BUSINESS AND TRANSFER TAXATION:

The Concept of Succession and Estate Tax

Week 3 and 4 – February 5 & 12, 2024

 OVERVIEW AND OBJECTIVES:

1. The concept 3. The nature of 5. The model of

of succession. estate tax. estate taxation.

2. The types and 4. The types of

elements of the decedents
succession. and their
taxation rules.

BUSINESS AND TRANSFER TAXATION

 SUCCESSION
q Mode of acquisition by virtue of which the property, rights
and obligations to the extent of the value of the inheritance,
of a person are transmitted through his death to another or
others either by his will or by operation of law (Art. 774, Civil
Code).
q Inheritance includes all property, rights and obligations of a
person which are not extinguished by his death (Art. 776, Ibid)
q Rights to the succession are transmitted from the moment of
death of the decedent (Art. 777, Ibid).
q The decedent is the deceased or dead person.
TYPES OF SUCCESSION

1. Testate of Testamentary Succession – Is that which results from the designation of an heir,
made in a will in the form prescribed by law. (Art. 779, Civil Code)
§ A person can specify the recipient of his properties upon death made through last will
and testament.
§ Testate is the person who died with a will.
§ Testator is a person who died with a written will.
2. Legal or Intestate Succession – If a decedent dies without a will or with an invalid one,
the distribution of his estate shall be in accordance with the default provision of the Civil
Code.
3. Mixed Succession – Transmission of the decedent properties shall be partly by virtue of a
written will and partly by operation of law.

BUSINESS AND TRANSFER TAXATION

WILL

q WILL – is an act whereby one person is permitted, with the formalities prescribed by law, to
control to a certain degree the disposition of his/her estate, to take effect after his death
(Art. 783, Ibid)
q An expression of decedent’s desire on how his properties will be distributed after his or
her death.

q TYPES OF WILL
1. Holographic will – A will which is entirely written, dated, and signed by the hand of the
testator himself.
2. Notarial will – A notarized will signed by the decedent and witnesses.
3. Codicil - A supplement or addition to a will, made after the execution of a will and annexed
to be taken as part thereof, by which disposition is made in the original will is explained,
added to or altered (Art. 285, Ibid)

BUSINESS AND TRANSFER TAXATION

NATURE OF SUCCESSION

q SUCCESSION is a gratuitous transmission of property from a deceased person in favor of

his successors.
q Succession involves only the net property of the decedent.
q The heirs shall not inherit the debt of the decedent.

q ELEMENTS OF SUCCESSION
1. Decedent – The general term applied to the person whose property is transmitted through
succession, whether or not he left a will. He is also called Testator if he left a will.
2. Estate – The property, rights and obligations of the decedent not extinguished by his
death.
3. Heirs - A person called to the succession either by the provision of a will or by operation of
law (Art. 782, Ibid).

BUSINESS AND TRANSFER TAXATION

HEIRS under intestate succession

q Intestate succession, the heirs shall be the following in a descending order of priority:
1. Compulsory heirs.
2. Relatives up to fifth degree of consanguinity.
3. Republic of the Philippines.
q Compulsory Heirs are the persons who will inherit the estate by default.

q TYPES OF COMPULSORY HEIRS:

1. Primary heirs: Legitimate children and their direct descendants.
2. Secondary heirs: Legitimate/ illegitimate parents and ascendants.
3. Concurring heirs: The surviving spouse and illegitimate descendants.

Note: The secondary heirs shall inherit only in default of primary heirs. Normally, only
primary and concurring heirs share in the hereditary estate.

BUSINESS AND TRANSFER TAXATION

HEIRS under intestate succession

q In the absence of compulsory heirs, the following shall inherit in the following order of
priority:
1. Collateral relatives up to the fifth degree of consanguinity.
2. The Philippine Government.
q Summary Rules:
1. Concurring heirs and
a. Descendants, or in their default,
b. Ascendants
2. Relatives in the collateral line up to the fifth (5th) degree
3. Republic of the Philippines.

BUSINESS AND TRANSFER TAXATION

HEIRS – ILLUSTRATION:
q MODEL: q PRIORITY LEVELS:
B3 A1- Children 1ST Priority - A = From A1 onwards in
A2 – Grand children descending order of priority.
C4 B2 2nd Priority A3 – Great grandchildren 2nd Priority – B = From B1 onwards
B1 – Parents in descending order of priority
C5 C3 B1 B2 – Grandparents 3rd Priority – C = From C2 to C5 in
C2 Decedent Spouse (A1) B3 – Great grandparents descending order of priority
C4
C2 – 2nd degree relatives 4th Priority – Philippine government
C5 A1 (i.e., brothers and sisters)
C3 q NOTE:
1st Priority C3 – 3RD degree relatives 1. A1 includes both legitimate
C4 A2 (Uncle, aunt, niece, nephew)
and illegitimate children.
C4 – 4TH degree relatives
C5 A3 2. Second cousins are in the 6th
(1st cousins, 1st cousins of
degree in the collateral line;
3rd Priority grand parents)
hence they cannot inherit.

BUSINESS AND TRANSFER TAXATION

Illustration:

Illustration #01
Mr. X died. He was survived by his wife and four children. Mr. X has two brothers and
one surviving parent.
The compulsory heirs are:
a. Mrs. X
b. The four children
The surviving parent (secondary heirs) of Mr. X will not inherit because there are
descendants (i.e., four children)

Illustration #02
Mr. X died single and without a child. Ms. X’s parents, three brothers, and two sisters
were surviving relatives.
The compulsory heirs are Ms. X’s parents. The collateral relatives (brothers and sisters)
cannot inherit since there are compulsory heirs.

BUSINESS AND TRANSFER TAXATION

Basic Intestate Partition Procedures:

1. The decedent and the surviving spouse shall first share in the common properties.
§ The common properties net of expenses and obligations chargeable to the common
properties of the spouses is divided between the decedent and the surviving spouse.
2. Determination of the decedent’s net interest.
The decedent’s net interest comprising of the following is computed:
a. Exclusive property of the decedent.
b. Share of the decedent in the net common properties.
3. Partition of the decedent’s net interest:
a. Surviving spouse
b. Legitimate children
c. Illegitimate children
The surviving spouse and each of the legitimate children have one share. Each illegitimate
child is entitled to a half share.

BUSINESS AND TRANSFER TAXATION

Basic Intestate Partition Procedures:

ILLUSTRATION 1:
Mr. Richie Rich, a widower, died leaving P 45,000,000 estate for his two legitimate children,
Harold and Alex, and two illegitimate children , Elon and John.

The estate shall be partitioned as follows:

Heirs Share Partition Inheritance

Harold (legitimate) 1.0 1/3 X P 45,000,000 P 15,000,000
Alex (legitimate) 1.0 1/3 X P 45,000,000 15,000,000
Elon (illegitimate) 0.5 .5/3 X P 45,000,000 7,500,000
John (illegitimate) 0.5 .5/3 X P 45,000,000 7,500,000
Total 3.0 P 45,000,000

BUSINESS AND TRANSFER TAXATION

Basic Intestate Partition Procedures:

ILLUSTRATION 2:
Don Uyong died living behind his widow. Mrs. Uyong, his legitimate children, Max and Rey,
and illegitimate children, Joan, Sylvia and Eunice, as heirs. Mr. and Mrs. Uyong had the following
properties:
Exclusive properties of Don Uyong P 18,000,000
Exclusive properties of Mrs. Uyong 16,000,000
Net common properties 36,000,000

The net estate properties of the decedent shall be computed as follows:

Exclusive properties of Don Uyong P 18,000,000
Share in net common properties (P36M/2) 18,000,000
Distributable estate P 36,000,000

BUSINESS AND TRANSFER TAXATION

Basic Intestate Partition Procedures:

ILLUSTRATION 2: (Cont.)
Don Uyong died living behind his widow. Mrs. Uyong, his legitimate children, Max and Rey,
and illegitimate children, Joan, Sylvia and Eunice, as heirs. Mr. and Mrs. Uyong had the following
properties:

The estate shall be partitioned as follows:

Heirs Share Partition Inheritance
Mrs. Uyong 1.0 1/4.5 x P 36 million P 8,000,000
Max (legitimate) 1.0 1/4.5 x P 36 million 8,000,000
Rey (legitimate) 1.0 1/4.5 x P 36 million 8,000,000
Joan (illegitimate) 0.5 .5/4.5 x P 36 million 4,000,000
Sylvia (illegitimate) 0.5 .5/4.5 x P 36 million 4,000,000
Eunice (illegitimate) 0.5 .5/4.5 x P 36 million 4,000,000
Total 4.5 P 36,000,000

BUSINESS AND TRANSFER TAXATION

Basic Intestate Partition Procedures:

ILLUSTRATION 2: (Cont.)

The total properties of the surviving spouse after the partition shall be:
Exclusive properties of Mrs. Uyong P 16,000,000
Share in net common properties (P36m/2) 18,000,000
Share in distributable estate 8,000,000
Total properties P 42,000,000

BUSINESS AND TRANSFER TAXATION

 HEIRS UNDER TESTAMENTARY DISPOSITION
q In the testamentary succession, the heirs shall be the following:
1. Compulsory heirs.
2. Other persons specified by the decedent in his will.
q LEGITIME – is the part of the testator’s property which he cannot dispose of because of the law
has reserved it for certain heirs who are, therefore, called as compulsory heirs. (Art. 886, Ibid)
q The excess property of the decedent is called “free portion”.
q Testator can designate the free portion of his estate for additional heirs irrespective of their
relationship to him but he cannot exclude or disinherit compulsory heirs without a valid basis
under the law.
q OTHE PERSONS IN SUCCESSION:
1. Legatee – a person whom gifts of personal property is given by virtue of a will.
2. Devisee – a person whom gifts of real property is given by virtue of a will.
3. Executors – a person named by the decedent who shall carry out the provisions of his will.
4. Administrators – a person appointed by the court to manage the distribution of the estate of
the decedent.
BUSINESS AND TRANSFER TAXATION
ESTATE TAXATION

q ESTATE TAXATION. Taxation of gratuitous transfer of properties of the decedent to the heirs
upon the decedent’s death.
q Estate taxation is governed by the law in force at the time of the decedent’s death.
q The estate tax accrues as of the decedent’s death.
q Upon the death of the decedent succession takes place.
q The right of the State to tax the privilege to transmit the estate vests instantly upon
death.
q Hence,

Decedents who died Between January 1, 1998 On or after January 1,

to December 31, 2017 2018
Shall be governed by The NIRC The TRAIN Law

M&F Architects 2020

BUSINESS AND TRANSFER TAXATION

 M&F Architects 2020

BUSINESS AND TRANSFER TAXATION

NATURE OF ESTATE TAXATION

1. Excise tax. Estate tax is not a tax on the property but on the privilege to transfer property
through death
2. Revenue or general tax. Estate tax is intended as a revenue or fiscal measure.
3. Ad valorem tax. Estate tax is dependent upon the value of the estate.
4. National tax. Estate tax is imposed by national government.
5. Proportional tax. Estate tax is imposed as 6% of the net estate.
6. One-time tax. Estate tax applies to a person only once in a lifetime.

M&F Architects 2020

BUSINESS AND TRANSFER TAXATION

CLASSIFICATION OF DECEDENTS FOR TAXATION PURPOSES

1. Resident or Citizen Decedents – taxable on properties located within or outside the

Philippines.
2. Non-resident Alien Decedents – taxable only on properties located in the Philippines,
except intangible personal property when the reciprocity rule applies.

Taxpayers Inter-vivos Mortis-causa

Resident or citizens Global donation Global estate
Non-resident aliens Philippine donation Philippine estate

M&F Architects 2020

BUSINESS AND TRANSFER TAXATION

THE ESTATE TAX MODEL

GROSS ESTATE P XXX,XXX

LESS: DEDUCTIONS FROM GROSS ESTATE XXX,XXX
NET TAXABLE ESTATE P XXX,XXX

q GROSS ESTATE pertains to the totality of the properties owned by the decedent at
the point of his death.
q DEDUCTIONS generally pertain to reductions in the inheritance of the heirs such as
obligations of the decedent, and losses of property during administration. It also
include exemptions from the estate under the law.
q NET TAXABLE ESTATE is the net properties of the decedent after all pertinent
deductions allowable by law subject to tax.

M&F Architects 2020

BUSINESS AND TRANSFER TAXATION

Trust in the Lord with all your heart and lean not
on your own understanding
Proverbs 3:5
###

Sir A J . February 2024