Chapter S Deductions from the Gross Estate To compute the net estate of the deceased, there are certain items that canbe deducted from the value of the gross estate under the Tax Code. RR 12-2018 in relation to sections 86(A) and 86(B) of the Tax Code, as amended under TRAIN Law, allows deductions from the gross estate to arrive at the taxable net estate which is used as a basis in determining the applicable estate tax due. Deductions from the gross estate are classified as follows: 4. Ordinary deductions 2. Special deductions 3. Share of the surviving spouse, if the decedent is married Beginning January 1, 2018 or upon the effectivity of the TRAIN Law, the allowable deductions from the gross estate are summarized as follows: PERM Nee Oe cea nae AOS SESE Pee jenlResident Nonresident Alien A. Ordinary Deductions . 1. Life (Losses, Indebtedness, v (proportional)"* Taxes, etc.) 2. Vanishing Deduction Vv v 3. Transfer for Public Use (TFPU) Vv ‘ Vv B. Special Deductions 1. Standard Deduction V (PSM) ¥ (P500,000) | 2. Family Home Vv NA 3, RAAQI7 qv NA ©. Share of the Surviving Spouse v v (For married decedents) “Total LiTe x (GE Phils. GE world) 89 Scanned with CamScannerDaductioas foon the Gross Estate ORDINARY DEDUCTIONS A. LiTe (Losses, Indebtedness, Taxes, etc.) 1. Losses For purposes of estate taxation, deductible losses from the gross estate shall pertain to “casualty losses”. Casualty losses include losses arising from acts of God such as losses due to storms, shipwreck and other casualties. It also includes losses arising from acts of man, specifically from robbery, theft or embezzlement. The amount deductible is the value of the property lost. Requisites for Deductibility: a) Arising exclusively fro * acts of God such as fire, storm, shipwreck and other similar casualty * acts of man such as robbery, theft, embezzlement b) Not compensated by insurance or otherwise. c) Not claimed as a deduction in an income tax return of the estate subject to income tax (refer to Illustration #1, Case B). d) Incurred during the settlement period of the estate. Settlement period pertains to the period prescribed by law to file and pay the estate tax, which is, under the TRAIN Law, within one (1) year from the date of death. | WLUSTRATION. | CASE A: i | Among the properties included in the gross estate of the decedent at the time of his death was a newly developed tourist destination in Siargao valued at P20,000,000. George is the sole heir tothe property. During the settlement of the estate and before | the last day of fling the estate tax retun, a super typhoon hit Siargao partially | destroying the newly developed property. It was determined that the fair market value | of the property after the incident was reduced to 18,000,000. . | i | Question 1; What amount should be included in the decedent's gross estate? Answer: 20,000,000 (FMV at the time of death) | | Question 2: How much shouldbe the allowable deduction fom the gross estate? Answer: P2,000,000. Deductible loss = P20M - P 6,000,000 = PM Scanned with CamScannerDeductions fom the Gross Estate Question 3: What amount should be included as part of the allowable deductions from the gross estate assuming the property was insured for P25,000,000 > Answer: PO Since the loss was fully compensated by insurance, no deduction shall be claimed against the gross estate of the decedent Question 4: What amount should be included as deductible loss assuming the incident | happened beyond the settlement period of one (1) year, and the property was not insured , | | | | + Answer: PO. Only losses incurred during the settlement period (within 1 year after death) are allowed as deduction from the gross estate. Question 5: What amount should be included in the gross estate of the decedent | assuming the incident happened one (1) day before the death of the decedent? “> Answer: PO, i Gross estate shall compose ofthe properties of the decedent atthe time of his death. ifthe incident happened before death, then the property is no fonger existing as of he date of death, ence, should no longer be included in his gross estate. Question 6: In relation to question # 5, what amount should be included as deduction from the gross estate of the decedent? “Answer: PO. © Aside from the requirement that losses, to be deductible, should have been incurred after death but during the settlement period, the property ino longer included in the gross estate of the decedent. Consequently, no deduction from the gross estate should be allowed. CASE B: Use the same data in Case A. In addition, assume that the property earned gross income of P6M and incurred operating expenses of P2 from the date of death of the | decedent up to the time of the incident or the calamity (typhoon). Assume further that | the loss incurred due to the typhoon was recognized as additional operating expenses | for purposes of computing the net taxable income of the estate. Question: How much should be allowed as deduction from the gross estate? Answer: PO. © Since the loss was already claimed as deduction for purposes of . determining the taxable net income of the estate, such loss should no \_____longer be allowed as deduction in determining the taxable gross estate. _ an sen © 91 F Scanned with CamScannerDeductions from the Griss Estate 2. Indebtedness or Claims against the Estate “Claims” is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. The liability represents a personal obligation of the deceased existing at the time of his death, contracted in good faith (during his lifetime) for adequate and full consideration in money or money's worth. Claims against the estate (CAE) or indebtedness in respect of property may arise out of the following sources: = Contract = * Operation of Law REQUISITES FOR DEDUCTIBILITY (RR 12-2018): a. The liability represents personal obligation of the deceased existing at the time of his death; b. The liability was contracted in good faith and for adequate and full consideration in money or money's worth; c. The liability, must be a debt or claim which is valid in law and enforceable in court; d. The debt must not have been condoned by the creditor or the action to collect from the decedent must not have been prescribed. SUBSTANTIATION REQUIREMENTS: _ All unpaid obligations and liabilities of the decedent at the time of his death are allowed as deduction from gross estate. Provided, however, that the following requirements/documents are complied with/submitted: In Sf. Joan (including advances a) The debt instrument must be duly notarized at the time the : indebtedness was incurred, such as promissory note or , contract of loan, except for loans granted by financial institutions where notarization is not part of the business practice/policy of the financial institution-lender. b) Duly notarized Certification from thé creditor as to the unpaid balance of the debt, including interest as of the time of death. If the creditor is a corporation, the sworn certification should be signed by the President, or Vice President, or other principal officer of the corporation Scanned with CamScannerDeductions from the Gross Estate If the creditor is a partnership, the sworn certification should be signed by any of the general partners. If the creditor is a bank or other financial institutions, the Certification shall be signed by the branch manger of the bank/financial institution which monitors and manages the loan of the decedent-debtor. If the creditor is an individual, the swor certification should be signed by him. In any of these cases, the one who should certify must not be a relative of the borrower within the fourth civil degree, either by consanguinity or affinity, except when the requirement below is complied with: When the lender, or the President/Vice-President or Principal Officer of the ccreditor-corporation, or the General Partner of the creditor-partnership is a relative of the debtor in the degree mentioned above, @ copy of the promissory note or other evidence of indebtedness must be fled with RDO having jurisdiction over the borrower within fifteen days from execution thereof. ©) In accordance with the requirements as prescribed in existing or prevailing internal revenue issuances, proof of financial capacity of the creditor to lend the amount at the time the loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. In case the creditor is individual who is no longer required to file an income tax return with the Bureau, a duly notarized Declaration by the creditor of his capacity to lend at the time when the loan was granted without prejudice to verification that may be made by the BIR to substantiate such declaration of the creditor, If the creditor is a non-resident, the executor/administrator or any of the legal heirs must submit a.duly notarized declaration of his capacity to lend at the time when the loan was granted, authenticated or certified to as such by the tax authority of the Country where the non-resident creditor is a resident. 93 Scanned with CamScannerDeductions from the Gross Estate If the creditor is a partnership, the sworn certification should be signed by any of the general partners. If the creditor is a bank or other financial institutions, the Certification shall be signed by the branch manger of the bank/financial institution which monitors and manages the loan ef the decedent-debtor. If the creditor is an individual, the sworn certification should be signed by him. In any of these cases, the one who should certify must not be a relative of the borrower within the fourth civil degree, either by consanguinity or affinity, except when the requirement below is complied with: When the lender, or the President/Vice-President or Principal Officer ofthe crediter-corporation, or the General Partner of the creditor-partnership is @ relative of the debtor in the degree mentioned above, a copy of the promissory note or other evidence of indebtedness must be filed with RDO hraving jurisdiction over the borrower within fen days from execution thereof. ©) In accordance with the requirements as prescribed in existing or prevailing internal revenue issuances, proof of financial capacity of the creditor to lend the amount at the time the loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. In case the creditor is individual who is no longer required to file an income tax return with the Bureau, a duly notarized Declaration by the creditor of his capacity to lend at the time when the loan was granted without prejudice to verification that may be made by the BIR to substantiate such declaration of the creditor. If the creditor is a non-resident, the executor/administrator or any of the legal heirs must submit a-duly notarized declaration of his capacity to lend at the time when the loan was granted, authenticated or certified to as such by the tax authority of the ‘country where the non-resident creditor is a resident. 93 Scanned with CamScannerDalections fom the Gross Estate a the administrator or mn executed by the administiaior 0 d) A statement under oat! od Yn ofthe proceeds te reflecting the executor ofthe estate ES contracted win three (3) years prior to the death of the decedent. or services: ifthe unpaid obligation arose from purchase of goods a) Pertinent documents evidencing the ee free service, such as sales invoiceldelivery rece! ip! feecg pe goods), or contract for the services agreed to be i (fo sale of service), as duly acknowledged, executed and signed by decedent-debtor and creditor, and statement of account given by the creditor as duly received by the decedent-debtor. b) Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. If the creditor is a corporation, the sworn certification should be signed by the President, or Vice President, or other principal officer of the corporation If the creditor is @ partnership, the sworn certification should be signed by any of the general partners. If the creditor is a bank or other financial institutions, the Certification shall be signed by the branch manger of the bank/financial institution which monitors and manages the loan of the decedent-debtor. Hf the creditor is a sole proprietorship, the sworn certification ‘should be signed by the owner of the business, In any of these cases, the one who should cert , certify m a relative of the borrower within the fourth civil jes “aiher by consanguinity or affinity, except when the requirement below is complied with: oe Scanned with CamScannersdions from the Gross Estate ¢) Certified true copy of the latest audited balance sheet of the creditor with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. Moreover, a certified true copy of the updated latest subsidiary ledgers/records of the debt of the debtor-decedent (certified by the creditor, i.e. cettified by the officers in the preceding paragraphs) should likewise be submitted. 4) Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing the claims against the estate, and the Court Order approving the said claims, if already issued, in addition to the documents mentioned in the preceding paragraphs. Funeral, Medical, and Judicial Expenses Beginning January 1, 2018 or upon effectivity of the TRAIN Law, the following expenses are no longer allowed as deduction from the gross estate of a decedent: = Funeral expenses «Medical expenses * Judicial expenses ‘TLLUSTRATION 2: ‘Aresident decedent died on April , 2021. He availed of a P500,000 salary loan from | ABC Manufacturing Corporation (his employer) by issuing a promissory note during his Hetime. Question f:_Ifall the requisites in order tobe allowed as a deduction as claims against the estate were present, what amount may be deducted from the gross estate? Answer: P500,0000 | Question 2: If the obligation has prescribed as atthe time of his death, what amount may be deducted from the gross estate? “> Answer: PO Question 3: Ifthe loan document (promissory note) was not duly notarized, what ‘amount may be deducted from the gross estate pertaining to the claim? + Answer: PO I the indebtedness arises from a debt instrument (., loan document), i must be notarized to be deductible. 95 Scanned with CamScannerjon the Gress Estate Deduction: Question 4: If the loan was contracted three (3) years ago and the executor cannot determine how the loan proceeds were disposed of, what amount may be deducted from the gross estate pertaining to the claim? ‘Answer: PO RR 2-2002/RR 12-2018 provides that i he loan was contracted within three (3) years before the death of the decedent, a statement under oath (by the execulor/administretor) must be executed and must be attached therewith a slatement showing the disposition of the proceeds of the loan. UNPAID MORTGAGEs OR INDEBTEDNESS ON PROPERTY These are deductions allowed when a decedent leaves property encumbered by a mortgage or indebtedness contracted in good faith and for adequate and full consideration. To be allowed as a deduction, his gross estate must include the fair market value of the property encumbered. The amount allowed as a deduction would be the outstanding debt or mortgage. In case unpaid mortgage payable is being claimed by the estate, verification must be made as to who was the beneficiary of the loan proceeds. ACCOMODATION LOAN If the loan is found to be merely an accommodation loan where the loan proceeds went to another person, the value of the unpaid loan must be included as a receivable of the estate. If there is a legal impediment to recognize the same as receivable of the estate, said unpaid obligation/mortgage payable shall not be allowed as a deduction from the gross estate. In all instances, the mortgaged property, fo the extent of the decedent's interest therein, should always form part of the gross estate. "ILLUSTRATION 3: CASE A: A resident decedent lft the following upon his death: Cash in bank (from various peso accounts) 8,000,000 Cash in bank (ftom various FCDU accounts) 9,600,000 Real property, Philippines 40,000,000 Real property abroad 40,000,000 The real property located inthe Philippines was mortgaged for 28,000,000 Determine the folowing: i | 4. Gross estate of the decedent 2. Deductions for “unpaid mortgage" 96 Scanned with CamScannerDauctions fri the Gross Estat Answers: H 4. 37,600,000 Cash in bank (peso accounts) 8,000,000 Cash in bank (FCDU accounts) 9,600,000 Real properties Philippines 10,000,000 Real properties abroad 10,000,000 _ Gross Estate Pi 2. 8,000,000 CASEB: Pedro died in 2021. The following claims against Pedro's estate were claimed by his heirs as deductions from the decedent's gross estate. Notes payable (notarized) 500,000 Notes payable (not notarized) 200,000 Unpaid property taxes before his death 300,000 Unpaid property taxes on his estate (after death) 400,000 Unpaid mortgage on his properties before death 50,000 Debis from gamblirig losses questioned by decedent while stil alive 50,000 Question: How much is the deductible Indebtedness or claim against the estate? “© Answer:-P850,000 computed as follows: Notes payable (notarized) 500,000 Unpaid property taxes before death 300,000 Unpaid mortgage before death 000 Claim against the estate = Claims against the estate should pertain only to valid claims as of the date of death. Claims arising affer death are not alowed as deductions from gross estate. | * Receivables from gambling (wagering gains) before death are inclusions | from the decedent's gross estate, however, debts from wagering or | _____. gambling losses are not allowed as deductions from the gross estate. 3. Taxes These are unpaid taxes that accrued prior to the death of the decedent. However, the following are not allowed as a deduction: = Income tax on income received after death = Property taxes accrued after death + Estate tax 97 Scanned with CamScannerDeductions fom the Gitss Estate ILLUSTRATION 4: : \Which among the folowing should be allowed as deduction from the Gross Estate of a Filipino decedent who died on March 30, 2021? s TEM PARTICULARS 4, Unpaid donors tax on donations made during the previous year 2 Unpaid donor's tax on donations made during the current year 3 Unpaid income tax on decedent’ income for 2020 4 Unpaid income tax on decedent’s income from January to March 2024 5 Unpaid income tax attributable tothe state's income from April to December 31, 2021 Unpaid business tax for 2020 taxable yea. Unpaid business tax from January to March 2024 8 Unpaid business tax on the decedent's estate from Apri fo December 31, 2021 9 Unpaid municipal taxes from January to March 2021 10 Unpaid municipal taxes on the decedent's estate (business) from Apri to December 31, 2024 11 Unpaid import duties on importatons made from January 1 to March 2024 12 Tax assessmentideficiencies prior to death Answer: Items 1, 2, 3, 4, 6, 7,9, 11 and 12 Claims Against Insolvent Persons (CAIP) Claims against the estate are “receivables due or owing from persons who are not financially capable of meeting their obligations". Hence, these are claims by the decedent during his lifetime that are not collectible. An insolvent is a person whose properties are not sufficient to satisty, whether fully or partially, his debt(s). REQUISITES FOR DEDUCTIBILITY For purposes of estate taxation, a judicial declaration of insolvency is not required but a) The incapacity of the debtor to pay his obligation should be proven; b) The full amount owed by the insolvent must first be included in the decedent's gross estate and the amount uncollectible shall be allowed as a deduction; and 98 Scanned with CamScannerDeductions from the Gross Estate c) If the insolvent could only pay partial amount, the full amount owed shall be included in the gross estate, and the amount uncollectible shall be allowed as a deduction. ILLUSTRATION 5: Case A: Juan is indebted to Pedro for 1,000,000, For the past ten (10) years, the credit standing and reputation of Juan is outstanding. However, during 2020, the relationship of Juan and Pedro was tainted by a personal disagreement’ Consequently, Pedro was unable to collect the amount of P1,000,000 due from Juan. Juan intentionally ignored several collection/demand letters from Pedro. In 2021, Pedro died, Question 1. ‘Should the P1,000,000 collectible from Juan be included in the gross estate of Pedro? * Yes. The P1M is a valid and enforceable claim of Pedro as of the date of his death, Question 2: ‘Should the P1,000,000 collectible from Juan be deducted in Pedro's gross estate? > No. Only uncollectible claims against insolvent persons are deductible from the gross estate. In the case provided, Juan is obviously not an insolvent person for estate tax purposes. Case B: | Assume the same data in Case A, except that during 2020, Juan experienced financial | difficulty and his assets are no longer sufficient to settle his liabilities. Consequently, | Juan was only able to pay P500,000 to Pedro in 2020. In the same year, Juan asked al + competent court for a judicial declaration that he is insolvent. The court is yet to decide | | on Juan's petition. In 2021, Pedro died | Question 1: | Should the remaining amount of 500,000 collectible from Juan be included in the gross estate of Pedro? + Yes Question 2: | Should the unpaid amount of P500,000 collectible from Juan be deducted in Pedro's | gioss estate? * Yes | Judicial declaration of insolvency is not required to consider a person insolvent. It, ‘is sufficient that the person's insolvency is proven. | Scanned with CamScannerDeductions from the Gross Estate Case c: Pedro died in 2021. At the time of his death, he has a collectible sum of 1,000,000 from a debtor who was subsequently declared by a court as insolvent for having total | abilities of 4,000,000 against his total properties valued at P800,000 only. Question 1: How much should be included in the gross estate of Pedro? 1 > Answer:-P1,000,000. Question 2: How much may be claimed as deduction from the gross estate of Pedro? “Answer: P800,000 computed as follows Amount of Claim 1,000,000 Collectible: % x P800,000 (200,000) Uncollectible portion P 800,000 OR: Amount of Claim ‘1,000,000 Collectible: P800/P4,000 x PIM (200,000) __Uncolectble portion 00,000" _ B. TRANSFER FOR PUBLIC USE Transfers For Public Use (TFPU) are dispositions in a last will and testament or transfers to take effect after the death in favor of the goverment of the Philippines or any of its political subdivisions thereof (e.g. barangay, province, city/municipality) for exclusively public purposes. In order for a transfer for public use to be allowed as a deduction from the gross estate of a decedent, the same amount shall be included in the computation of the decedent's gross estate. Legacies to the Philippine Red Cross (PRC) Under RA 10072 (An Act Recognizing the Philippine Red Cross as an independent, ‘autonomous, nongovernmental organization auxiliary to the authorities of the Republic of the Philippines in the Humanitarian Field, to be known as *The Philippine Red Cross Act of 2005"), all donations, ‘egacies and gits made legacies to the PRC to suppott its purposes and objectives shall be exempt from donor's tax and shall be deductible from the gross income of the donor for income tax purposes or from the computation of the cdonor-decedent's net estate as a “transfer for public use” for estate tax purposes. 100 Scanned with CamScannerDeductions fo C. VANISHING DEDUCTIONS (PROPERTY PREVIOUSLY TAXED) int the Cpross Estate This deduction is also referred to as a deduction for “property previously taxed”. It is an amount allowed to reduce the taxable estate of a decedent where a property included in his gross estate was previously received by him, either: 1) From a prior decedent by way of inheritance; or 2) From a donor by way of gift or donation The aforementioned property has been the object of a previous transfer taxation, either estate tax or donor's tax (thus, the term property previously taxed). Therefore, vanishing deduction is allowed as a deduction from the gross estate to minimize the effect of or as a remedy against indirect double taxation. REQUISITES FOR DEDUCTIBILITY: 1. Death — the present decedent died within 5 years from the date of death of the prior decedent or date of gift. 2. Identity of property — the property with respect to which deduction is sought can be identified as the one received from the prior decedent, or from the donor, or as the property acquired in exchange for the original property so received, 3. Location — the property on which vanishing deduction is being claimed must be located in the Philippines. 4. Inclusion of the property - the property must have formed part of the gross estate situated in the Philippines of the prior decedent or have been included in the total amount of the gifts of the donor made within five (5) years prior to the present decedent's death. 5. Previous taxation of the property — the estate tax on the prior succession or the donor's tax on the gift must have been finally determined and paid by the prior decedent or by the donor as the case maybe and 6. No previous vanishing deduction on the property — no such deduction on the property, or the property given in exchange therefore, was allowed in determining the value of the net estate of the prior decedent. 101 Scanned with CamScannerri Deductions fon the Gross Estate VANISHING DEDUCTION RATES: Period (from receipt up to the decedent's death) Rate Within one year 400% Beyond one year to 2 years 80% Beyond 2 years to 3 years, 60% Beyond 3 years to 4 years. 40% Beyond 4 years to 5 years 20% PRO-FORMA COMPUTATION OF VANISHING DEDUCTION: VALUE TO TAKE Prox Whichever is lower between the value ofthe property: = In the gross estate of the prior decedent or in the gross git of the donor; and "Inthe gross estate of the present decedent LESS: MORTGAGE PAID (also known as 1* deduction) (Paid by the present decedent from the mortgage assumed when the property was inherited or received as donation) (xxx) INITIAL BASIS Prox Less: Proportional deduction (or 2 deduction) computed as: Initial basis Gross estate x “LIT + Transfer for Public Use (0x) FINAL BASIS. ox x Vanishing deduction % % VANISHING DEDUCTION Prox ** Under the Tax Code, as amended under the TRAIN Law, the multiplier tothe ratio of inital Basis over the Gross Estate is the total of LITe, plus Transfer for Public Use. CASE A: Determine the correct vanishing deduction rate of the folowing. 1) Ana died in April 1, 2021. A vehicle included in her gross estale was previously received by her as inheritance from her father on January 8, 2018 2) Pedro died in April 1, 2021. A parcel of land which was included in his gross estate was previously received by him as donation from his bestfriend on May 3, 2018. 3) Juan died in April 1, 2021. A parcel of land was donated to him by his sister as 3 _ wedding git on September 7, 2015, 102 Scanned with CamScannerDedactions fe om. the Ges 5 4) Loma died on June 1, 2021. Included in her estate is a vacation house which she purchased on June 30, 2019. “Answer: 41. 40% (more than 3 years but not more than 4 years) 2. 60% (more than 2 years but not more than 3 years) 3._NA. The property was received as donation more than five (5) years before death of the decedent. 4. NA. Vanishing deduction is applicable only to gratuitous transfers. In this particular case, Loma purchased (acquired through onerous transfer) the property CASE B: Pedro received a car as a gift from Juan on January 1, 2019. The value of the car at the time it was donated to Pedro was P1,000,000. However, Pedro assumed a 200,000 mortgage on the car. The corresponding donor's tax was paid by Juan Pedro paid a total of 100,000 on the mortgage in 2019 and 2020. On Nov. 1, 2021, Pedro died. His gross estate at the time of his death amounted to 5,000,000 including the car received from Pedro valued at P700,000. The following deductions were also claimed by his beneficiaries Losses 400,000 Unpaid mortgage (including the mortgage on the car) 200,000 Unpaid taxes before death 100,000 Unpaid taxes after death 25,000 Donation mors causa to Quezon City for public purpose 500,000 | Question 1: How much is the allowable vanishing deduction? * Answer: 295,200 computed as. Value to take (lower amount) 18 Deduction Initial basis Less: 2» deduction (600/5,000 x (P900,000**)) Final Besis xrate (within 3 years) Vanishing deduction Losses Unpaid morgage Unpaid taxes before death Transfer for Public Use (Donation mortis causa fo Quezon City) TOTAL ** Scanned with CamScannerDedac cous from the Gross Estate Question 2: Assume the corresponding donor's tax was not paid by Juan upon donation, how much is the allowable vanishing deduction? “= Answer: PO Vanishing deduction is a mode of ‘tax relief” from multiple imposition of indirect taxes. This is the reason why payment of donor's tax or estate tax from the grantor is a requisite before vanishing deduction is allowed. Hence, if the donor's tax was not paid at the time of the donation, vanishing deduction is not allowed due to the absence of “indirect double taxation’. Question 3: Assume the corresponding donor's tax was paid by Juan upon perfection of the donation. Assume further that the donation was made on January 1, 2010. How much is the allowable vanishing deduction? “Answer: PO The donation was made more than five (5) years prior to Pedro's death, CASE C: In 2021, Pedro died, leaving @ property worth 210,000,000 which he inherited 4 % years ago from Juan. The property's fair market value at the time of Juan's death was 8,000,000. An unpaid mortgage of P1,000,000 was also assumed by Pedro which remained unpaid at the time of his death, Other properties in Pedro's gross estate had fair market value of P30,000,000. The losses, taxes and transfer for public purpose amounted to P4,000,000 Question 1: What is the correct amount of vanishing deduction? Answer: P1,440,000 computed as follows: Value to take 8,000,000 1 Deduction : pee Initial basis 8,000,000 Less: 2° deduction [8,000/40,000" x (P4M)} (800,000) Final Basis 7,200,000 xrate = ons Vanishing deduction. _P1,440,000 Correct amount of GE** FV of the property inherited upon Pedro's death 40,000,000 Other properties in Pedro's estate 30,000,000 Total GE 40,000,000" 104 Scanned with CamScannerthe Gross b state Dewctives f SPECIAL DEDUCTIONS. A. STANDARD DEDUGTION Tho law allows @ standard deduction without quatification, condition nor Fequinilo, Whatvoover, This amount shall be allowed as an additional deduction without need of substantiation — The full amount shatl by allowed aa deduction for the benefit of the decedent The allowable amounts under the TRAIN Law are © Ifthe decedent is. a citizen oF resident ~ P§,000,000, © Ifthe decedent is a nonresident ation ~ P500,000 This is the only special deduction allowed to a nonresident alien decedont. Tho other special deductions (family home and RA 4917) can bo claimed only by citizen and resident decodents, B. FAMILY HOME The amount of family home allowable Family Home as a deduction would be whichever is Tho dwoling house, inchuding lower of P10,000,000 or the fair market tho land on which it is value at the time of the decedent's death, situated, whero the husband of the family home and the land on which it and wite, oF a head of tho stands. family, and mombers of their The family home is deemod constituted family reside, a3 certified to on the house and {ot from the time it is by the Barangay Captain of" actually occupied as a family residence the locality. and 18 considered as such for as long as any of its benoficiaries actually resides therein. (Arts. 152 and 153, Family Code) Actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned in such cases as the temporary absence from the constituted family home due to travel or studies or work abroad, In other words, the family home is generally characterized by permanency, that is, the place to which, whenever absent for business of pleasure, one stil intends to return. The family home must be part of the properties of the absolute community or of the conjugal partnership, or of the exclusive properties of either spouse, depending upon the classification of the property (family home) and the property relations prevailing on the properties of the husband and wife. It may also be constituted by an unmarried head of a family on his or her own property. 105 Scanned with CamScannerDadactions prim the Gros Estate UNMARRIED HEAD OF A FAMILY ‘An unmarried or legally man or woman with one or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon him or her for their chief support, where such brothers or sisters or children are not more than twenty one (21) years of age, unmarried and not gainfully employed or where such children, brothers or sisters, regardless of age are incapable of self- support because of mental or physical defect, or any of the beneficiaries mentioned in Article 154 of the Family Code who is living in the family home and dependent upon the head of the family for legal support. ee oars OF A FAMILY HOME:, The husband and wife, or the head of a family; and + Their parents, ascendants, descendants including legally adopted children, brothers and sisters, whether the relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support. LIMITATION For purposes of availing of a family home deduction to the extent allowable, a person may constitute only one (1) family home. REQUISITES FOR DEDUCTIBILITY: 1. The decedent was married or if single, was a head of the family 2. The family home as well as the land on which it stands must be owned by the decedent. Therefore, the fair market value of the family home should have been included in the computation of the decedent's gross estate. 3. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the family home is situated. 4, Allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate, or the extent of the decedent's interest (whether conjugal/community or exclusive property), whichever is lower, but not exceeding P'10,000,000, as amended. 106 Scanned with CamScannerDeductions pron the Gross Extute ILLUSTRATION 7: Determine the allowable deduction for Family Home (FH) from the following independent cases: Case A: FH valued at P15,000,000. Decedent was single. “© Answer: PO. Case B: FH valued at P15,000,000. Decedent was head of the family. > Answer: P10,000,000. Case C: FH valued at P5,000,000. Decedent was head of the family Answer: P5,000,000 Case D: FH valued at 15,000,000 (exclusive). Decedent was married. “Answer: P10,000,000 Case E: FH valued at P15,000,000 (conjugal). Decedent was married. “Answer: P7,500,000. For married decedent, the FMV ofthe family home should be divided by two | (2)if the same is conjugal or community property. \ Case F: FH valued at P15,000,000 of which, 10,000,000 is allocated to the land {exclusive) and P5,000,000 to the house (conjugal). Decedent is married “+ Answer: R10,000,000 Land (exclusive) 10,000,000 i House (conjugal) P5,000,000/2 2,500,000 | Total 12,500,000 (2 Maximum deductible amount is P10,000,000. | Case G: The fair market value of the family home which is parlly exclusive and partly * common folows: Family ot (exclusive) 5,000,000 Family house (common) 9,000,000 Answer: P9,500,000 Land (exclusive) 5,000,000 House (common) P9,000,000/2 4,500,000 Total P9500, 107 Scanned with CamScannerDedacticns from the Gross Estate C. AMOUNTS RECEIVED BY HEIRS UNDER RA 4917 Any amount received by heir(s) from the decedent's employer as a consequence of the death of the decedent-employee in accordance with RA. No. 4817 (An Act Providing that Retirement Benefits of Employees of Private Firms shall not be subject to Attachment, Levy, Execution or Any Tax Whalsoever), provided such amount is included as part of the gross estate of the decedent. NET SHARE OF THE SURVIVING SPOUSE The amount deductible under this category is the net share of the surviving spouse in the conjugal partnership property. The net share is equivalent to % or 50% of the conjugal property after deducting the obligations chargeable (ordinary deductions only) to such property. The share of the surviving spouse must be removed to ensure that only the decedent's interest in the estate is taxed. Deductions from, the Gross Estate of a Nonresident Abn The value of the net estate of a decedent who is a non-resident alien in the Philippines shall be determined by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines. The summary of allowable deductions, as discussed in Table 3-1, page 89 are shown below (based on RR2-2003; RR 12-2018): PEN POs A. Ordinary Deductions 1. Life (Losses, (proportional deduction oniy** Indebtedness, Taxes, etc) “Total LiTe x (GE Phis (GE wor) | 2. Vanishing Deduction v 3. Transfer for Public Use v | (TFPU) | B. Special Deductions | 1, Standard Deduction + (P500,000) i | 2. Family Home NA | | 3. Raagt7 NA C. Share of the Surviving Spouse qv (For maried decedents) < 108 Scanned with CamScannerDatuctioas fron the Gress Estate TLLUSTRATION 8: Mr. Krung, a resident of Seoul, South Korea and a Korean citizen died on July 4, 2024 leaving the following properties: Condominium unit in Makati 4,500,000 Family Home in Seoul, Korea 7,000,000 Rest House in Australia 2,750,000 Jewelries received as git dated August 25, 2020 500,000 Carin Makati 1,000,000 The heirs of Mr. Krung claimed the folowing deductions Funeral expenses 300,000 Ciaims against the estate 500,000, Claim against insolvent person 500,000 Judicial expenses 100,000 Medical expenses 200,000 Family Home 1,500,000 Standard Deductions 4,200,000 Required: Determine the net taxable net estate. 4 Answer: P5,130,769 lution: GROSS ESTATE Condominium uitin Makati Jewelries Car in Makati Claims against insolvent person Total gross estate - Philippines ALLOWABLE DEDUCTIONS Ordinary Deductions Life = (P6.5M/P16.25M* x P1,000,000"*) {400,000)*** Vanishing Deductions** (469,231) Special Deductions = Standard Deduction ___ (600,000) ‘TAXABLE NET ESTATE ~P 5,130,769 He: LL) *Funeral and judicial expenses are no longer allowed under TRAIN Law. {21 GE™ = indude claim against insolvent person GA LiTe of PIM" = Claim ageinst the estate and claim against insolent person. However, the allowable amount shall only be the propotonal amount of GE Phis. over GE world ifthe decedent a nonresdentaen {£11 Starderd deducton of P500,000 is alowed as deduction from the gross estate ‘of nonresident alien decederts under the TRAIN Law 109 Scanned with CamScannerDeductions from the Gress Estate ‘Computation of Vanishing Deduction Value to take Less: Mortgage paid Initial basis Less: Proportional deduction (50016 500 x P400,000) Final Basis x Vanishing deduction rate (within 1 year) Vanishing deduction iz ESTATE TAX RETURN PREPARATION Mr. Bu Ang, single and a non-resident alien, died of a heart attack in 2020, leaving the following properties in favor of his heirs: Gross estate within the Philippines 30,000,000 Gross estate outside the Philippines 20,000,000 Funeral Expense '500,000 Judicial and administrative expenses 2,000,000 Claims against the estate 5,000,000 His gross estate includes family home valued at P8,000.000. Required: 4. Compute the correct estate tax due 2. Fill-up the Estate Tax Return Solation; Gross estate, Philippines 30,000,000 Ordinary deduction (3,000,000) Standard deduction (500,000) Taxable net estate 26,500,000 x Estate tax rate 6% Estate Tax Due P,590,000 NOTE: Additional exercises on Estate Tax Return preparations are shown in the Chapter 4. 110 Scanned with CamScannernetious jon Ue G Estate eS Oe Be CEE ie0t,|_Estate Tax Rewrn OREM TEDI Tes [011 82g] eto eli eam vawn mw oy [SES | Fa =Tae eraon iaaoerintennaw [a3 fas. s,2 ila 6 5,0, 0 oro [a9 [apps Ninn arse cian rio ca stave or] A, nS, 18,U ji fraceecsaTteete teak ttt PAG GY MALLING: ST, ITV ELARAL PLURAL (940,601 (B1R, GY RAIN, Que Om Git, acest Ale? he Gj GU MALLY NG, ‘ pias 10 ed [ipstate soll so37 fitooo- seroe_|0,9:0)7 7,685 5 4 B Benatpores LQ uM Itt MG AM WMAMA Wy COM | yy vi rsisiry Nosomeercrsren Cre fhe [uwnmwry| viii gid Giiteecen OB iteencrmmmmcetenee 7 Bela srenmests ayeeanoe wee”) Pat Toe Ta WTAE ne Wiese To Rae WESATEIAO vans ‘DAF Case Tae peiiaid [Bota Pare heey Fed Ifa e iwc nee BC Tateneeven se 1 Bihan posi Fas a a ant ery rae pa HN. possiiiiig Daag ores sine 5 14 6,910, 00,0) BAS poo Ed wwweeeee i aca ee a Wraheawarese=! yy iy My SOTA AO PATAGLE moeeraneie seen peraeerane ne 71 5510, 9 0, 0} 0,0} Freese aa sore oleic icp ed SS a ee ANG .GUMALI NG aa ET a] eee Pan: Pome eae mitititiiy at Mn DET teint | 114 Scanned with CamScannerDeductions jren the Gross Estate 1804 Estate Tax Return DRE 4.223 19,4 2 3,8;5, 0,0, 0,0, AWN Gy BLU, ar FS oven ant 3B Tes Gest oeamen neve ee tie of birng Spee ne Va RT EOE “SINET TAXABLE ESTATE pe tins one Pere Pav eaeaaien cies Dea a TROPERTES| yea aoe oe Teiedaie |= Ona of PROPERTIES Fartone vie Fine 2 i per ‘Schedule (A ~Oetis oF ‘Schedule? ‘Schedsle 9 - Taxable Torsone apa same oT "4 Gasiness Bees surh oe Het Eay and ober nal nied save oe sass Daa ‘Tate ane ¢ Boor ae epewrsAses cs “Pescemas commen Cosmmece cnanren fesmngiw Suomen home foaaoe” Repay Pay Cheer 112 Scanned with CamScanner