CHAPTER FOUR

Introduction to Transfer Taxes

TRANSFER TAXES
Transfer taxes are excise taxes imposed upon the privilege of gratuitously transmitting one’s property to
another. There are two transfer taxes in the National Internal Revenue Code, namely:
 Estate tax – a tax imposed upon the right of transmitting property at the time of death and the
privilege of controlling the disposition of one’sproperty to take effect upon death.
 Donor’s tax – a tax on the privilege of transmitting one’s property to another during his
lifetime without adequate and full valuable consideration.

 Reasons Justifying the Imposition of Estate Tax

 Benefit-received theory – considers the service rendered by thegovernment in the distribution
of the estate of the decedent, either by law or in accordance with his wishes. For the performance
of these services and other benefits that accrue to the estate and the heirs, the Statecollects the
tax.
 Privilege theory/State partnership theory – inheritance is not a right buta privilege granted by
the state, and large estates have been acquired only with the protection of the State.
Consequently, the State as a passive and silent partner in the accumulation of property has the
right to collect the share which is properly due to it.
 Ability to pay theory – receipt of inheritance which is in the nature of an unearned wealth or
windfall, place assets into the hands of the heirs and beneficiaries hereby creating an ability to
pay the tax and thus contributes to government income.
 Redistribution of wealth theory – the receipt of inheritance is a contributing factor to the
inequalities in wealth and incomes. The imposition of death tax reduces the property received by
the successor, thus helping bring about a more equitable distribution of wealth in society.

SUCCESSION
Succession is a mode of acquisition by virtue of which the property, rights and obligations to the extent
of the value of the inheritance, of a person are transmitted through his death to another or others either
by his will or by operation of law. (Art. 774, Civil Code of the Philippines)

Elements of succession
 Decedent – a person whose property is transmitted through succession, whether or not he
left a will. If he left a will, he is also called the testator.
 Heir – a person called to the succession either by the provision of a will or by operation of
law.
 Estate – refers to all the property, rights and obligations of a person whichare not
extinguished by his death.

The rights to the succession are transmitted from the moment of the death ofthe decedent.

Things transmissible in succession

1. Properties;
2. Rights;
3. Obligations, to the extent of the value of the inheritance.

Illustration 1
Mr. Rizal died leaving a piece of land to his son Joe. Is this a succession to property?
Answer: Yes. Decedent (Mr. Rizal), Heir (Joe), and Estate (Land)
 Illustration 2
Mr. Bonifacio died with a right to repurchase real property sold by him. Mr. Bonifacio had a
child Andy who will inherit his entire estate. On the property,is this a succession to a right?
Answer: Yes

Illustration 3
Mr. Luna died leaving properties with a value of ₱250,000 and obligation of ₱100,000.
He had a son John, to whom he left everything. What and howmuch did John inherited
from his father?
Answer: Properties ₱250,000 and Obligation ₱100,000

Illustration 4
Mr. Amorsolo died leaving properties with a value of ₱250,000 and obligationof ₱350,000.
He had a son Fernan, to whom he left everything that he owned.What and how much did
Fernan inherited from his father?
Answer: Properties ₱250,000 and Obligation ₱250,000

Kinds of succession
1. Testamentary – a succession which results from the designation of anheir, made in a
will executed in the form prescribed by law.
2. Legal or intestate – a transmission of properties where there is no will orif there is a will,
the same is void or nobody succeeds in the will.
3. Mixed – a transmission of properties which is effected party by will andparty by
operation of law.

Kinds of successors in a testamentary succession

1. Devisee – a person to whom gifts of real property are given by virtue of awill.
2. Legatee – a person to whom gifts of personal property are given by virtueof a will.

Devise – the gift of real property by will.

Legacy – a gift of personal property or money to a beneficiary (legatee) of a will

Will is an act whereby a person is permitted, with the formalities prescribedby law, to
control to a certain degree the disposition of this estate, to take effect after his death.

Codicil is supplement or addition to a will, made after the execution of a will and annexed to
be taken as a part thereof, by which disposition made in the original will is explained, added
to, or altered.

Kinds of last will and testament

1. Holographic will – a will entirely written, dated, and signed by the hand ofthe testator
himself. It is subject to no other form, and may be made in or out of the Philippines, and
need not be witnessed.
2. Non-holographic will – a will that is created for the testator by a third party, usually his
lawyer, follows proper form, signed and dated in front of the required number of witnesses
and acknowledged by the presence of anotary public.
Probate of the last will and testament – special proceeding to establish the validity of a will.
Probate is mandatory, which means that no will passes eitherreal or personal property unless
it is proved and allowed in a proper court.

Revocation of will – the testator may revoke his last will and testament atany time before
he dies.
Persons authorized to manage the estate
1. Executor – the person named in a will to administer the estate.
2. Administrator – the person appointed by the court to administer theestate of someone who died
without a will.

Illustration 5
Mr. Marcos died with a last will and testament leaving all his properties to his daughter Irene,
and his son Bong, in equal shares. What kind of succession isthis?
Answer: Testamentary, there

Illustration 6
Mr. Quezon died without a last will and testament, leaving behind a son, hiswife and his
mother. What kind of succession is this?
Answer: Answer: Intestate, and under the law of intestate succession, the heirs are his son
and wife

Illustration 7
Mr. Osmeña died with a last will and testament. He was survived by his son and mother. In his
last will and testament, he gave one-half of his properties mentioned in the last will and
testament to his son, and one-half to hismother. After the last will and testament was executed,
he acquired additionalproperties. What kind of succession is this?
Answer: The succession to the properties mentioned in his last will and testament is
testamentary;
The succession to the properties acquired after the last will and testament was executed is
intestate.

Kinds of heirs
1. Compulsory or forced heir – a person to whom the law reserves a part of his
predecessor’s estate and who would inherit unless disinherited for serious grounds
mentioned in the last will and testament.
2. Voluntary heir – an heir who inherits because of a last will and testament,and who would
not have inherited without being mentioned in the last will and testament.

An heir called to an inheritance may accept or refuse the inheritance. Refusal of an

inheritance is called repudiation of the inheritance. The repudiation must be made in a
public or authentic document, or by petition to the court having jurisdiction over the
testamentary or intestate proceedings.

The following are compulsory or forced heirs:

1. Legitimate children and descendants, with respect to their legitimate parents or ascendants;

2. In default of the foregoing, legitimate parents or ascendants, with respect to their

legitimate children and descendants;
3. Widow or widower; and
4. Illegitimate children

Primary compulsory heirs” are preferred over secondary heirs, who receive only in default of
the primary. “Concurring compulsory heirs” generally succeed as compulsory heirs, together
with primary or secondary heirs.

Legitime is the portion of the decedent's estate which the law reserves tocompulsory heirs.

Free portion is the portion of the decedent's estate in excess of the legitimes.The free portion
may be given to anybody.
 The rules on legitimes are not substitutes for testamentary dispositions. Violations of the rules
on legitimes do not make the last will and testament void. The rules on legitimes are tests only
on the testamentary dispositions. If the testamentary dispositions do not impair the legitimes,
such dispositions must be followed. On the other hand, if the testamentary dispositions impair
the legitimes, the dispositions must be modified in such a manner that any compulsory
heir not mentioned in the will, or receiving by provisions of the willlesser than his or her
legitime, must be paid his or her legitime in full.

Illustration 8
Mr. Mabini died with a legitimate son, Paulo. In his last will and testament, he left all his
properties worth ₱800,000 to his mother, without leaving anything to Paulo. What kind of heir
is Paulo? Is he entitled to a legitime? If yes, how much is his share?
Answer: Answer: Paulo is a primary compulsory heir. Yes, he is entitled to a legitime of
one-half (1/2) of the estate.
Hereditary estate 800,000
Less: Legitime of Paulo (800,000 x 1⁄2) (400,000)
Legitime of parent/ascendant (800,000 x 1⁄4) 200,000
Free portion 200,000

Disinheritance of children and descendants

The following shall be sufficient causes for the disinheritance of children anddescendants,
legitimate as well as illegitimate: (Art. 919, Civil Code of the Philippines)
1. When a child or descendant has been found guilty of an attempt against the life of the
testator, his or her spouse, descendants, or ascendants;
2. When a child or descendant has accused the testator of a crime for which the law prescribes
imprisonment for six years or more, if the accusation has been found groundless;
3. When a child or descendant has been convicted of adultery orconcubinage with the spouse
of the testator;
4. When a child or descendant by fraud, violence, intimidation, or undue influence causes the
testator to make a will or to change one already made;
5. A refusal without justifiable cause to support the parent or ascendant who disinherits such
child or descendant;
6. Maltreatment of the testator by word or deed, by the child or descendant;
7. When a child or descendant leads a dishonorable or disgraceful life;
8. Conviction of a crime which carries with it the penalty of civil interdiction.

DONATION
Donation is an act of liberality whereby a person disposes gratuitously of a thing orright in favor of
another, who accepts it. (Art. 725, ibid.)

Kinds of donations
1. Donation inter vivos – one made between living persons, and which is perfected from the
moment the donor knows of the acceptance of the donee. It is subject to donor’s tax.
2. Donation mortis causa – one which is to take effect upon the deathof the donor and
therefore, partakes of the nature of testamentary disposition. It is subject to estate tax.

Persons who may give or receive a donation

1. All persons who may contract and dispose of their property may make adonation.
2. Guardians and trustees cannot donate the property entrusted to them.
3. The donor's capacity shall be determined as of the time of the making ofthe donation.
4. All those who are not specially disqualified by law therefor may acceptdonations.
5. The following donations shall be void:
a. Those made between persons who were guilty of adultery orconcubinage at the time of the
 donation;
b. Those made between persons found guilty of the same criminaloffense, in consideration
thereof;
c. Those made to a public officer or his wife, descendants andascendants, by reason of his
office.
The donation of a movable may be made orally or in writing. An oral donationrequires the
simultaneous delivery of the thing or of the document representing the right donated.

If the value of the personal property donated exceeds five thousand pesos (₱5,000), the
donation and the acceptance shall be made in writing, otherwise, the donation shall be void.

In order that the donation of an immovable may be valid, it must be made in apublic document,
specifying therein the property donated and the value of the charges which the donee must
satisfy.

The acceptance may be made in the same deed of donation or in a separate public document,
but it shall not take effect unless it is done during thelifetime of the donor.
If the acceptance is made in a separate instrument, the donor shall be notifiedthereof in an
authentic form, and this step shall be noted in both instruments.

Limitations
1. The donations may comprehend all the present property of the donor, or part thereof,
provided he reserves, in full ownership or in usufruct, sufficient means for the support of
himself, and of all relatives who, at the time of the acceptance of the donation, are by law
entitled to be supported by the donor. Without such reservation, the donation shall be
reduced in petition of any person affected.
2. Donations cannot comprehend future property.
3. No person may give or receive, by way of donation, more than he may give or receive by
will.

Upon the death of a donor, a donation is theoretically brought back to the estate. This is called
collation. The properties in the estate plus the donation collated are what the decedent
theoretically can dispose of at death (theoretical estate). If collation results in a finding that
because of the donation the compulsory heirs are receiving less than their legitimes from the
theoretical estate, the donation becomes what is called inofficious. There is a violation of the
rule that a person can give by way of donation only what he can give by will (meaning out of
the free portion). Such donation shall be reduced so that the legitimes shall be satisfied. The
donee gives back to the estate the excess of the donation over what is allowed.

Illustration 9
During his lifetime, Jason donated a piece of land to Melanie a friend. The value of this piece
of land at the time of Jason’s death was ₱2,000,000. At death, the properties of Jason, net
of liabilities and charges, amounted to
₱1,000,000. He left a legitimate son. How much is the net distributableestate? How much is
the legitime of the son?
Answer:
Net distributable estate (2,000,000 + 1,000,000) 3,000,000
Less: Legitime of child (3,000,000 x 1⁄2) 1,500,000
Free portion 1,500,000
Less: Donation to Melanie 2,000,000
- 500,000
Hence the donation impaired the legitime by ₱500,000. The donation shall be reduced by ₱500,000, which may be accomplished by requiring the donee to pay
₱500,000 to the estate.

Note: Taxpayer in estate tax is the estate of the deceased person; taxpayer in donor’s tax is the donor.
 Legitime of the Compulsory Heirs and Shares of Heirs in Intestacy
Survivors Legitimes Intestacy
First, their legitimes
ALL FORCED HEIRS
- will be satisfied, then
Legitimate parents/ascendants
1/2 participate in the free
Legitimate children/descendants
Equal to legitime ofa portion in the same
Spouse
legitimate child 1/2 free portion as their
of legitime of legitimes.
Illegitimate child
legitimate child
ALL FORCED HEIRS, EXCEPT
LEGITIMATE CHILDREN AND/OR
DESCENDANTS:
Legitimate parents or ascendants 1/2 1/2
Spouse 1/8 1/4
Illegitimate children 1/4 1/4
LEGITIMATE ASCENDANTS AND
SPOUSE:
Legitimate ascendants 1/2 1/2
Spouse 1/4 1/2
SPOUSE AND ILLEGITIMATE
CHILDREN:
Spouse 1/3 1/2
Illegitimate children 1/3 1/2
SPOUSE ONLY 1/2 1/2

SPOUSE, BROTHERS AND SISTERS:

Spouse
1/2 1/2
Brothers and sisters
- 1/2
BROTHERS AND SISTERS - All
COLLATERAL RELATIVES WITHIN THE
- All
FIFTH CIVIL DEGREE
STATE - All

NOTES:
1. Legitimate children share equally in their legitime of 1/2 of the hereditary estate.
2. When the spouse survives with one legitimate child only, the legitime of the spouse is 1/4 of the hereditary estate. If
there are several legitimate children, the legitime of the spouse is equal to the legitime of a legitimate child.
3. When the surviving spouse was married in articulo mortis and the testator died within three monthsfrom the time of
marriage, his or her legitime, if sole compulsory heir, is 1/3 of the hereditary estate,unless they have been living together
as husband and wife for more than five years, in which casehis or her legitime is 1/2 of the hereditary estate.
4. The legitimes of the legitimate children and descendants and that of surviving spouse take precedence over those of
illegitimate children. If the estate is not sufficient to pay in full the legitimes, the legitimate children and spouse shall
first be paid their legitimes in full. The balance of the estate shall then be available for legitimes of the illegitimate
children.
 ILLUTRATION OF TESTAMENTARY DISTRIBUTION OF NET ESTATE

Illustration 1
Mr. Don a widower died leaving a net hereditary estate of ₱10,000,000 to his two legitimate children.
How much is the legitime of each compulsory heirs?
Answer: Hereditary estate ₱10,000,000
Legitime, 2 LC (10,000,000 x 1⁄2) (5,000,000)
Free portion 5,000,000

Illustration 2
Mr. Don a widower died leaving a net hereditary estate of ₱10,000,000 to his two legitimate children
and his illegitimate son. How much is the legitime of each compulsoryheirs?
Answer: Hereditary estate ₱10,000,000
Legitime, 2 LC (10,000,000 x 1⁄2) (5,000,000)
Legitime, IC (5,000,000 / 2 x 1⁄2) (1,250,000)
Free portion 3,750,000

Illustration 3
Mr. Don died leaving a net hereditary estate of ₱10,000,000 to his daughter, Cindy and his wife Ellen.
How much is the legitime of each compulsory heirs?
Answer: Hereditary estate ₱10,000,000
Legitime, LC (10,000,000 x 1⁄2) (5,000,000)
Legitime, SS (10,000,000 x 1⁄4) (2,500,000)
Free portion 2,500,000

Illustration 4
Mr. Don died leaving a net hereditary estate of ₱10,000,000 to his two illegitimate sons, and his legal
wife Ellen. How much is the legitime of each compulsory heirs?
Answer: Hereditary estate ₱10,000,000
Legitime, SS (10,000,000 x 1/3) (3,333,333)
Legitime, IC (10,000,000 x 1/3) (3,333,333)
Free portion 3,333,334

Illustration 5
Mr. Don died leaving a net hereditary estate of ₱10,000,000 to his two legitimate children,his two
illegitimate children and his legal wife Ellen. How much is the legitime of each compulsory heirs?
Answer: Hereditary estate ₱10,000,000
Legitime, 2 LC (10,000,000 x 1⁄2) (5,000,000)
Legitime, SS (5,000,000 / 2) (2,500,000)
Legitime, 2 IC (5,000,000 / 2 x 1⁄2) 2 (2,500,000)
Free portion -0-

Illustration 6
Mr. Don died leaving a net hereditary estate of ₱10,000,000 to his parents and his wife Ellen. How
much is the legitime of each compulsory heirs?
Answer: Hereditary estate ₱10,000,000
Legitime, 2 P (10,000,000 x 1⁄2) (5,000,000)
Legitime, SS (10,000,000 x 1⁄4) (2,500,000)
Free portion 2,500,000
Illustration 7
Mr. Don died leaving a net hereditary estate of ₱10,000,000 to his parents, his wife Ellen,and
illegitimate son. How much is the legitime of each compulsory heirs?
Answer: Hereditary estate ₱10,000,000
Legitime, 2 P (10,000,000 x 1⁄2) (5,000,000)
Legitime, SS (10,000,000 x 1/8) (1,250,000)
Legitime, IC (10,000,000 x 1⁄4) (2,500,000)
Free portion 1,250,000

LLUTRATION OF INTESTATE DISTRIBUTION OF NET ESTATE

Illustration 1
Mr. Don a widower died leaving a net hereditary estate of ₱10,000,000 to his two legitimate
children. How much would be the distribution to each heir?
Answer: Answer: Hereditary estate ₱10,000,000
2 LC 1⁄2 (5,000,000 each x 2) (10,000,000)
-0-

Illustration 2
Mr. Don a widower died leaving a net hereditary estate of ₱10,000,000 to his parents andfour
legitimate children. How much would be the distribution to each heir?
Answer: Hereditary estate ₱10,000,000
4 LC 1⁄4 (2,500,000 each x 4) (10,000,000)
Parents -0-
-0-

Illustration 3
Mr. Don died leaving a net hereditary estate of ₱10,000,000 to his four legitimate children and his wife.
How much would be the distribution to each heir?
Answer: Hereditary estate ₱10,000,000
4 LC 1/5 (2,000,000 each x 4) (8,000,000)
1 Spouse (10,000,000 / 5) (2,000,000)
5 units -0-
Illustration 4
Mr. Don a widower died leaving a net hereditary estate of ₱10,000,000 to his four legitimate children
and one illegitimate children. How much would be the distribution to each heir?
Answer: Hereditary estate ₱10,000,000
4 LC /4.5 (2,222,222 each x 4) (8,888,889)
0.5 IC 1⁄2 of one LC (1,111,111)
4.5 units -0-

Illustration 5
Mr. Don a widower died leaving a net hereditary estate of ₱10,000,000 to his parents, hiswife, and two
illegitimate children. How much would be the distribution to each heir?
Answer: Answer: Hereditary estate ₱10,000,000
Parents 1⁄2 (2,500,000 each x 2) (5,000,000)
 Spouse 1⁄4 (2,500,000)
Illegitimate 1⁄4 (1,250,000 each x 2) (2,500,000)
-0-

Illustration 6
Mr. Don a widower died leaving a net hereditary estate of ₱10,000,000 to his parents andhis wife. How
much would be the distribution to each heir?
Answer: Answer: Hereditary estate ₱10,000,000
Parents 1⁄2 (2,500,000 each x 2) (5,000,000)
Spouse 1⁄2 (5,000,000)
-0-