Chapler 2 Gross Estate The first estate tax law in the Philippines is embodied in Act 2601 which took effect on July 1, 1916. It imposes graduated estate tax rates computed on net inventoried Property left by a decedent. It_was subsequently amended by the Revised Administrative Code of the Philippines imposing upon “every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance, devise or bequest.” Since then, several laws were introduced to amending Act 2601. RA 8424 also known as “Tax Reform Act” or the National Internal Revenue Code (NIRC) Effective Jan.1, 1998 further restructured the tax base and rates of both estate and donor's taxes in addition to allowing the deduction of medical expenses from the gross estate. Bulk of the estate tax law aside from determining the tax base and rates which are found in NIRC are embodied in the Civil Code and Family Code of the Philippines. The recent amendment to Estate Tax law was introduced by RA 10963, or the “Tax Reform for Acceleration and Inclusion (TRAIN) Act” which took effect on January 1, 2018. It substantially amended the estate tax law by getting rid of the use of graduated tax rate and changed it to a single rate of 6% of the net taxable estate as well as revising the thresholds for Standard Deduction, Family Home and other amendments such as repealing funeral expenses, judicial expenses and medical expenses. 33leper 2 ~ Gross Estate Estate Tax - Definition and Nature In the Philippines, Estate Tax is a tax imposed on the privilege that a person is given in controlling to a certain extent, the disposition of his property to take effect upon death. As discussed in Chapter 1, it is an excise tax imposed on the act of passing the ownership of property at the time of death and not on the value of the property or right. On this basis, estate tax should not be construed as a direct tax on the property of the decedent although the tax is based thereon. Since estate tax accrues as of the time death, the right of the State to tax the privilege to transmit the estate’vests instantly upon death. The accrual of the tax is distinct from the obligation to pay the same. Justification for the Imposition of Estate Tax 1. Benefit-Received Theory | The law considers the service rendered by the government in the distribution’ of the estate “of the decedent, either by law or in accordance with his wishes. For the performance of these services and other benefits that accrue to the estate and the heirs, the State) collects the tax. Privilege or State Partnership Theory Under this theory, inheritance is not a right but a privilege granted by the State and legatees have been acquired only with the protection of the State. Consequently, the State as a passive silent partner in the accumulation of property has the right to collect the share which is properly due to it. NS 3. Ability to Pay Theory Receipt of inheritance which is in the nature of an unearned wealth or windfall, are place assets into the hands of the heirs and beneficiaries. This creates an ability to pay the tax and thus contributes to government income. 4. Redistribution of Wealth Theory The receipt of inheritance is a contributing factor to the inequalities in wealth and incomes. The imposition of estate tax reduces the property received by the successor, thus helping to promote equitable distribution of wealth in society. The tax base is the value of the property and the progressive scheme of taxation is precisely motivated by the desire to mitigate the evils of inheritance in the present form.C veo - Gross Estate Classification of Decedents and Composition of Gross Estate — For estate taxation purposes, decedents are classified into three (3); citizens, resident aliens and nonresident aliens. Section 85 of the Tax Code provides that the value of the gross — of the decedent should be determined by including the value at the ame his death of all property, teal or personal, tangible or intangible, wherever situated; Provided, however, that in the case of a nonresident _decedent who at the time of his death was not a citizen of the Philippines, ‘Only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. The composition of the estate may be summarized as follows: 1) EP SR kee Cte en citizenship and residency DECEDENT GROSS ESTATE =~ Gitizen 1) Property (Real or Personal) wherever situated = Resident alien 2) Intangible personal property wherever situated . '' /;,| . = Nonresident alien 1) Real property situated in the Philippines 2) Tangible personal property situated in the Philippines 3) Intangible personal property with situs in the Philippines, unless excluded on the basis of reciprocity. RECIPROCITY CLAUSE (Section 104 of the Tax Code, as amended) The Tax Code excludes “intangible” personal property with situs in the Philippines from the gross estate of a non-resident alien decedent if there is reciprocity. There is reciprocity if: = The decedent at the time of his death was a resident citizen of a foreign country which at the time of his death did not impose an estate tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or = The laws of the foreign country of which the decedent was a resident citizen at the time of his death allow a similar exemption from estate taxes of every character, in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. 35a C taster 2 Gross Estate Intangible Asset The term “intangible asset" was not defined in the Tax Code, nonetheless, Accounting Standards defines intangible asset as an “identifiable nonmonetary asset without physical substance". They derive their value from intellectual or legal rights, and from the value they add to the other assets. As a tule, the situs of intangible personal property is the domicile of the owner, also known as “mobilia sequntur personam’. However, such tule is not applicable if the intangible property has situs elsewhere or where the intangible property has acquired a business situs in another jurisdiction because the principle of “mobilia sequntur personam" is only used for convenience. It must yield to the actual situs of such property. The situs of Franchise, for instance, should not be based on the domicile of the owner but the place where such franchise is exercised. INTANGIBLE ASSETS WITH SITUS “WITHIN” THE PHILIPPINES Section 104 of the Tax Code enumerates the following intangible personal property with situs in the Philippines, for estate tax purposes: 1. Franchise which must be exercised in the Philippines. 2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws. 3. Shares, obligations or bonds issued by any foreign corporation, 85% of the business of which is located in the Philippines. 4. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines. 5. Shares or rights. in any partnership, business or industry established in the Philippines. TABLE 2-2: SITUS OF TANGIBLE AND INTANGIBLE PROPERTY PROPERTY siTus = Real Property and Location of the property Tangible personal property = Shares, franchise, Where the intangible is exercised regardless of copyright, and the like. where the corresponding certificate is stored |= Receivables Residence of the debtor = Bank deposit Location of the depository bank 36Chapter 2 - Gros Este ILLUSTRATION 4; Anonresident alien decedent left the following estate: Mot House and Lot - Hongkong, inherited before marriage 15,000,000 » Car, acquired during marriage in Cebu i>. sc!e 1,500,000 . Shares of stocks issued by a foreign corporation,’ 20% of its operation is in the Philippines xr «: * : OA 250,000 © Bank deposit with PNB branch in New York, New York tepresenting income eared during marriage 500,000 * Shares of stocks issued by PLDT group of companies, a 500,000 corporation organized under Philippine laws : 5-year, 12% promissory note, received 2 years ago, during marriage. The debtor is a resident of Q.C. 500,000 - Case A: Assume there is no reciprocity, what is the correct value of the gross estate? “Answer: P2,620,000 ‘ Solution: Car, acquired during marriage in Cebu 1,500,000 Shares of stocks - PLDT 500,000 . _ 5-year, 10% Promissory Note 500,000 yO Interest income (P500,000 x 12% x 2) 120,000 Gross Estate 2,620,000 Fe ereee oes * The shares of stock issued by a foreign corporation (20% of its operations is in the Philippines) is considered situated outside of the Philippines. Under the tax code, a nonresident alien decedent is taxable only for properties situated in the Philippines. Same rule applies to the House and Lot as well as the bank deposit in New York, USA. Interest income eamed before or at the time of death shall likewise form part of the decedent's gross estate. Case B: Assume there is reciprocity, what is the correct value of the gross estate? Answer: P1,500,000 Only the car in Cebu acquired during marriage shall be included in the decedent's gross estate. Intangible properties with situs within the Philippines are excluded in the determination of gross estate if there is reciprocity. | 37ILLUSTRATION 2: From the list of properties shown below, determi ing: 1) Situs of the Property erases 2) Whether or not the property is included in the decedent's gross estate. PARTICULARS Parcel of Land ~ Makati Parcel of Land - Bali, Indonesia House and Lot (Family Home) ~ Taguig Rest House ~ Batangas Rest House —Palawan_ Rest House - Malaysia Cars-Philippines Cars Abroad BPI Deposit-Philippine branch BPI Deposit-U.S. branch | ABN Amro Bank (Foreign bank) — Philippine Branch 72 | ABN Amro Bank (Foreign bank) - London | c|~a] | en] | eo]no] = a\s Branch 73_| Receivables-debtor from Philippines 14_| Receivables-debtor from Canada 45 | Shares of stocks of domestic corporations. The certificates are stored in the Philippines 76 | Shares of stocks of domestic corporations. The certificates are stored abroad 47_| Shares of stocks of foreign corporations. The certificates are stored in the Philippines 48 | Shares of stocks of foreign corporations. The certificates are stored abroad 19 | Shares of stocks of foreign corporations, 90% of its operations is in the Philippines 20 | Shares of stocks of foreign corporations, 80% of its operations is in the Philippines. 24 | Shares of stocks of foreign corporations which acquired business situs in the Philippines 22._| Patents and copyrights exercised in the Philippines Patents and copyrights exercised abroad 38Citizen | NRA or Without Resident it Reciproci Include | Include Include "Parcel of Land — Bali, Indonesia “Include | Exclude Exclude House and Lot (Family Home) ~ Taguig it Include | Include Include | Rest Batangas Nn [Include | Include Include Rest House ~Palawan —_| Within [Include |" Include Include Rest House — Malaysia Wo | Include | Exclude Exclude Cars-Philippines Within | Include Include Include Cars ~Abroad Wo | Include | Exclude Exclude BPI Deposit-Philippine branch Within |" Include | Exclude Include _ BPI Deposit-U.S. branch _| Wo | Include |" Exclude | Exclude ABN Amro Bank (Foreign bank) - Within | Include | Exclude Include Philippine Branch aD a Bank (Foreign bank)—London | Wlo | Include | ~ Exclude Exclude rand Receivables-debtors from Philippines | Within | Include | Exclude Include Receivables-debtors from Canada | Wo | Include [Exclude Exclude Shares of stock of domestic corporations. | Within | Include | Exclude Include The certificates are stored in the { Philippines _ Shares of stock of domestic corporations. | Within | Include | Exclude | Include _| ‘The certificates are stored abroad _ _ = Shares of stock of foreign corporations Wo | Include | Exclude ~ | Exclude The certificates are stored in the Philippines Shares of stock of foreign corporations. | Wio | Include | Exclude | Exclude The certificates are stored abroad I 19. | Shares of stock of foreign corporations, | Within | Include | Exclude Include |, 90% of its operations is in the Philippines | Shares of stock of foreign corporations, | Wo | Include | Exclude Exclude 80% of its operations is in the Philippines “Shares of stocks of foreign corporations | Within | Include Exclude | — Include | | as aie wleo|rjoja) ais which acquired business situs in the Philippines { _+—___ — = ' Patents and copyrights exercised inthe | Within | Include | Exclude | Include Philippines | {of Patents and copyrights exercised abroad | Wio_|__Include Exclude 39Valuation of Gross Estate (as amended by RA10963; RR 12-2018) The estate of the decedent shall be appraised at its fair market value at the time of his death. Since succession and the accrual of the corresponding estate tax takes effect upon death, it shall only be fair to appraise the estate at its fair market value at the time of the decedent's death. Specifically, the following rules shall apply in determining the valuation of the estate: 1. In General 2. Real Property wt : Fair Market Value at the time of death The higher value between: FMV determined by the Commissioner; and FMV as shown in the schedule of values fixed by the provincial and city assessors (also known as assessed value or FMV for real estate tax purposes), For purposes of prescribing real property values, the CIR is authorized to divide the Philippine into different zones or areas and shall, upon consultation with competent appraisers, both from the private and public sectors, determine the fair market value of real properties located in each zone or area. If there is an improvement, the value of improvement is the construction cost per building permit or the fair market value per latest tax declaration. 3. Personal Property 4. Shares of stock 5. Units of participation in any association, recreation or amusement club (ie.,golf, polo, similar clubs) 6. Right to usufruct, use or habitation, and annuity Fair market value at the time of death Unlisted common share: Book value per share of the issuing corporation (Appraisal surplus shall not be considered, as well as the assigned amount to preference shares, if any). Unlisted Preference share: Par value per share Listed shares: FMV shall be the arithmetic mean belween the highest and lowest quotation at a date nearest the date of death if none is available on the date of death itself (RR 2-2003/ RR 12-2018). The bid price nearest the date of death published in any newspaper or publication for general circulation. In accordance with the latest Basic Standard Mortality Table taking into account the probable life of the beneficiary, to be approved by the Secretary of Finance upon recommendation of the Insurance Commissioner [Section 88(A)-NIRC]. 40Gross Estate _| The decedent devised to his son a 1,000 square meter lot in Global City, Taguig with the ILLUSTRATION 3: Determine the correct amount to be included in th i following independent caves in the gross estate of the decedent in the Case A: feces! Fre hy fee bought a brand new(car with a cash price of P3,000,000. He bought the car on installment with the following-terms: down payment of P500,000 and annual installment ee for four years. On his way home, he run over an approaching truck and + “Answer: P3,000,000 Case B: The decedent granted a P2,000,000 loan to his best friend two years before his death with a 10% interest per annum evidenced by a note. Both the principal and interest are due after three years, + Answer: P2,400,000. Principal amount plus interest of 10% for 2 years Case C: ee following valuation: Fair value as determined by city assessors °°" *"' ~~ « P20,000/sq.m. Zonal value as determined bythe CIR. 17,000,000 FV determined by independent assessors 18,500,000 + Answer: P20,000,000 (1,000 sq.m x P20,000) The higher between the fair value as determined by city assessors and the zonal value as determined by the Commissioner of Intemnal Revenue (CIR) Case D: Decedent owns 100,000 ordinary shares of Alpha Company at the time of his death. At that time, Alpha’s outstanding shares were 1,000,000 with P10 par value and Retained Earnings amounting to P5,000,000. The shares are not traded in the stock exchange. Answer: P1,500,000 Book value per share of Alpha Company multiplied by the number of shares held by the decedent at the time of death P10M + 5M. 1,000,000 shares X — 100,000 shares Case E: ‘A decedent left 10,000 Pinoy Telecom shares. The shares were traded in the local stock exchange. At the time of death, the following were available: Highest quotation P800 per share Lowest quotation P200 per share Book value P350 per share Answer: P5,000,000 _[10,000sh. x ((800+200)/2)] aGross Estate EXEMPTIONS AND EXCLUSIONS FROM THE GROSS ESTATE The following shall be excluded from the gross estate of a decedent: A. Exclusions under Sections 85 and 104 of the Tax Code 1. Exclusive property of the surviving spouse [Sec. 85(H)}. The gross estate in case of married decedents, is composed of: = Exclusive properties of the decedent; and * Common properties of the decedent and the surviving spouse Exclusive properties of the surviving spouse should be excluded in the gross estate because these properties are not owned by the decedent upon his death. For estate tax purposes, exclusive properties of the husband are known as “capital” while exclusive properties of the wife are known as “paraphernal” properties (Article 135 of the Civil Code). Whether such property is exclusive or common will depend on the type of property relations or marriage settlement of the husband and wife. Marriage settlements are discussed in Chapter 4 of this book. 2. Property outside the Philippines of a non-resident alien decedent (Sec. 85 and 104). The Tax Code provides that for nonresident alien decedents, only his properties situated or with situs within the Philippines shall be included in his gross estate. Consequently, properties outside of the Philippines are excluded in determining the gross estate of a nonresident alien decedent. 3. Intangible personal property in the Philippines of a non-resident alien under the Reciprocity Law. Section 104 of the Tax Code expressly provides that “intangible” personal property in the Philippines of a nonresident alien decedent shall be excluded from the gross estate if there is reciprocity. 42Gross Estate B. Exclusions under Section 87 of the Tax Code The merger of usufruct in the owner of the naked title. 2. The transmission or delivery of the inheritance or legacy by the fiduciary heir (also known as the 1® heir) or legatee to the fideicommisary (also known as the 2" heir). 3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor (also known as “Transfer under Special Power of Appointment’). 4. All bequest devises, legacies or transfers to social welfare, cultural and Charitable institutions, no part of the net income of which .s. Inures to the benefit of any individual: Provided, however, that not_ more than thirty percent (30%) of the said bequest, devises, legacies or transfers shall be used by such institutions for = administration purposes. The government agency which is empowered to determine the exemption is the BIR. To enable it to exercise such power, the value of transfer to social welfare, cultural and charitable institutions should be included in the gross estate. An equal amount, however, may be taken up as a deduction. THE MERGER OF USUFRUCT IN THE OWNER OF THE NAKED TITLE The decedent in this particular case (known as donee-decedent or current decedent) only received from the prior decedent (donor-decedent or prior decedent) usufruct over the latter's property. Usufruct pertains only to the right or privilege to enjoy the use and advantages of another's property. Thus, the current decedent is not considered the owner of the property. Consequently upon his death, the usufruct will be merged to the owner of the naked title, the intended beneficiary of the property. ILLUSTRATION 4: In the last will and testament of Mr. Yumao, he assigned the usufruct of one of his parcels of land to his son (Juan) while his grandson (Pedro) was named the owner of the naked title. Upon the death of Mr. Yumao, the parcel of land should be included in his gross estate. However, upon the death of Juan (the current decedent), the parcel of land should be “excluded” in his gross estate because he is not the intended owner/beneficiary of the land but his son, Pedro. Upon Juan’s death, there will be merger of usufruct in the owner of the naked title (Pedro). Meaning, Pedro will be entitled to both the usufruct and ownership of the naked title upon Juan's death. 43Gross Estate Merger of usufruct in the owner of the naked title pa ta I el A ld db sees IT} Ce eco ‘= The intended owner of the land (naked title) * The usufruct will be merged to his naked title upon Juan’s death = Usufructuary but ‘not the intended ‘owner of the land Lonard Seca peo = +in GE upon death * Subject to Estate Tax = +in GE Subject to Estate Tax Sen + Not Subject to Estate Tax TRANSMISSION FROM THE FIRST HEIR, LEGATEE OR DONEE IN FAVOR OF ANOTHER BENEFICIARY (Also known as 2nd Heir), IN ACCORDANCE WITH THE DESIRE OF THE PREDECESSOR (Also known as Transfer under Special Power of Appointment) ILLUSTRATION 5: In the-last will and testament of Mr. Yumao, he devised a parcel of land to Juan but with a condition that such property should be given to Pedro upon Juan's death. Thus, the parcel of land is intended to be inherited by Pedro, not Juan. Juan is acting only as a trustee or fiduciary until such time that the property is transferred to Pedro. Upon Juan's death, the parcel of land should be “excluded” in his gross estate simply because he is not the owner of the property. In the illustration provided, Juan only received the parcel of land under a Special Power of Appointment (SPA) from Mr. Yumao, the prior decedent/predecessor or also known as the donor of the power or donor-decedent. Thus, Juan is known as the donee-of the power or donee-decedent or current decedent. Special Power of Appointment exists when the donee-decedent (Juan) can appoint only from a restricted or designated class of persons other than himself. \n the problem above, Juan is restricted to transfer such property only to Pedro, in accordance with the desire of the Predecessor (Prior Decedent or Donor-Decedent). Property transferred under a special power of appointment should be excluded from the gross estate of the donee of the power because the donee- decedent only holds the property in trust. ; aGross Estate Special Power of Appointment Ca Pera) eee) Mace ms © * Theparcelofland * The intended oes isnotintended for beneficiary of Mr. Be Juan Yumao_ B 5 = Acting only as aoa 5 trustee/fiduciary BO of Pedro eer ae = +inGE * Subject to Estate Tax * + in GE upon death Estate Tax © Subj. to Estate Tax TRANSMISSION OR DELIVERY OF THE INHERITANCE OR LEGACY BY THE FIDUCIARY HEIR/LEGATEE (Also known as the 1st heir) TO THE FIDEICOMMISARY (Also known as the 2nd heir). ILLUSTRATION 6: Using the same information in the immediately preceding illustration (Illustration No. 5) and assuming further that Juan is the father of Pedro. Since Juan is the father of Pedro and both were alive at the time of the testator's death (Mr. Yumao), the ‘substitution or transfer from Juan to Pedro is known as fideicommissary substitution. Upon the death of Mr. Yumao, the parcel of land should be included in his gross estate. However, upon the death of Juan, the parcel of land should be “excluded” in his gross estate because Juan is acting only as the trustee of Pedro. Fideicommisary transfer of property is in substance, the same with transfer of property received under Special Power of Appointment (SPA), except that the telationship of the 1st heir and the 2nd heir should not be more than one (1) degree apart (Refer to Illustration #7 of Chapter 1 for the determination of degree of relationship). Elements of a fideicommissary substitution: «The substitution must not go beyond one degree from the heir originally instituted (i.e. father to son). = The fiduciary(first heir) and the fideicommissary(second heir) must be both living at the time of the testator’s death. ed HebeGross Estate C. Exclusions under Special Laws 4. Proceeds of life insurance ‘and benefits received by members of the GSIS (RA728). 2. Accruals and benefits received by members from the SSS by reason of death (RA1792). 3. Amounts received from Philippines and United States governments for war damages (RA227). 4. Amounts received from United States Veterans Administration. Payments from the Philippines of US government to the legal heirs of deceased of World War Il Veterans and deceased civilian for supplies/services furnished to the US and Philippine Army (RA136). 6. Retirement benefits of officials/employees of a private firm (RA4917). 7. Personal Equity and Retirement Account (PERA) assets of the decedent-contributor (Sec. 14, RA 9505 - Personal Equity and Retirement Account Act of 2008). 8. Compensation paid to private and oublic health workers who have contracted COVID-19 in case of death, the said amount shall not be included as part of the gross estate of the decedent subject to estate tax as provided under Republic Act No. 11494 or the “Bayanihan to Recover as One Act" COMPOSITION OF THE GROSS ESTATE 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 stocks, v Shares of stock Bank deposit Dividends declared before his death but received after death, Partnership profit which have accrued before his death. v v v Y — Usufructuary & rights 46Gross Estate Section 85 of the Tax Code enumerates the composition of the Gross Estate. 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. Decedent’s Interest [Sec. 85(A)] The Tax Code provides that Decedent's Inierest to the extent of the interest therein of the decedent at the time of death shall be included in the gross estate.. Decedent Interest refers to the extent of equity or ownership participation of the decedent on any property physically existing and present in the gross estate, whether or not in his possession, control or dominion. It also refer to the value of any interest in property owned or possessed by the decedent at the time of his death (interest having value or capable of being valued or transferred). 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 Tax Code, as amended, provides: To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bonafide sale for an adequate and full consideration in money or money's worth, 47Gross Estate A transfer in contemplation of death is a disposition of property prompted by thought of death. It is the thought of death, as a controlling motive which induces the disposition of the property. Included within this concept is donation mortis causa. 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. Section 85 of the Tax Code, as amended, provides that there is no transfer in contemplation of death when the transfer of property is a bonafide sale for en adequate and full consideration in money or money's worth. b. Revocable Transfers (Sec. 85(C)] It is a transfer where the terms of enjoyment of the property may be altered, amended, revoked or terminated by the decedent. It is sufficient that the decedent had the power to revoke though he did not exercise the power. 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 bonafide 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 fo any change through the exercise of a power (in whatever capacity exercisable) 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), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death. 48——— Gross Estate (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 fo 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 ower 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. . ILLUSTRATION 7: Case A: Ahigh ranking official realized that due to the nature of his illness, age and the pressure brought about by the various legal cases filed against him, death might not be that far. Hence, he gratuitously transferred most of his properties to his children while still alive. Should the properties transferred be included in the gross estate of the decedent- transferor upon his death? | = Answer: Yes The properties transferred should be included in the estate of the decedent because the transfers were intended to take effect upon his death (donation mortis causa), regardless of the date of the actual transfer to the beneficiaries or heirs. Case B: Renato, a natural philanthropist, gratuitously transferred a property to CJ worth 50,000,000 during his lifetime. What amount should be included in the gross estate of Renato upon his death? “Answer: PO. ; The transfer was not intended to take effect upon his death but during his lifetime, thus, it should be treated as a “donation inter-vivos” rather than inheritance (donation mortis- causa). The transfer is subject to donor's tax instead of estate tax. Case C: | Due to an unstable medical condition, Pedro thought that it is only proper for him i yratuitously transfer his properties to his love ones now instead of waiting for his death. fe then transferred various condominium units to his children worth P200,000,000 while he was undergoing major medical operation. At the time of Pedro's death, the fair market value of the properties transferred increased to 250,000,000. What amount should be included in the computation of Pedro's gross estate? 49» Gross Estate Answer: P250,000,000. The transfer is @ donation mortis causa intended fo take effect at the time of the decedent's death. It isthe thought of death, as a controling motive which induces the disposiion ofthe property. The fair market value of the property atthe date ofthe actual transfer should be ignored. Case D: Pedro transferred all his real properties worth P10,0 Juan's legitimate minor son. Pedro reserved his right ¢ Question 1 | What amount should be included in Pedro's gross estate upon his death? Answer: P10,000,000. 100,000 to Juan, in trust for Boy, to terminate the transfer anytime. Question 2; Ae orcs Assume Juan ‘subsequently died a year after Pedro's death, what amount should be included in Juan's gross estate? > Answer: PO The transfer is revocable on the part of not actually convey ownership over the property anytime by the testator (regardless of whether the ri the testator (Pedro). A revocable transfer does transfered because it may be revoked ight to revoke was exercised) c. Transfers under a General Power of Appointment [Sec. 85(D)} Power of appointment refers to the right to designate the person or persons who will succeed to the property of the prior decedent. The power of appointment may be “general” or “special”. It is considered “general” when the power_of appointment authorizes the donee of the power to appoint any person he pleases. The power may be exercised in favor of anybody including the donee-decedent. The donee of a general power of appointment holds the appointed property with all the attributes of ownership thus, the appointed property shall form part of the gross estate of the donee (beneficiary) of the power upon his death. Special Power of Appointment (SPA) exists when the donee can appoint only from a restricted or designated class of persons other than himself. Property transferred under a special power of appointment should be excluded from the gross estate of the donee of the power because the donee-decedent only holds the property in trust. Refer also to Exclusions under Section 87 of the Tax Code as discussed in illustration #5, #8 Case B and Page 45. 50Gross Estate The power of appointment may be exercised by the donor- decedent through the following modes: a) Bywill 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 or for any period which does not in fact end before his death. The possession or enjoyment of, or the right to the income from the property. 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. ILLUSTRATION 8 - GENERAL POWER OF APPOINTMENT (SPA): In the last will and testament of Mr. Yumao, he devised a parcel of land located in Batangas to Juan, with the power to appoint any person he pleases. Juan decided to transfer the property to Pedro through his last will and testament. d e In this illustration, Juan received the property under “General Power of Appointment (GPA). GPA exists when the power of appointment authorizes the donee of the power to appoint any person he pleases. The power may be exercised in favor of anybody including the donee-decedent. The donee of a general power of appointment holds the appointed property with all the attbutes of ownership thus, the appointed property shall form part of the gross estate of the donee (beneficiary) of the power upon his death Mr. Yumao * Donor of the power * Predecessor / Donor-decedent Juan = Done of the power or 1st heir = Current decedent / Donee-decedent Parcel ofland * Appointed property | General Power of Appointment COC a ce) Cate Wists od Euan a otis * #inGE upon death == + INGE + +InGE = Subject to Estate Tax * Subjectto —_* Subject to Estate Estate Tax Tax 51