Chapter 13A

ESTATE TAX:
GROSS ESTATE
Module 3
Prepared by: Mrs. Nelia I. Tomas, CPA, LPT

Business and Transfer Taxation, Laws, Principles and Application. 2019 Edition. Banggawan, Rex B.
Learning Objectives
After completing the lesson, the students will be able to
 Understand the concept of gross estate
 Apply the procedures in determining gross estate
 Comprehend the list of exempt transfers
 Identify the list of taxable transfers
 Analyze the treatment of mortis causa transfers made for insufficient consideration
 Apply the rules of valuation of gross estate
 GROSS ESTATE
 It consists of all properties of the decedent, tangible or intangible, real or personal,
and wherever situated at the point of death.

Summary of rules
Residents or Citizens NRA without reciprocity NRA with reciprocity
Property Location Within Abroad Within Outside Within Outside
Real properties / / / x / x
Personal properties
- Tangible / / / x / x
- Intangible / / / x x x
PROCEDURES IN ESTABLISHING GROSS ESTATE
1. Inventory count of existing properties at the point of death
2. Adjustments for exempt transfers and taxable transfers

Inventory count of existing properties at the point of death

1. An inventory of the properties of decedent and their fair values at the point of death
shall first be established.
2. The list of properties existing at the point of death is known, the list is simply drawn
directly.
3. If the inventory is prepared as of a later date after the decedent's death, the inventory
must be worked back to establish the list of properties present at the point of death.
Illustration 1
A decedent died on June 30, 2019. An inventory was not immediately prepared because
of the funeral of the decedent. An inventory count of his properties was drawn only on
July 15, 2019.

On July 15, there were properties which had a total fair value of P5,000,000. P100,000 of
this represents income earned after death while P400,000 represents income earned
before death.

A total of P500,000 was paid for funeral expenses and judicial expenses of the estate. A
total of P200,000 obligations of the decedent was paid since his death.

Requirement: How much is the gross estate at the date of death?

Illustration 1 - Solution
The gross estate shall be recomputed as:

Properties as of July 15, 2019 P 5,000,000

Less: Increase in properties since death 100,000
Add: Decrease in properties since death (P500K + P200K) 700,000
Properties existing at the date of death (Gross Estate) P 5,600,000
THE GROSS ESTATE FORMULA:
Inventory of properties at the point of death P xxx,xxx
Less: Exempt transfers
Properties not owned P xxx,xxx
Properties owned but excluded by law xxx,xxx xxx,xxx
Inventory of taxable present properties P xxx,xxx
Add: Taxable transfers xxx,xxx
GROSS ESTATE P xxx,xxx

EXEMPT TRANSFERS
1. Transfers of properties not owned by the decedent
2. Transfers legally excluded - referred to as exclusion in gross estate
Transfer of properties not owned by the decedent
1. Merger of the usufruct in the owner of the naked title
2. The transmission or delivery of the inheritance or legacy by fiduciary heir or legatee to
the fideicommissary
3. The transmission from the first heir, legatee, or donee in favor of another beneficiary, in
accordance with the desire of the predecessor
4. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate,
executor or administrator
5. Properties held in trust by the decedent
6. Separate properties of the surviving spouse of the decedent
7. Transfer by way of bona fide sales
1. Merger of the usufruct in the owner of the naked title
Illustration:
Mr. A died in June 2011. In his will, he devised an agricultural land to B who shall use the
property over 10 years and thereafter, to C. Subsequently, B died resulting in the
transmission of the property to C.

Predecessor Current decedent

A B C
(Usufructuary) (Owner of the naked title)
2. The transmission or delivery of the inheritance or legacy by fiduciary heir or
legatee to the fideicommissary
Illustration:
Mr. A died leaving an inheritance consisting of several real estates to his favorite grandson,
C from his favorite son, B. Because C was a minor, Mr. A appointed B, as fiduciary of the
inheritance. Before transferring the property to C, B died.

Predecessor Current decedent

A B C
(Fiduciary heir) (Fideicomissary)
3. The transmission from the first heir, legatee, or donee in favor of another
beneficiary, in accordance with the desire of the predecessor
Illustration:
In his will, Mr. A devised a piece of land to B as the first heir and thereafter to C as the
second heir. B subsequently died transmitting the property to C accordance with Mr. A's will.

Predecessor Current decedent

A B C
(1st heir) (2nd heir)
4. Proceeds of irrevocable life insurance policy payable to beneficiary other than the
estate, executor or administrator

 The proceeds of life insurance policies which are irrevocably designate by the decedent to the
beneficiary are no longer owned by the decedent at the point of his/her death. They are owned by the
beneficiary designated by the decedent. Hence, these shall not be included in gross estate.

 The proceeds of life insurance policies which are revocably designated by the decedent to any
beneficiary are owned by the decedent at the point of his/her death. Hence, the proceeds are
included in gross estate.

 If the decedent named a beneficiary without indicating whether the designation is revocable or
irrevocable, the designation is presumed to be revocable. However, if the decedent did not replace
the beneficiary until his death, the designation shall be deemed irrevocable exempt from estate tax.

 If the beneficiary designated is the estate, executor or administrator, the proceeds of life insurance is
included in grass estate regardless of the designation of the beneficiary because these beneficiaries
are considered extensions of the interest of the decedent.
 Illustration 1
Mr. Tubod died. His heirs collected the following proceeds of life insurance policies:

AXA, revocably designated to wife P 800,000

Manulife, irrevocably designated Mr. to daughter 600,000
Sunlife, revocably designated to Tubod’s estate 700,000
PhilAm, irrevocably designated to Mr. Tubod’s executor 400,000

Requirement: How much proceeds of insurance policies should be included in the gross
estate?
 Illustration 1 - Solution
The proceeds of insurance policies to be included in gross estate shall be:

AXA, revocably designated to wife P 800,000

Sunlife, revocably designated to Mr. Tubod’s estate 700,000
PhilAm, irrevocably designated to Mr. Tubod’s executor 400,000
Total P1,900,000
5. Properties held in trust by the decedent

 Properties held in trust by the decedent at the point of his death are not owned by him.
These are excluded in gross estate because these will not form part of the decedent's
donation mortis causa to the heirs.
 Illustration 2
The following properties were identified upon the death of Mr. Ubaldo:
Car, registered in the name of his brother P 800,000
Merchandise, consigned to Mr. Ubaldo 200,000
House and lot 2,400,000
Motorcycle, borrowed from a friend 150,000
Boarding house, held as trustee 4,000,000
Taxicab 1,000,000
Taxicab franchise 600,000
Clothes, books, equipment, and other personal belongings 400,000

Requirement: How much is the gross estate of the decedent?

 Illustration 2 - Solution
The gross estate of the decedent shall consist of the following:
House and lot P 2,400,000
Taxicab 1,000,000
Taxicab franchise 600,000
Clothes, books, equipment and other personal belongings 400,000
Total P 4,400,000
6. Separate properties of the surviving spouse of the decedent
 The separate or exclusive properties of the husband are referred to as “husband's
capital” while that of the wife is referred to as “wife’s paraphernal”.
 The wife's paraphernal shall not be included in the gross estate of the husband upon his
death since these will not form part of his donation mortis causa.
 Similarly, the husband's capital shall not be included in the gross estate of the wife upon
her death on the same basis.
 The gross estate of a married decedent includes the separate properties of the decedent
and their common properties with the surviving spouse.

7. Transfer by way of bona fide sales

 These are onerous transactions rather than gratuitous transactions; hence, they are not
subject to estate tax.
 Ownership over properties sold normally passes on to the buyer immediately
at the point of sale.
Legal Exclusions
The following are the list of properties owned by the decedent at the point of death which
naturally forms part of the hereditary estate but are not subjected to estate tax by law:
1. Proceeds of group insurance taken out by a company for its employees
2. Proceed of GSIS policy or benefits from GSIS
3. Accruals from SSS
4. United States Veterans Administration (USVA) benefits - RA 136
5. War damage payments

Note:
 Properties acquired using GSIS benefits, SSS accruals, USVA benefits, proceeds of
group insurance and war damage payments are still exempt so long as the heirs or
administrators can prove that the properties were acquired using these exempt properties.
 Legal Exclusions
6. All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of net income of which inures to the benefit of any individual; provided,
however, that not more than 30% of the said bequest, devises, legacies or transfers shall
be used by such institutions for administration purposes.
Note:
 This applies if the donee institution uses not more 30% of the bequest, device, or legacies for
administration purposes and its income does not inure to the benefit of any private individual.
 The 30% conditional exclusion is deemed satisfied if the donee is an accredited non-profit donee
institution. If the donee is a qualified donee institution, the same is excluded in gross estate.
 Transfers to these institutions are initially included in the inventory taxable properties, but are
removed from the list if the donee is verified as a qualified donee institution.
 If the transfer qualifies for exclusion, the same is not reflected in both gross estate and deduction.
 Bequests, devises or legacies which are restricted by the decedent for administrative expenses
of the donee institution (whether accredited or non-accredited) shall be included in gross estate.
Legal Exclusions
7. Acquisitions and/or transfers expressly declared as non-taxable by law
8. Bank deposits withdrawn from the decedent account during the settlement of the estate

Note:
 The TRAIN law allows unlimited withdrawal from the decedent’s bank account but
requires bank with knowledge of the decedent’s death to withhold 6% final withholding
tax upon the withdrawal if made within one year from the decedent’s death (RR8-2019).
 The 6% withholding tax is a final tax and is non-creditable. As such, amounts subjected to
the 6% final tax must be excluded in the gross estate.
 However, if such withdrawal is not subjected to the 6% final tax, the amount of withdrawal
must be included in the gross state.
TAXABLE TRANSFERS
 These are referred to as inclusions in gross estate.

Types of Taxable Transfers

1. Transfer in contemplation of death
2. Revocable transfers, including conditional transfers
3. Property passing under the general power of appointment

Transfer in contemplation of death

 These are donations made by the decedent during his lifetime motivated by the thought
of his death.
 These transfers are treated by the tax law as donation mortis causa subject to estate tax
not, to donors tax.
Revocable transfers, including conditional transfers
 These involve transfers of possession over property during the lifetime of the decedent,
but not transfer of ownership over said property. At the point of death, the decedent owns
the property; hence, it must be included as part of his gross estate since the same is part
of his donation mortis causa.
 In revocable transfers, ownership transfers only when the transferor waives the right to
revoke the transfer. If the transferor dies without waiving his right of revocation, he owns
the property at the point of his death. Hence, it should be included in his gross estate.
 If properties are transferred by the decedent prior to his death but retains the possession
or enjoyment of, or right to income from, the property, the same shall be included in gross
estate to the extent of the decedent's interest therein.

Property passing under the general power of appointment

 Properties subject to a general power of appointment by the decedent shall be included
in the gross estate of the decedent. The presence of the general power enables the
holder of such power to do with the property anything which he could do as if the
property were his own.
COMPOSITION OF GROSS ESTATE
1. Properties, movable or immovable, tangible or intangible
2. Decedent’s interest on properties
3. Proceeds of life insurance:
 Designated as revocable to any heir
 Designated to estate, administrator or executor as beneficiary
4. Taxable transfers
PRESENTATION OF GROSS ESTATE IN THE ESTATE TAX RETURN
In reporting gross estate under BIR Form 1801, the composition of the gross estate shall be
classified as follows:
1. Real properties - all immovable properties of the decedent, excluding family home
2. Family home
3. Personal properties – all movable properties of the decedent, except rights or interests in
any business
4. Business interests
VALUATION OF THE GROSS ESTATE
 Properties subject to estate tax shall be appraised at their fair value at the point of death.
 Fair value refers to the amount at which two willing independent buyers and sellers could
transact an exchange.

Valuation rules
1. The fair value of the property as of the time of death shall be the value to include in gross
estate.
2. Fair value rules set by law or revenue regulations must be followed.
3. In default of such fair value rules, reference may be made to fair value rules under
generally accepted accounting principles.
4. Encumbrances on the property or decrease in value thereof after death shall be ignored.
Real properties
Under the NIRC the appraisal value of real property shall be whichever is higher of:
a. The value as determined by the Commissioner of Internal Revenue (zonal value), or
b. The value fixed by the Provincial or City Assessor

 If there is no zonal value, the taxable base shall be the fair market value that appears in
the latest tax declaration.
 The TRAIN law points to the fair value listed in the schedule of market value - not the
assessed value.
 If there is an improvement, the value of the improvement shall be the construction cost
per building permit or the fair value that appears in the latest tax declaration.
 Illustration 3
Mrs. Geogracia died leaving a house and lot as part of her estate. The property which
was encumbered by a P1,000,000 mortgage had the following fair values:

Lot House
Zonal value P 3,000,000
Fair value, per assessor 2,000,000 P 4,000,000
Assessed value 400,000 1,600,000
Appraisal value 2,500,000 4,500,000

Requirements: How much is the fair value of house and lot?

Answer:
Lot = P3,000,000
House = 4,000,000
Shares or stocks
The fair market value of stocks shall depend on whether the stocks are listed or unlisted in
the stock exchanges.
 Preferred shares are valued at par value.
 Unlisted common shares shall be valued at their book value.
For this purpose, RR12-2018 reinstated the financial statement method which ignores
appraisal surplus. The Adjusted Net Asset Method under RR6-2013 is no longer
followed.
 For shares which are listed in the stock exchange, RR12-2018 also reinstated the use of
arithmetic mean of highest and lowest quotation at a date nearest the date of death.
 Illustration 4
Mr. Yakal died leaving 1,000 preferred shares and 300,000 common stocks of MVC Company,
a non-listed company, in his estate. The equity section of MVC in the its latest quarterly
financial statements is as follows:
Preferred stocks, 10,000 shares @ P500 par P 5,000,000
Common shares, 10,000 shares@ P2 par 20,000,000
Share premium - common shares 4,000,000
Retained earnings 12,000,000
Revaluation surplus – PPE 2,000,000
Less: Treasury shares, 100,000 shares - 360,000
Total shareholder’s equity P 42,640,000

Requirement: How much is the total investment of Mr. Yakal?

 Illustration 4 - Solution
The book value per share of share shall be computed as:
Common shares, 10,000 shares@ P2 par P 20,000,000
Share premium - common shares 4,000,000
Retained earnings 12,000,000
Less: Treasury shares, 100,000 shares - 360,000
Residual net assets P 35,640,000
Divide by: Outstanding common shares
(10,000,000 - 100,000) 9,900,000
Book value per share P 3.60

Mr. Yakal’s shares shall be valued as follows in his gross estate:

Preferred stocks (1,000 shares @ P500) P 500,000
Ordinary shares (300,000 x 3.60) 1,080,000
Total investment P 1,580,000
Usufruct and annuities
 A decedent may transfer usufructuary right to income over property or right to receive
amounts of annuities to his/her heirs. The fair value of such usufruct or annuities must
be included in gross estate.
 To determine the value of the right to usufruct, use, or habitation, as well as that of
annuity there shall be taken into account the probable life of the beneficiary in
accordance with the latest basic standard mortality table, to be approved by the
Secretary of Finance, upon recommendation of the Insurance Commissioner.
 Illustration 5
Mr. Mairugin, 60 years old, sold his company under a condition that the acquirer shall pay his
35-year-old wife and their child P300,000 yearly support payment for 30 years. Mr. Mairugin
died after the fifth payment was made by the acquirer.

Requirement: Assuming that the appropriate discount rate is 12%, how much is the value of
the annuity that should be included in the gross estate of Mr. Mairugin?
 Illustration 5 - Solution
The annuity shall be included in the gross estate of Mr. Mairugin at the present value of the
25 remaining future payments to be received under the contract.

The present value of an annuity is mathematically computed as follows:

(1 −(1+𝑖)−𝑛
Value of annuity = x Annuity payments
𝑖
Where:
i = interest rate or discount rate per period = 12%
n = number of periods = 30years - 5 years = 25 years

(1 −(1+12%)−25
Value of annuity = x P 300,000
12%
= P 2,352,941.73
Other properties
 For properties which the law or revenue regulations has not fixed valuation rules,
valuation shall take into consideration fair value rules under generally accepted
accounting principles (GAAP).
 Additional Guidelines in Determining Fair Values
• For newly purchased property, the fair value may be its purchase price. If not newly
acquired, the fair value shall be its second-hand value.
• For pawned properties, the fair value may be reestablished by grossing-up the pawn
value by the loan-to-value ratio.
• For property fixed in monetary terms such as a loan or receivable, the fair value is
the amount fixed in the contract including accrued income thereto.
• For foreign currencies, the fair value shall be its peso value translated at the
prevailing exchange rate at the date of death.
 Illustration 6
At the point of death, Mr. X has a piece of jewelry which was pawned with Munting Pawnshop
for P90,000. Munting Pawnshop maintains a 60% loan-to-appraisal value.

Requirement: How much is the fair value of the pawned jewelry?

Solution:
Fair value = P90,000 / 60% = P150,000

The P90,000 loan shall not be offset with the value of the jewelry but should be presented as
an item of deduction from the gross income.
Taxable transfers
 Taxable transfers made without consideration are included in gross estate at the fair
value of the transferred property at the date of death.
 Taxable transfers made for a consideration are valued as; Fair value at the date of death
less consideration paid at the date of transfer.
 Illustration 7
Before her death, Mrs. Power the following mortis causa transfers during her lifetime:

At the date of transfer Fair value

Fair value Consideration at death
To Alexander P 300,000 P 0 P 200,000
To Bee Jay 200,000 195,000 300,000
To Cedric 100,000 40,000 120,000
To Donnie 150,000 80,000 70,000

Requirement: How much is the taxable transfers to be included in gross estate?

 Illustration 7 - Solution
Fair value at death Consideration
To Alexander P 200,000 P 0 P 200,000
To Cedric 120,000 40,000 80,000
Total amount to be included in the gross estate P 280,000

 The transfer to Bee Jay is for adequate consideration. Hence, a bona fide sales subject
to income tax at the date of sale.
 The transfer to Donnie is ignored because it is a transfer that decreased in fair value
below the consideration.
Questions to Ponder:
1. What is the gross estate? Distinguish the extent of gross estate of each type of
decedent taxpayer.
2. Discuss and illustrate the computational procedures of gross estate.
3. Enumerate the list of property transfers which are not owned by the decedent.
4. Enumerate the list of property transfers which are properly includible in gross estate
but which are excluded by law.
5. Enumerate the list of taxable transfers.
6. Discuss the treatment of mortis causa transfer made for the insufficient consideration.
7. Discuss the valuation rules for real property, stocks, usufruct and annuity and other
properties.
Required Readings
1. Chapters 13A, pp.460 – 480:

Banggawan, Rex B. 2019. BUSINESS AND TRANSFER TAXATION LAWS, PRINCIPLES,

AND APPLICATIONS. Real Excellence Publishing., Pasay Default Barangay, Pasay City,
Philippines.

2. https://www.bir.gov.ph/index.php/tax-information/estate-tax.html
Learning Activities
1. Chapters 13A, pp.481 – 500:

Banggawan, Rex B. 2019. BUSINESS AND TRANSFER TAXATION LAWS, PRINCIPLES,

AND APPLICATIONS. Real Excellence Publishing., Pasay Default Barangay, Pasay City,
Philippines.
 Appendix: Course Materials Evaluation
Adopted: BEST PRACTICES AND SAMPLE QUESTIONS FOR COURSE EVALUATION SURVEYS. Retrieved from
https://assessment.provost.wisc.edu/best-practices-and-sample-questions-for-courseevaluation-surveys//.