ESTATE TAXES

DEFINITION
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 upon death. 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.

● Accrual - It accrues as of the death of the decedent,

notwithstanding the postponement of the actual possession
ESTATE or enjoyment of the estate by the beneficiary. Upon the
death of the decedent, succession takes place and the right
TAX of the ‘State’ to the tax the privilege to transmit the estate
vests instantly upon death (RR 2-2003).
● Taxpayer - The “estate” of the decedent as a juridical person
BIR FORM 1801 ● Personal obligation to file and pay the applicable taxes:
○ Primary liable - Administrator or executor
○ Secondary liable - Any of the heirs
 Filing of Estate Tax Return

Decedent died before 2018: within 6 months after death

Decedent died on or after Jan. 1, 2018: within 1 year from the date of death

Law to be applied: The law or statute in force as of the date of death of the decedent
(RR 12-2018)
DEFINITION
It is a mode of acquisition by virtue of which the property, rights
and obligations to the extent of the value of the inheritance, of a
person are transmitted through his death to another or others
either by will or by operation of law.

TYPES
1. Testamentary - That which results from the designation of
an heir, made in a will executed in the form prescribed by
law (the decedent executed a last will and testament).
2. Legal or Intestate - That which is effected by operation of
SUCCESSION law or transmission of properties where
❏ There is no will; or
❏ If there is a will, the same is void or lost its validity, or
nobody succeeds in the will.
3. Mixed - That which is effected partly by a will or by
operation of law.
DEFINITION
An 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
1. Notarial or Ordinary or Attested Will - is one which is
executed in accordance with the formalities prescribed by
WILL Art. 804 to 808 of the New Civil Code.
2. Holographic Will - is a written will which must be entirely
written, dated and signed by the hand of the testator
himself, without the necessity of any witness.
➢ Codicil - a supplement or addition to a will, made after
the execution of a will and annexed to be taken as part
thereof, by which any disposition made in the original
will is explained, added to or altered.
 ELEMENTS OF SUCCESSION

Succession takes place if the following elements are present:

A. DECEDENT - the person whose property is transmitted through succession, whether or
not he left a will.
B. HEIR - the person called to the succession either by provision of a will or by operation
of law
C. ESTATE (Inheritance) - refers to all of the property, rights and obligations of a person
which are not extinguished by his death

DECEDENT’S ESTATE

1. LEGITIME is the portion of the testator’s property which could not be disposed of freely
because the law has reserved it for the compulsory heirs.
2. FREE PORTION is that part of the whole estate which the testator could dispose of
freely through written will irrespective of his relationship to the recipient.
 KINDS OF HEIRS

1. Compulsory Heirs - They inherit with or without a will

● Primary Compulsory Heirs
❏ Legitimate children and descendants
❏ Illegitimate children
❏ Widow or widower
● Secondary Compulsory Heirs
❏ In default of legitimate children and descendants, legitimate parents and
ascendants
2. Voluntary Heirs
3. Intestate Heirs
● The compulsory heirs in testamentary succession are also heirs in intestate
succession. They are entitled to their legitime.
 KINDS OF HEIRS

However, as to the free portion of the estate, it shall be distributed to the following intestate
heirs as follows (order of priority) in the absence of a valid will:
a. Legitimate children
b. Legitimate parent
c. Illegitimate children
d. Spouse
e. Brothers or sisters
f. Relatives by consanguinity up to 5th civil degree
g. State
 RATE

➢ The estate tax rate beginning January 1, 2018 or upon

the effectivity of RA 10963 (TRAIN Law) is 6% based on
the value of the net estate as presented in the
ESTATE TAX foregoing format of computing the estate tax due.
DEFINITION

➢ Consists of all properties and interests in properties of

the decedent at the time of his death as well as
properties transferred during lifetime (only in form),
GROSS but in substance was only transferred at the time of
ESTATE death.
 COMPONENTS OF GROSS ESTATE

PROPERTIES EXISTING AT THE TIME OF DEATH SUCH AS:

a. Real property and other tangible Personal Property
b. Decedents interest and intangibles
● Decedent’s Interest - Refers to the extent of equity or ownership participation of the
decedent on any property physically existing and present in the gross estate, whether or
not in his possession, control or dominion.

Intangible Properties considered Located in the Philippines:

❏ Franchise which must be exercised in the Philippines;
❏ Shares, obligations or bonds issued by any corporation or sociedad anonima,
organized or constituted in the Philippines;
❏ Shares, obligations or bonds issued by foreign corporation, at least 85% of the
business of which is located in the Philippines;
❏ Shares, obligations or bonds issued by foreign corporation if such have acquired a
business situs in the Philippines;
❏ Shares or rights in partnership, business or industry established in the Philippines.
 COMPONENTS OF GROSS ESTATE

c. Properties transferred gratuitously during lifetime, but in substance, transferred upon

death:
1. Transfer in contemplation of death - the thought of death must be the controlling
motive which induces the disposition of the property.
2. Transfer with retention or reservation of certain right - allows the transferor to
continue enjoying, possessing or controlling the property (beneficial ownership)
because only the naked title has been transferred.
3. Revocable transfer - decedent transfers the enjoyment of his property to another,
subject to his right to revoke the transfer at will, with or without notifying the
transferee, any time before he dies.
4. Property passing under General Power of Appointment
5. Transfer for insufficient consideration - not a bona fide sale for an adequate and full
consideration in money or money’s worth
AMOUNT INCLUDED IN GROSS ESTATE
FMV at the time of death
Less: Selling price
Excess of FMV over SP (Included in Gross Estate)
 COMPONENTS OF GROSS ESTATE

6. Proceeds from Life Insurance (on insurance under policies taken out by the
decedent upon his own life). The following are included in the gross estate:
a) Whether designated as REVOCABLE or IRREVOCABLE when the beneficiary is the:
● Estate of the deceased
● His executor; or
● Administrator
b) When the beneficiary is a third person and the designation is REVOCABLE.
 EXEMPTIONS AND EXCLUSIONS GROSS ESTATE

a) Under Sec. 85 and 104 of the Tax Code, as amended

➔ Capital or exclusive property of the surviving spouse
➔ Properties outside the Philippines of a non-resident alien decedent
➔ Intangible personal property in the Philippines of a non-resident alien when the rule
of Reciprocity applies
b) Under Sec. 87 of the Tax Code, as amended
1. The merger of the usufruct (right to use) in the owner of the naked title.
2. The transmission from the first heir, legatee or donee in favor of another beneficiary
in accordance with the will of the predecessor.
● GPA vs. SPA:
○ GPA = inclusion to the gross estate
○ SPA = exclusion from the gross estate
3. The transmission or delivery of the inheritance or legacy of the fiduciary heir or
legatee to the fideicommissary.
4. 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.
 EXEMPTIONS AND EXCLUSIONS GROSS ESTATE

c) Under Special Laws

● Proceeds of life insurance and benefits received by members of the GSIS
● Benefits received by members from the SSS by reason of death
● Amounts received from Philippine and US governments for war damages
● Amounts received from US Veterans Association
● Benefits received from the Philippines and US government for damages suffered during
World War II
● Retirement benefits of officials/employees of a private firm
● 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
● Proceeds of life insurance under a group insurance taken out by employer (not taken out
upon his life)
● Transfers by way of bona fide sales
● Transfers of property to the National government or to any of its political subdivisions.
● Personal Equity and Retirement Account (PERA) assets of the decedent-contributor
● Compensation paid to private and public health workers who contracted Covid-19
 COMPOSITION OF ESTATE TAX

Decedent Gross Estate

● Citizen or Resident Alien 1. Property (Real or Personal) property wherever situated

2. Intangible personal property wherever situated

● Nonresident Alien 1. Real property situated in the Philippines

2. Tangible personal property situated in the Philippines
3. Intangible personal property with situs in the Philippines,
unless excluded on the basis of reciprocity

RECIPROCITY CLAUSE - no tax shall be imposed with respect to intangible personal properties
of a Non-resident Alien decedent situated in the Philippines;
● 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 taxes, but grants similar exemption with
respect to intangible personal properties of Filipinos not residing in that country.
 VALUATION OF GROSS ESTATE

❏ In general - fair market value upon death

❏ Personal properties - Fair market value
❏ Real Property - the higher amount between:
➢ Fair Market Value
➢ Zonal Value
❏ Shares of stock
A. Traded in the Local Stock Exchange - mean value between the highest and lowest
quotations nearest the date of death if none is available on the date of death itself.
B. Not traded in the Local Stock Exchange
1. Common (ordinary) shares - Book value
2. Preferred (preference) shares - Par value
❏ Usufruct - based on the latest Basic Mortality Table to be approved by the Secretary of
Finance, upon recommendation of the Insurance Commissioner.
DEFINITION

➢ Deductions are items which the law on estate tax

allows, as amended, to be subtracted from the value of
the gross estate in order to arrive at the net taxable
ALLOWABLE estate. As a rule, deductions from gross estate are
DEDUCTION presumed to be common deductions unless specifically
identified as exclusive.
 ORDINARY DEDUCTIONS - classified as exclusive or common deduction.

1. LOSSES, INDEBTEDNESS, TAXES, etc.

● Casualty Losses
● Indebtedness or Claims against the Estate
● Unpaid Mortgage
● Unpaid Taxes
● Claims against Insolvent Persons
2. TRANSFER FOR PUBLIC USE
3. VANISHING DEDUCTION (PROPERTY PREVIOUSLY TAXED
 ORDINARY DEDUCTIONS - classified as exclusive or common deduction.

1. LOSSES, INDEBTEDNESS, TAXES, etc. (LITe)

● Casualty Losses
Requisites:
➢ Incurred during the settlement of the estate. Settlement period is the period
allowed by law to file and pay the estate tax as follows:
❖ Decedent died before 2018 - within 6 months after death
❖ Decedent died on or after Jan. 1, 2018 - within one year after the death
➢ 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.
Amount deductible - is the value of the property lost.
 ORDINARY DEDUCTIONS - classified as exclusive or common deduction.

1. LOSSES, INDEBTEDNESS, TAXES, etc. (LITe)

● Indebtedness or Claims against the Estate
Requisites:
1. Personal debt of the decedent existing at the time of his death;
2. Contracted in good faith;
3. Must be valid in law and enforceable in court;
4. Must not have been condoned by the creditors;
5. Must not have prescribed
6. Substantiation requirements
Amount Deductible - the amount of debt that will qualify in the above requirements.
 ORDINARY DEDUCTIONS - classified as exclusive or common deduction.

1. LOSSES, INDEBTEDNESS, TAXES, etc. (LITe)

● Unpaid Mortgage
Requisites:
A. The fair market value of the mortgaged property undiminished by the mortgage
indebtedness should be included in the gross estate;
B. Contracted in good faith; and
C. For an adequate and full consideration.
Amount Deductible - amount of unpaid mortgage.
● Unpaid Taxes
Requisite - the tax must have accrued before the death of the decedent
Amount Deductible - unpaid taxes that accrued before the decendent’s death but not including
A. Any income tax upon income received after death;
B. Property taxes not accrued before death; and
C. Estate tax from the transmission of his estate.
● Claims against Insolvent Persons
Requisites:
A. Value of the claims is included in the gross estate; and
B. The insolvency of the debtor must be established.
Amount deductible - the amount of claims/receivable that cannot be collected.
 ORDINARY DEDUCTIONS - classified as exclusive or common deduction.

2. TRANSFER FOR PUBLIC USE (TFPU)

Requisites:
❖ Given to the Government of the Philippines (National or Local);
❖ Must be testamentary in character; or
❖ By way of donation mortis causa executed by the decedent before his death;
❖ Exclusively for public purpose
Amount Deductible - amount of all bequests, legacies, devises, or transfers to or for the
use of the Government of the Philippines, or any of its political subdivisions.
 ORDINARY DEDUCTIONS - classified as exclusive or common deduction.

3. VANISHING DEDUCTION (PROPERTY PREVIOUSLY TAXED

Requisites:
❖ The decedent died within 5 years from receipt of the property from a prior decedent
OR donor;
❖ The property is located in the Philippines;
❖ The property must have formed part of the taxable estate of the prior decedent or
the taxable gift of the donor and the transfer tax (estate tax or donor’s tax, as the
case may be) relative thereto had been paid;
❖ The property on which vanishing deduction 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.
 SPECIAL DEDUCTIONS

SUMMARY

Citizen/Resident decedent NRA decedent

Standard deduction P5,000,000 P500,000

Family Home Not allowed

● Purely exclusive FMV but not to exceed P10M
● Purely common FMV/2 but not to exceed P10M
● Mixed (exclusive and common) Add the properties applying the foregoing
rules but the total amount shall not exceed
P10M

Benefits under RA 4917 Amount of death benefit Not allowed

 SPECIAL DEDUCTIONS

1. Standard Deduction
The amount deductible without any required substantiation is P5,000,000 if the decedent
died on or after January 1, 2018. A standard deduction of P500,000 shall also be allowed
to nonresident alien decedent beginning January 1, 2018.

2. Family Home Allowance

Requisites
● The decedent is married or head of a family;
● The family home must be the 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
● It is located in the Philippines
● The value of the family home is included in the gross estate
 SPECIAL DEDUCTIONS

2. Family Home Allowance

Amount Deductible - The LOWER between te Actual Interest and the Limit.
Actual Interest
❏ Purely exclusive = 100% FMV
❏ Purely common property = 100%/FMV/2
❏ Mixed:
Exclusive property (100%) Pxx
Add: Common property (100%/2) xx
Total Pxx

3. Amount received by heirs under RA 4917

Requisites:
❏ Include such amount in the gross estate
❏ Amount Deductible - amount received by the heirs from the decedent’s employer
as a consequence of the death of the decedent-employee.