Measurement of properties subject to estate tax = Fair Value at properties property purchase)
the point of death P FV = Second-hand value (For not
newly purchased)
Pawned P FV = Reestablished by grossing-up
 Valuation Rules properties the pawn value by the loan-to-value
1. The fair value at the time of the property as of the time of ratio)
death = The value to include in gross estate
Property P FV = Amount fixed in the contract
2. Fair value rules set by law or revenue regulations must be
fixed in including accrued income
followed
monetary
3. Fair value rules under generally accepted accounting
terms (ex:
principles – in default of such fair values
Loan or
4. Encumbrances on the property or decrease in value after
Receivables
the death shall be ignored.
)
Foreign P FV = Peso value translated @
currencies exchange rate at the date of death
Taxable Transfers without
transfers Consideration FV of the transferred property at
the date of death

FV of the transferred property at

the date of death
Transfers without
(Consideration paid @ date of
consideration
transfer)
-------------------------------------------
Taxable estate
INTEGRATIVE ILLUSTRATIONS

ILLUSTRATION 1
ILLUSTRATION 3
A resident decedent died with the following properties at the point of death:
An inventory of Mr. D’s properties was taken two years after his death. He had the
Cash in bank account P1,000,000 following properties during the inventory-taking:
Receivables from friends and relatives 200,000
Borrowed car from a friend 120,000 Cash (40% from income of properties after death) P4,000,000
House and Lot 2,000,000 Car (bought for P1.2M a week before Mr. Ds death) 800,000
Motorcycle, registered in the name of his youngest son 80,000 House and lot (worth P8M on Mr. D’s death) 10,000,000
Total P3,400,000 Business interest (worth P6M on Mr. D’s death) 7,000,000
TOTAL P21,800,000
The gross estate shall be computed as:
Inventory of present properties P3,400,000 The following possible deductions can be claimed by the estate:
LESS: Not owned Funeral and judicial expenses paid P1,100,000
Borrowed car P120,000 Wreck of a fishing boat, one year after Mr. D’s death 800,000
Motorcycle 80,000 200,000 Obligations of Mr. D paid from his properties 1,500,000
GROSS ESTATE P3,200,000
The gross estate at the point of death shall be established as:

Inventory of property P21,800,000

ILLUSTRATION 2
ADD: Decreases in properties since death
Funeral and judicial expense P1,100,000
Mr. A, a citizen decedent, died leaving the following properties:
Wreck of a fishing boat 800,000
Obligations paid after death 1,500,000
Cash proceeds of life insurance designated to
Decrease in value of car (P1.2M-0.8M) 400,000 3,800,000
a brother as revocable beneficiary P 1,000,000
Total P25,600,000
Building, properties held as usufructuary 4,000,000
LESS: Increases in properties since death
Cash in Bank 2,400,000
Cash income of properties (P4Mx40%) P1,600,000
Agricultural land 3,000,000
Increase in value of house and lot (P10M-P8M) 2,000,000
House and Lot, from Mr. A’s industry 7,000,000
Increase in business interest (P7M-P6M) 1,000,000 4,600,000
Benefits from GSIS 500,000
GROSS ESTATE P21,000,000
Total properties P 17,900,000

Additional information
1. The agricultural land was designated by Mr. A’s father in his will to be 4 FAIR VALUE OF ASSETS
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 ILLUSTRATION (REAL PROPERTIES)
brother E. Mr. E paid P400,000 when the lot was worth P1,000,000.
The lot was currently valued at P2M zonal value upon Mr. A’s death. Mrs. Geogracia died leaving a house and lot as part of her estate. The property
3. The heirs withdrew P376,000 cash from the decedent’s bank account which was encumbered by a P1,000,000 mortgage had the following fair value:
for Mr. A’s wake, net of 6% final tax deducted by the bank.
LOT HOUSE
The gross estate shall be computed as:
Zonal Value P3,000,000
Inventory of present properties P17,900,00 Fair Value, per assessor 2,000,000 P4,000,000
LESS: Properties not owned
Assessed value 400,000 1,600,000
Building P4,000,000
Appraisal value 2,500,000 4,500,000
Agricultural land 3,000,000
Total P7,000,000 P Independent appraisal not used
Solution:
Properties exempted by law
House – P4,000,000 P Mortgage shall not be offset against
GSIS benefits 500,000
Lot - 3,000,000 the value of property
Bank withdrawal (P376,000/94%) 400,000 7,900,000
P7,000,000
Taxable present properties P10,000,000
ADD: Taxable transfers (2M-400k) 1,600,000
GROSS ESTATE P11,600,000
ILLUSTRATION (SHARES OF STOCK)

Mr. Yakal died leaving 1,000 preferred shares and 300,000 common shares of
MVC Company in his estate. The equity section of MVC in its latest quarterly FS
is as follows:

Preferred stocks, 10,000 shares @ P500 par P5,000,000

Common shares, 10,000 shares @ P2 par 20,000,000
Share premium-common 4,000,000
Retained earnings 12,000,000
Revaluation surplus-PPE 2,000,000
Less: Treasury Shares, P100,000 shares 360,000
TOTAL SHAREHOLDERS EQUITY P42,640,000
ILLUSTRATION (SHARES OF STOCK) Solution:
Upon the death of Aurelius, the usufruct will be transferred to his heirs for
Case 1 the four years (10 yrs – 6 yrs) remaining UNEXPIRED term of the usufruct.

Assuming MVC is non-listed company, the book value per share of common The fair value of the usufruct to be included in the gross estate of Aurelius
share shall be computed as: shall be the PV of the annual income on the property for 4 years:

Common shares, 10,000 shares @P2 par P20,000,000 Value of usufruct= (1-(1+12%)-4) x P1,000,000
Share premium-common 4,000,000 12%
Retained earnings 12,000,000
Less: Treasury Shares (360,000) =3.037349 x P1,000,000
Residual net assets P35,640,000 =P3,037,349
Divide by: Outstanding common shares (10M-100K) 9,900,000
BOOK VALUE PER SHARE P 3.60 Note:
1. The transfer of property from Aurelius to his heir for the
Mr. Yakal’s shares shall be valued in his gross estate: remainder of the usufruct is not a merger of the usufruct to the
owner of the naked title
Preferred stocks (1,000@ P500) P500,000 2. Assuming Don Midas granted Aurelius’ heir a life usufruct, the fair
Common Stocks (300,000 x P3.60) 1,080,000 value of the usufruct to be included in the gross estate of Aurelius
TOTAL GROSS ESTATE P 1,580,000 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
Case 2 death to Marcus is exempted from transfer tax.

Assuming MVC is listed and traded as follows in the stock market at the nearest
trading day to the date of death:
ILLUSTRATION (OTHER PROPERTIES)
Lowest price: P 4 Average price: 4+6=10/2= P5 CASE 1: USED PROPERTIES
Highest price: P 6
Mr Bantay died leaving a used car as part of his estate. Mr. bantay bought the
car at P400,000. Brand new car units of the same car model sell at P500,000.
The car sells at P250,000 idf sold as is at the point of death.
Mr. Yakal’s shares shall be valued in his gross estate:

Preferred stocks (1,000@ P500) P500,000 Fair Value in Gross estate = P250,000
Common Stocks (300,000 x P5) 1,500,000
TOTAL GROSS ESTATE P 2,000,000
CASE 2: PAWNED JEWELRY
At the point of death, Mr X has a piece of jewelry which was pawned with
Munting Pawnshop for P90,000. Muting Pawnshop maintains a 60% loan-to-
ILLUSTRATION (USUFRUCT AND ANNUITIES)
appraisal value.
Case 1: Annuity Contract
Fair value included in Gross Estate: P90,000/60%= P150,000
Mr. Maruiguin, 60 years old, sold his company under the condition that the The P90,000 loan shall not be offset with the value of the jewelry but
acquirer shall pay his 35-year-old wife and their child P300,000 yearly support should be presented as an item of deduction from gross estate.
payment for 30 years. Mr Maruiguin died after the fifth payment was made by
the acquirer. Discount rate is 12%
CASE 3: LOANS RECEIVABLES
Solution:
On June 30,2020, Mr. Bombay died with the following outstanding
receivables:
Value of annuity = PV of OA 1 x Annuity payments
 P50,000 non-interest bearing loan to Mr. A given April 1,2020 and
= (1-(1+i)-n) x Annuity payments
is due in 3 months
I
 P 300,000 loan, bearing 10% interest to Mrs. B, given January 1,
2020 and is due in one year.
= 7.843139 x P300,000
 A P20,000 non-interest bearing loan to Mr. C, due March 30,2020
Included in GE = P 2,352,941.73
but still unpaid
Note: i= interest rate/discount rate: 12%
The foregoing loans shall be included in gross estate as:
N= number of periods: 30 years-5years=25 years
Loan to Mr. A P50,000
Loan to Mrs. B 300,000
Accrued interest on loan to Mrs. B at the date of death 15,000
Case 2: Usufruct
Overdue loan to Mr. C 20,000
Amount to include in gross estate P 385,000
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
NOTE:
Marcus who was designated as the owner of the naked title. Aurelius died just
1. Accrued interest: P 300,000 x 10% x 6/12= P15,000
after the end of the sixth year of usufruct.
2. Overdue claim, even if due from insolvent persons – INCLUDED IN
GROSS ESTATE (Claims proven worthless are still included in gross
The property earns P1,000,000 annual income. Discount rate is 12%.
estate then separately presented as deductions)
ILLUSTRATION (TAXABLE TRANSFERS)

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

At date of transfer FV at death

Fair Value Consideration
Alexander P 300,000 0 P200,000
BJ 200,000 195,000 300,000
Cedric 100,000 40,000 120,000
Donnie 150,000 80,000 70,000

SOLUTION:

FV at death Consideration TAXABLE

Alexander 200,000 0 200,000
BJ - - -
Cedric 120,000 40,000 80,000
Donnie 70,000 80,000 -
280,000

NOTE:
1. BJ: transfer is for adequate consideration (bona fide sale not
subject to estate tax but to income tax at date of sale)
2. Donnie: Decrease in FV below consideration - Ignored
 The gross estate of a decedent is reported as follows:

* For MARRIED DECEDENT

EXCLUSIVE/SEPARATE CONJUGAL/COMMUNAL TOTAL
GROSS ESTATE P xxx,xxx P xxx,xxx P. xxx,xxx
Less: Deductions (xxx,xxx) (xxx,xxx) (xxx,xxx)
Net Taxable Estate P xxx,xxx P xxx,xxx P xxx,xxx

*For SINGLE DECEDENT: The conjugal/communal column is left blank.

ABSOLUTE SEPARATION
OF PROPERTY (ASP)
CONJUGAL PARTNERSHIP OF GAINS (CPG) ABSOLUTE COMMUNITY OF PROPERTY (ACP)
P ALL properties of the
spouses are SEPARATE During marriage Before marriage During marriage
Before marriage
PROPERTIES
P EXCEPT: Those which
they may acquire jointly Retrospective Date of marriage Prospective
Prospective
All properties here are common All properties here are common
All properties here are All properties here are common Exceptions: Exceptions:
exclusive EXCEPTION: - Properties of spouse with - Gratuitous acquisitions
- Gratuitous acquisitions received descendants in a prior marriage received by either spouse
- Fruits of exclusive property
by either spouse (Donation or
Inheritance) - Properties of personal exclusive use of either spouse, EXCEPT JEWELRY

SUMMARY OF RULES: SPOUSE WITH DESCEDANTS IN A PRIOR MARRIAGE

Before During marriage
Properties acquired Before During
marriage
marriage marriage
Fruit of labor or industry EXCLUSIVE CONJUGAL - From gratuitous acquisitions Exclusive Exclusive
Fruit of properties EXCLUSIVE CONJUGAL - From fruit of industry Exclusive Communal
Inheritance or donation EXCLUSIVE EXCLUSIVE - From fruit of property
(If designated to
both spouses =  Separate property Exclusive Exclusive
Conjugal)  Community property Exclusive Communal
- From exclusive use of either
Classification spouse
 Jewelry Exclusive Communal
Properties before marriage EXCLUSIVE  Non-jewelry Exclusive Exclusive
Properties derived during the marriage
SUMMARY OF RULES: ABSOLUTE COMMUNITY OF PROPERTY
- From fruits income and gains COMMON
Properties acquired Before During
- From gratuitous acquisitions (Donations and EXCLUSIVE marriage marriage
inheritance) - From gratuitous acquisitions Communal Exclusive
- From fruit of industry Communal Communal
- From fruit of property

 Separate property Communal Exclusive

 Community property Communal Communal
- From exclusive use of either
spouse
 Jewelry Communal Communal
 Non-jewelry Exclusive Exclusive
4 APPLICABLE PROPERTY REGIME IN DEFAULT OF AN AGREEMENT

Conjugal partnership of gains Absolute community of property

August 3, 1988

 In the absence of any agreement or when the regime agreed

was VOID:

P Married before August 3, 1988 : CONJUGAL

PARTNENERSHIP OF GAINS (CPG)
P Married on or after August 3, 1988: ABSOLUTE
COMMUNITY OF PROPERTY

4 BASIC RULES IN THE DETERMINATION OF PROPERTY INTEREST

1. Common property presumption rule

P Presumed common properties unless proven exclusive
properties of either spouses
P Does not apply to ASP (Absolute Separation of Property)
2. Consistent classification rule
P Sale or exchange do not alter the classification
P Properties acquired separate are separate
P Properties acquired common are common
3. Accruals in value or gains on sale of properties
P Increases in value or gains on the sale of properties are
fruits subject to the rules of the property regime agreed
upon by the spouses.

4 CONJUGAL PARTNERSHIP OF GAINS (CGP)

P This property relation views marriage as a partnership of gains
P All properties of the spouses before the marriage are their
exclusive properties because there is no partnership yet.
P When property donated/inherited is designated by the donor or
predecessor to both of the spouses = COMMON PROPERTY