Gross Estate
Gross Estate
Gross Estate
GROSS ESTATE
The first estate tax law in the Philippines is embodied in Act 2601 which took effect on July 1,
1916. It imposes graduated estate tax rates computed on net inventoried property left by a decedent. It
was subsequently revised by the Revised Administrative Code of the Philippines imposing upon "every
transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of
inheritance, devise or bequest." Since then, several laws were introduced to amending Act 2601.
RA 8424 also known as “Tax Reform Act" or the National Internal Revenue Code (NIRC) Effective
Jan.1, 1998 further restructured the tax base and rates of both estate and donor's taxes in addition to
allowing the deduction of medical expenses from the gross estate. Bulk of the estate tax law (aside from
determining the tax base and rates which are found in NIRC are embodied in the New Civil Code of the
Philippines.
In the Philippines, Estate Tax is a tax imposed on the privilege that a person is given in controlling
to a certain extent, the disposition of his property to take effect upon death. As discussed in Chapter 1, it
is an excise tax imposed on the act of passing the ownership of property at the time of death and not on
the value of the property or right. On this basis, estate tax should not be construed as a direct tax on the
property of the decedent although the tax is based thereon. Since estate tax accrues as of the time death,
the right of the State to 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.
1. Benefit-Received Theory
The law considers the service rendered by the government in distribution of the estate of the
decedent, either by law or accordance with his wishes. For the performance of these services and
other benefits that accrue to the estate and the heirs, the Senate collects the tax.
Under this theory, inheritance is not a right but a privilege granted by the State and legatees
have been acquired only with the protection of the State. Consequently, the State as a passive silent
partner in the accumulation of property has the right to collect the share which properly due to it.
Receipt of inheritance which is in the nature of an unearned wealth or windfall, are place
assets into the hands of the heirs and beneficiaries. This creates an ability to pay the tax and thus
contributes to government income.
The receipt of inheritance is a contributing factor to the inequalities in wealth and incomes.
The imposition of estate tax reduces the property received by the successor, thus helping to promote
equitable distribution of wealth in society. The tax base is the value of the property and the
progressive scheme of taxation is precisely motivated by the desire to mitigate the evils of inheritance
in the present form.
Section 85 of the Tax Code states that the value of the gross estate of the decedent should be
determined by including the value at the time of his death of all property, real or personal, tangible or
intangible, wherever situated: Provided, however, that in the case of a non-resident decedent who, at the
time of death, was not a citizen of the Philippines, only that part of the entire gross estate which is situated
in the Philippines shall be included in the taxable estate.
BUSINESS TAXATION (AE16)
RECIPROCITY CLAUSE
The tax code excludes "intangible" personal property with situs in the Philippines from the gross
estate of a non-resident alien decedent if there is reciprocity. There is reciprocity if:
• The decedent at the time of his death was a resident citizen of a foreign country which at the time
of his death did not impose an estate tax of any character in respect of intangible personal
property of citizens of the Philippines not residing in that foreign country; or
• The laws of the foreign country of which the decedent was a resident citizen at the time of his
death allow a similar exemptionfrom estate taxesof every character, in respect of
intangiblepersonal property owned by citizens of the Philippines not residingin that foreign
country.
Intangible Asset
The term "intangible asset" was not defined in the Tax Code, nonetheless, Accounting Standards
defines intangible asset as an "identifiable nonmonetary asset without physical substance". They derive
their value from intellectual or legal rights, and from the value they add to the other assets.
As a rule, the situs of intangible personal property is the domicile of the owner, also known as
"mobilia sequntur personam". However, such rule is not applicable it the intangible property has situs
elsewhere or where the intangible property has acquired a business situs in another jurisdiction because
the principle of "mobilia sequntur personam" is only used for convenience. It must yield to the actual situs
of such property. The situs of Franchise, for instance, should not be based on the domicile of the owner
but the place where such franchise is exercised.
Section 104 of the Tax Code enumerates the following intangible personal property with situs in the
Philippines:
ILLUSTRATION 1
Case A: Assume there is no reciprocity, what is the correct value of the gross estate?
ANSWER: P2,620,000
Solution:
Car, acquired during marriage in Cebu P1,500,000
Shares of stocks – PLDT P0,500,000
5-year, 10% Promissory Note P0,500,000
Interest income (P500,000 x 12% x 2) P0,120,000
Gross Estate P2,620,000
• The shares of stock issued by a foreign corporation (20% of its operation is in the Philippines)
is considered situated outside of the Philippines. Under the tax code, a nonresident alien
decedent is taxable only for properties situated in the Philippines. Same rule applies to the
House and Lot as well as the bank deposit in New York, USA.
• Interest income earned before or at the time of death shall likewise form part of the decedent’s
gross estate.
Case B: Assume there is reciprocity, what is the correct value of the gross estate?
ANSWER: P1,500,000
Only the car in Cebu acquired during marriage shall be included in the decedent’s gross estate.
Intangible properties with situs within the Philippines are excluded in the determination of
gross estate if there is reciprocity.
4. Shares of stock • Unlisted common share: Book value per share of the
issuing corporation (Appraisal surplus shall not be
considered, as well as the assigned amount o
preference shares, if any).
• Unlisted preference share: Par value per share
• Listed shares: FMV shall be the arithmetic mean
between the highest and lowest quotation at a date
nearest the date of death, if none is available on the
death itself (RR 2-2003/ RR 12-2018)
5. Units of participation in any The bid price nearest he date of death published in any
association, recreation or newspaper or publication for general circulation.
amusement club (ie., golo,
polo, similar clubs)
6. Right to usufruct, use or In accordance with the latest Basic Standard Mortality Table
habitation, and annuity taking into account the probable life of the beneficiary, to be
approved by the Secretary of Finance upon recommendation
of the Insurance Commissioner [Section 88(A) NIRC].
ILLUSTRATION 2/3
Determine the correct amount to be included in the gross estate o the decedent in the following
independent cases:
Case A: Pedro bought a brand new car with a cash price of P3,000,000. He bought the car on installment
with the following terms: down payment of P500,000 and annual installment of P700,000 for four years.
On his way home, he run over an approaching truck and died.
ANSWER: P3,000,000
Case B: The decedent granted a P2,000,000 loan to his best friend two years before his death with a
10% interest per annum evidenced by a note. Both the principal and interest are due after three years.
ANSWER: P2,600,000
Principal amount plus interest of 10% for 2 years
Case C: The decedent devised to his son a 1,000 square meter lot in Global City, Taguig with the
following valuation:
Fair value as determined by city assessors P20,000/sq.m.
Zonal value as determined by the CIR 17,000,000
FV determined by independent assessors 18,500,000
Case D: Decedent owns 100,000 ordinary shares of Alpha Company at the time of his death. At that
time, Alpha's outstanding shares were 1,000,000 with P10 par value and Retained Earnings amounting
to P5,000,000. The shares are not traded in the stock exchange.
ANSWER: P1,500,000
Book value per share of Alpha Company multiplied by the number of shares held by the
decedent at the time of death. [(P10M + 5M) / 1,000,000 shares] x 100,000 shares
Case E: A decedent left 10,000 Pinoy Telecom shares. The shares were traded in the local stock
exchange. At the time of death, the following were available:
Highest quotation P800 per share
Lowest quotation P200 per share
Book Value P350 per share
Exclusive properties of the surviving spouse should be excluded in the gross estate
because these properties are not owned by the decedent upon his death.
For estate tax purposes, exclusive properties of the husband are known as "capital" while
exclusive properties of the wife are known as "paraphernal" properties. Whether such property
is exclusive or common will depend on the type of property relations of the husband and wife.
Property relations are discussed in Chapter 4.
Section 85 of the Tax Code provides that for nonresident alien decedents, only his
properties situated or with situs within the Philippines shall be included in his gross estate.
Consequently, properties outside of the Philippines are excluded in determining gross estate.
3. Intangible personal property in the Philippines of a non-resident alien under the Reciprocity Law.
The tax code excludes "intangible" personal property with situs in the Philippines from
the gross estate of a non-resident alien decedent if there is reciprocity.
The government agency which is empowered to determine the exemption is the BIR. To
enable it to exercise such power, the value of transfer to social welfare, cultural and charitable
institutions should be included in the gross estate. An equal amount, however, may be taken up
as a deduction. While the Tax Code includes this item in the exempt acquisitions and transmissions,
it is actually considered a deduction from the gross estate. Failure to include the property
transferred to social welfare, cultural or charitable institutions will impair the power of the BIR to
assess taxes properly.
ILLUSTRATION 4
In the last will and testament of Mr. Yumao, he assigned the usufruct of his parcel of land, to
his son (Juan) while his grandson (Pedro) was named the owner of the naked title.
Upon the death of Mr. Yumao, the parcel of land should be included in his gross estate.
However, upon the death of Juan, the parcel of land should be "excluded" in his gross estate
because he is not the owner of the land but his son, Pedro. There will be merger of usufruct in
the owner of the naked title (Pedro) upon Juan's death. Meaning, Pedro will be entitled to both
the usufruct and ownership of the naked title upon Juan's death.
BUSINESS TAXATION (AE16)
Case B: The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to
the fideicommissary.
In the last will and testament of Mr. Yumao, he devised his parcel of land to his son (Juan) but
with a condition that such property should be given to his grandson (Pedro) when the former
dies. Thus, the parcel of land is intended to be inherited by Pedro, not Juan (For purposes of
convenience, disregard rules on legitimes discussed in Chapter 1). Juan is acting only as a
trustee or fiduciary until such time that the property is transferred to Pedro. Since Juan is the
father of Pedro and both were alive at the time of the testator's death (Mr. Yumao), the
substitution or transfer from Juan-to Pedro is known as fideicommissary substitution. Upon the
death of Mr. Yumao, the parcel of land should be included in his gross estate. However, upon
the death of Juan, the parcel of land should be "excluded" in his gross estate because Juan is
acting only as a trustee of Pedro.
Case C: The transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor
Assume the same data as presented in "Case B" except that the relationship between Juan and
Pedro is beyond one degree. For instance, Juan is the uncle of Pedro. In this case, there is no
fideicommissary substitution. Nonetheless, the parcel of land is still intended to be inherited
by Pedro, not Juan. Juan is still acting as a trustee or fiduciary until such time that the property
is transferred to Pedro. Likewise, Juan is also known as the 1st heir while Pedro is the 2nd heir.
The only difference between exemption in Case B and Case C is the degree of relationship
between the 1st heir and the 2nd heir. The effect as to whether or not the property is included
in the gross estate is the same. Hence, upon the death of Mr. Yumao, the parcel of land should
be included in his gross estate. However, upon the death of Juan, the property should be
"excluded" in his gross estate because he is not the owner of the property upon his death.
1. Proceeds of life insurance and benefits received by members of the GSIS (RA728).
2. Accruals and benefits received by members from the SSS by reason of death (RA1792).
3. Life Insurance proceeds on life insurance policy taken out by the decedent himself, upon his own
life, where the beneficiary is a third person and is irrevocably designated.
1. 4 Life Insurance proceeds on Insurance policy (group insurance) taken out by his employer on the
employee's life, whoever the beneficiary maybe, whether the designation as beneficiary is
revocable or irrevocable.
2. Amounts received from Philippines and United States governments for war damages (RA227).
3. Payments from the Philippines of US government to the legal heirs of deceased of World War II
Veterans and deceased civilian for supplies/services furnished to the US and Philippine Army
(RA136).
7. Amounts received from United States Veterans Administration.
8. Transfer by way of bona fide sales.
9. Properties held in trust by the decedent
10. Acquisition and/or transfer expressly declared as not taxable
11. Personal Equity and Retirement Account (PERA) assets of the decedent-contributor (Sec. 14, RA
9505 – Personal Equity and Retirement Account Act of 2008)
A. Property owned by the decedent ACTUALLY AND PHYSICALLY PRESENT IN HIS ESTATE at the time of
his death such as land, buildings, shares of stock, vehicles, bank deposit, and the like.
the decedent at the time of his death (interest having value ❖ Usufructuary & rights
or capable of being valued or transferred).
C. Property NOT PHYSICALLY IN THE ESTATE (these have already been transferred during the lifetime
of the decedent but are still subject to payment of estate tax) such as:
3. Revocable Transfers
It is a transfer where the terms of 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
Inclusions C.2 and C.3 above do not actually convey full ownership over the property
transferred. Hence, still part of the gross estate of the transferor.
ILLUSTRATION 5
Case A: A high ranking official realized that due to the nature of her illness, age and the pressure
brought about by the various legal cases filed against her, death might not be that far. Hence, she
gratuitously transferred most of her properties to her children while still alive. Should the properties
transferred be included in the gross estate of the decedent-transferor upon her death?
ANSWER: Yes
The properties transferred should be included in the estate of the high ranking official at the
time of her death because such transfers were intended to take effect upon her death
(donation mortis causa) regardless of the date of the actual transfer to the beneficiaries or
heirs.
ANSWER: P0.
The transfer was not intended to take effect upon his death but during his lifetime. It should
therefore be treated as a "donation inter-vivos" rather than inheritance (donation mortis-
causa). The transfer is subject to donor’s tax (Chapter 6).
Case C: Due to an unstable medical condition, Pedro thought that it is only proper for him to
gratuitously transfer his properties to his love ones now instead of waiting for his death. He then
transferred various condominium units to his children worth P200,000,000 while he was undergoing
major medical operation. At the time of Pedro's death, the fair market value of the properties
transferred increased to P250,000,000. What amount should be included in the computation of Pedro's
gross estate?
BUSINESS TAXATION (AE16)
ANSWER: P250,000,000
The transfer is a donation mortis causa intended to take effect at the time of the decedent's
death. The fair market value of the property at the date of the actual transfer should be ignored.
Case D: Pedro transferred all his real properties worth P10,000,000 to Juan, in trust for Boy, Juan's
legitimate minor son. Pedro reserved his right to terminate the transfer anytime.
Question 1: What amount should be included in Pedro's gross estate upon his death?
ANSWER: P10,000,000.
Question 2: Assume Juan subsequently died a year after Pedro's death, what amount should be
included in Juan's gross estate?
ANSWER: P0
The transfer is revocable on the part of the testator (Pedro). A revocable transfer does not
actually convey ownership over the property transferred because it may be revoked anytime
by the testator (regardless of whether the right to revoke was exercised or not).
Power of appointment refers to the right to designate the person or persons who will succeed
to the property of the prior decedent. The power of appointment may be "general" or "special".
The power of appointment is "general" when the power of appointment authorizes the donee
of the power to appoint any person he pleases. The power may be exercised in favor of anybody
including the donee-decedent. The donee of a general power of appointment holds the
appointed property with all the attributes of ownership thus, the appointed property shall form
part of the gross estate of the donee (beneficiary) of the power upon his death.
Special power of appointment exists when the donee can appoint only from a restricted or
designated class of persons other than himself. Property transferred under a special power of
appointment should be excluded from the gross estate of the donee of the power because the
donee-decedent only holds the property in trust. Refer also to exclusions under Section 87 of
the Tax Code as discussed in illustration #4 Cases B and C as well as in illustration #6 Case B.
If there was no consideration received at the date of transfer and such transfer was made "in
contemplation of death" (donation mortis causa), the fair market value of the property at the
date of death, not at the date of transfer, should be included in the gross estate of the
decedent. If there was no consideration received at the date of transfer and such transfer was
not made "in contemplation or death" such transfer shall be considered donation inter-vivos
subject to donor's tax based on the fair market value of the property at the date the donation
was made. The above rules on insufficient consideration are summarized in Table 2-3 below:
Sale was made in the Bona fide sale regardless of the amount of
ordinary course of trade consideration.
ILLUSTRATION 7
Case A: In January 2015, Juan sold for P5,000,000 an apartment with carrying value of P3,500,000 to
Pedro. At the time of sale, the property has a prevailing market price of P7,000,000. Juan died on June
2015. At the time of death, the prevailing fair market value of the property was P8,000,000.
Question 1: What amount should be included in the gross estate of the decedent?
ANSWER: P3,000,000.
The excess of the fair value of the property at the time of death over the consideration received
(P8,000,000 vs. P5,000,000). The carrying value of the property transferred is disregarded for
purposes of determining whether or not the transfer was made for an adequate and full
consideration.
Question 2: What amount should be included in the gross estate of the decedent assuming the fair
market value of the property at the time of death was P4,000,000?
ANSWER: P0.
The fair market value at the time of death was lower than the amount of consideration
received. Hence, the P5,000,000 is considered adequate and full consideration.
Question 3: Assume that the property sold is classified as an ordinary asset and the sale or transfer was
made in the ordinary course of trade or business. What amount should be included as part of the gross
estate of the decedent?
ANSWER: P0.
The sale or transfer is a result of a bona fide sale
Case B: In January 2015, Juan sold for P5,000,000 an apartment with carrying value of P3.500,000 to
Pedro. At the time of sale, the property has a prevailing market price of P5,000,000. Juan died on June
2015. At the time of death, the prevailing fair market value of the property was P8,000,000.
Question 1: What amount should be included in the gross estate of the decedent?
ANSWER: P0.
If the consideration received is substantially the same with the fair market value at the time of
transfer, such sale or transfer is considered a bona fide sale, hence, not subject to estate tax.
Question 2: Assume Juan transferred the property without consideration, what amount should be
included in his gross estate at the time of his death?
ANSWER: P8,000,000
The transfer is considered transfer in contemplation of death. Thus, the transfer should take
effect upon Juan's death. The fair market value of the property at the time Juan's death should
be included in his gross estate.
Question 3: Assume Juan transferred the property during his lifetime and the corresponding donor's
tax was paid, what amount should be included in his gross estate at the time of his death?
ANSWER: P0.
The transfer is subject to donor's tax, not estate tax
For estate tax purposes, an insolvent is a person whose properties are not sufficient to satisfy,
whether fully or partially, his debt(s). A judicial declaration of insolvency is not required but the
incapacity of the debtor to pay his obligation should be proven. As a rule, regardless of the amount
the debtor is unable to pay, the full amount of the claim against the insolvent person should be
included in the gross estate of the decedent. The portion of the claim which is not collectible
should be allowed as a deduction from the gross estate.
BUSINESS TAXATION (AE16)
ILLUSTRATION 8
Case A: Juan died with an existing collectible of P5,000,000 against Pedro. Since Pedro is financially
stable, Juan exerted all possible efforts to collect the amount during his lifetime, however, Pedro failed
settle the same before Juan's death.
Question 2: How much is the deduction from the gross estate of Juan?
ANSWER: P0.
The debtor is not an insolvent person. The incapacity of the debtor to pay his obligation should
be proven before a deduction under this category is allowed.
Question 3: Assume that after Juan failed to collect the amount due from Pedro, he decided to just
condone the claim. The condonation was gladly welcomed by Pedro. A year later, Juan died. How much
should be included in the gross estate of Juan?
ANSWER: P0.
The claim was condoned by him prior to his death. Therefore, the condonation should be
classified as donation inter-vivos subject to donor's tax.
Case B: Juan died with an existing collectible of P5,000,000 against Pedro whose properties are not
sufficient to satisfy his debts. Pedro's properties are valued at P6,000,000 while his liabilities amounted
to P10,000,000.
Question 2: How much is the deduction from the gross estate of Juan?
ANSWER: P2,000,000.
Only the uncollectible portion.
Collectible portion = Debtor's assets/Debtor's Liabilities x Claims
Collectible = P6M/P10M x P5M = P3,000,000
Uncollectible = P5M - 3M = P2,000,000
Question 3: Assume that P2M of Pedro's liabilities are unpaid taxes from the government, how much
should be included as a deduction from the gross estate of Juan?
ANSWER: P2,500,000.
Only the uncollectible portion.
Pedro's assets after unpaid taxes = P6M-2M = PAM
Pedro's liabilities excluding unpaid taxes = P8M
Collectible portion = Debtor's assets/Debtor's Liabilities x Claims
Collectible = P4M/P8M x P5M = P2,500,000
Uncollectible = P5M - 2.5M = P2,500,000
Proceeds of life insurance taken out by the by the decedent on his own life should be included in
the gross estate if the following requisites are present:
The Philippine Insurance Code presumes that the designation of a policy is revocable in case the
designation of the beneficiary is not clear or silent. Section 11 of the Insurance Code states that "the
insured should have the right to change the beneficiary he designated in the policy, unless he has expressly
waived this right in said policy.
ILLUSTRATION 9
Case A: A life insurance worth P10,000,000 was taken out by Pedro upon his life. He designated his
friend, Juan, as beneficiary. Should the proceeds be included in the gross estate of Pedro upon his
death?
ANSWER: Yes.
The beneficiary was his friend (other than the decedent's estate, executor or administrator).
Since the designation is silent, it should be assumed that Juan's designation as beneficiary is
revocable. As a rule, when the beneficiary is a third person and the designation is revocable,
the amount of proceeds should form part of the decedent's gross estate. Irrevocable
designation of a beneficiary is not presumed. To be excluded from the gross estate, Juan's
designation should be clearly stated as irrevocable beneficiary.
Case B: Assume the same data in case A, except that Juan's designation as beneficiary is Irrevocable.
Should the proceeds be included in the gross estate of Pedro upon his death?
ANSWER: No