Taxation

Estate tax

Estate tax – is the tax on the right to transmit property at death and on certain transfers which are made by law the equivalent of
testamentary disposition.

Composition of Gross estate:

a) Based on the classification of the decedent:

1. Resident or citizen decedent – Resident citizen, non-resident citizen and resident alien –
2. Non-resident alien decedent - nonresident not a citizen of the Philippines

Properties Resident or citizen decedent Non resident alien decedent

Real Properties Whereever situated Situated in the Philippines
Personal Properties
Tangible personal properties Whereever situated Situated in the Philippines
Situated in the Philippines –
Intangible personal properties Whereever situated subject to reciprocity
Family home Situated in the Philippines -0 -
Taxable transfers Whereever situated Situated in the Philippines

b) Based on physical location of the estate:

 properties owned by the decedent at the time of death notwithstanding the fact that they might have been transferred
before he died.

c) Based on the civil status of the decedent:

1. Single decedent – properties owned at the time of death

2. Married decedent:

Conjugal Partnership of Gains Absolute Community of

Properties properties
Exclusive properties of the decedent Included Included
Exclusive properties of the surviving spouse Not included Not included
Common properties Included Included

RULE OF RECIPROCITY (NON RESIDENT ALIEN DEDECENT)

a) Properties covered by reciprocity - Intangible personal properties situated in the Philippines owned by non-resident alien.

b) Basic Rules

- No tax shall be collected in respect of intangible personal property:

1. if the non resident alien decedent at the time of his death was a citizen and resident of a foreign county which at the
time of his death did not impose a transfer tax of any character, in respect to intangible personal property of citizens
of the Philippines not residing in that foreign country, or

2. if the laws of the foreign country of which the non resident alien decedent was a citizen and resident at the time of
his death allows a similar exemption from transfer or death taxes of every character or description in respect to
intangible personal property owned by citizen of the Philippines not residing in that foreign country.

When there is reciprocity - the intangible personal property of NRA decedent situated in the Philippines are not included in
the gross estate.

When there is no reciprocity - the intangible personal property of NRA decedent situated in the Philippines are included in
the gross estate.

c. Properties considered situated in the Philippines:

- The following shall be considered as situated in the Philippines (among others)

1. Franchise which must be exercised in the Philippines;
2. Shares, obligations or bonds issued by any corporation or sociedad anomina organized or constituted in the
Philippines in accordance with its laws;
3. Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the
Philippines;
4. Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a
business situs in the Philippines.
 5. Shares or rights in any partnership, business or industry established in the Philippines.
TAXABLE TRANSFERS
a) Examples:
1. Transfer in contemplation of death
2. Revocable transfer
3. Transfer under the general power of appointment
4. Transfer with retention or reservation of certain rights.
5. Transfer for insufficient consideration.

b) Motives which preclude a transfer from category of one made in contemplation of death.
1. To relieve donor from the burden of management.
2. To save income or property taxes
3. To settle family litigated and unlitigated disputes.
4. To provide independent income for dependents.
5. To see the children enjoy the property while the donor is alive.
6. To protect the family from hazards of business operations.
7. To reward services rendered.

1. Transfer in contemplation of death

 is a transfer motivated by death although death may not be eminent.
 Donation mortis causa – a donation which takes effect upon or after the donor’s death. It partakes of the nature of
testamentary disposition.

2. Revocable transfer –
 transfer where the enjoyment of the property may be altered, amended, revoked or terminated by the decedent. It is sufficient
that the decedent had the power to revoke, though he did not exercise the power.

3. Transfer under the general power of appointment-

 Power of appointment is the right to designate the person or persons who will succeed to the property of a prior decedent.
- donor of the power – the person who creates the power of appointment.
- donee of the power – the person who is given the right to exercise the power.
- appointed property – is the subject of the power of appointment which is the property being transferred.

 General power of appointment - is one which authorizes the donee of the power to appoint any person to possessor enjoy
the property.

 Example: G. Adan died leaving a last will and testament in which there was a disposition of property in favor of Mr. Bitay.
G. Adan stated that should Mr. Bitay decide to transfer the property, he may transfer the property in favor of anybody.
Mr. Bitay , in his last will and testament, transferred the property to Mr. Bono. The property shall be included in the
gross estate of Mr. Bitay. (general power of appoiontment).

 Limited power of appointment – is one which authorizes the donee of the power to appoint only from among the designated
class or group of persons other than himself. The property shall not form part of the gross estate.

 Example: Mr. Dee transferred his property in trust, the income of such property is payable to Lee, his son. It was stated in
his last will, Lee may designate only from among Lee’s children, the one who shall succeed to the property. Lee, in his
last will transferred the property to Gie, his daughter. The property shall not form part of the gross estate. (limited
power of appointment)

4. Transfer for Insufficient consideration –

Value to include in the gross estate shall be in accordance with the following rules:
 if the transfer was in the nature of a bona fide sale for an adequate and full consideration in money or money’s worth, no
value shall be included in the gross estate.
 If the consideration received on the transfer was less than adequate and full, the value to include in the gross estate shall be
the excess of the fair market value of the property at the time of the decedent’s death over the consideration
received.
 If there was no consideration received on the transfer as in donation mortis causa, the value to include in the gross estate shall
be the fair market value of the property at the time of death.

 To illustrate:
Case A Case B Case C
a) FMV, time of transfer P 1,500,000 P 2,000,000 P 2,500,000
b) FMV, time of death 2,000,000 2,500,000 2,000,000
c) Consideration received at the time of transfer 800,000 2,000,000 0
d) Value to include in the gross estate __________ __________ __________

PROCEEDS OF LIFE INSURANCE

 Generally taxable, except when:
1. a third person is irrevocably designated as beneficiary.
2. the proceeds/benefits come from SSS or GSIS
3. when the proceeds come from group insurance
  When the designation of the beneficiary is not stated or is not clear, the Insurance Code assumed revocable designation.
CLAIMS AGAINST INSOLVENT PERSONS
a) the full amount of the claims is included in the gross estate.
b) The uncollectible amount of the claim is deducted from the gross estate.
c) Exercises:
Case A Case B Case C
Claims agains insolvent debtor P 50,000 P 60,000 P 70,000
Amount which can be collected 25,000 10,000 Zero
Amount to include in gross estate ________ _________ _________
Amount to deduct from the gross estate _________ _________ _________

AMOUNT RECEIVED BY HEIRS UNDER R.A. NO. 4917

a) R.A. NO. 4917 is entitled “An Act providing that Retirement Benefits of Employees of Private Firms Shall Not be Subject to
Attachment, Levy, Execution or Any Tax Whatsoever”.

b) The amount received by heirs from the decedent’s employer as a consequence of the death of the decedent-employee is
included in the gross estate of the decedent.

c) The amount above is also allowed as deduction from gross estate.

EXEMPTIONS OF CERTAINS ACQUISITIONS AND TRANSMISSIONS – the following shall not be taxed:
a) the merger of usufruct in the owner of the naked title;

Example:
Ann (testator) devised in his will a piece of land;, naked title to Ben and usufruct to Cee, for as long
as Cee lives, thereafter to Ben. The transmission from Ann to Ben and Cee is subject to estate tax but
the merger of the usufruct and the naked title in Ben upon death of Cee is exempt

b) the transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary;
Example:
Anton devised in his will real property to his brother, Sony (fiduciary heir) who is entrusted with
the obligation to preserve and to transmit the property to Celso ( fedeicommissary), a son of Sony when
Celso becomes of age.

c) the transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the
predecessor; and
Example:
Dino devised in his will a piece of land to Elmo, a nephew for five years after which it shall belon to Benny, a son in-
law.

d) all bequests, devises, legacies or transfers to social welfare, cultural and charitable organizations, no part of the net of which
inures to the benefit of any individual: Provided, however, That not more than 30% of the said bequests, legacies or transfers
shall be used by such institution for administration purposes.

EXCLUSIONS FROM GROSS ESTATE UNDER SPECIAL LAWS

a) Amount received as war damages

b) Amount received from US Veterans Administration
c) Benefits from GSIS and SSS
d) Retirement benefits of employees of private firms.

DETERMINATION OF THE VALUE OF THE ESTATE

a) Usufruct – in accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance upon
recommendation of the Insurance Commissioner.

b) Properties -
1. Generally, the gross estate shall be valued at the fair market value at the time of the decedent’s death.

2. In case of real property: The appraised value of real property as of the time of death shall be whichever is the higher
of:
a. The fair market value (or zonal value) as determined by the Commissioner, or
b. The fair market value as shown in the Schedule of valued fixed the Provincial and City Assessors.

3. In case of personal property:

a) Recently purchased = Purchase Price
b) Not Recently Purchased = Pawn value x 3

4. In case of Securities ( e.g. shares of stock)

a) Traded in the stock exchange – Mean between the highest and lowest quotations on valuation date or on the date
nearest the valuation date.
b) Not traded in the stock exchange –
 1. Common (ordinary) shares - Book value on the valuation date or on a date nearest the the valuation date,
2. Preferred (preference) shares - Par value

Tax 2:
Exercise 1 – Gross estate

A decedent left the following property:

1. Apartment in Canada, P 350,000.
2. Land in Masbate, P 150,000.
3. Car in Manila, P 250,000.
4. House and lot in Manila, P 850,000.
5. Jewelry in Canada, P 100,000.
6. Jewelry in Manila, P 240,000.
7. Shares of stock, San Miguel corporation, Manila, certificate are kept in Canada, P 200,000.
8. Value of interest in Canadian partnership, P 300,000.
9. Investment in bonds, Canadian corporation of which 85% of business is located in the Philippines, P 100,000.
10. Investment in stock, Canadian corporation of which 60% of business is located in the Philippines. (shares have acquired
business situs in the Philippines), P 50,000.
11. Accounts receivable, debtor residing in Manila, P 150,000.
12. Accounts receivable, debtor residing in Canada, P 75,000.
13. Cash in Bank, PNB, Manila, P500,000.
14. Investment in stock, Canadian Corporation of which 75%of business is located in the Philippines, P 125,000.
15. Car in Canada, P 400,000.
16. Furnitures and appliances, Manila, P 200,000.

REQUIRED:
Compute the taxable gross estate assuming decedent is:
a) resident or citizen
b) non resident alien ( no reciprocity)
c) non resident alien ( with reciprocity)

Exercise 2 - Determine the taxable value (gross estate)

1. Lot, 700 sq. m. FMV; P 700,000; Assessed value, P 800,000; zonal value, P 1,500 per sq. m.

2. Agricultural land inherited from father:

FMV, father’s death , P 1,000,000
FMV, present decedent’s death, P 700,000.

3. 50,000 shares, San Miguel Corp., par value P 25,000; shares are traded, highest quotation,
P 0.45; lowest quotation, P 0.35 at time of death

4. 100 shares, Adruth Corp. , par value P 60,000; shares are not traded, Adurth has authorized
shares of P 500,000; unissued shares, P 100,000; retained earnings, P 260,000.