Transfer Taxes

Estate Tax (TRAIN Law or RA

10963)
 Introduction: Ownership
• The right to use, abuse, dispose, etc., with
limitations of the laws and other legalities, of
personal or real properties.
• Modes of Acquiring Ownership: (OLD TIPS)
– Occupation
– Legal Formalities
– Donation
– Transaction
– Intellectual Creation
– Prescription
– Succession
 Gratuitous vs. Onerous
• Gratuitous - transfer of ownership without
consideration [e.g. succession (donation mortis
causa), donation (donation inter vivos)]
• Onerous - transfer of ownership with
consideration (e.g. transaction)
• Transfer Taxes (gratuitous, in general)
– Estate Tax
– Donor's Tax
• Business Taxes (onerous, in general)
– VAT
– Other Percentage Tax
 Nature of Estate Tax
• tax on right to transfer property at death (succession) and
on certain transfers which are made by law the equivalent
of testamentary disposition and is measured by the value
of the property.
• excise tax, object of which is the shifting of economic
benefits and enjoyment of property from the dead to the
living
• accrues as of the death of the decedent
• the taxpayer is the estate of the decedent represented by the
administrator, executor or the heirs
 Purpose of Estate Tax
• Benefit-received theory
• Privilege theory
• Ability to pay theory
• Redistribution of wealth theory
 Concept of Succession
• Succession - mode of acquisition by virtue
of the property, rights and obligations to
the extent of the value of the inheritance,
of a person are transmitted thru his death
to another or others either by will or by
operation of law.
 Wills
• 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 from
the moment of the death of the decedent,
the rights to the succession are
transmitted, and the possession of the
hereditary property is deemed transmitted
to the heir.
 Kinds of Wills
• Notarial or Ordinary or Attested Will (Art. 804-
808 of the New Civil Code of the Phil.)
– will 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) and
acknowledged by the presence of a notary public.
• Holographic Will
– written will which must be entirely written, dated and
signed by the hand of the testator himself, without
necessity of any witness.
• Note: Codicil - supplement or addition to a will,
by which any disposition made in the original will
is explained, added or altered
 Elements of Succession
• Decedent - person whose property is
transmitted thru succession, whether or
not he left a will. (Testator - person who
left a will)
• Heir/Successors - person called to the
succession
• Estate - all the property, rights and
obligations which are not extinguished by
the decedent's death
• Acceptance
 Kinds of Succession
• Testamentary - succession which results
from the designation of an heir, made in a
will executed in the form prescribed by law
• Legal/Intestate - transmission of properties
where there is no will, or if the will is void,
or nobody succeeds in the will.
• Mixed - effected partly by will and partly by
operation of law
 Testamentary Succession
• Kinds of successors in a testamentary
succession
– Legatee, heir to a particular personal
property by virtue of a will
– Devisee, heir to a particular real property by
virtue of a will
 Testamentary Succession
• Executor - person nominated by a testator
to carry out the directions and request in
his will and to dispose of his property
according to his testamentary provisions
after his death. (if man, executor; if
woman, executrix)
 Testamentary Succession
• Compulsory Heirs vs. Voluntary Heirs
– Compulsory heirs
• legitimate children and descendants
• in default of the foregoing, legitimate parents or
ascendants
• widow/widower/surviving spouse
• illegitimate children
– Voluntary heirs - anyone except to those
mentioned as compulsory heirs
 Testamentary Succession
• Under testamentary succession, the mass
of properties left by the decedent may be
classified into:
– Legitime - portion of the testator's property
which could not be disposed of freely because
the law has reserved it for the compulsory
heirs
– Free portion - can be disposed freely thru
written will irrespective of his relationship to
the recipient
 Legal or Intestate Succession
• In this type of succession, the entire estate
of the decedent is distributed to the heirs.
However, intestate heirs include brothers
and sisters, collateral relatives within the
fifth civil degree, and the state.
• Administrator - person appointed by the
court to administer and settle intestate
estate as no competent executor
designated by the testator.
 Gross Estate
• consists of all properties and interests in
properties of the decedent at the time of
his death as well as properies transferred
during lifetime (only in form), but in
substance was only transferred at the time
of death.
 Components of Gross Estate
• Properties at the time of death
– Real, Tangible/Intangible Personal Properties
• Decedent's Interest
– Any interest in property owned or possessed by the decedent at
the time of death (e.g. dividends declared but not received at the
death of the decedent, accrued partnership profits at the time of
death, etc.)
• Properties transferred gratuitously during lifetime, but in
substance, transferred upon death
• Proceeds from life insurance
– Revocable/Irrevocable (beneficiary is estate, executor or
administrator)
– Revocable (beneficiary is third person)
 Intangible Properties considered
located in the Philippines
• Franchise which must be exercised in the Philippines
• Shares, obligations, or bonds issued by any corporation
organized or constituted in the Philippines
• Shares, obligations, or bonds issued by any foreign
corporation, at least 85% of the business of which is
located in the Philippines
• Shares, obligations, or bonds issued by any foreign
corporation if such have acquired a business situs in the
Philippines
• Shares or rights in partnership, business or industry
established in the Philippines
 Properties transferred gratuitously during
lifetime, but in substance, transferred upon
death
• Transfer in contemplation of death - the
cause of transfer is the thought of death
(age, sickness, etc.)
• Transfer with retention or reservation of
certain right
• Revocable Transfer
• Properties passing under general power
of appointment
• Transfer for insufficient consideration
 General vs. Special Power of
Appointment
• General - appointed by the decedent to
transfer the property to anyone, without
restrictions
• Special - appointed by the decedent to
transfer the property to certain
restrictions/limitations imposed by the
decedent
 Transfer for Insufficient
Consideration
• Amount included in the gross estate:
• "Fair Market Value" at the time of death,
less the "selling price/consideration“
• Insufficient consideration (FV at time of
transfer > consideration received)
 Classification of Decedent
• Citizen or Resident
• Non-resident Alien
– Without reciprocity
– With reciprocity
 Reciprocity Clause
• No tax shall be imposed with respect to
intangible personal properties of a NRA
situated in the PH
– when the foreign country, where such NRA 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
– when the foreign country imposes transfer
tax, but grants similar exemption with respect
to intangible personal properties of Filipino
citizens not residing in that country.
 Summary of Gross Estate Based
on Citizenship & Residence
Tangible Personal Intangible Personal
Real Property
Property Property

Decedent w/in w/out w/in w/out w/in w/out

Citizen or
⁄ ⁄ ⁄ ⁄ ⁄ ⁄
Resident

NRA w/o
⁄ x ⁄ x ⁄ x
reciprocity

NRA w/
⁄ x ⁄ x x x
reciprocity
 Valuation of Gross Estate
• Real Properties (higher between FMV and ZV)
• Personal Properties (FMV)
• Shares of stock
– traded in LSE (mean between highest and lowest
quotations)
– not traded in LSE
• Common Stock (book value)
• Preferred Stock (par value)
• Usufruct (based on latest Basic Mortality Table
to be approved by Secretary of Finance upon
recommendation of the Insurance Commission
 Exemptions and Exclusions from
Gross Estate
• Under Sec. 87 NIRC
– merger of the usufruct (right to use) in the owner of
the naked title (without right to use)
– transmission or delivery of the inheritance or legacy
of the fiduciary heir or legatee to the fedeicomissary
– the transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the will of the predecessor
– all bequests, devices, legacies or transfers to social
welfare, cultural and charitable institutions provided
• no part of the net income of said institutions inure
to the benefit of any individual
• not more than 30% of such transfers shall be used
for administration purposes
 Deductions from Gross Estate
• Deductions are items which the law on
estate tax allows to be subtracted from the
value of the gross estate in order to arrive
at the net taxable estate
• as a rule, deductions from gross estate are
pesumed to be common deductions
unless specially identified as exclusive.
 Classifications of Deductions
• Ordinary deductions
• Special deductions
• Share of the surviving spouse (SSS)
 Ordinary Deductions (TRAIN)
• Losses, indebtedness, taxes (LIT)
– casualty losses
– claims against insolvent persons
– claims against the estate
– unpaid mortgage
– unpaid taxes
• Transfer for Public Use (TPP)
• Property Previously Taxed (PPT) / Vanishing
Deduction
 Casualty Losses
• Requisites
– incurred during the settlement of the estate
– arising from fires, storms, shipwreck, or other
casualties, or from robbery, theft or
embezzlement
– not compensated by insurance
– not claimed as deduction for income tax
purposes
– incurred not later than the last day for the
payment of the estate tax
 Claims against Insolvent Persons
• Requisites
– Value of claim is included in the gross estate
– insolvency of the debtor must be established
• Deductible: amount of receivable that
cannot be collected
 Claims against the estate
• Requisites
– personal debt of the decedent existing at the time of
his death
– contracted in good faith
– must be valid in law and enforceable in court
– must not have been condoned by the creditors
– must not have prescribed
– debt instrument must be notarized
– if the loan was contracted 3 years before death,
submit settlement showing the disposition of the
proceeds
 Unpaid mortgage
• Requisites
– the FMV of the of the mortgaged property
undiminished by the mortgage indebtedness
should be included in gross estate
– contracted in good faith
– for adequate and full consideration
 Unpaid taxes
• tax must have accrued before the
decedent's death
• Deductible
– unpaid taxes accrued but not including
• any income tax upon income received after death
• property taxes not accrued before death
• estate tax from the transmission of the estate
 Transfer for Public Use
• Requisites
– given to the government of the Philippines
– testamentary in character
– way of donation mortis causa executed before
the decedent's death
– exclusively for public purpose
• Deductible
– amount of bequests, legacies, devises, or
transfers to or for the use of the government
 Vanishing Deduction (PPT)
• Requisites
– decedent died within 5 years from receipt of the property from
a prior decedent or donor
– property of which PPT is claimed is located in the Philippines
– property must have formed part of the taxable estate of the
decedent or taxable net gift of the donor and the transfer tax
relative thereto had been paid
– property on which PPT is being taken must be identified as
the one received from the prior decedent, or from the donor,
or something acquired in exchange therefore
– no vanishing deduction on the property was allowable to the
estate of the prior decedent
 Vanishing Deduction
Computation:

Initial Vaue (FMV at the time of

transfer vs. FMV at the time of
death, whichever is lower) Pxxx
Less: Mortgage paid xxx
Initial Basis xxx
Less: Proportional Deduction
[(IB/GE)x(ELIT+TPP)] xxx
Final Basis xxx
x Rate xxx
Vanishing Deduction Pxxx
 Vanishing Deduction
• Interval of Acquisition and Death of the
Present Decedent

Within 1 year 100%

More than 1 year but not more than

80%
2 years
More than 2 years but not more than
60%
3 years
More than 3 years but not more than
40%
4 years
More than 4 years but not more than
20%
5 years
 Special Deductions (TRAIN)
• Amount received by heirs under R.A 4917
• Family Home
– decedent is married or head of the family
– must be actual residential home of the decedent
and his family at the time of his death, as certified
by the Brgy. Captain of the locality the family home
is situated
– located in the PH
– included in gross estate
– the amount must be the lower between the actual
interest or P10,000,000
• Standard Deduction – P5,000,000
Deductions of a Non-resident Alien
Decedent
• Standard deduction in the amount of ₱500,000
• Value of
– Claims against the estate
– Claims against insolvent person
– Unpaid mortgages
(In proportion to the value of the entire gross estate
situated in the Philippines)
• Property previously taxed
• Transfer for public use
 Property Relationship Between
Spouses
Components of Gross Estate of a Married
Decedent

Exclusive Properties of Decedent Pxxx

Conjugal/Common Properties xxx
Gross Estate Pxxx

Note: Exclusive properties of the surviving spouse

is not included in computation of gross estate
 Conjugal Partnership of Gains
(CPOG)
• Married before August 3, 1988
• Rules on Properties
– Exclusive
• which is brought to the marriage as his/her own
• which each acquires during marriage by gratuitous
title
• which is acquired by right redemption, by barter or
exchange with property belonging to any one of
the spouses
• which is purchased with exclusive money of the
wife or of the husband
 Conjugal Partnership of Gains
(CPOG)
• Rules on Properties
– Conjugal
• acquired by onerous title during marriage at the expense of
the common fund
• obtained from labor, industry, work or profession by one of
either or both spouses during marriage
• fruits, natural, civil or industrial, from common property, as
well as net fruits from the exclusive properties
• share of either spouse in the hidden treasure
• acquired by occupation
• livestock existing upon dissolution of partnership brought to
the marriage
• acquired by chance (gambling/betting). However, losses
shall be borne exclusively by the loser-spouse
 Absolute Community of Property
(ACOP)
• On or after August 3, 1988
• Rules on Properties
– Exclusive
• Property acquired during marriage by gratuitous
title and its fruits and income, except that the
properties inherited/received as gift is expressly
granted for the community property
• property for personal and exclusive use of either
spouse, except jewelries
• property acquired before marriage who has
legitimate descendants by the former marriage and
its fruits and income
 Absolute Community of Property
(ACOP)
• Rules on Properties
– Common
• All properties owned by the spouses at the time of
celebration of marriage, and
• acquired thereafter
• Jewelries
 Share of the Surviving Spouse
(SSS)
Deductible

Common Properties Pxxx

Common Deductions (xxx)
Net Common Properties xxx
Multiply by 50%
Share of the Surviving Spouse
Pxxx
 Classification of Ordinary
Deductions for Married Decedent
Casualty Losses common or exclusive

Claims against insolvent persons common or exclusive

Claims against the estate common or exclusive

Unpaid mortgage common or exclusive

Unpaid taxes common or exclusive

Transfer for public use Common or exclusive

exclusive under CPOG,
Vanishing deduction
common or exclusive under ACOP
 Estate Tax Rate
• 6% of net taxable estate (whether resident
or nonresident)
 Tax Credit of Estate Tax Paid to a
Foreign Country
Only residents/citizens can claim tax credit
Lower between the actual tax paid abroad or the limit as discussed below:

Limit (only one country is involved)

Net Estate, Foreign x PH Estate Tax
World Net Estate

Limit (if two or more country, lower between A or B)

A - Per Foreign Country
Net Estate, per Foreign x PH Estate Tax
World Net Estate

B - By Total
Net Estate, All Foreign Countries x PH Estate Tax
World Net Estate
 Compliance Requirements
Estate Tax Return
• all cases subject to estate tax and
regardless of the amount of the gross
estate if consists of registered or
registrable property
• within 1 year after the decedent's death
 Compliance Requirements
When shall certification by a Certified Public Accountant (CPA)
needed?
• gross estate exceeding P5,000,000

Where to file?
• Resident decedent
– authorized agent bank
– revenue district officer (RDO)
– collection officer
– duly authorized treasurer of the city or municipality in which the
decedent was domiciled at the time of his death
• Nonresident decedent
– RDO where executor/administrator is registered
– RDO where executor/administrator, legal residence have
jurisdiction
– Office of the BIR (RDO No. 39, South Quezon City)
 Compliance Requirements
Payment of Estate Tax
• Pay as you file
• If there are undue hardships
– Allowed extension:
• 5 years if settled judicially/thru the use of courts
• 2 years if settled extra-judicially
 Compliance Requirements
Payment by installment of estate tax
•In case the available cash of the estate is
insufficient to pay the total estate tax due,
payment by installment shall be allowed
within two (2) years from the statutory
date of payment, without civil penalty
and interest.
 Compliance Requirements
Payment of tax antecedent to the transfer of
shares, bonds, or rights
•If a bank has knowledge of the death of a
person, who maintained a bank deposit
account alone, or jointly with another, it
shall allow any withdrawal from the said
deposit account, subject to a final
withholding tax of (6%).