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TRANSFER TAXES,
BASIC SUCCESSION
AND GROSS ESTATE
By: Edelwin Fajutagana
INTENDED LEARNING OUTCOME:

At the end of this topic, you will be able to:

• Understand the basic concepts of transfer taxes
• Understand the basis of succession
• Identify the concept of gross estate

Transfer taxes, Basic Succession and Gross Estate

 Transfer Taxes
Nature of Transfer Taxes

Transfer is any mode of disposing of or parting with an asset or interest in an

asset. This can include gift, payment of money, release, lease, creation of a lien
or other encumbrance. It is also a conveyance of property or title from one
person to another.
Transfer taxes, on the other hand, are excise or privilege taxes. These taxes are
imposed for gratuitous passing of private owned properties to the heirs in case
of death, or to the donee in case of donation.
This tax is imposed on the act of passing the ownership of property and not a tax
on the value of the property itself.

Transfer taxes, Basic Succession and Gross Estate

Transfer taxes, Basic Succession and Gross Estate
Transfer taxes, Basic Succession and Gross Estate
 Concept of Succession

What is succession?
According to Art. 774 (Civil Code): Succession is a mode of acquisition by virtue of which
the property, rights and obligation 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.
Succession:
Only open at the time of death.
A mode of acquiring ownership
Transfers property, as well as rights and obligations that are not personal to the deceased.
Art. 776 (Civil Code): The inheritance includes all the property, rights and obligations of a
person which are not extinguished by his death.
Art. 777 (Civil Code): The rights to the succession are transmitted from the moment of
death.

Transfer taxes, Basic Succession and Gross Estate

 Concept of Succession

Elements of Succession:
• Decedent - person who died and whose succession is now open
• Testator - a decedent whose properties are to be transferred to his successor through a written
will.

• Successor - is the person to whom the property or property rights is to be

transferred. They are also called as heir.
• Estate - a properties or property rights of the decedent, which is the subject
matter of succession

Transfer taxes, Basic Succession and Gross Estate

 Concept of Succession

Terms:
• Deceased, decedent - person who died and whose succession is now open.
• Heir - person who is legally entitled to the estate or a portion thereof.
• Estate, inheritance - the net properties and worth of the deceased/decedent.
• Last Will and Testament - a legal document that provides a person's final wish and
instructions regarding his properties and who shall receive them.

Transfer taxes, Basic Succession and Gross Estate

 Concept of Succession

Type of Succession
1. Testamentary succession - the decedent provides a will
2. Intestate succession - decedent hat no will; or the will is void
3. Mixed succession - combination of the two, may have a valid will but incomplete.
Type of Heirs
4. Compulsory Heir - those whom the law reserve as legitime. The following are the compulsory
heirs:
1. Legitimate children and descendants, surviving spouse; illegitimate children and legitimate or
illegitimate parents
5. Voluntary/Instituted Heirs - those designated by the decedent on his will
Note: Brothers and sisters are neither compulsory heirs nor strangers. However they may be voluntary heirs.

Transfer taxes, Basic Succession and Gross Estate

 Concept of Succession

What is Legitime?
Legitime is the part of the testator's property which he cannot dispose of because the law has
reserved it for certain heirs who are, therefore called compulsory heirs.

Two Kinds of Will

1. Holographic Will - handwritten and signed by the testator without a required of witness
2. Notarial Will - care of notary public with a required of at least three (3) witnesses.

Transfer taxes, Basic Succession and Gross Estate

 Concept of Succession
Ways to settle the Estate?
1. Judicial - filing the petition for judicial settlement of the estate with the proper Regional Trial Court.
This is advisable during the following:
1. when the deceased left a will;
2. he had unpaid debts or obligations; and
3. the heirs are in disputes.
2. Extra-judicial Settlement - without going to court and securing letter of administration, provided by the
following conditions are present:
1. the decedent died without a will;
2. he did not have any debt or obligation at the time of his death;
3. the heirs are all of age or if there are minor heirs, they are duly represented; and
4. made by a public instrument or affidavit filed with the proper Register of Deeds and published once a week for
three (3) consecutive weeks.

Transfer taxes, Basic Succession and Gross Estate

 Concept of Estate

Characteristics of Estate Tax

• As to Subject Matter (excise tax; privilege tax)
• It is tax on the privilege (Mortis Causa)
• Direct tax – Taxpayer here is the estate itself but represented by the executor/administrator
• As to Amount – Ad valorem
• As to Scope – Tax on the national level
• As to Purpose – General tax/Fiscal tax (the purpose is to raise revenue with 6% rate)
• As to Rate – Proportional tax – fixed rate of 6%

Transfer taxes, Basic Succession and Gross Estate

 Concept of Estate

Reason of Estate
• Ability to pay theory – the estate received by the heir/s is unearned wealth
which increases its resources, creating ability to pay.
• Benefit received theory – government provides services for the transfer of
estate of the decedent.
• State partnership theory – (government share is a silent partner)
• Redistribution of wealth theory – (to prevent improper distribution of
wealth)

Transfer taxes, Basic Succession and Gross Estate

 Gross Estate
Gross Estate
The gross estate consists of all property owned by a decedent at the time of his death, including stocks,
bonds, real estate, mortgages and any other property that technically belonged to him. The case of a non-
resident alien decedent, gross estate includes only properties situated in the Philippines except intangible
personal property when the reciprocity rule applies.

Transfer taxes, Basic Succession and Gross Estate

 Gross Estate
Illustration:
A decedent died leaving the following property:

Gross Estate:
If the decedent is a:
1. Resident citizen, non-resident citizen or resident alien - ( All properties, within and abroad are included in his/her gross estate) P
8,000,000.00
2. Non-resident alien without reciprocity - (All properties within are included in his/her gross estate) P 3,300,000
3. Non-resident alien with reciprocity - (All properties within, except intangible personal properties are included in his/her gross estate) P
2,500,000.00

Transfer taxes, Basic Succession and Gross Estate

 Valuation of the Gross Estate

For the purpose of computing the estate tax, it is necessary that the gross estate of the decedent be
appraised or valued at the time of death. 
The date of valuation is the time of death because the transfer of properties from the dead to the
living takes effect at the moment the of death. (Art. 777, Civil Code of the Philippines)
It is important to  determine the value of the gross estate since it is the basis in computing the
estate tax.
Valuation:
• Fair market value at the time of death
• Real Property, it is possible to this valuation has two basis; in this event, it is the HIGHER between:
• Assessed Value - Fair market value as shown in the value fixed by the provincial and city assessors.
• Zonal Value - Fair market value determined by the BIR Commissioner.

Transfer taxes, Basic Succession and Gross Estate

 Valuation of the Gross Estate

Illustration:
Mr. Ded Li died leaving the following real properties in Cebu City.

The value of the real properties of Mr. Li to be included in his gross estate would be P 71,000,000.00
determined as follows:

Transfer taxes, Basic Succession and Gross Estate

 Valuation of the Gross Estate

• Personal Property - Fair market value at the time of death.

Illustration:
Mr. Tapos died leaving a building which he purchase for P14,000,000.00 five years ago. At the
time of his death, the building has a book value of P12,800,000.00 but can be sold for
P10,000,000.00
The building should be included as part of the gross estate at the current market value of
P10,000,000.00

Transfer taxes, Basic Succession and Gross Estate

 Valuation of the Gross Estate

• Share of Stocks - Fair market value, and shall depend on whether the stocks are listed or unlisted in the
stock exchanges. Preferred shares are valued at par value
• Unlisted common shares shall be valued at their book value
• For the purpose, RR12-2018 reinstated the financial statement method which ignores appraisal surplus. The Adjusted Net
Asset Method under RR6-2013 is no longer followed 
• For shares which are listed in the stock market, RR12-2018 also reinstated the use of arithmetic mean of highest
or lowest quotation at the date nearest the date of death.
Illustration:
Mr. Dee Do died leaving 1,000 preferred shares and 300,000 common stocks of MRC Company in his estate.
The equity section of MRC in the latest quarterly financial statements is as follows:

Transfer taxes, Basic Succession and Gross Estate

 Valuation of the Gross Estate

Assumption 1:
Assuming MRC is non-listed company, the book value per share of common share shall be computed as:

Transfer taxes, Basic Succession and Gross Estate

 Valuation of the Gross Estate

Assumption 2:
Assuming MRC is listed and is traded as follows in the stock market at the nearest trading day of the date of death:

The average price based on the foregoing graph shall be (4 + 6) / 2 = P5. Mr. Do's shares shall be valued as
follows in his gross estate:
Preferred stocks (1,000 shares @ P500) P    500,000
Ordinary shares (300,000 x 5.00) P 1,500,000
Total investment P 2,000,000

Transfer taxes, Basic Succession and Gross Estate

 Valuation of the Gross Estate

In addition to the properties and rights that are easily and physically identifiable,
there are still some rights or properties which are not physically included in the
estate at the time of death, but are still be included as part of the gross estate of the
decedent for the estate tax computation.
Taxable Transfers (Transfers during the lifetime of the decedent) - are mortis
causa transfers of properties in the guise and form of inter-vivos transfer. These
are referred to as inclusions in gross estate.
• Revocable transfers;
• Transfers in contemplation of death; and
• Property passing under general power of appointment

Transfer taxes, Basic Succession and Gross Estate

 Valuation of the Gross Estate

Revocable transfers
Revocable transfers involve transfers of possession over property during the lifetime of the decedent, but not
transfer of ownership over said property. At the point of death, the decedent owns the property, hence, it must
be included as part of his gross estate since the same is part of his donation mortis causa.
In revocable transfer, ownership transfers only when the transferor waives the right to revoke the transfer. If the
transferor dies without waiving his right of revocation, he owns the property at the point of his death. Hence, it
should be included in his gross estate.
Illustration:
In January 2017, Mr. Lago transferred a car with fair value to P1,200,000 to Mr. Sago. The car shall be
revocable by Mr. Lago until July 30,2020. Mr. Lago died on May 30, 2020 when the care had a fair value of
P1,100,000
The car shall be included in gross estate of Mr. Lago at the fair value of P1,100,000
The transfer shall be subject to donor's tax when the right to revoke expired prior to Mr. Lago's death or when
Mr. Lago waived the right to revoke before his death. In this case, the property shall not be included in gross.
estate
Transfer taxes, Basic Succession and Gross Estate
 Valuation of the Gross Estate

Transfers in contemplation of Death

These are donations made by decedent during his lifetime which are
motivated by the thought of his death.
Transfer in contemplation of death may include:
1. Transfers of property to take effect in possession or enjoyment at or after death
2. Transfer of property with retention of the right of possession or enjoyment or right over
income of the property until death
3. Transfer of property with retention of the right to designate, alone or in conjunction
with any person, the person who shall enjoy the property or the income there from.

Transfer taxes, Basic Succession and Gross Estate

 Valuation of the Gross Estate

Transfer under general power of appointment

Properties subject to the general power of appointment by the decedent shall be included in the
gross estate of the decedent. The presence of the general power enables the holder of such power
to do with the property anything which he could do as if the property were his own.
Illustration
Dondon died, and in his will, he gave Dada a house and lot with the right to designate the property
to whomever heir she wants. Dada eventually died and appointed Coco as heir to the property.
Dada has a general power over the property. The same shall be included in her gross estate. If
Dada had limited power, the same shall not be included in her gross estate.

Transfer taxes, Basic Succession and Gross Estate

 Valuation of the Gross Estate

Composition of Gross Estate

1. Properties, movable or immovable, tangible or intangible
2. Decedent's interest on properties
3. Proceeds of life insurance:
1. Designated as revocable to any heir
2. Designated to estate, administrator or executor as beneficiary
4. Taxable transfers

Transfer taxes, Basic Succession and Gross Estate

 Exemptions from Estate Tax

The term "exemption from estate tax" is synonymous with the term "exclusion from gross estate". It refers to
properties, rights or transfers that are specifically declared by the law as free from the burden of estate tax.
As a rule, properties or transfers, which are exempt by law from estate tax, are not considered in the
determination of the amount of the gross estate.
Transfer of properties not owned by the decedent:
1. Merger of the usufruct in the owner of the naked title
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary
3. The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire
of the predecessor
4. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate, executor or administrator
5. Properties held in trust by the decedent
6. Separate properties of the surviving spouse of the decedent
7. Transfer by way of bona fide sales

Transfer taxes, Basic Succession and Gross Estate

END
 The more privilege you have, the more
opportunity you have. The more opportunity
you have, the more responsibility you have.
- Noam Chomsky
STUDENTS CONCERNS:

 If you have any concerns about our online class especially if it affects
majority of the class, please do let me know.
CLASS REMINDERS:
Please be reminded of the following activities for our 1st week of
Online Class Discussion.
 Assignment will be given after our online discussion
 Our scheduled quiz which will be on Friday: 3PM-4:PM
• This is a one hour quiz, after the time given, you can no longer access
our online quiz.

INTRODUCTION TO TAXATION AND TAX ADMINISTRATION

Thank you
And
keep safe