CHAPTER 4 - CO-OWNERSHIP, ESTATES

AND TRUSTS

CO-OWNERSHIP

There is Co-ownership when two or more heirs or beneficiaries inherit an undivided

property from a decedent, or when a donor makes a gift of an undivided property
in favor of two or more donees. Inheritance is subject to "Estate Tax" while
Donation is subject to "Donor's Tax". Both taxes are not income taxes but
classified as "Transfer Taxes) which are discussed in Volume 2 (Transfer and
Business Taxation). Nonetheless, incomes from such properties are Subject to
income tax.

Co-owners are taxed individually on their distributive share in the income of the
co-ownership. Meaning, co-ownership itself is not taxable for the reason that the
activities of co-Ownership are generally limited to the preservation of the common
property and the collection of the income therefrom. Should the co-owners invest
the income in business for profit, they would constitute themselves into a
partnership and such shall be taxable as a corporation as discussed in Chapter 6
Income Tax of a Partnership.

INCOME TAX OF AN ESTATE

Income tax of an estate refers to the tax on income received by the estate during
the Period of administration or settlement. An estate is a mass or all the property,
rights, and obligations of a deceased person which are not extinguished by his
death, including those which nave accrued thereto since the opening of (succession.
For instance, the parcel of land worth P60, 000,000 in illustration 1, CASE B above
is the estate of Noy. The passage of his property to his heirs upon his death is
subject to Estate Tax (Refer to Volume 2 Business and Transfer Taxes).

The estate of a decedent may be settled judicially or extra judicially Judicial

settlement pertains to settlement of an estate in a court proceeding while in
extrajudicial settlement, the heirs or beneficiaries settle for themselves the
distribution of the estate or their inheritance.

Classification of Estates under settlement or administration

 Estate under judicial administration

Fiduciary/trustee (administrator/executor) files the ITR and pays the tax

due thereon.

 Estates not under judicial administration (i.e., extrajudicial settlement)

Heirs and/or beneficiaries file the ITR of the estate and pay the tax due
thereon.

Applicable tax

The taxable income of the estate is computed in the same manner an individual
taxpayer Consequently, the tax due is therefore computed as using the graduated
income tax rates for individuals under Section 24(A) the Tax Code (as amended
under RA 10963 otherwise known as the TRAIN Law). Likewise, an estate is
required to adopt the calendar year as its accounting period. Where prior to the
settlement of the estate, the executor or administrator sells property of a
decedent's estate for more than the appraised value place upon it at the
decedent' s death, the excess is income taxable to the estate. Where the heir
sells the property after the settlement, the heir is taxable individually on any
profit derived.

Deduction from estate's gross income

Deductions from the estate's gross Income are the same items of deductions
(business expenses) allowed tor individual taxpayers under Section 34 of the Tax
Code. However, in addition to the usual allowable business expenses, the amount of
income of the estate for the taxable year which is properly paid or credited)
during such year to any legatee, heir, or beneficiary should be deducted (also
known as special deduction) in the determination of the estate's taxable income.
However, such amount of income distributed shall be included in the determination
of the taxable income of the legatee/heir/beneficiary.
The formula in computing the taxable income of the estate is as follows:
Gross Income of the Estate   Pxxx
Less: Deductions    
         Business Expenses Pxxx  
        Special Deduction:
Distribution of estate income to the xxx
beneficiaries*
Taxable Income of the Estate   Pxxx
Tax Due [Graduated Tax Rate] Pxxx

Termination of al/Extrajudicial Settlement

After termination of judicial/extrajudicial settlement of the estate where the

heirs still do not divide the property, or industry with intention to divide the
profits between is created and the estate g themselves, an unregistered becomes
liable for the payment of corporate income tax.

TAXATION OF TRUSTs

Trust is a right on property, real or personal, held by one party for the benefit of
another. It may be arranged inter-vivos or created by will under which title to a
property 1S passed to another for conservation or investment with the income
therefrom and ultimately the corpus (principal) to be distributed in accordance
With the directions of the creator as expressed in the governing instrument.

Trust agreement allows individuals to create sustained benefits for an individual or

entity> For instance, a parent may place a sum of money property or other types of
financial assets such as equity and debt instruments in the hands of a trustee for
the benefit of an incapacitated or minor child.

PARTIES to a TRUST:

 Trustor- Person who establishes a trust.

  Trustee- One in whom confidence is reposed as regards property for the
benefit of another person.
 Beneficiary Person for whose benefit trust is created.
 Fiduciary- any person or corporation that holds in trust an estate of another
person or persons. A fiduciary may exist only if a legal trust is created.

Taxability of Income of Trusts

The income of a trust may be taxable to the trustee, beneficiary or grantor, as the
case may be.

Taxable to the "Trustee" if:

The income of the trust is taxable to the "trustee" if the income is to be

accumulated or held for future distribution, whether ordinary income or gain
from sale of assets included in the corpus of the trust. The imposition of
the tax is not affected by the fact that the ultimate beneficiary may be a
person exempt from tax Likewise, the income of a trust administered in a
foreign country is taxable to the trustee

Taxable to the "Grantor/Trustor” if:

 Under the term of the trust, the title to any par o the corpus principal the
trust may be revested to the grantor (Revocable True Tne income of the
corpus or principal that may be revested to grant shall be taxable to the
grantor shall be taxable to the grantor.
 The income of the trust may be held or distributed for the benefit of the
grantor.
 Under the term of the trust, the income of the trust shall be applied for
the benefit of the grantor.

Taxable to the Beneficiaries

The income of the trust is taxable to the beneficiaries if the income is to be

distributed to the beneficiaries. In such a case, the beneficiaries include in their
return their distributive share in the net income of the trust. The distribution of
the year's income to an heir or beneficiary is a special item of deduction for the
trust.

Computation of Taxable Income

The principles applied in computing the taxable income of an estate, as previously

discussed, is also applicable. in the determination of the taxable income of a trust.
Hence, the Trust's taxable income is likewise computed in the same manner as an
individual taxpayer, except that the basic personal exemption allowed is limited
only to P20,000 (Section 62- NIRC The tax due is also based on the graduated
rates provided under Section 24(A) of the Tax Code as shown in Table 2-2 of
Chapter 2. Moreover, calendar period shall be used as accounting period for tax
purposes. A trust is required to adopt the calendar year as its accounting period.

Gross Income of the Estate   Pxxx

Less: Deductions    
         Business Expenses Pxxx  
        Special Deduction:
Distribution of estate income to the xxx
beneficiaries*
Taxable Income of the Estate   Pxxx
Tax Due [Graduated Tax Rate] Pxxx

Classification of Trust

1: Ordinary Trust- the income and corpus of the trust do not revert to the grantor.
The trust income is accumulated and held for distribution to the beneficiaries.
Under the Tax Code, ordinary trust is any of the following trusts:

 A trust where the income is accumulated or held for future distribution

under the terms of a will trust.
  A trust where the income is to be distributed currently by the fiduciary to
the beneficiaries.
 A trust where the income is accumulated for the benefit of unborn or
unascertained person or persons with contingent interest.
 A trust where the income collected by a guardian of a infant is held or
distributed as the court may direct; and
 A trust where the income, is at the discretion of fiduciary, may be either
distributed to the beneficiaries or accumulated

2. Revocable Trust (Section 63-NIRC)-a trust where at any time, the power to
revest in the grantor, title to any part of the corpus of the vested:

 In the grantor either conjunction with any person not having d Substantial
adverse interest in disposition of such part of the corpus of the income
therefrom; or
 In any person not having a substantial adverse in interest in the disposition
of such part of the corpus or the income therefrom.
1. Employees' Trust- income tax shall not apply to employees trust which part
of pension, stock bonus, or pro-snaring plan of an employer for the (benefit
of some or all of his employees [Section 6O (B)-NIRC]. The income of an
employee’s trust is likewise exempt from the payment of final taxes as well
as income derived from the Sale of real property whose funds are sourced
from the employee’s trust fund.

Requisites or Conditions for Exemption of Employee's Trust

 The employee's trust must form part of a pension, stock bonus, or profit-
sharing plan of an employer for the benefit of some or all of his employees
 Contributions are made to the trust by such employer, or employees, or
both;
 The contributions are made for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan;
 Under the trust instrument it is impossible at any time prior to the
satisfaction of all liabilities with respect to employees under the trust, for
 any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive
benefit of his employees.

Consolidated Income Tax Returns (Two or more trusts)

Where two or more trusts are created by the same trustor or grantor and the
beneficiary is the same person, the following rules shall apply:

The taxable income of all the trusts shall be consolidated and the tax computed on
such consolidated income. The tax computed on the consolidated income shall be
apportioned to the different trusts) such that each trust shall have a share in the
income tax on consolidated income.

The format of computation follows (Tax Apportionment):

Taxable income of trusts

Tax Apportioned to a Trust Consolidated Income Tax
Taxable income of all trusts

1. Such proportion of said tax shall be assessed and collected from each
trustee which the taxable income of the trust administered by him bears to
the consolidated income of the several trusts, Each trust shall pay an income
tax still due or payable computed as followS:
Income Tax apportioned to a trust Pxxx
Less: Income tax already paid (xxx)
Income tax payable Pxxx

Filing of Income Tax Returns

The following persons acting in any fiduciary capacity shall file come tax return for
an estate or trust (Section 65-NIRC):

 Guardians
 Trustees
  Executors/administrators
 Receivers
 Conservators
 All other persons or corporations acting in any fiduciary capacity

In case of two or more joint fiduciaries,) return filed by one of them shall be a
sufficient compliance with the requirements of the Tax Code.

 The return may be filed in

 Authorized agent banks;
 Revenue District Officer
 Collection agent;
 Duly authorized city or municipal Treasurer in which the taxpayer has his
legal residence or principal place of business.