TAXATION FOR ESTATES AND TRUSTS

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 (Art. 776, Civil Code).

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 (Art 78 h Civil Code).

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 (Art. 775, Civil Code).

Heir Defined

An heir is a person called to the succession either by the provision of a will or by operation of law (Art. 782, Civil
Code).

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 (Art, 782, Civil Code).

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) (Secs. 209 and 210, Rev, Reg. No. 2).

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 a 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 distributives 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
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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 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 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.

Notes:

1. In the event of delivery of property in kind to a legatee or distribute, no income is 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 (Sec. 61, NIRC).

Special Deduction of Estates

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

Notes:

(a) The amount so allowed as a deduction shall be included in computing the taxable income of the legatee,
heir, or beneficiary (Sec. 61 (B) NIRC).

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 (Sec. 211, Rev. Reg. 2).

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 the income tax of estates. As estate shall thus have the
following tax rates:
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 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);

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
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.

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 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 of another person or
persons. In order that a fiduciary relationship may exist, it is necessary that a legal trust be created (Sec. 207,
Rev. Reg. No. 2).

Classification of Trusts

Trusts may be classified into the following categories.

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

Ordinary trust
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