Chapter 8 Net Estate & Estate Tax: Absolute Community of Property

SYSTEM OF ABSOLUTE COMMUNITY

In case the future spouses agree in the marriage settlements that the system of absolute community
shall govern their property relations during marriage, there are provisions in the Family Code that shall
apply.

Net Taxable Estate

The net estate subject to tax or net taxable estate is the basis for the computation of estate tax. Pro-
forma computataion (pre-TRAIN) is shown below:

Exclusive Community Total

Community Properties
Family Home ₱xxx
Real Properties Xxx ₱xxx
Exclusive Properties ₱xxx Xxx
Gross Estate ₱xxx ₱xxx ₱xxx

Less: Deductions
Ordinary Deductions
Community Deductions
Funeral Expenses xxx xxx
Other Deductions xxx xxx
Total Community Deductions xxx xxx
Net Community Estate xxx

Exclusive Deductions xxx

Special Deductions
Family Deduction xxx
Standard Deduction xxx
Medical Expenses xxx
Total Deductions xxx
Net Estate xxx
Less: ½ Share of Surviving Spouse
Gross Community Estate xxx
Community Deductions xxx
Net Conmmunity Estate xxx
Net Community Estate/2 xxx
Net Taxable Estate ₱xxx

GROSS ESTATE

The gross estate of a married decedent under the system of absolute community during the marriage
shall be composed of the following:

1. Exclusive property of the decedent; and

 2. Absolute community (communal) property.

Exclusive Property of Each Spouse

The following shall be the exclusive property of each spouse:

1. Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well
as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor
that they shall form part of the communal property;
2. Property for personal and exclusive use of either spouse; however, jewelry shall form part of the
communal property; and
3. Property acquired before the marriage by either spouse who has legitimate descendants by a
former marriage, and the fruits as well as the income, if any, of such property.

Communal Property

Unless otherwise provided in the Family Code or in the marriage settlements, the communal property
shall consist of all the property owned by the spouses at the time of the celebration of the marriage or
acquired thereafter.

Property acquired during the marriage is presumed to belong to the community, unless it is provided
that it is one of those excluded therefrom.

Proceeds of Life Insurance

Proceeds of life insurance policy payable to the insured’s estate may be communal or exclusive in
character. The time when the policy was taken and the source of premium payment shall determine
whether the proceeds are to form part of the gross estate of the decedent spouse. The same rules
discussed in Chapter 7 apply here.

1. If policy was taken before marriage –

a. And premiums were fully paid by the decedent spouse, proceeds are the exclusive
property of the decedent spouse.
b. And premiums were fully paid with the exclusive property of the surviving spouse,
proceeds are the exclusive property of the surviving spouse.
c. But premiums were paid partly with exclusive and partly with conjugal funds during the
marriage; proceeds shall likewise be proportionately exclusive and conjugal.
2. If policy was taken during marriage, proceeds are conjugal because it is presumed that property
acquired uring the marriage is conjugal. In this case, the one-half share of teh surviving spouse
in the proceeds is excluded in the taxable gross estate.

Claims Against Insolvent Person

The inclusion of claims against insolvent person in the gross estate of the decedent spouse as either
exclusive or communal property will depend on the nature of the claim – whether it is for an exclusive
or for a communal property.

DEDUCTIONS FROM GROSS ESTATE

1. Expenses, Losses, Indebtedness and Taxes

 a. Funeral expenses including the construction of a tombstone or mausoleum shall be
chargeable to the communal partnership property.
b. Judicial expenses of testamentary/intestate proceedings
c. Claims against the estate
d. Claims of the deceased against insolvent persons
e. Unpaid mortgages/indebtedness
f. Unpaid taxes
g. Casualty losses
2. Property Previously Taxes or Vanishing Deduction
3. Transfers for Public Use
4. Family Home. The family home must be part of the communal partnership property or of the
exclusive property of either spouse with the other spouse’s consent.
5. Standard deduction equivalent to one million pesos (₱1,000,000).
6. Medical expenses.
7. Amount recieved by heirs under Republic Act 4917
8. One-hal net share of the surviving spouse in the communal partnership property. Gross
communal estate less charges agains such conjugal estate equals net conjugal estate. Net
conjugal estate divide by two (or multiply by 1/2) equals net share of the surviving spouse.

The concepts of deductions discussed in Chapter 4 also apply to married individuals. Deductions must
appropriately be classified as either chargeable against exclusive or communal property. Formats in the
following discussion (on family home, standard deduction and vanishing deduction) shown in Chapter 7
(conjugal partnership of gains) also apply to Chapter 8 (absolute community of property).

Family Home, Standard Deduction and Vanishing Deduction

The following presentations of Family Home (FH) and Standard Deduction (SD) in deductions from the
gross estate are consistent with Rev. Regs. 2-2003. The regulations classify deductions into two, ordinary
and special. FH and SD fall under special deductions.

Refer to Chapter 7 for the RR 12-18, Section 8, illustration of the proper presentation of Family Home
deduction, Standard Deduction, and other allowable deductions from the gross estate of a married
decedent.

Illustration (pre-TRAIN): Husband and wife are both Filipino citizens. The husband’s death was suceeded
by the wife’s death. Both deaths occured in the same year. Three children were lef. The family home
with a fair market value of ₱2 million is a communal property.

Estate of Husband

Exclusive Community Total

Community Properties
Real Properties 6,000,000 6,000,000
Personal Properties 4,000,000 4,000,000
Family Home 2,000,000 2,000,000
Exclusive Properties
Real Properties 4,000,000 4,000,000
Personal Properties 1,000,000 1,000,000
 Gross Estate 5,000,000 12,000,000 17,000,000

Less: Deductions
Ordinary Deductions – Community 4,000,000 4,000,000
Net Community Estate 8,000,000

Special Deductions
Family Home 1,000,000
Standard Deduction 1,000,000
Total Deductions 6,000,000

Net Estate 11,000,000

Less: ½ Share of Surviving Spouse

Gross Community Estate 12,000,000
Community Deductions 4,000,000
Net Community Estate 8,000,000
(8,000,000/2) 4,000,000
Net Taxable Estate 7,000,000

Estate of Wife

Inherited Portion Share from Total

from Husband Community Estate
Community Real Properties 750,000 3,000,000 3,750,000
Community Personal Properties 500,000 2,000,000 2,500,000
Family Home 250,000 1,000,000 1,250,000
Exclusive Properties 1,000,000 1,000,000
Paraphernal/Exclusive Personal 250,000 250,000
Properties
Gross Estate 2,750,000 6,000,000 8,750,000

Less: Deductions
Ordinary Deductions
Vanishing Deduction (Sch.) 1,964,286 1,964,286
Other Deductions 500,000 2,000,000 2,500,000

Special Deductions
Family Home 1,000,000 1,000,000
Standard Deduction 1,000,000 1,000,000
Total Deductions 2,464,286 4,000,000 6,464,286
Net Taxable Estate 285,714 2,000,000 2,285,714

NET TAXABLE ESTATE AND ESTATE TAX

Mr. Paterno, a citizen and resident of the Philippines, died on Nov. 1, 2015. He was married and the
property relationship during the marriage was the absolute community of property. He left the following
property, with their fair market values, and obligations and charges thereon:

Agricultural land 1,100,000

House and lot acquired by inheritance 4 ¼ years 500,000
ago even before the marriage; with a fair market
value of ₱420,000 and a mortgage of ₱120,000.
Mr. Paterno paid ₱20,000 before he died. It was
used as family home.
Jewelry of Mrs. Paterno, acquired during the 50,000
marriage with the exclusive money of Mrs.
Paterno
Personal effects acquired during the marriage,
with income during the marriage:
For use of Mr. Paterno 60,000
For use of Mrs. Paterno 70,000
Cash on hand and in banks, source of income 1,300,000
cannot be identified
Cash in bank:
From a sale at a loss of exclusive property 1,500,000
Received as gift six year ago and before the
marriage (current account) 40,000
Other property:
Owned before the marriage 90,000
Acquired during the marriage 20,000

Total funeral exoenses of ₱300,000. Paid from 58,000

the estate.
Judicial expenses 120,000
Unpaid mortgage (already on the property at the
time acquired):
On agricultural land 20,000
On house and lot 100,000
Other obligations 20,000
Legacy to the Philippine Government from 10,000
current account

Exclusive Community Total

Community Properties
Agricultural Land 1,100,000 1,100,000
House and Lot 500,000 500,000
Jewelry 50,000 50,000
Cash (income) from Unidentified 1,300,000 1,300,000
Sources
Cash received as Gift 40,000 40,000
Property Owned before Marriage 90,000 90,000
 Property Acquired during Marriage 20,000 20,000
Exclusive Properties
Cash Sale of Exclusive Property 1,500,000 1,500,000
Clothes 60,000 60,000
Gross Estate 1,560,000 3,100,000 4,660,000

Less: Deductions
Ordinary Deductions
Community Deductions
Funeral Expenses 58,000 58,000
Judicial Expenses 120,000 120,000
Unpaid Mortgage – Agricultural 20,000 20,000
Land
Unpaid Mortgage – House and Lot 100,000 100,000
Other Obligations 20,000 20,000
Transfer for Public Purposes 10,000 10,000
Vanishing Deduction (Sch.) 74,369 74,369
Total Community Deductions 402,369 402,369
Net Community Estate 2,697,631

Special Deductions
Family Home 200,000
Standard Deductions 1,000,000
Total Deductions 1,602,369

Net Estate 3,057,631

Less: ½ Share of Surviving Spouse
Gross Community Estate 3,100,000
Community Deductions 402,369
Net Community Estate 2,697,631
(₱2,697,631/2) 1,348,816
Net Taxable Estate 1,708,816

Estate Tax:
On ₱500,000 ₱15,000
1,208,815 at 8% 96,705
₱1,708,815 ₱111,705

Schedule of Vanishing Deduction:

Value taken, Property Inherited 420,000

Less: Mortgage paid 20,000
Initial basis 400,000
Less: (400,000/4,660,000**) x 328,000*** 28,155
Final Basis 371,845
Multiply by rate 20%
Vanishing Deduction 74,369
*Family home: 500,000 (fair value) – 100,000 (unpaid mortgage) = 400,000

400,000 x ½ = 200,000

**Gross Estate

***Funeral expenses, judicial expenses, unpaid mortgage – agricultural land, house & lot, other
obligations, transfer for public purpose