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1 T A X A T I O N II Pre Midterms| maru.mhealler|404

TRANSFER TAXES

TRANSFER TAXESare taxes imposed upon the gratuitous disposition

of private property.

However, it is to be noted that even if the transfer is onerous, the

transfer may still be taxable, subject to income tax, VAT, percentage

and other sales tax.

Under the Tax Code, transfer taxes refer to:

1. ESTATE TAX (donation mortis causa)Tax levied on the

transmission of properties from a decedent to his heirs.

Estate tax is the tax on the privilege to transmit property

at death (mortis causa transfers) and on certain transfers

which are made the equivalent of testamentary

dispositions by the statute.

2. DONORS TAX (donation inter vivos) Tax levied on the

transmission of properties from a living person (donor) to

another living person (donee).

ESTATE TAX

I.

NATURE AND PURPOSE OF ESTATE TAX

Nature. Estate tax is laid neither on the property nor on

the transferor or the transferee. It is an EXCISE TAX or

PRIVILEGE TAX and its object is to tax the shifting of

economic benefits and enjoyment of property from the

dead to the living.

Purpose:

1. The primary reason for all taxes is to raise revenues.

2. To supplement income taxation because in the

absence of transfers of property from one hand to

another during the lifetime of a person, thegovernment cannot collect taxes. So, to supplement

this, there is estate tax.

3. To prevent undue accumulation of wealth.

Inheritance Tax.Inheritance tax us a tax on the right of the

heirs or beneficiaries to receive the estate of the deceased

person. It is levied upon the part of an estate which each

heir receives. The law imposes only an estate tax.

Inheritance tax is no longer imposed. Both taxes have

been integrated into an estate tax. The rates of estate tax,

like income tax, are also progressive or graduated.

Tax Imposed on Estate. The estate is primarily liable forthe payment of the estate tax. But somebody (executor,

administrator or any legal heir) has to do the actual

payment. But the liability falls on the estate. The estate tax

imposed is different from estate income tax. The latter

covers for the income generated by the estate during

judicial settlement while the former covers the privilege of

transferring property gratuitously.

Justification of Estate Tax. There are four theories which

support the imposition of estate taxes, to wit:

a. Benefits-Received Theory The State expects to be

paid or should be remunerated for the services that it

has rendered in a system of distribution or property.

b. State Partnership Theory or Privilege Theory

Succession to the property of a deceased person is

not a fundamental right and consequently, the

legislature can constitutionally burden such

succession with a tax. The State is hailed to be the

silent-passive partner of the decedent in the

accumulation or increase of his wealth.

c. Ability to Pay Theory Those who have more

properties to transfer to their heirs upon death shal

pay more estate taxes.

d. Redistribution of Wealth Theory This is founded

upon the principle of reduction of social inequality

The taxes paid by rich people are programmed fo

disbursement by Congress more for the benefit of the

poor in terms of social services, education, health

etc.

II.

APPLICABLE LAW IN ESTATE TAXATION

The law in force at the time of death of the decedent

governs. Succession takes effect at the time of death. By

operation of law, whatever properties are left by the

decedent is transmitted to the heirs or to the successors

Therefore, taxability should be reckoned at the time o

death. Tax accrues at the point of death of the deceden

because it is at this time that his personality ceases.

III.

KINDS OF DECEDENT

In estate taxation, the primary liability for the burden o

tax falls upon the estate itself. For purposes of taxing the

estate, the estate is classified as to whether the decedent

is:

1. Resident Citizenone who is a Philippine citizen and

a resident of the country;

2. Resident Alien one who is not a Filipino but is

nonetheless residing in the Philippines;

3. Non-Resident Citizena Filipino who is not residing

in the Philippines; OR

4.

Non-Resident Alienone who is not a Filipino and is

neither a resident of the country but one who may

have identifiable properties left in the Philippines.

Residence. Residence: refers to the permanent home o

domicile, the place to which whenever absent, fo

business or pleasure, one intends to return.

In Income Taxation, a Resident Alien is classified as such

according to whether or not he intends to make

Philippines his temporary home. However, in estate

taxation, residence shall mean domicile.

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For purposes of income taxation, an alien becomes a

resident alien if his intention in the Philippines is not to

become a mere transient or sojourner. He has an

indefinite purpose of a lengthy stay in the Philippines,

thereby making the Philippines his temporary home.

Be reminded that the 180 day yardstick in income taxation

does not classify whether an alien has established

residence or not. It is only necessary to distinguish

whether the alien is engaged in trade or business or

otherwise.

Therefore, in estate tax, there are only 2 categories for

purposes of knowing how to tax the estate:

1.

RESIDENT OR CITIZEN

-

Resident : RC or RA

-

Citizen: RC or NRC

2. NON CITIZEN, NON RESIDENT= NRA

IV. PROPERTIES COVERED BY GROSS ESTATE, IN

GENERAL

Resident, Non-Resident

Citizen, Resident Alien

Non Resident Alien

Real Within and without Within

Personal Tangible Within and without Within

Personal IntangibleWithin and without

Within (General

Rule)

All properties and interests in properties of the decedent

at the time of his death shall be included in his gross

estate. The properties includible in the gross estate of the

decedent would depend on whether or not the decedent

is a citizen or alien and whether or not the alien decedent

is a resident of the Philippines at the time of his death.

Thus,

1.

Citizen and Resident Alien Decedent:

(a) Real property wherever situated;

(b) Tangible personal property wherever situated;

(c) Intangible personal property wherever situated

2.

Non-Resident Alien Decedent:

(a)

Real property situated in the Philippines;

(b) Tangible personal property situated in the

Philippines

(c)

Intangible personal property with a situs in the

Philippines, unless exempted on the basis of

reciprocity.

Intangible Personal Property. As a general rule, the situs of

intangible personal property is at the domicile or

residence of the owner. This principle, however, does not

apply (a) when it is inconsistent with express provisions of

a statute, or (b) when justice does not demand that it

should be, as when the property has in fact a situs

elsewhere.

Under the Tax Code, the following intangible persona

properties have situs in the Philippines:

1. Franchise which must be exercised in the Philippines;

2. Shares, obligations, or bonds issued by any

corporation or sociedad anonima organized o

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 is such shares, obligations or bonds have

acquired business situs (i.e., they are used in

furtherance of its business in the Philippines by the

foreign corporation) in the Philippines;

5. Shares or rights in partnership, business or industry

established in the Philippines (Sec 104, NIRC).

Reciprocity Rule as to Intangible Personal Property. A

decedents intangible personal property may be subject to

transfer taxes both in his place of domicile or residence

and in the place where such property has a situs or is

located. In order to prevent multiplicity of taxation, the

Tax Code provides that the tax imposed by this Title shal

be credited with the amounts of any estate tax imposed by

the authority of a foreign country, subject to limitation

(Sec. 86[E], NIRC).

The rule applies only in the case of intangible persona

properties belonging to a non-resident alien. So that i

reciprocity applies, these intangible personal properties

will not be included in the computation of the net estate

of the NRA.

In all other casesRA, RC, NRC their intangible persona

property will always form part of the gross estate.

RECIPROCITY RULE:No tax shall be imposed in respect to

intangible personal property of the NRA:

(a) When the foreign country does not impose transfe

tax of any character in respect of intangible persona

property of citizens of the Philippines not residing inthat foreign country, or

(b) When the foreign country imposes transfer taxes bu

grants similar exemption from transfer taxes in

respect of intangible personal property owned by the

citizens of the Philippines not residing in that foreign

country.

V. VALUATION OF THE GROSS ESTATE

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The estate shall be appraised at its fair market value as of

the time of death since by fiction of law, property is

deemed to be transferred at such time.

Real Property. If the property is a real property, the fair

market value shall be the FMV as determined by the

Commissioner or the FMV as shown in the schedule of

values fixed by the provincial and city assessors, whichever

is higher.

Personal Property. Since there is no listing of FMV in thedirectories of the BIR or the LGU, FMVs would be the FMV

in the market the price at which the seller is not

compelled to sell and the buyer is not compelled to buy.

Unlisted Shares of Stock. Unlisted common shares are

valued based on their book value while unlisted preferred

shares are valued at par value.

Shares Listed in the Stock Exchange . For shares which are

listed in the stock exchange, the 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 date of death itself.

VI. ESTATE TAX FORMULA, in brief

In arriving at the estate tax payable, what will be covered

by the gross estate shall first be determined. Deductions

thereafter reduce the estate and the share of the surviving

spouse is removed to obtain the net estate. This is when

tax rates of 5-20% are multiplied to arrive at the estate tax

due.

Estate tax credits may be available which can be offsetted

against the estate tax due in order to arrive at the estate

tax payable. Note that tax credits shall not be available to

NRAs since they are not taxed for properties abroad.

VII.COMPOSITION OF THE GROSS ESTATE

The decedents gross estate include the following:

1. Decedents interest;

2. Transfers in contemplation of death;

3.

Revocable transfers;

4.

Property passing under general power o

appointment;

5.

Proceeds of life insurance;

6.

Prior interests;

7. Transfers for insufficient consideration;

8. Capital of the surviving spouse (Sec. 85, NIRC)

1.

DECEDENTS INTEREST

-

The general rule is that all property owned by

the decedent has to be included in the gross

estate, to the extent of the value of his interes

in such property at the time of his death. Thus, i

the decedent fully owns a piece of property, the

value of such property shall be included in the

gross estate. However, if he owns only a

proportionate share in the property, or is

entitled only to its use, it is only the value of

such share or such use that has to be included.

2.

TRANSFER IN CONTEMPLATION OF DEATH

- Transfers in contemplation of death cover those

which are transfers made during the lifetime but

are considered as part of the gross estate. If the

motive behind the transfer is due to an

impending death that he has been called or he

perceives, then the transfers may be incontemplation of death and at the time of his

death it will be considered as transfer in

contemplation of death and it will be considered

as part of his gross estate subject to estate tax.

-

The term in contemplation of death mean that

it is the thought of death, as a controlling

motive, which induces the disposition of the

property for the purpose of avoiding the tax. The

FORMULA ESTATE TAX

Gross estate

Less: (1) Deductions

(2) share of surviving spouse

Net estate

X Estate Tax Rates

Estate tax due

Less: Tax Credits

Estate tax payable

VERSUS

FORMULA INCOME TAX

Gross estate

Less: (1) Cost

Gross Income

Less: Deductions

Net Taxable Income

Tax Rates

Tax Due

Less: Tax Credits

Income Tax Payable

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decedent either has retained for his life or for

any period which does not in fact end before his

death (a) the possession or enjoyment, or the

right to the income from the property, or (b) the

right, either alone or in conjunction with any

person, to designate the person who shall

possess or enjoy the property or the income

therefrom, except in case of a bona fide sale for

an adequate and full consideration in money or

moneys worth.

- So the transfer may be done days before, weeks

before, even years before so long as the motive

behind the transfer is the thought of an

impending death. Before there was a bench

mark of 3 years, if the transfer was made within

3 years, it will be considered as transfer in

contemplation of death. But now, the 3 years

has been scrapped off and it is based on the

motive behind

- The purpose of the law is to reach such transfers

and thus prevent the evasion of estate tax.

-

To be free from the estate tax, the transfer intervivos must involve actual transfer of ownership,

i.e., the transfer must be absolute with no

strings attached whatsoever by the transferor or

a bona fide transfer for an adequate and full

consideration.

- Circumstances taken into account include:

a. Age and state of health of the decedent at

the time of gift, especially where he was

aware of a serious illness;

b.

Length of time between the gift and the

date of death. A short interval suggests the

conclusion that the thought of death was in

the decedents mind, and a long interval

suggests the opposite.

c. Concurrent making of a will or making a

will within a short time after the transfer.

- Motives associated with life that precludes the

category of transfer in contemplation of death

are:

a. To relieve the donor from the burden of

management;

b.

To save income or property taxes;

c. To settle family litigated and unlitigated

disputes;

d. To provide independent income for

dependents;

e. To see the children enjoy the property

while the donor is alive;

f. To protect the family from hazards o

business operations; and

g. To reward services unrendered.

3. REVOCABLE TRANSFER

- A revocable transfer is made when there is a

transfer of property with the transferor o

decedent retaining the rights to alter, amend

terminate or revoke the transfer during hislifetime whether or not such rights to revoke

terminate, amend or alter has been exercised. So

long as that right remains until the day of his

death, it is still under the control of the

decedent, it is part of his properties because he

actually will enjoy the income, the rights and the

enjoyment of the property.

- Revocable transfers is when there is a transfer o

property, the transferor having reserved the

rights to alter, revoke, amend or terminate the

enjoyment of the property by the transferee

Example is a CONDITIONAL TRANSFER of a

property to an heir or another person and whenthe transfer will sit or the transferee

predeceases, the property reverts back to the

transferor. It is a conditional transfer, revocable

transfer.

-

Transfers With Retention of Rights vs. Revocable

Transfers:

In revocable transfers, it involves the transfers

of property with the transferor reserving his

right to alter, amend revoke or terminate the

enjoyment of the property by the transferor, and

such property even if transferred will form part

of the gross estate even if the transfer has no

been exercised, the alteration, amendment, the

termination or the revocation of the property

Point is, so long as the transfer will retain those

rights until the day of his death, it is as if he has

full dominion of his property and it is part of his

gross estate.

With respect to transfers with retention

transfer of a property still but with a retention or

reservation of some rights. Not totally the same

as revocable transfers but somewhat takes the

form of a revocable transfer because there is a

right that has been retained or reserved by the

transferor during the time that the property has

been transferred during his lifetime. So long as

the transfer has retained those rights until the

day of his death, he can still say that he the

transferor may have at anytime have taken back

the property. So its equivalent to full dominion

over the property, still part of his gross estate as

if there was no transfer made.

-

EXCEPTION TO THE RULE THAT INTER VIVOS

TRANSFERS TAKING THE FORM OF

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TESTAMENTARY DISPOSITION SHALL BE

SUBJECTED TO ESTATE TAX:

When the transfer is made bona fide for an

adequate and full consideration in money or

moneys worth.

4.

PROPERTY PASSING UNDER GENERAL POWER OF

APPOINTMENT

-

A power of appointment refers to a right todesignate the person or persons who shall enjoy

or possess certain property from the estate of a

prior decedent.

- It is general when it gives to the donee the

power to appoint any person he pleases,

including himself, his spouse, his estate,

executor or administrator, and his creditor, thus

having as full dominion over the property as

though he owned it.

- It is special when the donee can appoint only

among a restricted or designated class of

persons other than himself.

- The power to dispose of property at death by

the exercise of a general power of appointment

is equivalent of ownership.

5.

PROCEEDS OF LIFE INSURANCE

Proceeds from life insurance are exempt from income tax

(Sec. 32-B, NIRC) but ARE NOT EXEMPT FROM ESTATE TAX.

The life insurance policy must be taken out by the

decedent himself. If it is not taken by the decedent

himself, it shall not be part of the estate.

Taxation of the proceeds of life insurance will depend on

the designated beneficiary and the manner of designation

of such beneficiary, such that:

- If the beneficiary is the estate itself, the executor

or the administrator, IT FORMS PART OF THE

GROSS ESTATE.

- If the beneficiary is other than the estate

executor, or administrator and the designation is

revocable (which is the default in the insurance

code), THE INSURANCE PROCEEDS FORM PART

OF THE GROSS ESTATE.

- If the beneficiary is other than the estate

executor, or administrator and the designation is

irrevocable, THE INSURANCE PROCEEDS WIL

NOT FORM PART OF THE GROSS ESTATE. The

transfer is absolute and the insured did noretain any legal interest in the insurance.

Note that as long as the beneficiary is the estate, executor

or administrator, the insurance proceeds will ALWAYS

form part of the gross estate regardless of the manner of

designation.

The proceeds of life insurance are not taxable in the

following cases:

a. Accident insurance proceeds. Tax Code specifically

mentions only life insurance policies;

b.

Proceeds of a group insurance policy taken out by acompany for its employees. The law speaks of policies

taken out by the decedent upon his own life;

c. Proceeds of insurance policies issued by the GSIS to

government officials and employees are exempt from

all taxes;

d. Benefits accruing under the SSS law;

e. Proceeds of life insurance payable to heirs o

deceased members of military personnel

6.

PRIOR INTERESTS

This is a catch all provision. The government is making sure

that everything will be considered in determining the gross

estate. So all transfers, trust estates, interests, rights

powers and relinquishments of powers made before o

after the effectivity of the tax code will still be pulled in

together but it doesnt matter now in determining the

gross estate why the tax code is already in effect 12 years

ago.

7. TRANSFERS FOR INSUFFICIENT CONSIDERATION

If during the lifetime of the decedent, he has entered into

transactions for inadequate or insufficient consideration

the property that was sold for insufficient consideration

will still form part of his gross estate at the time of his

death provided that no prior donors tax has been paid on

the said transaction.

The law does not provide for a time frame wherein

transfers may be classified as one with insufficien

consideration. For as long as it transpired during the

decedents lifetime, it should be included in the gross

estate.

Always part of the Gross Estate

Beneficiary:Estate/Executor/Admini

strator

PART OF THE GROSS ESTATE: IfRevocable

NOT PART OF THE GROSSESTATE: If Irrevocable

Beneficiary: Other thanEstate/Executor/Admini

strator

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What will be included in the gross estate is only the

difference between the consideration and the propertys

FMV at the time of death. So as a rule, it is not the whole

amount of the property that is included because there was

consideration only that the consideration of the sale was

inadequate.

Example:

A motor vehicle valued at P 1M at the time of sale, was

sold for only P 100,000, you can say that this is insufficientfor the consideration is inadequate. At the time of death,

the FMV of the motor vehicle reduced to P 900,000. How

much will form part of the gross estate?

Example:

But for properties which appreciate in value, it would be

more burdensome for the estate. If the FMV at the time of

death is P 2M, it was transferred for P 100,000. P

1,900,000 will form part of the gross estate of the

decedent.

These transactions are treated as if there is no transfer

actually made; only an advance payment which is the

insufficient consideration given to the decedent.

In transactions TANTAMOUNT TO A FICTITIOUS SALE OR

SIMULATED SALE, where no consideration was in fact

given, the entire FMV at the time of death will form part of

the gross estate of the decedent.

8.

CAPITAL OF THE SURVIVING SPOUSE

This involves the exclusive properties of the surviving

spouse and his/her share in the conjugal property.

This is included first in the gross estate and later excluded

in the formula.

REPUBLIC ACT 4917

RA 4917 provides for retirement benefits. Retirement

benefits are exempt from income tax. But with respect to

estate taxation, it shall first form part of the gross estate

But further on, it is a deduction. In effect, it will zero out

and the result is that it is not subjected to estate tax.

In other words, it is part of the gross estate but it is also a

deduction against the gross estate.

VIII.

ACQUISITIONS AND TRANSMISSIONS NOT

SUBJECT TO ESTATE TAX

These involve transfers or transmittals which do not giverise to estate tax even though it is in some way connected

to someones prior death.

1.

MERGER OR USUFRUCT IN THE OWNER OF THE NAKED TITLE

This involves a situation where upon the death of a

decedent, property is transferred to one person

(usufructuary) giving the latter the right to enjoy the

property, and to a second person (naked or beneficia

owner), the naked title to the property.

When the usufructuary dies and that the enjoyment of the

property is transferred to the naked owner (merger), this

transfer is not subject to estate tax because the sameproperty has already been subjected to tax upon the

decedents death.The transfer between the decedent and

the usufructuary has already been subjected to estate tax

The subsequent transfer from the usufructuary to the

naked owner should be therefore no longer taxed.

2. TRANSMISSION BY THE FIDUCIARY HEIR OR LEGATEES TO THE

FIDEICOMISSARY

This involves fideicomissary substitution wherein the

decedent provides in his will that upon the death of the

fiduciary heir, the property shall be transferred to the

fideicomissary heir.

The subsequent transfer (from fiduciary heir to

fideicomissary) shall be free from estate taxation because

the same property has already been taxed upon the first

transfer.

This is actually a method of avoiding tax. Had there been

no provision in the will regarding the fideicomissary

substitution, the subsequent transfer between the 1st

and

2nd

heir would be subjected to estate tax.

FMV during Transfer Php 1,000,000

Gross Selling Price Php 100,000

FMV at the time of Death Php 900,000

Answer: Php 800,000 (Php 900,000Php 100,000)

Property which

depreciate

FMV during Transfer Php 1,000,000

Gross Selling Price Php 100,000

FMV at the time of Death Php 2,000,000

Answer: Php 1,900,000 (Php 2,000,000Php 100,000)

Property which

appreciate

A

B

C

Subject to Estate Tax

NOT Subject to Estate Tax

Decedent

Fiduciary Heir

Fideicommissary

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3.

TRANSMISSION FROM THE FIRST HEIR, LEGATEE OR DONEE IN

FAVOR OF ANOTHER BENEFICIARY (in accordance with the

desire of the predecessor)

This contemplates a situation where the decedents will

provides that his property shall be transmitted to two

heirs proportionately. The subsequent transfer from the

1st

heir to the 2nd

heir will not be subject to estate tax if

such transfer was made in accordance with the will of the

decedent. This is so because the estate tax has already

been imposed on the 1st

transfer.

Example:

If in the will of decedent A there will be two beneficiaries,

B and C, each given of the property, if B transfers his half

to C thereby making the property whole, this 2nd

transfer is

NOT SUBJECT TO ESTATE TAX.

4.

BEQUESTS, DEVISES, LEGACIES OR TRANSFERS TO SOCIAL

WELFARE, CULTURAL AND CHARITABLE INSTITUTIONS

In order for this transmission to be considered non-

taxable, 3 requisites must be present:

a. Transfer to a social welfare, cultural and charitable

institutions;

b. No part of the income inures to the benefit of any

individual; and

c. Not more than 30% of the said bequests, devises,

legacies or transfers shall be used for administrative

purposes.

This transfer also includes transmissions made to NON-

STOCK, NON-PROFIT EDUCATION INSTITUTIONS. Although

not included in the enumeration provided for under theNIRC, such exemption is provided for in Art. XIV, Sec. 4(4)

of the 1987 Constitution which provides thatbequests to

be actually, directly and exclusively used for educational

purposes shall be exempt from tax.

5.

OTHERS

NOTE: The first 200K of the net estate is exempt from

estate tax.

The other transmissions of property or receipts/proceeds

of the estate of the decedent that are not subject to estate

tax are the following:

a.

Benefits received from SSS or GSIS;

b.

Benefits received from U.S. Veteran

Administration;

c.

War benefits given by the Philippine government

and U.S. government due to damages sufferedduring the war;

d.

Grants and donations to the Intramuros

Administration;

e.

If the decedent holds a property in trust fo

someone else, usually a beneficiary, the general rule

is that it does not form part of the estate of the

decedent because ultimately, it will be in favor o

the beneficiary, unless it falls under the genera

power of appointment over which the decedent has

been holding on to it with the free reign to designate

himself as the ultimate beneficiary;

f.

Transfers by way of bona fide sales of adequate and

full consideration;

g.

Life insurance proceeds from GSIS and from private

insurance companies so long as the beneficiary

designated irrevocably is a third person other than

the estate, administrator, executor. It will neve

form part of the gross estate of the decedent; anf

h.

Capital of the surviving spouse. Even if initially we

consider the assets of both spouses during lifetime

we eventually exclude the exclusive properties of

the surviving spouse.

IX.

DEDUCTIONS ALLOWED TO A CITIZEN OR A

RESIDENT

A.

EXPENSES, LOSSES, INDEBTEDNESS AND TAXES (ELIT)

1.

FUNERAL EXPENSES

For expenses to be considered under this category, such

expenses must be incurred from the moment of death

until interment.

The following are considered funeral expenses:

Mourning apparel of the surviving spouse and

unmarried minor children of the deceased

bought and used on the occasion of the burial

Expenses for the deceaseds wake, including

food and drinks

Publication charges for death notices (obituaries

Telecommunications expenses incurred in

informing relatives of the deceased

A

B C

Not subject to ESTATE TAX!

1/2

2nd Transfer

1/2

Sub ect to ESTATE TAX Sub ect to ESTATE TAX

B eventually transfers to C which causes the merger.

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Cost of burial plot, tombstones, monument or

mausoleum but not their upkeep. In case the

deceased owns a family estate or several burial

lots, only the value corresponding to the plot

where he is buried is deductible.

Interment and/or cremation fees and charges

All other expenses incurred for the performance

of the rites and ceremonies incident to

interment

In the case of funeral expenses, the amount allowable as

deductions is:

- The amount actually paid or incurred, OR

- 5% of the gross estate, WHICHEVER IS LOWER

- But in no case to exceed P 200,000

Example:

In effect, in funeral expenses, there are three choices,

whichever is the lower of the three. Refer first to the

actual funeral expenses or 5% of the gross estate,whichever is lower of the two but such amount must never

go beyond P 200K (the maximum funeral expense that can

be claimed as deductible against the gross estate).

In the example above, only P 150K can be claimed since it

is the lowest amount among the 3.

Funeral expenses NEED NOT BE PAID in order to be

deductible from the gross estate. It is sufficient that such

funeral expenses have been INCURRED.

Example:

Assuming gross estate is 4M. Actual funeral expense is

250K. 5% of the gross estate is 200K. Maximum limit is

200K. Of the 250K actual funeral expense, 200K is paid

while 50K is unpaid. However way you look at it, only 200K

funeral expense is deductible, which is the 200K actually

paid as well.

The 50K unpaid funeral expense cannot be categorized

under claims against the estate which is also deductible.

Because Revenue Regulations provide that the unpaid

portion of the funeral expenses incurred which is in excess

of the 200K threshold is NOT allowed to be claimed as a

deduction under claims against the estate. The claims

against the estate shall not include funeral expenses

because it has been categorized differently. So whateve

has been unsettled or any funeral expenses in excess o

what can be claimed, for example, the 50K, it remains as

funeral expenses not deductible from gross estate.

Note that in order for funeral expenses to be deductible, IT

MUST BE INCURRED BY THE FAMILY MEMBERS. If the

funeral expense has been paid for voluntary or as a

donation by someone else, it cannot be deductible fromthe estate. Such rule is also applicable to judicial expenses

In other words, judicial and funeral expenses must be

shouldered by the immediate family; otherwise, such

expenses are not deductible against the estate.

2. JUDICIAL EXPENSES

These are incurred with respect to settlement of the

estate, testamentary or intestate. These expenses include

fees of executor or administrator, attorneys fees, cour

fees, accountants fees, clerk hire, costs of preserving and

distributing the estate, costs of storing or maintaining

property of the estate, brokerage fees for selling property

of the estate, etc.

In the case of CIR v. CA, CTA and Josefina Pajonar, the

court ruled that the notarial fee paid for the extrajudicia

settlement is clearly a deductible expense since such

settlement effected a distribution of Pedro Pajonars

estate to his lawful heirs. Similarly, the Attorneys fee paid

to PNB for acting as the guardian of Pedro Pajonars

property during his lifetime should also be considered

deductible as an administration expense. PNB provided a

detailed accounting of decedents property and gave

advice as to the proper settlement of the latters estate,

acts which contributed towards the collection of

decedents assets and subsequent settlement of the

estate.

It is irrelevant whether the settlement is judicial o

extrajudicial. So long as the expenses are in relation to the

settlement of the estate, they can be claimed as part of

judicial expenses.

In order for judicial expenses be deductible, they must be

incurred during the settlement of the estate but not

beyond the last day prescribed by law, or the extension

Gross estate 3,000,000

Funeral expenses (Actual payment) 180,000

5% of the gross estate 150,000

Maximum deductible funeral expenses 200,000

Deductible amount

Gross estate 4M

Actual Funeral Expenses 250K

5% of gross estate 200K

Maximum limit of funeral expenses 200K

200K paid

50K unpaid

Not deductible

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thereof, for the filing of the estate tax return. So expenses

within the 6 months period or within the 30 day extension

granted are still deductible as judicial expenses.

3.

LOSSES

These are CASUALTY LOSSES losses which arose from

fires, storms, shipwrecks or other casualties or LOSSES

FROM ROBBERY, THEFT, OR EMBEZZLEMENT.

Such losses must occur during the settlement of the estatebut not later than the last day for payment of the estate

tax. This means that if there was a 30 day extension

granted, such loss which incurred during that period are

not deductible. Only losses incurred during the 6 months

filing period are deductible.

Losses before death are never deductible losses because

the computation of the gross estate is reckoned from the

decedents point of death and therefore does not

contemplate property that has been lost prior to his death.

Only losses occurring after death are deductible because

these are losses of properties that have already been

considered part of the gross estate and eventually lost.

Requirements in order for losses to be deductible:

a.

Incurred after death and during the settlement

of the estate;

b. Arose from fires, storms, shipwreck or other

casualties, or from robbery, theft or

embezzlement;

c.

Must not be compensated by insurance;

- Otherwise, if its compensated by

insurance, its as if nothing has been lost.

Therefore, if insured, it cannot be deductedagainst the gross estate. If there has been

partial insurance, only such part which has

not been insured can be deductible as

losses.

d.

Are not claimed as a deduction for income tax

purposes in an ITR in favor of either the

decedent or the estate itself; and

e. Were incurred not later than the last day for

payment of the estate tax.

-

Losses during the 30 day extension period

are no longer deductible.

Example:

Mr. A went abroad. He left his house unattended. He was

to come back on Nov. 12 but on Nov. 11, his house was

ransacked. His Nov. 12 flight met an accident. Mr. A died.

- The casualty loss is not deductible from his

estate since it occurred prior to his death.

- The gathering of the gross estate should

commence on Nov. 12

If the settlement of the estate should take 10 years, losses

occurring on the 9th

year are not deductible losses since

the losses must be incurred not later than the last day for

payment of the estate tax.

4.

CLAIMS AGAINST THE ESTATE

These are debts or demands of a pecuniary nature whichcould have been enforced against the deceased in his

lifetime and could have been reduced to simple money

judgment. They may arise out of contract, tort o

operation of law.

The requirements for the deductibility of claims agains

the estate are:

a. Must be a personal obligation of the deceased

existing at the time of his death (except unpaid

funeral expenses and unpaid medical expenses);

b.

Liability must have been contracted in good faith and

for adequate and full consideration in money or

moneys worth;

- Example of debt contracted in bad faith: When

the decedent obtained a loan at the time when

he knew that he will only be living for 2 months

So such contracted debt will not form part o

claims against the estate.

c.

The claim must be a debt or claim which is valid in law

and enforceable in court

d. Indebtedness not condoned by the creditor or the

action to collect from the decedent must not have

prescribed

e.

General rule: Must be duly substantiated.

- Just like funeral expenses, you cannot claim

funeral expenses w/o presenting receipts

invoices for the costs.

If the claim against the estate arose from a contract of

loan or a promissory note, the following additiona

requirements are needed:

a.

The debt instrument must be duly notarized at the

time the indebtedness was incurred

-

Except: Loans granted by financial institutionswhere notarization is not part of the business

practice/policy of the financial institution-lender

b.

Duly notarized certification from the creditor as to

the unpaid balance of the debt, including interest as

of the time of death

c. Proof of financial capacity of the creditor to lend the

amount at the time the loan was granted, as well as

its latest audited balance sheet with a detailed

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schedule of its receivable showing the unpaid balance

of the decedent-debtor

d. A statement under oath executed by the

administrator or executor of the estate reflecting the

disposition of the proceeds of the loan if said loan

was contracted within 3 years prior to the death of

the decedent.

If the claims against the estate arose from a simple

purchase of goods or services, it need not be substantiatedby a contract or a promissory note. They are usually

substantiated by invoices and receipts for the purchase of

the goods or services a certification from the creditor

still that the amount is collectible, including interest.

If the debt is condoned, the general rule is that it should

not be deductible.

- Except: If the debt is condoned after the death,

the same is deductible. Condonation should be

taken at the point of death. (This exception goes

against the lifeblood doctrine. Furthermore,

whether or not the condonation is before or

after the decedents death, such will not reducehis estate. The most plausible view must be to

favour the lifeblood doctrine and that any

condonation of debt must be non deductible.

Nonetheless, the exception is upheld because of

jurisprudence.)

5.

CLAIMS AGAINST THE INSOLVENT

In claims against the insolvent, it is the decedent who is

the creditor who has extended a loan but can no longer

collect the loan because the debtor is already insolvent. A

person is insolvent when his liabilities exceeds his assets.

For claims against insolvent persons to be deductible from

the gross estate (Sec. 86(d), it is important to show that:

a. The amount of said claims has been initially included

as part of his gross estate; and

b. The incapacity of the debtors to pay their obligations

is proven, not merely alleged.

CLAIMS AGAINST THE

ESTATE

CLAIMS AGAINST THE

INSOLVENT

Decedent is DEBTOR Decedent is the CREDITOR

Claim is a PAYABLE Claim is a RECEIVABLE

Need not be included first

in the gross estate

It is required that the value

of the decedents interest is

included first in the value of

the gross estate before

deducted.

6.

UNPAID MORTGAGES OR INDEBTEDNESS

Unpaid mortgages upon, or any indebtedness in respect to

property shall be deductible from gross estate, where the

value of decedents interest therein, undiminished by such

mortgage or indebtedness, is included in the value of the

gross estate. The unpaid mortgages must be contracted

bona fide and for an adequate and full consideration in

money or moneys worth (Sec. 86[e], NIRC).

Here, the decedent has mortgaged his property during his

lifetime. It is a payable on the part of the decedent in the

form of a mortgage wherein the decedent is a mortgagor

Therefore, the estate should be reduced. It is likened to a

claim against the estate, only that it is in the form of a

mortgage.

Requisites in order for unpaid mortgages to be deductible

against the gross estate:

a. Value of the decedents interest in the property

encumbered by such mortgage or indebtedness is

included in the value of the gross estate;

- The value pertains to the propertys FMV at the

time of the death of the decedent on the

mortgaged property.

-

Where the indebtedness was secured by

mortgage of a real property situated outside the

Philippines, the value may not be deducted

because the same is not includible in the gross

estate for the reason that the decedent at the

time of his death was a non-resident alien.

-

In an accommodation mortgage, the value may

be deductible as long as the executor records

the same as a receivable. Otherwise, it is non

deductible.

b.

Such deduction shall be limited to the extent that

they were contracted bona fide and for an adequate

and full consideration in money or moneys worth, i

such unpaid mortgages or indebtedness were

founded upon a promise or an agreement;

- Where the decedent owned only of the

property mortgaged, only half of its value should

be included in the estate and thereafte

deductible. This is true even if the executor paid

the entire mortgage debt, inasmuch as the

executor would be subrogated to the rights o

the mortgagee as against the co-owner and co

mortgagor.

c. The mortgage must be contracted during the lifetime

of the decedent.

-

It must be a mortgage personally contracted by

the decedent. Otherwise, if the heirs were the

ones who mortgaged the property, the value is

not deductible.

7.

UNPAID TAXES

Unpaid income tax upon income received after the death

of the decedent, or property taxes not accrued before his

death, or any estate tax shall not be deductible from gross

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estate. The unpaid taxes must be contracted bona fide and

for an adequate and full consideration in money or

moneys worth(Sec. 86[e], NIRC).

Requisites for unpaid taxes to be deductible against the

gross estate:

a. The taxes must have accrued as of the death of the

decedent or prior to the death of the decedent.

-

The reckoning point is the point of death. So alltaxes which accrue during the lifetime of the

decedent up to the point of death is considered

deductible against the gross estate. Note that

the gathering of the gross estate is always

reckoned upon the date of death. Any taxes

accruing after death will be considered as a

separate taxable entity.

- Property taxes accrued prior to the decedents

death, unpaid taxes on income received by

decedent during his lifetime, donors taxes which

are unpaid upon death are properly deductible

against the estate.

- The same rules apply to real property taxes.

However, the difference lies in the due date

when the real property taxes shall be paid. In

income tax, the taxes shall be due on or before

the 15th

of April following the close of the

taxable year. Real property taxes are due once

every January 1.

b. They were unpaid as of the time of death.

c. This deduction shall not include income tax upon

income received after death, or property taxes not

accrued before his death, or the estate tax due fromthe transmission of his estate.

B.

MEDICAL EXPENSES

Requisites for deductibility of medical expenses:

a. The expenses (cost of medicines, hospital bills, doctors

fees, etc.) were incurred within one (1) year prior to

the death of the decedent;

- Example: If decedent died on Dec. 8, 2011

expenses must be incurred on Dec. 9 up to Dec

8, 2011.

- Leap years are irrelevant, that is to say that even

if decedent died on a leap year, the same

computation for the 1 year period applies.

b.

The expenses are duly substantiated with officia

receipts for services rendered by the decedents

attending physicians, invoices, statements of accounduly certified by the hospital, and such other

documents in support thereof;

c. Provided, that the total amount thereof, whether paid

or unpaid, does not exceed Five hundred thousand

pesos (P 500,000)

-

So all medical expenses, whether paid or unpaid

for as long as they have been incurred are

considered.

Any amount of medical expenses exceeding P 500K, even i

unpaid, shall not be allowed as deduction under the

medical expenses. Neither can this excess amount be

allowed to be deducted from the gross estate as claim

against the estate (same rule in funeral expenses).

The medical expenses need not pertain to the cause of

death of the decedent for it to be a deductible medica

expense. It can be for any type of illness and the cause o

death maybe any other illness, or accident, etc. for as long

as the requisites are present.

C.

FAMILY HOME

Family home means the dwelling house, including the land

on which it is situated, where the husband and wife, or a

head of the family, and members of their family reside, as

certified to by the Barangay Captain of the locality. The

family home is deemed constituted on the house and lot

from the time it is actually occupied as a family residence

and is considered as such for as long as any of its

beneficiaries actually resides therein (Arts. 152 and 153

Family Code).

- The family home consists of the house and the

lot on which the house is situated.

- Only one family home can one person own.

- Married individuals and heads of the family

whether single, widowed or divorcedcan claim

family home as a deductible item against the

gross estate.

- For income tax purposes, the head of the family

no longer has a useful definition since al

individuals regardless of the status is entitled to

the personal exemption of P 50K. The difference

lies in whether a taxpayer has dependents which

entitles him/her to an additional exemption of P

25K for every dependent.

Jan. 1 Dec. 31Nov. 17 Death

Income earned before death

Non-deductibleDeductible

Income earned

after death

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- But for estate tax purposes, the definition of the

head of the family is still significant. A head of

the family is:

An individual who is single, legally

separated or widowed, etc. who is

chiefly supporting a child, whether

legitimate, illegitimate, legally adopted

or naturally acknowledged, not more

than 21 years of age, where such child

is not gainfully employed, unmarriedand he can be more than 21 if he is

mentally incapacitated or physically

disabled.

An individual who is chiefly supporting

a parent living with him.

An individual who is chiefly supporting

a brother or sister living with the

former, provided that the latter shall

be no more than 21 years of age,

unmarried and not gainfully employed.

An individual who is supporting asenior citizen whether or not related to

each other, provided that the latter be

60 years of age or above and not

earning more than P 5K a month.

-

For income tax purposes, among the 4 types of

dependents, only a child can entitle a taxpayer

to avail of the P 25K additional exemption. But

for estate taxes, if youre classified as a married

individual or single but head of the family, then

your family home can be considered as a

deductible item.

An amount equivalent to the current or fair market value

of the decedents family home, whichever is higher:

Provided, however, That if the said current or fair market

value or zonal value exceeds one million pesos (P

1,000,000), the excess shall be subject to estate tax. As a

sine qua non condition for the exemption or deduction,

said family home must have been the decedents family

home as certified by the barangay captain of the locality

(Sec. 2, No.4, RA 7499)

Conditions for the allowance of family home as deduction

from the gross estate:

a.

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 Barangay Captain of the

locality where the family home is situated;

-

Gleaning from this requisite, the family home

must be located in the Philippines because of the

fact of need of a certification from the Barangay

Captain.

b. The total value of the family home must be included

as part of the gross estate of the decedent; and

c. Allowable deduction must be in an amoun

equivalent to the current fair market value of the

family home as declared or included in the gross

estate, or the extent of the decedents interest

(whether conjugal or community, or exclusive

property), whichever is lower, but not exceeding P

1,000,000.

-

Any excess of the P 1,000,000 is subjected to

estate tax.

Examples:

Decedent: Mr. A, single but head of the family, owns a

house worth P 750K and lot P 500K

- Only 1M can be deductible being the maximum

amount allowed.

Decedent: Mr. A, single but head of the family, owns a

house worth P 250K and lot worth P 500K.

- Only P 750K can be claimed as deduction

because the deductible amount is the actua

value of the family home or P 1M, whichever is

lower.

Decedent: Mr. A, married, owns a house worth P 300K and

lot worth P 500K.

- Determine first whether the property is conjuga

or exclusive property.

- If the house and lot are exclusive properties o

the decedent, the entire P 800K is deductible.

- If both the house and lot are conjugal properties

only P 400K [(300K/2) + (500K/2)] is deductible

because the division between the spouses is

always or 50% in the absence of a propertyrelation before marriage.

- If the house is exclusive and the lot is conjugal, P

550K is deductible [300K + (500K/2)]

- If the house is 1.3M conjugal and the lot is 500K

exclusive, the result obtained is 1.15M [(1.3M/2

+ 500K] but since P 1M is the maximum

deductible amount, only P 1M can be claimed as

deduction.

D.

PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTIONS)

Vanishing deductions or property previously taxed inestate taxation refers to the diminishing

deductibility/exemption, at the rate of 20% over a period

of five (5) years until it is lost after the fifth year, of any

property (situated in the Philippines) forming part of the

gross estate, acquired by the decedent from a prior

decedent or donor who died within a period of five (5

years from the decedents death.

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The vanishing deduction, so-called because of the

diminishing exemption at the rate of 20% until it is lost

after the fifth year, is designed to mitigate the harshness

of successive taxation.

Vanishing deductions shall be allowed only under the

following conditions, to wit:

1.

Prior Transfer. There is a prior decedent or donor

who gave a property;

2. Death. The present decedent died within 5 years

after receiving the inheritance from the prior

decedent or gift from the prior donor;

- Example:Mr. A, present decedent, died on Dec.

8, 2011, has previously acquired a parcel of land

through inheritance from Mr. Z last Aug, 2008. In

order for the rules on vanishing deductions to

apply, the present decedent must have died

within 5 years from such inheritance.

3. Identity of the Property.The property with respect to

which deduction is sought can be identified as the

one received from the prior decedent or the donor,or as the property acquired in exchange for the

original property so received;

- Example:So if Mr. Z transmitted a parcel of land

to Mr. A, it should be the same parcel of land

that will form part of Mr. As gross estate.

4. Inclusion of the Property. The property must form

part of the gross estate of the present decedent.

-

Example: In order to claim for vanishing

deductions, the parcel of land must first be

included in the gross estate of Mr. A.

-

The value of the property shall be according to

the FMV at the time of death of the present

decedent. If at the time of the inheritance the

parcel of land was valued at 1M and at the time

of Mr. As death, the property is already valued

at 1.2M, the latter amount should be included in

the gross estate.

5.

Previous Taxation of the Property.The estate tax on

the prior succession, or the donors tax on the gift,

must have been finally determined and paid by the

prior decedent or by the donor as the case may be.

- Example: When Mr. Z transmitted the property

to Mr. A by inheritance, the proper estate tax

should have been paid.

6. No Previous Vanishing Deduction on the Property.

No such deduction on the property, or the property

given in exchange therefore, was allowed in

determining the value of the net estate of the prior

decedent. This limitation is intended to preclude the

application of vanishing deduction on the same

property more than once (Sec. 86[A][2], NIRC).

- Example: Should Mr. Z also acquire the same

property by inheritance or donation last Aug. 8

2007 (Aug. 8, 2007 until Dec. 8, 2011 is stil

within the five year period. For purposes of thi

requirement, if there had been two transfers

such transfers must have transpired within 5

years of each other.), Mr. Z should not have

claimed vanishing deductions for the same

property in the computation of his estate tax i

Mr. A should be allowed to claim the such

deductions. If Mr. Z had already claimedvanishing deductions over the parcel of land, Mr

A can no longer claim for vanishing deductions

over the same property. Vanishing deduction

shall be allowed only once.

7.

The property should be located in the Philippines.

-

Example: If the property transmitted by Mr. Z to

Mr. A was a motor vehicle which was located

previously in the US, the requirement is satisfied

for as long as during the death of the presen

decedent, the subject property has already been

transferred in the Philippines. The motor vehicle

must be located in the Philippines as of Dec. 82011 (Mr. As death).

-

Example: If Mr. A, a NRA decedent, has a moto

vehicle located in the US at the time of his death

It was transmitted as an inheritance to Mr. B, a

RC who died within 1 year from receiving the

motor vehicle. The motor vehicle was already in

the Philippines at the time of death of Mr. B.

Vanishing deductions shall not be allowed in this

case. Even if the property has indeed been

transferred in the Philippines, the problem is

that Mr. A, when he died as a NRA, all his

properties located outside of the Philippines arenot covered by Philippine estate taxation, which

means that the transfer has not been subjected

to a prior transfer tax.

Limitations as to amount of deduction allowable:

1. Value of the property The deduction is limited by the

value of the property previously taxed (prior decedents

estate) or the value of such property in present decedents

gross estate, whichever is lower.

-

In including the value of the property in the

gross estate, the FMV at the time of death shal

be the basis. However, this is not the case in

obtaining for the initial basis of the vanishing

deductions allowed. The value shall be prior o

present FMV, whichever is lower.

- Example: Lets say that the FMV at the time o

the inheritance was 1 M and at the time o

death, the FMV was 1.2M. To obtain the initia

basis, the FMV of 1M shall be used being the

lower amount.

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2. Deduction for mortgage or other lien. The initial value

above shall be reduced by the total amount paid, if any, by

the present decedent, on any mortgage or other lien on

the property where a deduction was allowed.

- This happens when the property transmitted by

inheritance or donation has an accompanying

mortgage or lien. The value of the property is

reduced by any amount paid by the present

decedent with respect to the mortgage that was

taken by the prior decedent. This is becausewhat the present decedent inherited is not really

the full value of the property because of the

accompanying mortgage.

- Example: If theres no mortgage payments

made, the value of P 1M in #1 above is carried

over. At this point, we have the INITIAL BASIS.

3. Deduction for expense, losses, indebtedness, taxes,

transfers for public useThe value as reduced above shall

be further reduced to the extent of the pro rata

deductions based on the principle that a portion of the

expenses (ELIT and TFPU) pertains to the percentage of

the property inherited for vanishing deduction over thetotal gross estate.

- Example: If the total gross estate is 5M, the

initial basis of 1M shall be divided by 5M. The

ratio obtained is 20%. This ratio shall be

multiplied with the ELIT and TFPU. Lets say we

have ELIT of 500K, multiplied by 20%, the second

deduction is 100K (500K x 20%).

The INITIAL BASIS in #2 shall be further reduced

by the deductions in #3 to obtain the FINAL

BASIS.

In this case, 1M100K = 900K (FINAL BASIS)

4.

Percentage of DeductionsThe vanishing deduction shall

be the value in #3 multiplied by the following percentage

of deduction:

100% if the present decedent dies within 1 year,

80% if the present decedent dies more than 1 year

but not more than 2 years,

60% if the present decedent dies more than 2 years

but not more than 3 years,


but not more than 4 years


but not more than 5 years

- Example: If the present decedent dies within 1

year, the full amount of 900K is deductible (900K

x 100%). If the present decedent died more than

4 years after the death of the first decedent,

only 180K is deductible (900K x 20%)

In sum, the computation above is as follows:

E.

AMOUNT RECEIVED BY HEIRS UNDER RA 4917

Any amount received by the heirs from the decedents

employer as a consequence of the death of the decedent

employee in accordance with RA 4917. This law provide

that retirement benefits of private employees shall not be

subject to attachment, levy, execution or any tax

PROVIDED that such amount is included in the gross estateof the decedent.

So it zeroes out in the end. The amount received by the

heirs under RA 4917 is deductible so long as such amount

has been included as part of the gross estate, otherwise

not part of the gross estate, not deductible. In the end, its

not a taxable asset of the decedent or the estate.

F.

STANDARD DEDUCTION

An amount equivalent to 1M shall be deducted from the

gross estate without need of substantiation

Standard deduction shall be considered as automatic

deduction against the gross estate of a decedent and if thedecedent is a married individual, it is considered as a

conjugal deduction shared by both spouses so

effectively, only half.

G.

TRANSFERS FOR PUBLIC USE

The whole amount of all the bequests, legacies, devises o

transfers to or for the use of the Government of the RP, o

any political subdivision thereof, for exclusively public

purposes shall be deductible from gross estate, provided

such amount or value had been included in the gross

estate.

The transfers to the government or political subdivisions

include only provinces, cities, municipalities and

barangays. IT DOES NOT INCLUDE GOCCs.

For bequests to charitable institutions, social welfare, etc.

they are not deductible since in the first place, they are

exempt transmission of property. In other words, they are

not includible in the gross estate. Unlike a deduction which

must first be included as part of the gross estate and

subsequently deducted.

FMV (prior or present, whichever is lower) 1M

Less Mortgage payments (0)

INITIAL BASIS 1M

Less Pro rata deductions [(1M/5M) x 500K ELIT) (100K)

FINAL BASIS 900K

X Vanishing Deduction Rate x 20%

VANISHING DEDUCTION ALLOWED 180K

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If the TFPU has been previously made during the lifetime

and prior to the death of the decedent, it will not form

part of the gross estate of the decedent.

Not all transmissions to the government are deductible.

What is contemplated under the law are transfers for

public use, if the purpose is private, it is not deductible.

TFPU are allowable deduction in order to encourage

decedents to put into writing or in the will or to make

transfers to the government, to give them incentives such

as deductions and exemptions from tax.

H.

SHARE OF SURVIVING SPOUSE IN CONJUGAL PROPERTY

The share in the conjugal or community property of the

surviving spouse on such estate is deductible.

X. DEDUCTIONS ALLOWED TO A NON-RESIDENT

ALIEN

In the case of NRA, where the estate situated only in the

Philippines is subject to the tax, the deductions are limited

to

a.

The proportion of the ELIT which the value of hisgross estate in the Philippines bears to his entire

gross estate wherever situated;

-

Not the entire ELIT of the estate is deductible.

- Example: Decedent: Mr. A, NRA

Global Estate: 100M

Phil Estate: 20M

Funeral Expenses: 500K

Allowable ELIT deductions = (20M/100M) x 500K

= 20% x 500K

= 100K

b.

Vanishing deductions on the property located in the

Philippines previously taxed (estate or donors tax)

also gradually diminishing at the rate of 20%

annually until the fifth year; and

- Provided that the 7 requisites are present.

c.

Transfer for public purposes to the Philippine

Government or its political subdivisions.

d.

Conjugal share of the surviving spouse

The NRA cannot claim deductions for family home,

standard deduction, medical expenses, and amounts

received under RA 4917.

The NRA cannot deduct family home because he cannot

be considered to have a domicile or family home in the

Philippines.

XI. NET ESTATE AND ESTATE TAX RATES

OVER BUT NOT

OVER

TAX IS PLUS OF THE

EXCESS

OVER

200,000 Exempt

200,000 500,000 0 5% 200,000

500,000 2 million 15,000 8% 500,000

2 million 5 million 135,000 11% 2 million

5 million 10 million 465,000 15% 5 million

10 million And over 1,215,000 20% 10 million

A. EXEMPTION FROM ESTATE TAX

The first P 200,000 value of the net estate is exempted

from tax.

The net estate is simply the gross estate less the

deductions (including the surviving spouses conjuga

share)

Example: If we have a net estate of P 5,404,000, the tax

due is:

465K + (15% of 404,000) = 525,600

B.

ESTATE TAX CREDITS

In income taxation, only RCs are allowed to offset foreign

income taxes against Philippine income tax while others

are not allowed to claim income tax credits.

However, in estate taxation, only NRAs are not allowed to

offset foreign estate tax against Philippine estate tax while

all others are allowed to claim estate tax credits in order to

lessen the burden of double taxation on properties that

are located outside the Philippines. For NRAs, the

Philippine estate tax due would only refer to propertieslocated in the Philippines, so theres no risk of double

taxation.

Formula:

ESTATE TAX PAYABLE = Philippine Estate Tax Due Foreign Tax

Credits

For estate tax credits, you cannot automatically deduct the

actual estate taxes paid abroad. We have to observe

whichever is lower between the actual foreign estate tax

paid as against the limitation per country and as against

the global imitation for the worldwide estate.

Limitations:

Income Tax Credits Estate Tax Credits

RC

NRC X

RA X

NRA X X

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Real Property 4M

House and lot, inherited from Mr. Z 2M

Personal properties 3M

Revocable transfer 1M

Property sold 1M

Life insurance proceeds 1.5M

Amounts received under RA 4917 1M

Receivable from Mr. B, insolvent 500K

TOTAL GROSS ESTATE: 14M

PER COUNTRY LIMITATION

GLOBAL or OVERALL LIMITATION

Example: Mr. X, RC

GROSS

ESTATE

NET

ESTATE

TAX DUE LIMITATION

PHILIPPINES 8M 5M 1.215M 607,500

COUNTRY A 7M 3M 500K 364,500

COUNTRY B 5M 2M 200K 243,00020M 10M

Global Tax Credit Allowed is

564,500 (200K + 364,500) being

the lower amount as against

607,500.

PER COUNTRY LIMITATION

NE COUNTRY A X PHIL ESTATE TAX DUE = LIMITATION

WORLDWIDE NE

3M/10M X 1.215 M = 364,500 (Country A)

2M/10M X 1.215 M = 243,000 (Country B)

GLOBAL LIMITATION

FOREIGN COUNTRIES NE X PET DUE = LIMITATION

WORLDWIDE NE

5M/10M X 1.215 M = 607,500 (Global Limit)

XII.

GROSS/NET ESTATE OF A DECEDENT

A. SINGLE DECEDENT

Mr. A, single, no dependent, died on Nov. 22, 2010

GROSS ESTATE:

Gross estate

Less: Deductions

share of surviving spouse

Net estate

X Estate Tax Rates

Estate tax due

Less: Tax Credits

Estate tax payable

1) Decedents interest

- Real property Php 4M

- House and lot (inherited from Mr. Z, father) Php 2MFMV today)

FMV, Nov. 23, 2007 (Mr. Zs death) Php 1.5M

w/ unpaid mortgage Php 100K

- Personal properties Php 3M

2) Previous transfers- Revocable transfer

(Date of transfer: Nov. 27, 2008) Php 1M

- Property sold

(Date of sale: Dec. 15, 2005) Php 100K (consideration

of sale)

FMV Dec. 15, 2005 Php 1,200,000 (FMV at

time of sale)

FMV Nov. 22, 2010 Php 1,100,000 (FMV at

time of death)

3) Others (amounts expected to be received by heir after death)

- Life Insurance proceeds (estate is the beneficiary) Php 1.5M

- Amount received under RA 4917 Php 1M

- Receivable from Mr. B, Bankrupt Php 500K

4) Expenses

- Funeral expenses Php 250K

- Judicial expenses Php 250K

- Casualty losses on Nov. 23, 2010 Php 500K(A day after

death)

- Outstanding bank loan (date of death)

(duly supported by a notarized document)

Principal Php 700K

Interest Php 100K

- Unpaid mortgage taken out by Mr. Z (father)

and paid by Mr. A during his lifetime Php 100Knote: not the

unpaid mortgage that is deductible

- Accrued income taxes as of the date of death Php 150K

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EXPENSES:

VANISHING DEDUCTIONS:

NET ESTATE:

B.

MARRIED DECEDENT

Mr. A, RC, married, no dependents, died on Nov. 22, 2010

1) Decedents interest

- Real property (conjugal) 4M

- Agricultural land

(inherited from Mr. Z, father during marriage)2M

FMV, Nov. 23, 2007 (Mr. Zs death) 1.5M

- Personal properties (exclusive) 3M

- Family home, lot (exclusive)600K & house (conjugal)900K

2) Previous transfers

- Revocable transfer (conjugal) (Date of transfer: Nov. 27, 2008)

1M

- Property sold (exclusive) (Date of sale: Dec. 15, 2005) 100K

consideration

FMV Dec. 15, 2005 1.2M

FMV Nov. 22, 2010 1.1M

3) Others (all conjugal)

- Amount received under RA 4917 1M

- Receivable from Mr. B, judicially declared Bankrupt 500K

TOTAL GROSS ESTATE 14,000,000

Less:

ELIT: (2,400,000)

Funeral expenses [200K]

Judicial expenses [250K]

Casualty losses [500K]

Claims against the estate [800K]

Claims against insolvent [500K]Unpaid taxes [150K]

Vanishing deduction (696,000)

Standard deduction (1,000,000)

RA 4917 (1,000,000)

TOTAL NET ESTATE 8,904,000

- Receivable from Mr. B, declared Bankrupt Php 500,000

Given Expenses

- Funeral expenses Php 250,000

- Judicial expenses Php 250,000

- Casualty losses on Nov. 23, 2010 Php 500,000

- Outstanding bank loan (date of death)Principal Php 700,000

Interest Php 100,000

- Unpaid mortgage taken out by Mr. Z (father)

and paid by Mr. A during his lifetime Php 100,000

- Accrued income taxes as of date of death Php 150,000

Given:

- House and lot (inherited from Mr. Z, father) Php 2,000,000

FMV, Nov. 23, 2007 (Mr. Zs death) Php 1,500,00

w/ unpaid mortgage Php 100,000

H&L (Lesser FMV) 1,500,000

Less: Unpaid Mortgage 100,000

Equals: Initial Basis 1,400,000

Divided: Gross Estate 14,000,000

Proportionate Deduction Percentage 10%

ELIT Expenses 2,400,000

Multiply: Proportionate Deduction Percentage 10%

Proportionate Deduction Allowed 240,000

Initial Basis 1,400,000

Less: Proportionate Deduction Allowed 240,000

Basis of Vanishing Deduction 1,160,000

X Percentage of Deduction Level (at 3 years) 60%

Vanishing Deduction 696,000

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4) Expenses

- Funeral expenses 250K

- Judicial expenses 250K

- Casualty losses 500K

- Outstanding bank loan (date of death)

Principal 700K

Interest 100K

- Unpaid mortgage taken out by Mr. Z and paid by Mr. A during his

lifetime 100K

- Accrued income taxes, date of death 150K

ANSWER:

Exclusive Conjugal Total

6,600,000 7,400,000 14,000,000

(Total

property/Gross

estate)[2,400,000] (Total

conjugal ordinary

deductions/expenses)

6,600,000 5,000,000 (net conjugal

estate)

[2,500,000] (Exclusive

deductions/expenses as

share of the surviving

spouse)

[1,000,000] (Standard

deduction)

[696,000] (Vanishing

deduction)

[600,000] [400,000] (Family home)

[1,000,000] (RA 4917)

5,304,000 100,000 5,404,000 (Net

taxable estate)

Computations:

- Gross exclusive properties:

1. Agricultural land inherited from Mr. Z 2M

2. Personal properties3M

3.

Family home (lot)600K

4. Property sold1M (1.1M-100K)

TOTAL6,600,000

- Gross conjugal properties:

1.

Real property4M

2. Family home (house)900K

3. Revocable transfer1M

4. Amounts received under RA 49171M

5.

Receivable from Mr. B judicially bankrupt 500K

TOTAL7,400,000

- Total conjugal ordinary deductions:

1. Funeral expenses200K

2. Judicial expenses250K

3.

Casualty losses500K

4. Accrued income taxes150K

5. Claims against insolvent500K

6. Claims against the estate800K

TOTAL2,400,000

- Exclusive deductions:

1. [Gross conjugal properties Total conjuga

ordinary deductions]/2 (as share of surviving spouse

= Exclusive deductions

Exclusive deductions = [7,400,000

2,400,000]/2 = 2,500,000

- Vanishing deductions:

1. Initial basis = FMVunpaid mortgage

Initial basis = 1.5M100K = 1.4M

2.

Final basis = Initial basis [(Initial basis/gross

estate) x ELIT]

Final basis = 1.4M [(1.4M/14M) x

2.4M) = 1.16M

3. Vanishing deduction = Final basis x 60%

Vanishing deduction = 1.16M x .6 =

696,000

Rules in Property Ownership between Spouses

-In the absence of any other facts contradicting, we use absolutecommunity of property on the assumption that marriage took

place after the effectivity of the new FC. Under the absolute

community of property, whatever you bring into marriage is

usually considered as conjugal. What remains as exclusive is

when during marriage, one of the spouses receives a donation

or an inheritance and there is no indication that such property

belonged to the spouses, it will be considered as exclusive.

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- In conjugal partnership of gains, whether during marriage or

before marriage, any inheritance or donation received will be

considered as exclusive property of such spouse. Any property

brought into marriage is still exclusive property of the spouse.

- Expenses more often than not are considered as conjugal

expenses/conjugal deductions. Even to the extent of standard

deduction of 1M, it shall be offsetted against the conjugal

property but its not an expense. Standard deduction is an

arbitrary amount deducted.

- What will become exclusive deduction or expenses are those

expenses incurred on an exclusive property. So if its an

encumbrance or a mortgage taken out by the spouse on an

exclusive property, such expense would be exclusive. If its a

vanishing deduction on an exclusive property, such vanishing

deduction is also exclusive. It will not reduce the conjugal

property. This issue becomes relevant because we really have

to know how much is the net conjugal estate for purposes of

taking out the 50% belonging to the surviving spouse.

XIII.

ADMINISTRATIVE MATTERS

A. NOTICE OF DEATH

Notice of death is not necessary in all cases. The

Commissioner shall be notified of the fact of death in the

following cases:

1. In all cases of transfers subject to tax, OR

- Notice of death shall be necessary when the

death of the decedent would result to estate

taxation, meaning it will be subject to tax

beyond the 200K limitation.

2.

Where, though exempt from tax, the gross value of

the estate exceeds 20K

- Even if the estate is not subjected to tax for as

long as the gross value of the estate exceeds

20K, a notice of death shall be necessary.

Purpose. For purposes of the government to be prepared

in computing for the estate tax.

The notice of death shall be given to the Commissioner or

his/her alter ego within two monthsafter the decedents

death or within a like period after the executor or

administrator qualifies as such.

B. BANK DEPOSITS OF A DECEDENT

When a bank has knowledge of the death of a person who

maintains a bank deposit account, it shall not allow any

withdrawal from such account. In effect, pending the

settlement of the estate, the decedents account having

deposits/funds is thereby freezed.

- EXCEPTION: When the Commissioner has

certified that the estate taxes have been paid or

that the heirs of the decedent may, upon

authorization by the Commissioner, withdraw an

amount not exceeding 20K without the said

certification (Sec. 97, NIRC).

- Such exception is allowed in order to cover fo

the expenses in the settlement of the estate

because in some cases, a decedent may have left

all tangible items excluding cash and the cash is

in the bank.

Obituary is sufficient notice to the bank.

C. FILING OF THE ESTATE TAX RETURN

The estate tax return shall be filed within 6 months from

the date of death, unless the period is extended for not

more than 30 days by the Commissioner on meritorious

grounds.

Instances when an estate tax return is required:

1.

Whenever the decedent has left property and the

transmission of property would result to an estate

tax liability.In all transfers where an estate tax has to

be paid, meaning more than the first 200K net estate

an estate tax return has to be fi led.

2. Whenever the gross value of the estate exceeds

200K, an estate tax return is to be filed even if

youre not liable for estate tax.

- Example: Decedents gross estate is 250K. This is

not a taxable estate since in view of the standard

deduction of 1M, taxability does not result

Nonetheless, the law requires for an estate tax

return to be filed in such instance in order fo

the government to monitor whether or not the

gross estate is indeed subject to estate tax.

3. Regardless of the gross value of the estate, when the

said estate consists of registered or registrable

property such as real property, motor vehicle, shares

of stock or other similar property for which a

clearance from the BIR is required as a condition

precedent for the transfer of ownership thereof in

the name of the tranferee.

- If it is not covered to taxation because the

amount does not exceed the standard deduction

of 1M, still there must be proof that estate tax

return has been filed and the clearance from the

tax authorities has been given so that transfe

can smoothly be made.

If the gross value of the estate exceeds P 2M, the return

shall be supported with a statement duly certified to by a

CPA containing the following:

a. Itemized assets of the decedent with thei

corresponding gross value at the time of his death, or

in the case of a nonresident, not a citizen of the Phils.

of that part of his gross estate situated in the Phils.

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b. Itemized deductions from gross estate allowed in Sec.

86; and

c. The amount of tax due whether paid or still due and

outstanding

D.

PAYMENT OF THE ESTATE TAX DUE

Person primarily liable to pay the estate tax. It is the

estate that is primarily charged for the estate taxes but itwill have to be coursed through the executor or

administrator who shall be considered as the person

primarily liable to pay the estate tax.

When to pay the estate tax. The estate tax is due and

payable at the same time that the return is filed, i.e.,

within six months after the decedents death.

Extension of time to pay estate tax. When the

Commissioner finds that the payment on the due date of

the estate tax or any part of the said amount would

impose undue hardship upon the estate or any of the

heirs, he may extend the time for payment of such taxes

or any part thereof not to exceed 5 years in case of judicialsettlement or 2 years in the case of extrajudicial

settlement.

If extension granted, the Commissioner may require the

executor, or administrator, beneficiary, as the case may

be, to furnish a bond in such amount, not exceeding

double the amount of the tax and with such sureties as the

Commissioner deems necessary, conditioned upon the

payment of the said tax in accordance with the terms of

the extension.

Where to pay the estate tax. Except in cases where the

Commissioner otherwise permits, the return shall be filed

and the estate tax paid at:

An Authorized Agent Bank (AAB), or

Revenue District Office (RDO), or Collection

Officer, or

Duly authorized Treasurer of the city or

municipality in which the decedent was

domiciled at the time of his death, or

If there be no legal residence in the Phils., with

the Office of the Commissioner

Motion filed with Probate Court. After estate taxes have

been paid and settled, the best thing for an executor or

administrator to do is to ask the court a written discharge

from personal liability on such settlement of estate so that

if later on, it is found out that there have been

miscalculations, he cannot be considered as personally

liable.

SEC. 92. Discharge of Executor or Administrator from

Personal Liability.- If the executor or administrator makes

a written application to the Commissioner for

determination of the amount of the estate tax and

discharge from personal liability therefore, the

Commissioner (as soon as possible, and in any event

within one (1) year after the making of such application, or

if the application is made before the return is filed, then

within one (1) year after the return is filed, but not afte

the expiration of the period prescribed for the assessment

of the tax in Section 203 shall not notify the executor o

administrator of the amount of the tax. The executor or

administrator, upon payment of the amount of which he is

notified, shall be discharged from personal liability for anydeficiency in the tax thereafter found to be due and shal

be entitled to a receipt or writing showing such discharge.

E.

PENALTIES FOR NON-COMPLIANCE

In the event of a violation of the law, in respect to the foregoing, as

well as of regulations promulgated thereunder, criminal penalties

and civil liabilities (surcharges, ad valorem penalties, and interest

are imposed (Secs. 93, 247, NIRC).

o If its a simple extension of time to pay, the add-on penalty

would only be the 20 % interest.

o Surcharge would only com

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