TERUEL, MARIA NICOLE "Donation” is the gratuitous transfer of property from

TAX301 – FINAL OUTPUT a living donor to a donee. Since it is made between

living persons, it is called donation inter vivos.
CHAPTER 12: INTRODUCTION TO TRANSFER
TAXATION 2. Succession
"Succession” is the gratuitous transfer of the
What is transfer? properties of the deceased person upon his death to
Transfers refer to any transmission of property from his heirs.
one person to another.
When a person dies, his legal identity including
A person may be a natural person such as individuals
propriety rights are extinguished. His properties will
or a juridical person created by law such as
be gratuitously transferred to his successors either by
corporation, partnership or joint ventures.
operation of law or by virtue of a written will.
Succession is a donation of all the properties of the
Types of transfers:
decedent caused by his death. Hence, it is called
1. Bilateral transfers
donation mortis causa.
2. Unilateral transfers
3. Complex transfers
COMPLEX TRANSFERS
Complex transfers are transfers for less than full and
BILATERALTRANSFERS
adequate consideration. These are sales made at
Bilateral transfers involve transmission of property
prices which are significantly lower than the fair value
for a consideration. They are referred to as onerous
of the property sold.
transactions or exchanges.
What constitutes an adequate consideration?
Examples:
There is no fixed quantitative rule on what constitutes
1. Sale - exchange of property for money
an adequate consideration. The determination of
2. Barter - exchange of property for another property
whether or not a consideration is adequate requires
consideration of the facts and the circumstance
Taxation rules on Sales or If the seller is
surrounding the sale.
Barter
Business X business
This is subject to The adequacy of the price is influenced by the
Consideration P 1,000 Bus. Tax No tax liquidity or the availability of willing buyers of the
Less: Cost of concerned property. Hence, a discount of 20% to
property highly saleable goods like gold would be construed as
given (600)
gift due to its relative liquidity while this may not be
Realized Gain P 400 Income Income tax
tax the case in selling big real estates.

UNILATERAL TRANSFERS Tax rules on transfers for adequate consideration

Unilateral transfers involve the transmission of
property by a person without consideration. They are
commonly referred to as gratuitous transactions or
simply, transfers.
The right or privilege to transfer properties is subject
to "transfer taxes".
Types of Unilateral Transfers
1. Donation
Transfers for adequate consideration are deemed
pure exchanges and are subject to income tax, not to
transfer tax.
Transfer for less than adequate and full
consideration
Transfers for less than full and adequate
consideration are split into its components: transfer
element and exchange element. The transfer element
is subject to transfer tax while the realized gain on the
exchange element is subject to income tax.
RATIONALE OF TRANSFER TAXATION tool in redistributing wealth to society. When one
1. Tax evasion or minimization theory transfers his wealth, the transfer should be taxed so
2. Tax Recoupment theory that part of the wealth will be redistributed to benefit
3.Benefit received theory society.
4. State partnership theory
5. Wealth redistribution theory Ability to Pay Theory
6. Ability to pay theory No one could gratuitously give what he could not
afford. The ability to transfer property is an indication
The Tax Evasion or Minimization Theory of an ability to pay tax. Hence, the transfer is subject
Exchanges may be intentionally priced to evade or to tax.
minimize income taxes. The indirect donation in an
exchange is actually a lost gain which will evade COMPARISON OF THE TWO TYPES OF TRANSFER TAX
taxation. To plug this tax loophole, the government Donor’s tax Estate tax
subjects the gratuity to tax. However, it is not taxed Subject transfer Inter-vivos Mortis causa
in the absence of donative intent on the part of the Nature Annual tax One-time tax
Taxpayer Donor Decedent
seller such as when the sale is made in the normal
Who actually The donor himself. Executor,
course of business. pay the tax? administrator or
heirs in behalf of the
The Tax Recoupment Theory decedent
Even without a deliberate intent to evade income tax,
transfers have a natural effect of decreasing future NATURE OF TRANSFER TAXES
income tax collections of the government. 1. Privilege tax – transfer tax is a form of privilege tax
rather than a form of penalty tax. It is imposed
The Benefit Received Theory because the transferor is exercising a privilege in the
when a person transfers property by donation or form of assistance rendered by the government in
succession, the government is a party in the orderly effecting the transfer of properties by way of
transfer of the property to the donee or heir. This is donation or succession.
made possible by government laws which enforce or
effectuate donation and succession. 2. Ad valorem tax – the amount of transfer tax is
dependent on the value of the properties transferred.
The State Partnership Theory Thus, valuation of the property transferred is needed
The state ensures a civilized and orderly society in order to determine the amount of tax.
where commercial undertaking and wealth
accumulation flourish. The government therefore an 3.Proportional tax – Transfer taxes under the TRAIN
indirect partner behind all forms of wealth law are imposed at flat 6% of the net estate or gift.
accumulation by any within the state. Thus, when a
person transfers part or the whole of his wealth, the 4. National tax – transfer taxes are levied by the
government should take its fair share by taxing the national gov’t. LGU are legally precluded from
transfer of the wealth to other persons. imposing the same.

Wealth Redistribution Theory
Equitable distribution of wealth is widely accepted as
an element of social progress and stability. Societies
with high inequities in wealth distribution are
normally associated with high social unrest,
lawlessness, insurgencies, wars, and chaos.
5. Direct tax – Transfer taxes cannot be shifted. The
transferor-donor or transferor-decedent is the one
subject to tax.
6. Fiscal tax – Transfer taxes are levied to raise money
for the support of the government.

Thus, governments strive toward equitable wealth CLASSIFICATION OF TRANSFER TAXPAYERS AND
distribution as a basic policy. Taxation is a common THEIR EXTENT OF TAXATION

1. Residents or Citizens - such as:
a. Resident citizens
b. Resident aliens
c. Non-resident citizens
These are taxable on global transfers of property.
2. Non-resident Aliens
These are taxable on Philippine transfers of property.
SITUS OF TRANSFER
Transfers occur in the location of the property.
Properties are transferred mortis causa in the place
where they are located "the point of death. They are
not transferred at the place where the decedent died.
Likewise, properties are transferred inter-vivos in the
place where they are located at the date of donation.
They are not transferred at the place where the donor
executed the deed of donation.
If ownership over property is voluntarily transferred
by the owner during his lifetime, this is donation
inter-vivos. If the owner retained ownership until the
moment of his death, death will transfer it his
successors in interest. This transfer is donation
mortis causa.
TRANSFER IN CONTEMPLATION OF DEATH
A donation that is inspired or motivated by the
thought of death of the decedent is donation mortis
causa. If the donation is inspired by motives
associated with life, it is a donation inter-vivos.
The motive of donation is the determining factor
The motive of an inter-vivos transfer is very important
in determining whether it is actually an inter-vivos
transfer or a mortis causa transfer. The donor's
motive is established out of the wordings of the deed
of donation prepared by the donor to affect the
donation.
Thought of death
The presence of express wordings in the deed of
donation which indubitably manifest that the
donation is inspired by the decedent's thought of
death will qualify a donation as a donation mortis
causa.
Motives associated with life
The following motives precludes a transfer from being
classified as one in contemplation of death:
• To reward services rendered
• To relieve the donor of the burden of
management of the property
• To save on income tax
• To see children financially independent
• To see children, enjoy the property while the
decedent still lives
• To settle family disputes
TRANSFERS INTENDED TO TAKE EFFECT UPON
DEATH
A donation that is made on the decedent's last will
and testament is a donation mortis causa. The last will
and testament' is a document expressing the
decedent's desire on how his properties will be
distributed after his death.
Similarly, a donation that is made during the lifetime
of the decedent with a stipulation that ownership
shall transfer upon his death, the same is a donation
mortis causa.
INCOMPLETE TRANSFERS
-it involves the transmission or delivery of properties
from one person to another, but ownership is not
transferred at the point of delivery. The actual
transfer of ownership take effect in the future upon
the happening of certain future events or satisfaction
of certain conditions.
Types of incomplete transfers:
1. Conditional transfers
2. Revocable transfers
3. Transfers with reservation of title to property until
death
How are incomplete transfers completed?
1. Conditional transfers are completed inter-vivos
upon the happening of the following during the
lifetime of the donor:
a. fulfillment of the condition by the transferee or
b. waiver of the condition by the transferor
2. Revocable transfers are completed inter-vivos
upon:
a. waiver by the transferor to exercise his right of
revocation or
b. the lapse of his reserved right to revoke
3. Transfers with reservation of title to property until
death are completed by the death of the decedent.
Conditional transfers and revocable transfers become
donation mortis causa when the transfer is pre-
terminated by the death of the decedent. They will be
included in the properties of the decedent subject to
estate tax.
Timing of Taxation of Incomplete Transfers
Revocable and conditional transfers that are
completed during the lifetime of the transferor
constitute donations inter-vivos subject to donor's
tax at the fair value of the property at the date of their
completion or perfection. Revocable transfers and
conditional transfers that are pre-terminated by the
death of the transferor shall be subject to estate tax
at the point of death of the transferor.
Complex Incomplete Transfers
Incomplete transfers are sometimes made for less
than full and adequate consideration. Similar to
complex transfers, the gratuity component of the
complex transfers is subject to the appropriate type
of transfer tax.
Test of Taxability of Complex Incomplete Transfers
The following must be established before a complex
incomplete is taxable:
1. The incomplete transfer must have been paid for
less than full and adequate consideration at the date
of delivery of the property.
2. At the completion of the transfer, the property
must not have decrease in value below the
consideration paid.
Non-Taxable Transfers
There are transfers of properties which are not
actually donations and hence, not subject to transfer
taxes, such as:
1. Void transfers
b. Quasi-transfers
Void Transfers
Void transfers are those that are prohibited by law or
those that do not conform to legal requirements for
their validity. Void transfers do not transfer
ownership over property and are therefore not
subject to transfer tax.
Examples of void transfers:
• Donation of properties not owned by the
donor
• Donation between spouses
• Donations which do not manifest all
essential requisites to validity such as
donations refused by the donee
• Donations that do not conform to formal
requirements such as oral donation of real
properties
Quasi-transfers
There transmissions of property which will never
involve transfer of ownership. For the purpose of our
discussion, let us refer to these transmissions as
"quasi-transfers." Quasi-transfers are not taxable.
Examples:
1. Transmission of the property by the usufructuary
to the owner of the naked
2. Transmission of the property by a trustee to the
real owner
3. Transmission of the property from the first heir to
a second heir in accordance with the desire of a
predecessor.
CHAPTER 13: THE CONCEPT OF SUCCESION & ESTATE
TAX
"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).
The inheritance includes all the property, rights and
obligations of a person which are not extinguished by
his death (Art. 776, Ibid.).
The rights to the succession are transmitted from the
moment of the death of the decedent (Art. 777, Ibid.).
The decedent is a deceased or dead person.
TYPES OF SUCCESSION
1. Testate or Testamentary Succession
Testamentary succession is that which results from
the designation of an heir, made in a will executed in
the form prescribed by law. (Art. 779, Civil Code)
A person can specify the recipient of his properties
upon death. This designation must be made through
a written document called last will and testament. A
person who died with a will is said to be "testate." A
person who died with a written will is called a
"testator".
2. Legal or Intestate Succession
When a decedent dies without a will or with an invalid
one, the distribution of the estate shall be in
accordance with the default provision of the Civil
Code on succession.
3. Mixed Succession
Transmission of the decedent properties shall be
partly by virtue of a written will and partly by
operation of law.
Will
A will is an act whereby a person is permitted, with
the formalities prescribed by law, to control to a
certain degree the disposition of this estate, to take
effect after his death (Art. 783, Ibid).
A will is an expression of the decedent's desire as to
how his properties will be distributed after his or her
death.
The making of a will is a strictly personal act; it cannot
be left in whole or in part of the discretion of a third
person, or accomplished through the instrumentality
of an agent or attorney. (Art 784, Ibid.)
Types of will
Holographic will - a will which is entirely written,
dated, and signed by the hand of the testator himself
Notarial will - a notarized will signed by the decedent
and witnesses
Codicil - a 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 (Art 825,
Ibid.)
Notarial will must be acknowledged before a notary
public by the testator and the witnesses. A
holographic will need not be witnessed. A codicil
needs to be executed as in the case of a will to be
valid.
NATURE OF SUCCESSION
Succession is a gratuitous transmission of property
from a deceased person in favor of his successors.
Succession involves only the net properties of the
decedent. The heirs will Inherit what remains of the
decedent's property after satisfying the decedent's
indebtedness and obligations including the estate tax.
The heirs shall not inherit the debt of the decedent.
ELEMENTSOF SUCCESSION
1.Decedent - the general term applied to the 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 (Art. 775, Ibid.).
2. Estate - the property, rights and obligations of the
decedent not extinguished by his death. This is also
referred to as the "inheritance" of the decedent.
3. Heirs – a person called to the succession either by
the provision of a will or by operation of law (Art. 782,
Ibid.).
 b. Ascendants
WHO ARE THE HEIRS? 2. Relatives in the collateral line up to fifth (5th)
Heirs under intestate succession degree
In intestate succession, the heirs shall be the 3. Republic of the Philippines
following in descending order of priority:
1. Compulsory heirs
2. Relatives up to fifth degree of consanguinity
3. Republic of the Philippines

The law identified certain persons which it designated

as "compulsory heirs." These are the persons who will
inherit the estate by default. Only by their absence
shall the estate be partitioned to other relatives. In
the absence of relatives, the estate will go the
government.

Types of compulsory heirs

1. Primary heirs: Legitimate children and their direct
descendants
2. Secondary heirs: Legitimate/illegitimate parents
and ascendants
3. Concurring heirs: The surviving spouse and
illegitimate descendants

Definition of terms
• Legitimate children are those born out of a
legal marriage.
• Direct descendants refer to children or, in
their absence, grandchildren.
• Legitimate parents refer to biological
parents.
• Illegitimate parents are adopting parents to
an adopted child.
• The surviving spouse is the widow or
widower of the decedent.
• Illegitimate descendants are illegitimate
children.
In the absence of compulsory heirs, the following
shall inherit in the following order of priority:
1. Collateral relatives up to the fifth degree of
consanguinity
2. The Philippine government
3. Priority is given to collateral relatives in the closest
degree.
Summary of Rules:
1. Concurring heirs and
a. Descendants, or in their default,
Basic Intestate Partition Procedures
1. The decedent and the surviving spouse shall first
share in their common properties.
The common properties of the net of expenses and
obligations chargeable to the common properties of
the spouses is divided between the decedent and the
surviving spouse.
2. Determination of the decedent's net interest.
The decedent's net interest comprising of the
following is computed:
a. Exclusive property of the decedent
b. Share of the decedent in the net common
properties
Partition of the decedent's net interest to the heirs:
a. Surviving spouse
b. Legitimate children
c. Illegitimate children
The surviving spouse and each of the children have
one share each. Each illegitimate child is entitled to a
half share.
estate tax is computed out of the net estate. Neither
does the validity or invalidity of the decedent's will
nor the absence of an heir affect estate taxation. In
fact, the estate tax is due even if the decedent does
not have relatives who will inherit the property.

Furthermore, the determination of the share of each

heir in the distributable estate is done only after all
charges to the hereditary estate, including estate tax,
had been deducted.

Other persons in succession

1. Legatee - a person whom gifts of personal property
is given by virtue of a will
Heirs under Testamentary Disposition
2. Devisee - a person whom gifts of real property is
In testamentary succession, the heirs shall be the
given by virtue of a will
following:
3. Executors - a person named by the decedent who
1. Compulsory heirs
shall carry out the provisions of his will
2. Other persons specified by the decedent in his will
4. Administrators - a person appointed by the court to
manage the distribution of the estate of the decedent
Legitime
Legitime is that part of the testator's property which
ESTATE TAXATION
he cannot dispose of because the law has reserved it
Estate taxation pertains to the taxation of the
for certain heirs who are, therefore, called
gratuitous transfer of properties of the decedent to
compulsory heirs (Art. 886, Ibid). The excess
the heirs upon the decedent's death.
properties of the decedent are called "free portion".
Estate taxation is governed by the law in force at the
By means of a last will and testament, a testator can
time of the decedent's death. The estate tax accrues
designate the free portion of his estate for additional
as of the decedent's death and the accrual of the tax
heirs irrespective of their relationship to him but he
is distinct from the obligation to pay the same. Upon
cannot exclude or disinherit compulsory heirs
the death of the decedent, succession takes place and
without a valid basis under the law.
the right of the State to tax the privilege to transmit
the estate vests instantly upon death.
Disinheritance and Repudiation
A decedent can actually disinherit an heir on certain
NATURE OF ESTATE TAX:
grounds. Similarly, heirs may repudiate their share in
1. Excise tax- estate tax is not a tax on the property
the inheritance of the decedent.
but on the privilege to transfer property through
death
The rules on legitime, free portion, disinheritance of
2.Revenue or general tax - estate tax is intended as a
an heir or repudiation of inheritance are matters of
revenue or fiscal measure
law which are irrelevant to estate taxation. Hence,
3. Ad valorem tax- estate tax is dependent upon the
these topics will not be emphasized in our discussion.
value of the estate
Readers with particular interest in these matters are
4. National tax - estate tax is imposed by the national
advised to consult Title IV of Book III of the Civil Code.
government
5. Proportional tax- estate tax is imposed as 6% on
The determination of the estate tax does not require
the net estate
prior identification of the heirs. Once a person is
dead, the estate of the decedent is simply determined
6. One-time tax - estate tax applies to a person only
and reduced by deductions allowed by law. Then, the
once in a lifetime
Classification of Decedents for Taxation Purposes
1. Resident or of Citizen Decedents - taxable on
properties located within or outside the Philippines
2. Non-resident Alien Decedents- taxable only on
property properties located in the Philippines, except
intangible property when the reciprocity rule applies.
"Gross Estate" pertains to the totality of the
properties owned by the decedent at the point of his
death.
There are two concepts to be discussed under gross
estate:
Exclusions in gross estate - those properties or
transfers excluded by law from estate taxation
Inclusions in gross estate - those properties which are
to be included as part of the taxable gross estate
"Deductions" generally pertain to reductions in the
inheritance of the heirs such as obligations of the
decedent, and losses of property during
administration, but also include exemptions from the
estate tax under the law. Deductions are extensively
discussed in Chapter 14.
"Net taxable estate" is the net properties of the
decedent after all pertinent deductions allowable by
law that is subject to tax. Note that the net taxable
estate is not equivalent to the hereditary estate
before estate tax because of exclusions, exemption
rules and deduction criteria imposed by the law.
CHAPTER 13-A: ESTATE TAX: GROSS ESTATE
GROSS ESTATE
Gross estate consists of all properties of the
decedent, tangible or intangible real or personal, and
wherever situated at the point of death.
In the case of a non-resident alien decedent, gross
estate includes only properties situated in the
Philippines except intangible personal property when
the reciprocity rule applies.
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 of Properties
To establish the amount of the gross estate, an
inventory of the properties of the decedent and their
fair values at the point of death shall first be
established.
If the list of properties existing at the point of death is
known, the list is simply drawn directly.
However, 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.
EXEMPT TRANSFERS
1. Transfers of properties not owned by the
decedent – One cannot transfer properties he or she
does not own. Properties not owned by the decedent
are not part of his/her donation mortis causa. These
properties must be excluded in gross estate even if
they transfer to other persons at the point of death.
2. Transfers legally excluded – There are properties
that are owned by the decedent at the point of death.
These properties naturally form part of his/her
donation mortis causa to the heirs, but are exempted
by the law from estate taxation. Hence, these are
excluded from gross estate.
These 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 the 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
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 designated 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.
Estate, executor or administrator as beneficiary
If the beneficiary designated is the estate, executor or
administrator, the proceeds of life insurance is
included in gross estate regardless of the designation
of the beneficiary because these beneficiaries are
considered extensions of the interest of the
decedent.
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.
Separate properties of the surviving spouse
Spouses have their separate properties and common
properties. Common properties are owned jointly by
the spouses while separate or exclusive properties
are solely owned by either of them.
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.
Transfer by way of bona fide sales
Transfers by way of bona fide sales are onerous
transactions rather than gratuitous transactions;
hence, they are not subject to estate tax. Moreover,
ownership over properties sold normally passes on to
the buyer immediately at the point of sale.
Hence, properties transferred by way of bona fide
sale or for an adequate consideration are excluded in
gross estate because the decedent no longer owns
them at the date of his/her death.
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 from Veterans Administration
(USVA) benefits – RA 136
5. War damage payments
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
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
These properties must be removed from the gross
estate of the decedent.
Note on property acquisitions using exempt benefits
Properties proceeds of acquired group insurance
using GSIS and war benefits, damage SSS payments
accruals, are USVA still exempt benefits, so long as
the heirs or administrators can prove that the
properties were acquired using these exempt
properties.
Note on bequests, device, or legacies to social
welfare, cultural, and charitable institutions
The conditional exclusion applies if the donee
institution uses not more than 30% of the bequest,
device, or legacies for administration purposes.
The 30% conditional exclusion is deemed satisfied if
the donee is an accredited non-profit donee
institution. If the donee is a qualified non-profit
donee institution, the same is excluded in gross
estate.
It must be noted that one of the primary
requirements for the accreditation of donee
institutions is that their income does not inure to the
benefit of any private individual and that the level of
their administration expenses does not exceed 30%
of their total expenses.
Transfers to these institutions are initially included in
the inventory list of 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. It must
be noted that there is no item of deduction for such
transfer under the Tax Code and in the estate tax
return.
Despite this, for bequests, administrative devises
expenses or legacies of the which donee are
institution restricted (whether by the accredited or
non-accredited) shall be included in gross estate.
Deposits withdrawn from the decedent's bank
account
Previously under the NIRC, withdrawal from the bank
account is prohibited except withdrawal of up to
P20,000 for the funeral expenses of the decedent.
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 form 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 gross estate. However, if such
withdrawal is not subjected to the 6% final tax, the
amount of withdrawal must be included in
grossestate.
TAXABLE TRANSFERS
Taxable transfers are mortis causa transfers of
properties in the guise and form of inter-vivos
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 general power of
appointment
Transfers in contemplation of death
These are donations made by the decedent during his
lifetime which are motivated by the thought of his
death. These transfer inter-vivos are usually made by
the decedent in a stage of terminal illness or under
belief of an imminent death. Analogous to
testamentary disposition, transfers in contemplation
of death are treated by the tax law as donation mortis
causa subject to estate tax not, to donor's tax.
Transfer in contemplation of death may include:
a. Transfers of property to take effect in
possession or enjoyment at or after death
b. Transfer of property with retention of the
right of possession or enjoyment or right
over income of the property until death
c. Transfer of property with retention of the
right to designate, alone or in conjunction
with any person, the person who shall enjoy
the property or the income there from
Revocable transfers
Revocable transfers 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.
Transfer with retention of certain rights
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.
Transfer under 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:
a. Designated as revocable to any heir
b. Designated to estate, administrator
or executor as beneficiary
4. Taxable transfers
PRESENTATOIN 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 interest 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. Conceptually,
"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.
The following sections discuss fair value rules for the
following assets:
1. Real properties
2. Shares of stocks
3. Usufruct and annuities
4. Other properties
5. Taxable transfers
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. Note that the TRAIN law points to the fair
value listed in the schedule market value - not be
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.
Shares of 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.
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.
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.

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.

Other properties