Chapter 6

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’s
property 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 the
government 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 State
collects the tax.
 Privilege theory/State partnership theory – inheritance is not a right but
a 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. (Or successor is the person to whom the estate is to be
transferred.)
 Estate – refers to all the property, rights and obligations of a person which
are not extinguished by his death. (A bulk of property left behind by the decedent.)

The rights to the succession are transmitted from the moment of the death of
the 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)

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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 how
much 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 obligation
of ₱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 an
heir, made in a will executed in the form prescribed by law.
2. Legal or intestate – a transmission of properties where there is no will or
if 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 and
party 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 a
will.
2. Legatee – a person to whom gifts of personal property are given by virtue
of 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 prescribed by

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 of
the 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 a
notary public. (Notarial will)
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 either
real or personal property unless it is proved and allowed in a proper court.

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Revocation of will – the testator may revoke his last will and testament at
any 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 the
estate of someone who died without a will.
Illustration 5
Mr. Aquino died with a last will and testament leaving all his properties to his
daughter Kris, and his son Benigno, in equal shares. What kind of succession
is this?
Answer: Testamentary, there is a last will and testament.

Illustration 6
Mr. Quezon died without a last will and testament, leaving behind a son, his
wife and his mother. What kind of succession is this?
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 his mother.
After the last will and testament was executed, he acquired additional
properties. 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; Including legally adopted and legitimated children (Primary
compulsory heirs)
2. In default of the foregoing, legitimate parents or ascendants, with respect
to their legitimate children and descendants; (secondary compulsory heirs)
3. Widow or widower; and legitimate surviving spouse (concurring compulsory heirs)
4. Illegitimate children (concurring compulsory heirs)

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.

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Legitime is the portion of the decedent's estate which the law reserves to
compulsory 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 will
lesser 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: 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 ½) 400,000
Free portion 400,000

Disinheritance of children and descendants

The following shall be sufficient causes for the disinheritance of children and
descendants, 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 or
concubinage 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 or
right 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. (Donor’s tax or Gift tax)
2. Donation mortis causa – one which is to take effect upon the death of
the donor and therefore, partakes of the nature of testamentary
disposition. It is subject to estate tax. (This is similar to a transfer in contemplation
of death, and in the nature of a testamentary disposition which is subject to estate tax,
not to gift tax.)

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Introduction to Transfer Taxes

Persons who may give or receive a donation

1. All persons who may contract and dispose of their property may make a
donation.
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 of
the donation.
4. All those who are not specially disqualified by law therefor may accept
donations.
5. The following donations shall be void:
a) Those made between persons who were guilty of adultery or
concubinage at the time of the donation;
b) Those made between persons found guilty of the same criminal
offense, in consideration thereof;
c) Those made to a public officer or his wife, descendants and
ascendants, by reason of his office.

The donation of a movable may be made orally or in writing. An oral donation

requires 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 a

public 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 the lifetime
of the donor.
If the acceptance is made in a separate instrument, the donor shall be notified
thereof in an authentic form, and this step shall be noted in both instruments.
Note: Donation or gift; there is no monetary consideration received by the donor.

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.

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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 distributable
estate? 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 ½) 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

ALL FORCED HEIRS First, their legitimes

-
Legitimate parents/ascendants will be satisfied, then
1/2 participate in the
Legitimate children/descendants
Equal to legitime of free portion in the
Spouse
a legitimate child same free portion as
1/2 of legitime of
Illegitimate child their legitimes.
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

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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
months from 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 case his 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.
(In articulo mortis – at the point of death)
(My Note: If conjugal property, estate divide by 2 = ½ will go to the surviving spouse)

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 ½) (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
compulsory heirs?
Answer: Hereditary estate ₱10,000,000
Legitime, 2 LC (10,000,000 x ½) (5,000,000)
Legitime, IC (5,000,000 / 2 x ½) (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 ½) (5,000,000)
Legitime, SS (10,000,000 x ¼) (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?

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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 ½) (5,000,000) NOTE #2
Legitime, SS (5,000,000 / 2) (2,500,000)
Legitime, 2 IC (5,000,000 / 2 x ½) 2 (2,500,000) NOTE #4
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 ½) (5,000,000)
Legitime, SS (10,000,000 x ¼) (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 ½) (5,000,000)
Legitime, SS (10,000,000 x 1/8) (1,250,000)
Legitime, IC (10,000,000 x ¼) (2,500,000)
Free portion 1,250,000

ILLUTRATION 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: Hereditary estate ₱10,000,000
2 LC ½ (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
and four legitimate children. How much would be the distribution to each heir?
Answer: Hereditary estate ₱10,000,000
4 LC ¼ (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
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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 ½ 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,
his wife, and two illegitimate children. How much would be the distribution to each heir?
Answer: Hereditary estate ₱10,000,000
Parents ½ (2,500,000 each x 2) (5,000,000)
Spouse ¼ (2,500,000)
Illegitimate ¼ (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
and his wife. How much would be the distribution to each heir?
Answer: Hereditary estate ₱10,000,000
Parents ½ (2,500,000 each x 2) (5,000,000)
Spouse ½ (5,000,000)
-0-