MODULE 1: ESTATE TAXATION

What is Estate Tax?

It is a tax on the right to transfer property at death and on certain transfers that are made by
law the equivalent of testamentary disposition and is measured by the value of the property.
Nature of Estate Tax:
1. It is imposed upon transfer of property made thru succession.
2. Only natural persons are subject to estate tax.
Taxpayers for purposes of estate tax:
1. Resident Decedent – resident citizen/non-resident citizen/resident alien
2. Non-resident decedent – non-resident alien
Composition of the Gross Estate of a decedent:
1. Resident Decedent – all properties within and without the Philippines, whether real or
personal property
2. Non-Resident Citizen – real and tangible properties within the Philippines, intangible
personal properties are included only if the properties are located in the Philippines
unless exempted on the basis of the Principle of Reciprocity.
Inter vivos transfers which are treated under the Tax Code as substitutes for testamentary
disposition subject to estate tax:
a. Transfers in contemplation of death – it is a transfer motivated by the thought of death,
although death may not be imminent. A donation mortis causa (donation made during
the lifetime of the transferor but intended to take effect at death) is a transfer in
contemplation of death.

Ex. Mr. A is a cancer patient and terminally ill. He transferred all his properties to
his only son.

b. Revocable transfer – 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 that the
decedent had the power to revoke, though he did not exercise such power during his
lifetime.
Ex. X donated a parcel of land to B with the condition that B will return and
transfer the same to him with 30 days from receipt of a written notice.
 c. Transfer with reservation of certain rights – this kind of transfer allows the transferor to
continue enjoying, possessing or controlling the property (beneficial ownership)
because only the naked title has been transferred. Only upon death of the decedent
shall both the naked title and beneficial ownership are consolidated to the transferee.

d. Transfers for insufficient consideration – if the transfer is not a bona fide sale for
adequate and full consideration in money or in money’s worth, there shall be included
in the gross estate only the excess of the FMV of the property at the time of death over
the value of the consideration received by the decedent

Ex. S owns a land valued at 3M. He sold the same for only 200,000. The
difference in the FMV of 2.8M will form part of X gross estate.

e. Property passing under general power of appointment.

A power of appointment is the right to designate the person or persons who will
succeed to the property of a prior decedent. A general power of appointment is
one which may be exercised in favor of anybody.

Ex. X transferred his property to his cousin Y, under a general power of

appointment. Y subsequently died with the property in his possession but still
registered in the name of X. The value of the property forms part of the gross
estate of Y because he is considered the owner of the said property under the
GPA. He holds the property with all the attributes or under the concept of an
owner during his lifetime and to name the beneficiaries thereof when he dies.

EXCLUSIONS FROM THE GROSS ESTATE: (Properties excluded from the gross estate)
1. Real, personal and intangible personal properties belonging to a non-resident decedent
located outside of the Philippines.
2. Proceeds of life insurance if payable to a designated beneficiary under an irrevocable
policy;
3. Property held in trust or in a fiduciary capacity for others;
4. Property belonging exclusively to the surviving spouse (capital of the husband or
paraphernal property of the wife).
*** Proceeds of a life insurance policy is includible in the gross estate of the decedent the
policy is
a. A Life Insurance Policy
b. When the policy is revocable
 c. When the beneficiary is the estate of the deceased, his executor or administrator,
whether or not the deceased retained the power of revocation, whether or not the
designation of beneficiary is revocable or irrevocable.
Transfer Inter vivos that is exempt from estate tax under the Tax Code:
1. The merger of the usufruct (right to fruit) in the owner of the naked title (without right
to fruit).

Ex. Mr X died leaving a piece of land to Y in usufruct (right to enjoy the fruits), and to
Mr. Z in naked ownership (without the right to the fruits). The land was subject to the
estate of X. Upon the death of Y, the usufruct shall be merged into the naked
title/ownership of Z and Z shall become the absolute owner of the property. The
transmission of the usufruct from Y to Z shall be exempt from estate tax.
2. The transmission or delivery of the inheritance or legacy of the fiduciary heir or legatee
to the fedeicomissary.

Ex. X died leaving a piece of land to Y, a grandson, to be owned by him for 10 years, with
the obligation to preserve it, after which, ½ shall be given to Z, a great grandson and the
other half to be retained by him (Y). This is fedeicomissary substitution. The fiduciary
heir (Y) is entrusted with the obligation to preserve the property and to transmit it to
the fedeicommisary heir (Z) with the substitution not going beyond one degree from the
heir originally substituted, and both heirs being alive at the time of the testator’s death.
The transmission from X to Y is subject to the estate tax. Whereas, the transmission
from Y shall be exempt from the estate tax.

3. The transmission from the first heir, legatee or done in favor of another beneficiary,
accordance with the will of the predecessor.

Ex. Mr G died leaving a piece of land to Mr. H, a friend, but with the condition that if
another friend, Mr. J, gets married, Mr. H will give the property to Mr. J. Mr. J got
married. The transmission from Mr. G to Mr. H was subject to estate tax. The
transmission from Mr. H to J will not be subject to estate tax.

4. All bequests, devices, legacies or transfers to social welfare, cultural and charitable
institutions no part of the net income of which inures to the benefit of any individual;
Provided, that not more than 30% of the said bequests, legacies or transfers shall be
used by such institutions for administration purposes.
Ex. Donations to non-stock, non-profit organizations or associations
DEDUCTIONS FROM THE GROSS ESTATE OF A RESIDENT DECEDENT
a. Ordinary Deductions

1. Claims against the estate (decedent is the debtor)

It must be the personal debt of the decedent existing at the time of his death,
contracted in good faith, must be valid and enforceable in court, must not have been
condoned by the creditors, must not have been prescribed, and duly substantiated.

2. Claims against insolvent persons ( decedent is the creditor)

The claim against insolvent person must be included as part of the gross estate of the
decedent.

3. Unpaid mortgage indebtedness of the decedent that remains unpaid upon his death
Value of the decedent’s interest over the property encumbered should have been
included in the gross estate undiminished by the amount of the mortgage.

4. Unpaid taxes – Income tax, real estate tax or property taxes due at the time of death
except income, estate and property taxes accrued after death;
5. Losses – Losses are deductible from the gross estate if:
1. Incurred during the settlement of the estate;
2. Arising from fire, shipwreck or other casualty, robbery, theft or embezzlement;
3. Not compensated by insurance or otherwise;
4. At the time of filing of the estate tax return, such loss has not been claimed as a
deduction from gross income;
5. Incurred before the last day of the payment of the estate tax (within one year from
the decedent’s, or an extension granted by the Bureau of Internal Revenue not
exceeding 30 days for filing the estate tax return.

b. Share of surviving spouse in the net conjugal property

 (50% of the conjugal gross estate)

c. Standard deduction (Max. of 5M)

*this is an automatic deduction as provided by law

d. Family home (Max. of 10M)

 A family home of a married person, or an unmarried head of family, is the dwelling
house where the person and his family reside, and the land on which it is situated.
Within the meaning of “family” are the spouse, parents, ascendants, descendants,
brothers and sisters, who are living in the family home and who depend upon the
head of the family for support.
e. Vanishing deductions (also referred to as property previously taxed) – the purpose is
to ease the harshness of successive taxation of the same properties transferred within a
relatively short period of time.

Vanishing deduction is allowed when the following conditions are met:

1. The present decedent died within five years from receipt of the property from a
prior decedent or donor;
2. The property on which vanishing deduction is being claimed must be located in the
Philippines;
3. The property must have formed part of the taxable estate of the prior decedent, or
of the taxable gift of the donor;
4. The estate tax on the prior succession or the donor’s tax on the gift must have been
finally determined and paid;
5. The property on which vanishing deduction is being claimed must be identified as
the one received from the prior decedent, or from the donor, or something acquired
in exchange for it;
6. No vanishing deduction on the property was allowable to the estate of the prior
decedent.

Vanishing Rates:
100% - Second decedent died within one year from death of the first decedent
80% - More than 1 year but less than 2 years;
60% - More than 2 years but less than 3 years;
40% - More than 3 years but less than 4 years;
20% - More than 4 years but not less than 5 years.

Formula:

a.) Value of the property in the prior estate or the value of such property in the
present estate, whichever is lower = Initial Basis or First Deduction

b.) Initial Basis_____________ x Expenses, Losses, Indebtedness, unpaid

mortgage
Value of gross estate of 2nd decedent debt, transfers for public use, etc.
= Second Deduction
(*Note: Do not include family home, standard deduction, medical expenses,
amounts received under RA 4917 and the net share of the surviving spouse)
c.) Initial Deduction – Second Deduction = Final Basis
 d.) Final deduction x Vanishing deduction rate = Vanishing Deduction
f. Amounts received by heirs of decedent under RA 4917
 Retirement benefit receivable by the heirs from the decedent’s employer as a
consequence of the death of the decedent-employee in accordance with RA4917
will be deductible from the gross estate of the decedent.

g. Transfers for public use to the RP or any of the LGUs benefitting the public in general
(Oral transfers and pledges are not deductible)
*By “transfer for public use” as deduction from the gross estate is meant dispositions in
a last will and testament, or transfer to take effect after death, in favor of the
Government of the Philippines, or any political subdivision (Provinces, Cities,
Municipalities and Barangays) thereof, for exclusively public purposes.

h. Tax credit for estate tax paid to a foreign country.

The net taxable estate of a decedent who was a resident decedent includes his net
taxable estate wherever located. The net taxable estate outside the Philippines is
subject to the estate tax of the country where it is located. The net taxable estate
outside the Philippines is also subject to the Philippine estate tax. In other words, the
net taxable estate outside the country is paying both the foreign estate tax and
Philippine estate tax. The estate tax paid to that foreign country is allowed as a
deduction against the Philippine estate tax.

ALLOWABLE DEDUCTIONS OF ESTATE TAX OF A NON-RESIDENT DECEDENT:

a. Expenses, losses, indebtedness, taxes, etc.
Gross estate, Philippines x World deductions recognized by the Philippine laws
Gross estate, world
b. Transfers exclusive for public use to the RP and/or LGUs
c. Share of Surviving Spouse

NET TAXABLE ESTATE

How to compute Net Taxable Estate?
Net Taxable Estate = Gross Estate – Deductions from the gross estate
ESTATE TAX DUE
Estate Tax Due = Net Taxable Estate x 6%