ESTATE TAX

ESTATE TAX
• Estate Tax is a tax levied on the transmission of properties from a decedent to his
heirs. It is not a tax on property nor on the transferor or transferee. It is an excise tax
and its object is to tax the shifting of economic benefits.

• Donation mortis causa

– In consideration of death, without the donor’s intention to lose the thing
conveyed or its free disposal in case of survival
– Being testamentary in nature, it is embodied in a last will and testament; it is not
a contract but a legacy
– Transfer conveys no title or ownership to the transferee before death of
transferor, or transferor retains ownership, full or naked, of the property
conveyed
– Transfer is revocable before the transferor’s death and revocability may be
provided indirectly by means of the reserved power in the donor to dispose of
the property conveyed
– Transfer would be void, if transferor survived the transferee, or if legacy is not
embodied in a valid will
– Being in the form of a will, donation mortis causa is not accepted by the donee
during the donor’s lifetime.
 ESTATE TAX
• Death is the generating source of the power to tax (Lorenzo v. Posadas). No
manual or physical transfer of the property is required for the estate tax to
accrue.
• The law in force at the time of death of the decedent governs.
• “Residence” refers to the permanent home, the place to which whenever
absent, for business or pleasure, one intends to return, and depends on
facts and circumstances, in the sense that disclose intent (Corre v. Tan Corre).
It is not necessarily the actual place of residence at the time of death.
• All properties and interests in properties of the decedent at the time of his
death shall be included in his gross estate. However, properties
transferred or interests relinquished by the decedent before his death are
generally excluded from his gross estate.
• The estate shall be appraised at its fair market value at the time of death.
– Real property: fair market value as determined by the CIR
– Shares of stocks: fair market value as shown in the audited financial
statements closest to the date of death of the decedent
 ESTATE TAX
• Gross estate: Conjugal Exclusive Total
– Real property
– Personal property
• Less: Deductions:
– Funeral expenses (5% x gross estate, not to exceed P200,000 or actual exp)
– Judicial expenses of testate or intestate proceedings
– Claims against the estate – debt instrument was notarized; statement showing disposition of
proceeds of loan, if contracted within 3years from date of death
– Unpaid taxes and mortgages
– Medical expenses (incurred within 1 year prior to his death, substantiated with receipts, and
not exceeding P500,000)
– Family home (not to exceed P1 M) + barangay clearance
– Standard deduction (P1 M)
– Properties previously taxed (vanishing deduction)
– Transfers for public use
– Amount received by heirs under RA 4917, provided such amount is included in gross estate
of decedent
– Share of the surviving spouse (50% of net conjugal estate)
• Net Taxable Estate
• Estate tax (First P200,000 is exempt; 5% from P200,001; and 20% on over P10 M)
 ESTATE TAX
• WHO IS THE DECEDENT AND WHAT PROPERTIES FORM PART OF HIS GROSS
ESTATE?
– Resident decedent: Citizen or resident alien
• Include in his gross estate all properties, real or personal, tangible or
intangible, regardless of location (within or without the Philippines)
• Reciprocal exemption as to intangible personal property
– When foreign country does not impose transfer tax on intangible
– When foreign country imposes transfer tax but grants similar exemption from
tax in respect of intangible property
– Non-resident decedent: Non-resident alien
• Include in his gross estate all properties located in the Philippines
• For intangible properties, use the principle mobilia sequuntur personam –
Taxation of intangibles follows the residence or domicile of the owner,
except for certain intangible properties mentioned in Sec. 104, NIRC.
 ESTATE TAX
• INTANGIBLE PROPERTIES THAT HAVE SITUS IN THE PHILIPPINES (Sec. 104,

:
NIRC)

– Franchise which is exercised in the Phil

– Shares, obligations or bonds issued by any corporation
organized in the Phil
– Shares, obligations or bonds issued by any foreign
corporation, 85% of the business of which is located in the
Phil or if such properties have acquired business situs in
the Phil (Wells Fargo case)
– Shares or rights in partnership, business or industry
established in the Philippines
 ESTATE TAX
• DECEDENT’S GROSS ESTATE (Sec. 85, NIRC)
– Decedent’s interest (in property owned or possessed; the law
contemplates any interest or right in the nature of property, but less
than title having value or capable of being valued, transferred by the
decedent at his death; e.g., dividend before death but paid after death;
partnership profits)
– Transfers in contemplation of death
– Revocable transfers
– Property passing under a general power of appointment
– Proceeds of life insurance
– Transfers for insufficient consideration
– Capital of the surviving spouse
 ESTATE TAX
• TRANSFER IN CONTEMPLATION OF DEATH
• Transfer by decedent of property or interest therein, by trust or otherwise, in
contemplation or to take effect in possession or enjoyment at or after death, or
under which he 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 to designate the person who shall possess or
enjoy or the income therefrom. It does not cover bona-fide sale for an adequate
and full consideration in money or money’s worth.
• “Transfers in contemplation of death” refers to the thought of death, as a
controlling motive, which induces the disposition of the property for the
purpose of avoiding the tax.
• Circumstances taken into account
– Age and health of decedent at time of gift
– Length of time between date of gift and date of death
 ESTATE TAX
• REVOCABLE TRANSERS (transfer with retention or
reservation of certain rights)
• “Revocable transfers” covers transfers, by trust or otherwise,
where the enjoyment was subject at the date of his death to
any change thru the exercise of a power to alter, amend,
revoke or terminate, or where such power is relinquished in
contemplation of death.
– Deceased declared her conveyance was a donation mortis causa and
forbade the registration of the deed until after her death (Puig v.
Penaflorida).
– It does not cover bona-fide sale of property for an adequate and full
consideration in money or money’s worth.
 ESTATE TAX
• Transfer of property under a general power of appointment
– By will, or by deed executed in contemplation of death, or by deed
where he retains for his life or any period not ascertainable without
reference to his death, which in fact does not end before his death
– Possession or enjoyment of, or the right to the income from, the
property, or the right to designate the persons who shall possess or
enjoy the property or the income thereof
– Except in case of bona-fide sale for an adequate and full consideration
in money or money’s worth.
• Power of appointment is “general” when it gives to the donee the power
to appoint any person he pleases, thus having as full dominion over the
property as though he owned it. It is “special” when the donee can
appoint only among a restricted or designated class of persons other than
himself.
 ESTATE TAX
• Proceeds of life insurance
• Taxable:
– Beneficiary is the estate of the deceased, his executor or administrator,
irrespective of whether or not the insured retained the power of
revocation
– Beneficiary is other than the decedent’s estate, executor or
administrator, when the designation of beneficiary is not expressly
made irrevocable. [NOTE: Under the Insurance Code, insurance
policies are presumed revocable.]
• Not Taxable:
– Accident insurance proceeds (not life insurance)
– Proceeds of group insurance policies (not taken out on the life of the
decedent)
– Beneficiary (NOT decedent’s estate, executor or administrator) is
designated irrevocably
– GSIS, SSS, and AFP RSBS
 ESTATE TAX
• REQUISITES OF PROPERTY PREVIOUSLY TAXED (VANISHING
DEDUCTION)
– Death
– Identity of the property
– Inclusion of the property (in gross estate or gross gift)
– Previous taxation of the property (estate tax or gift tax on
previous inheritance or gift was paid)
– No previous vanishing deduction on the same property (to
preclude application of vanishing deduction on same property more
than once).
– Percentage of deduction decreases over a period of 5
years (or 20% reduction every year)
 ESTATE TAX
• FORMULA OF VANISHING DEDUCTION

• Value taken of property previously taxed (as declared in prior decedent’s gross
estate)
• Less: Mortgage debt paid (1st deduction)
• Initial basis
• Initial basis divided by the value of gross estate of present decedent = __%
• Multiplied by expenses, indebtedness, etc and transfers for public
purposes
• Equals 2nd deduction
• Initial basis less 2nd deduction = Final basis multiplied by applicable rate of
vanishing deduction =
• Amount of vanishing deduction deductible from the estate of second
decedent
 ESTATE TAX
• Notice of death (2 months from death) required:
– Transfers subject to estate tax, or
– Exempt transfers, but gross estate exceeds P20,000
• If gross estate exceeds P2 million, attach to estate tax return a certified
statement of assets and itemized deductions.
• File estate tax return and pay tax within six months from date of death. If
payment would impose undue hardship, payment date may be extended
for not more than 5 years (if judicially settled), or 2 years (if settled extra-
judicially).
• Tax clearance is required before any transfer of shares may be made in the
name of new owners. Banks shall not allow any withdrawal from bank
account of decedent, unless estate tax has been paid, but it may allow
withdrawal not to exceed P20,000 without such certification from the CIR.
Discharge of Executor or Administrator from
Personal Liability

If the executor or administrator makes a written application to the

Commissioner for determination of the amount of the estate tax and
discharge from personal liability therefor, the Commissioner (as soon as
possible, and in any event within one (1) year after the making of such
application, or if the application is made before the return is filed, then
within one (1) year after the return is filed, but not after the expiration of
the period prescribed for the assessment of the tax in Section 203 shall not
notify the executor or administrator of the amount of the tax.

The executor or administrator, upon payment of the amount of which he is

notified, shall be discharged from personal liability for any deficiency in the
tax thereafter found to be due and shall be entitled to a receipt or writing
showing such discharge. (SEC. 92, NIRC)
LIABILITIES OF CERTAIN OFFICERS
 Payment before Delivery by Executor or
Administrator
No judge shall authorize the executor or
judicial administrator to deliver a distributive
share to any party interested in the estate
unless a certification from the Commissioner
that the estate tax has been paid is shown.
(SEC. 95, NIRC)
 Duties of Certain
Officers and Debtors
Registers of Deeds shall not register in the Registry of Property
any document transferring real property or real rights therein or
any chattel mortgage, by way of gifts inter vivos or mortis causa,
legacy or inheritance, unless a certification from the
Commissioner that the tax fixed in this Title and actually due
thereon had been paid is show, and they shall immediately
notify the Commissioner, Regional Director, Revenue District
Officer, or Revenue Collection Officer or Treasurer of the city or
municipality where their offices are located, of the nonpayment
of the tax discovered by them.
Any lawyer, notary public, or any government officer
who, by reason of his official duties, intervenes in the
preparation or acknowledgment of documents regarding
partition or disposal of donation inter vivos or mortis
causa, legacy or inheritance, shall have the duty of
furnishing the Commissioner, Regional Director, Revenue
District Officer or Revenue Collection Officer of the place
where he may have his principal office, with copies of
such documents and any information whatsoever which
may facilitate the collection of the aforementioned tax.
Neither shall a debtor of the deceased pay his
debts to the heirs, legatee, executor or
administrator of his creditor, unless the
certification of the Commissioner that the tax
fixed in this Chapter had been paid is shown;
but he may pay the executor or judicial
administrator without said certification if the
credit is included in the inventory of the estate
of the deceased. (SEC. 95, NIRC)
 Restitution of Tax Upon Satisfaction of
Outstanding Obligations
If after the payment of the estate tax, new
obligations of the decedent shall appear, and
the persons interested shall have satisfied
them by order of the court, they shall have a
right to the restitution of the proportional part
of the tax paid. (SEC. 96, NIRC)
Payment of Tax Antecedent to the Transfer of
Shares, Bonds or Rights.
There shall not be transferred to any new
owner in the books of any corporation,
sociedad anonima, partnership, business, or
industry organized or established in the
Philippines any share, obligation, bond or right
by way of gift inter vivos or mortis causa, legacy
or inheritance, unless a certification from the
Commissioner that the taxes fixed in this Title
and due thereon have been paid is shown
If a bank has knowledge of the death of a person, who maintained a
bank deposit account alone, or jointly with another, it shall not allow
any withdrawal from the said deposit account, unless the
Commissioner has certified that the taxes imposed thereon by this
Title have been paid: Provided, however, That the administrator of
the estate or any one (1) of the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an amount not
exceeding Twenty thousand pesos (P20,000) without the said
certification. For this purpose, all withdrawal slips shall contain a
statement to the effect that all of the joint depositors are still living at
the time of withdrawal by any one of the joint depositors and such
statement shall be under oath by the said depositors.