MODULE 2

ESTATE TAXATION

Estate Tax: Is an excise tax imposed on the gratuitous transfer of ownership (succession) of a property at the time of death.

Accrual of Estate Tax

 It accrues as of the death of the decedent, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.
 Upon the death of the decedent, succession takes place and the right of the State to the 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.
 Governed by the law in force at the time of death.

NATURE OF ESTATE TAX

(a) Excise tax: It is a tax imposed on the exercise of the privilege to transfer ownership upon death.
(b) Transfer tax: It is a tax imposed on the gratuitous transfer of ownership at the point of death.
(c) Ad-valorem tax: The tax is based on the net taxable estate.
(d) Proportional tax: The rate of tax is 6% based on the net taxable estate.
(e) Revenue tax: It is imposed to raise revenue for the government.

ESTATE TAX COMPUTATION IN A NUTSHELL: CONCEPT STRUCTURE

EXCLUSIVE COMMON PROPERTIES TOTAL

PROPERTIES
GROSS ESTATE XXX XXX XXX
Ordinary Deductions:
Claims against the estate (XXX) (XXX) (XXX)
Claims against insolvent (XXX) (XXX) (XXX)
persons
Unpaid taxes, mortgages, (XXX) (XXX) (XXX)
and casualty losses
Vanishing Deduction (XXX) (XXX) (XXX)
Transfer for Public Use (XXX) (XXX)
Special Deductions:
Family Home (XXX)
Standard Deduction (XXX)
RA 4917 (XXX)

Net estate XXX

Share of the surviving spouse (XXX) (XXX)

NET TAXABLE ESTATE XXX

Multiplied by: 6 percent 6%

ESTATE TAX DUE XXX

SUCCESSION

Succession: is a 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.

TYPES OF SUCCESSION:

(1) TESTAMENTARY SUCCESSION: That which results from the designation of an heir, effected by executing a last will and testament

WILL: an act whereby a person is permitted with the formalities prescribed by law, to control to a certain degree the disposition of his estate, to take effect after his
death.

Article 784 of the Civil Code: The making of a will is a strictly personal act; it cannot be left in whole or in part of the discretion of a third person, or accomplished
through the instrumentality of an agent or attorney.

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Types of Wills:
(1) NOTARIAL OR ORDINARY OR ATTESTED WILL: is one which is executed in accordance with the formalities prescribed by Art. 804 to 808 of the New Civil
Code. It is a will that is created for the testator by a third party, usually his lawyer, follows proper form, signed and dated in front of the required number of witnesses
(3 or more witnesses) and acknowledged by the presence of a notary public.

(2) HOLOGRAPHIC WILL: is a written will which must be entirely written, dated and signed by the hand of the testator himself, without the necessity of any witness.

*CODICIL: a supplement or addition to a will, made after the execution of a will and annexed to be taken as a part thereof, by which any disposition made in the
original will is explained, added to or altered.

(2) LEGAL OR INTESTATE SUCCESSION: That which is effected by operation of law where:

(a) The decedent dies without a will at all; or

(b) There is a will, but the same is void.

(3) MIXED SUCCESSION: That which is effected partly by a will or by operation of law.

ELEMENTS OF SUCCESSION

(A) DECEDENT: the person whose property is transmitted through succession.

DECEDENTS FOR ESTATE TAXATION PURPOSES: CONCEPT STRUCTURE

COVERAGE OF GROSS ESTATE CAN CLAIM FOREIGN TAX CREDIT?

(1) Resident and Citizens On their worldwide gross estate YES
(2) Non-resident Aliens On their gross estate within the Philippines NO
only

Exempt by virtue of reciprocity: On their

intangible properties exercised in the
Philippines provided that:
(a) the foreign country, where such
nonresident alien is a resident and citizen,
does not impose transfer tax with respect to
intangible personal properties of Filipino
citizens not residing in that country; or
(b) the foreign country imposes transfer
taxes, but grants similar exemption with
respect to intangible personal properties of
Filipino citizens not residing in that country.

TAXPAYERS UNDER ESTATE TAXATION: CONCEPT STRUCTURE

TAXPAYER REAL PROPERTY TANGIBLE PERSONAL INTANGIBLE PERSONAL PROPERTY

PROPERTY
WITHIN WITHOUT WITHIN WITHOUT WITHIN WITHOUT
Residents and citizens TAXABLE TAXABLE TAXABLE TAXABLE TAXABLE TAXABLE
Non-resident Aliens TAXABLE EXEMPT TAXABLE EXEMPT GR: TAXABLE EXEMPT

Xpn: Reciprocity

(B) HEIRS: the persons called to the succession.

KINDS OF HEIRS: CONCEPT STRUCTURE

(1) COMPULSARY HEIRS (CH) Those established by law to inherit the estate (A) Primary Compulsory heirs: Legitimate children and direct
by default. descendants
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(B) Concurring Heirs: Surviving spouse and Illegitimate descendants

(C) Secondary Compulsory Heirs: Legitimate and illegitimate
ascendants
(2) VOLUNTARY HEIRS OR THOSE In case of a testamentary disposition
PERSONS SPECIFIED IN THE LAST WILL
AND TESTAMENT OF THE DECEDENT (IF
ANY)
(3) RELATIVES UP TO THE 5TH DEGREE In default of item 1 and 2
OF CONSANGUINITY
(4) REPUBLIC OF THE PHILIPPINES In default of the above

(C) ESTATE: refers to all the property, rights and obligations of a person which are not extinguished by his death.

COMPOSITION OF THE ESTATE:

(1) LEGITIME: portion of the testator's property which could not be disposed of freely because the law has reserved it for the compulsory heirs.
(2) FREE PORTION: portion of the estate which the testator may dispose of freely through written will irrespective of his relationship to the recipient.

Note that the heirs cannot be made liable for obligations beyond their share of the net hereditary estate.

*Transfer of:
(a) PERSONAL PROPERTIES THROUGH SUCCESSION – LEGACY
(b) REAL PROPERTIES THROUGH SUCCESION – DEVISE

GROSS ESTATE: CONCEPTS, SITUS AND VALUATION

GROSS ESTATE: Consists of:

(1) All properties and interests in properties of the decedent at the time of his death; and

(2) Properties transferred during lifetime (only in form), but in substance was only transferred at the time death.

[Synthesis] Technically, gross estate shall encompass all properties of the decedent, tangible or intangible, real or personal, and wherever situated AT THE POINT
OF DEATH.

ESTATE TAXATION – SITUS AND VALUATION OF PROPERTIES: CONCEPT STRUCTURE

PROPERTY SITUS VALUATION

(1) REAL PROPERTY WHERE THE PROPERTY IS LOCATED AT WHICHEVER IS HIGHER OF:
THE POINT OF DEATH (1) ZONAL VALUE OR
(2) FAIR VALUE PER PROVINCIAL/CITY ASSESSOR’S OFFICE
(2) PERSONAL PROPERTY WHERE THE PROPERTY IS SITUATED AT GENERALLY, AT FAIR VALUE. However, if fair value is not
THE POINT OF DEATH determinable:
(a) for BRAND-NEW PROPERTY – use the acquisition cost.
(b) for SECOND-HAND ITEMS – use the second-hand value.

(3) INTANGIBLE PROPERTY, in general
(4) SHARES, OBLIGATIONS OR BONDS
WHERE THE INTANGIBLE IS EXERCISED
AT THE POINT OF DEATH
SHALL BE CONSIDERED WITHIN THE
PHILIPPINES:
(A) issued by an any corporation or sociedad
anonima organized or constituted in the
Philippines;
GENERALLY, AT FAIR VALUE AT THE POINT OF DEATH
Specifically:
(a) for PARTICIPATION IN ANY ASSOCIATION, RECREATION,
OR AMUSEMENT CLUB – at the BID PRICE nearest the date of
death, should the fair value be absent.
(b) for RIGHT OF USUFRUCT – taken into account the probable
life of the beneficiary in accordance with the latest basic standard
mortality table.
GENERALLY, AT FAIR VALUE AT THE POINT OF DEATH.
Specifically, for shares of stock, the valuation be:
(a) LISTED/TRADED STOCKS:
(1) FAIR VALUE (QUOTATION AVAILABLE) at date of death

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(B) issued by a Domestic enterprise (2) The ARITHMETIC MEAN between the HIGHEST AND
(shares/rights in any partnership, business, LOWEST QUOTATION at the date nearest to date of death.
or industry established in the
Philippines). (b) UNLISTED/NOT TRADED STOCKS:

(C) Issued by any foreign corporation, at (1) Ordinary Stocks – BOOK VALUE (using the Adjusted Net
least 85% of the business of which is Asset Method)
located in the Philippines; or (2) Preferred Stocks – PAR VALUE

(D) Issued by any foreign corporation if such

shares, obligations, or bonds have acquired
a business situs in the Philippines.

**

Otherwise, the shares, obligations, or bonds

shall be considered located OUTSIDE the
Philippines.

(5) BANK DEPOSITS WHERE THE DEPOSITARY BANK IS GENERALLY, AT FAIR VALUE AT THE POINT OF DEATH
LOCATED
Specifically, for FOREIGN CURRENCIES, the fair value be PESO
VALUE TRANSLATED USING THE PREVAILING EXCHANGE
RATE AT THE DATE OF DEATH.

(6) RECEIVABLES DOMICILE OF THE DEBTOR GENERALLY, AT FAIR VALUE AT THE POINT OF DEATH

Specifically, for LOANS AND RECEIVABLES, the fair value be the

AMOUNT FIXED IN THE CONTRACT INCLUDING ACCRUED
INCOME THERETO.

Example 1a: Juan transferred via succession a real property located in Cebu to a Japanese living in the United States. The deed of donation was signed in Australia.
What is the situs?
ANS: SITUS is in the Philippines (since the real property is LOCATED in CEBU)

Example 1b: Juan donated a real property with a zonal value of P5,000,000, assessed value of P3,500,00, and net book value of P6,000,000. How much is the gross
estate?
ANS: P5,000,000 – being the highest between zonal value and assessed value.

Example 2: Mario transferred via succession the following properties:

Property SITUS
a. BPI (in Angeles City) SITUS: In the Philippines since the location of the bank is in the Philippines
b. HSBC account (Hong Kong Branch) SITUS: In Hong Kong since the location of the bank is in Hong Kong
c. Domestic stocks SITUS: In the Philippines since it is issued by a domestic corporation
d. Bonds issued by a foreign corporation SITUS: Abroad since it is issued by a foreign corporation
e. Bonds issued by a foreign corporation but acquired business situs in the SITUS: In the Philippines since the foreign corporation acquired business
Philippines situs in the Philippines
f. Bonds issued by a foreign corporation but 60% of the business is operating in SITUS: Abroad since it is issued by a foreign corporation and it did not meet
the Philippines the requisite (that at least 85% of the business be located/operated in the
Philippines).
g. Bonds issued by a foreign corporation but 90% of the business is operating SITUS: In the Philippines since it met the requisite (that at least 85% of the
in the Philippines business be located/operated in the Philippines).

Example 3: Rey transferred via succession 5,000 LISTED STOCKS with par value of 10/share and book value of 5/share. In the stock exchange, the highest quotation
is 12/share and lowest quotation is 6/share. Compute the gross estate.
ANS: Since it is a LISTED STOCK, we shall use the arithmetic mean of the highest and lowest quotations at the date of death (or nearest date to it). The arithmetic
mean is 9 ((12+6)/2). Hence, the gross estate will be 5,000 shares x 9 equals to P45,000.

Example 4: Rey transferred via succession 5,000 UNLISTED ORDINARY/COMMON STOCKS with par value of 10/share and book value of 5/share.
ANS: Since it is an UNLISTED DOMESTIC STOCK, we shall use the book value of the shares. The book value is 5/share. Hence, the gross estate will be 5,000 shares
x 5 equals to P25,000.

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Example 5: Rey transferred via succession 5,000 UNLISTED PREFERRED STOCKS with par value of 10/share and book value of 5/share.
ANS: Since it is an UNLISTED PREFERRED STOCK, we shall use the par value of the shares. The par value is 10/share. Hence, the gross estate will be 5,000 shares
x 10 equals to P50,000.