TAXATION

FAR EASTERN UNIVERSITY – MANILA

ESTATE TAX (101)

Transfer tax is defined as a tax imposed on gratuitous transfer of property, rights and obligations.
Two General Ways of Transferring Ownership of Property
Onerous transfer is one where as part of the transfer process, there is a consideration or burden required from Bilateral transfers or exchanges,
the transferee. This kind of transfer is characterized by the exchange of values between the transferor and such as sale and barter. These
transferee. are referred to as “onerous
transfer”.
Gratuitous transfer is one where there is no burden that is imposed on or consideration required from, the Unilateral transfers, such as
recipient or transferee. succession – transfer of property
upon death and donation. These
Kinds of Gratuitous Transfer are referred to as “gratutitous
1. Estate Tax – Which is a kind of transfer tax imposed on gratuitous transfer of property which takes transfer”.
effect upon death of the transferor. ( A tax levied upon the transfer of the net estate of a decedent to
his heirs)
2. Donor’s Tax – Which is a kind of transfer tax imposed on gratuitous transfer of property that is
completed even during the lifetime of the transferor.
On the basis, transfer tax is considered as excise tax.
Under current usage, unilateral transfers are simply referred to as “transfer” while bilateral transfers are called “exchanges”. Benefits derived from
onerous transactions are “earned or realized”, hence subject to income tax. Benefits derived from gratuitous transactions are not realized because of
the absence of an earning process. Benefits from gratuitous transactions are subject to transfer tax not income tax.

Complex transactions- are partly gratuitous and partly onerous. These transactions are commonly referred to as “transfer for less ull and adequate
consideration”. The gratuitous portion of the transaction is subject to transfer tax while the benefit from the onerous portion is subject to income tax.

PROBLEM
Problem 1: (Income tax and Transfer tax) Check the box where each of the following items is taxable:
Income tax Transfer tax
1. Sale of goods X
2. Donation of goods X
3. Barter of goods X
4. Transfer of properties from a decedent to his heirs upon death X
5. Transfer for less than full and adequate consideration

Concept of Succession and Estate Tax

Succession – is a mode of acquisition by virtue of which the property, rights and obligation to the extent of the value of the inheritance, of a person
are transmitted through his death to another or others either by will or by operation of law. (Art. 774, Civil Code of the Philippines).
 Will- an act whereby a person is permitted with the formalities prescribed by law, to control to a certain degree the disposition of his
estate, to take effect after his death (Art. 783,CCP) from the moment of the death of the decedent, the rights to the succession are
transmitted, and the possession of the hereditary property is deemed transmitted to the heir (Art. 777, CCP)

Elements of Succession
a. Decedent- the person whose property is transmitted through succession, whether or not he left a will (Art 775, CCP)
b. Heir- the person called to the succession either by the provision of a will or by operation of law (Art. 782,CCP)
c. Estate- refers to all the property, rights and obligations of a person which are not extinguished by his death (Art. 776, CCP)

Requisites of Succession
1. Death of the transferor or decedent
2. Estate or the mass of properties left by the decedent
3. Successors, beneficiaries, or heirs of the decedent
4. Executors and/or administrator

Kinds of Succession
Testate succession – 1. Testamentary- succession which results from the designation of an heir, made in a will executed in the form prescribed
is one that takes effect by law (Art. 779,CCP)
by virtue of a will
executed by a person, While the decedent may dispose of his properties in a last will and testament, he must, however, reserve some for certain
known as the persons who are called by law as compulsory or forced heirs.
decedents, in favor of  Kinds of successors in a testamentary succession
another or other 1. Legatee- an heir to a particular personal property given by virtue of a will.
beneficiaries (also 2. Devisee- an heir to a particular real property given by virtue of a will.
known as heirs) in the  Executor- is the person nominated by a testator to carry out the directions and request in his will and to
form prescribed by dispose of his property according to his testamentary provisions after his death.
law.  Kinds of compulsory heirs:
1. Primary – those who have precedence over and exclude other compulsory heirs (i.e. legitimate children
and descendants)
2. Secondary – those who succeed only in the absence of the primary compulsory heirs (i.e. legitimate
parents and ascendants)
3. Concurring – those who succeed together with the primary or secondary compulsory heirs (i.e.
illegitimate children and descendants and surviving spouse)
 Under testamentary succession, the mass of properties left by the decedent may be classified into:
1. Legitime is the portion of the testator’s property which could not be disposed of freely because the law
has reserved it for the compulsory heirs. (Art.886,CCP)

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 2. Free Portion is that part of the whole estate which the testator could dispose of freely through written
will irrespective of his relationship to the recipient.
Intestate succession – 2. Legal or Intestate- transmission of properties where there is no will, or if there is a will, the same is void or lost its
is one that is effected validity, or nobody succeeds in the will.
by operation of law if
the transferor of the In intestate succession, the entire estate of the decedent is distributed to the heirs. The compulsory heirs in testamentary
property did not succession are also heirs in intestate succession. However, intestate heirs include, brothers and sisters, collateral relatives
execute a will within the fifth civil degree, and the state.

Administrator is a person appointed by the court, in accordance with the governing statute, to administer and settle
intestate estate and such testate estate as no competent executor designated by the testator.
Mixed succession – is 3. Mixed- transmission of properties, which is effected partly by will and partly by operation of law.
one that is effected
partly through a will
and partly by operation
of law.

Composition of Gross Estate

The gross estate is divided into two main categories for succession purposes, the legitime and free portion as shown below:
Decedent’s Estate To be inherited by:
Legitime Compulsory heirs:
This portion of the estate is reserved by law specifically to compulsory heirs as provided in Table A, regardless
of whether or not a last will and testament was prepared. Refer also to Table C for the sharing of legitimes by the
compulsory heirs.
Free portion Compulsory Heirs and/or Voluntary Heirs
 As provided in the last will and testament.
 In the absence of a will, this portion of the estate shall be distributed to “intestate heirs” based in the
order of priority as provided in Table B

Table A – Compulsory Heirs

Compulsory Heir Classification

1. Legitimate children and their legitimate descendants Primary Compulsory
2. Surviving spouse Primary Compulsory
3. Illegitimate children and their descendants, legitimate or illegitimate Primary Compulsory
4. Legitimate parents and Legitimate ascendants (Will inherit only in default of number 1) Secondary Compulsory
5. Illegitimate parents (no other descendants) – (Will inherit only in default of number 1 and Secondary Compulsory
3)

Table B – Order of Intestate Succession

1 Legitimate children or descendants

2 Legitimate parents or ascendants
3 Illegitimate children or descendants
4 Surviving spouse
5 Brothers and sisters, nephews and nieces
6 Other collateral relatives within the 5th degree
7 State

Table C- Legitimes

Survivor Legitime Notes

LC 1/2 Divide by the number of LC, whether they survive alone or with concurring compulsory heir (CH)
1LC 1/2
SS 1/4
2 or more 1/2
LC Equal to 1
SS LC
LC 1/2 All the concurring CH get from the half free portion, the share of the SS having preference over that of the IC, whose
SS 1/4 share may suffer reduction pro-rata because there is no preference among themselves
IC 1/2 of 1 LC
LPA 1/2 Whether they survive alone or with concurring CH
LPA 1/2 IC succeed in the ¼ in equal shares
IC 1/4
LPA 1/2
SS 1/4
LPA 1/2
SS 1/8
IC 1/4
IC 1/2 Divide equally among the IC
SS 1/3
IC 1/3

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Survivor Legitime Notes
SS 1/2 1/3 if marriage is in articulo mortis (at the point of death) and deceased spouse dies within 3 months after the marriage
IP 1/2
IP Excluded Children inherit in the amounts established in the foregoing rules
Any child It depends
IP 1/4 Only the parents of IC are included. Grandparents and other ascendants are excluded
SS 1/4

Collateral Relatives
Consanguinity
Lineal consanguinity
Collateral consanguinity
Proximity of relationship
The relation of persons descending from the same stock or common ancestors. These person are known as blood
relatives and are said to be related by blood or consanguinity.
Which may be descending or ascending, is that which subsists between persons or whom one is descended in a
direct line from the other.
Which subsists between persons who have the same ancestors, but who not descend (or ascend) one from the
other.
Determined by the number of generations. Each generation forms a degree.

Determining Blood Relationship

AB
CE DF

GK H I JL

M N

Notes:
1. In the illustration, C and D are siblings. Their common parents are A and B.
2. G is the daughter of C and E; J is the son of D and F.
3. M is the son of G and K; N is the daughter of J and L.
4. A, C, G and M, in that order, are relatives in the descending direct line. From A to C is one degree; from C to G is another degree and G to M is
another degree.
5. N, J, D and B, in that order, are relatives in the ascending direct line.
6. C, G and M, are relatives of D, J and N in the collateral line.
7. G is the niece of D, D is the uncle of G; J is the nephew of C, C is the aunt of J.
8. H and I are first cousins; they are four degrees apart, H to C, C to AB, AB to D and D to I.
9. M and N are second cousins; they are six degrees apart.
10. Because of G’s marriage to K, K becomes H’s brother-in-law, H being G’s brother. They become relatives by affinity. Affinity is the
connection existing consequence of a marriage between each of the married spouse and the kindred of the other.

PROBLEMS
Problem 1: (Legitimes and Free Portion of the Estate)
A died leaving an estate valued at P24,000,000. The surviving heirs were his spouse, 2 legitimate children and 1 illegitimate child.
Required: Distribute the estate by applying the rules on legitimes.
Notes:
 The legitime of the children is always ½ of the total estate regardless of the number of children
 The legitime of an illegitimate child is ½ of the legitime of 1 legitimate child.
 The legitime of the surviving spouse varies as shown in table C
 The free portion may be given by the testator to anyone in accordance with his wishes. However, only voluntary heirs included in the
provisions of the will should be recognized.

Problem 2: Assume the same data with Problem 1, except that there is only 1 legitimate child.
Required: Distribute the estate by applying the rules on legitimes.

Problem 3: Assume the same data with Problem 2 except that the testator provided P10,000,000 to his secretary.
Required: Distribute the estate by applying the rules on legitimes.

Note:
In this case, since P10,000,000 was allotted to the secretary, the legitimes of the children and the surviving spouse were impaired. The amount of
estate left after deducting P10,000,000 will not enough to satisfy the legitimes of the compulsory heirs amounting to P18,000,000. Hence, the
amount to be given to the secretary should be modified or reduced to P6,000,000 to satisfy the legitimes.
Purpose of Estate Tax
The following theories have been used to justify the imposition of estate tax:
1. Benefit received theory – under this theory, the estate tax is paid on return for the services rendered by the state in the distribution of the
estate of the decedent and for the benefits that accrue to the estate and the heirs.
2. State partnership theory – the tax is considered the share of the state as a “passive and silent partner” in the accumulation of property.
3. Ability to pay theory – the tax is based on the fact that the receipt of inheritance creates an ability to pay and thus the receipt of
inheritance creates an ability to pay and thus to contribute to governmental income.
4. Redistribution of wealth theory – the tax is imposed to help reduce undue concentration of wealth in society to which the receipt of
inheritance is a contributing factor.

Basic Concepts in Estate Proceeding and Estate Tax

Inheritance – Inheritance includes all the property, rights and obligations of a person which are not extinguished by his death.

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 (Civil Code, Art. 776)
Legitime - Is that part of the testator’s property which he cannot dispose of because the law has reserved it for certain heirs
who and therefore, called compulsory heirs.
Testate estate – An estate of a deceased person which is settled or to be settled with a valid last will and testament.
Intestate estate – An estate of a deceased person without a will.
Will – An act whereby a person is permitted, with the formalities prescribed by law, to control to a certain degree the
disposition of his estate. (Civil Code, Art. 783)
Codicil - A supplement or an additional to a will, made after the execution of a will and annexed to be taken as a part
thereof, by any disposition made in the original will is explained, added to or altered (Civil Code, Art. 825)
Holographic will- One entirely written, dated and signed in the very handwriting of the testator himself and is subject to no
required form, and may be made in or out of the Philippines, and may be made without a witness. (Civil Code,
Art. 810)
Notarial will - A will written in public instruments, notarized by a lawyer, signed by the testator and witnesses. (Civil Code,
Art. 805-806)
Testator – The deceased person who made a last will and testament. (Civil Code, Art. 775)
Probate – A 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.
Reprobate – A special proceeding to establish the validity of a will previously proved in a foreign country.
Legatee – One who is given personal property through a will. (Civil Code, Art. 782)
Devisee – One who is given real property in a will. (Civil Code, Art. 782)
Executor – The person named in the will who is entrusted to implement its provisions. (Rules of Court, Rule 78)
Executrix – A female executor.
Administrator – The person entrusted with the care, custody and management of the estate of a decedent until the estate is
partitioned and distributed to the heirs, legatees and devisees, if any. (Rules of Court, Rule 78)
Administratrix – A female administrator.
Special proceedings – A remedy by which a party seeks to establish a status, a right, or a particular fact. (Rules of Court, Rule 1, Sec.
3 [c]). Among the subject matters of special proceedings are escheat and settlement of estate of deceased
persons. (Rules of Court, Rule 72, Sec. 1)
Escheat – A proceeding whereby the state, by virtue of its sovereignty, steps in and claims the real or personal property of
a person who dies intestate leaving no heir. In the absence of a lawful owner, a property is claimed by the state
to forestall an open “invitation to self-service by the first comers”. (Republic vs. CA, G.R. No. 143483)
Estate tax – A tax on the transfer of the net estate of the decedent. (Tax Reform Act of 1997, Sec. 84)
Gross estate – The total value of all property belonging to the decedent at the time of death, wherever situated. (Tax Reform
Act of 1997, Secs. 85, 104)
Net estate – Gross estate less allowable deductions and exemptions. (Tax Reform Act of 1997, Secs. 84, 85 and 86)

A. FORMAT OF COMPUTATION (BIR form 1801)

Exclusive Common Total

Real properties excluding family home P xxx P xxx P xxx
Personal properties xxx xxx Xxx
Family home xxx xxx Xxx
Taxable transfers xxx xxx Xxx
Gross estate P xxx P xxx P xxx
Less: Deductions ( xxx ) ( xxx ) ( xxx )
Estate after deductions xxx xxx xxx
Less: Special deductions
Family home ( xxx )
Standard deduction ( xxx )
Net Estate Xxx
Less: Share of Surviving Spouse (Net Conjugal Estate divided by 2) ( xxx )
Taxable net estate P xxx

Tax due P xxx

Less: Tax credits/payments
Foreign estate tax paid (tax credit) ( xxx )
Tax paid in return previously filed (if this is an amended return) (xxx )
Tax payable Xxx

B. ESTATE TAX RATES

There shall be levied, assessed, collected and paid upon the transfer of the net estate of every decedent, whether resident or non-resident of the
Philippines, a tax at the rate of six percent 6% based on the value of such net estate.

C. TAXABILITY OF THE ESTATE IN GENERAL

1. Classification of a Decedent

a. Resident Citizen

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 b. Non-Resident Citizen
c. Resident Alien
d. Non-Resident Alien

2. Types of Properties

a. Real or immovable property

b. Tangible personal property
c. Intangible personal property Rights and claims of the decedent existing at the time of death

3. Taxability of the estate in accordance to the classification of a decedent and type of property
Classification of Decedent Properties located in the Philippines Properties located in a Foreign Country
Tangible Intangible Tangible Intangible
Real Real
personal personal personal personal
properties properties
properties properties properties properties
Resident Citizen / / / / / /
Non-Resident Citizen / / / / / /
Resident Alien / / / / / /
Non-Resident Alien / / /* X X X

4. Rule of reciprocity (Non-resident Alien)*

a. Properties covered by reciprocity
Intangible personal property situated in the Philippines owned by non-resident alien decedent.
Reciprocity can take place when the foreign country where the non-resident alien was a citizen and resident:
- Does not have any kind of death taxes
- Has death tax but allows exemption to non-resident Filipinos

b. Basic Rules
When there is reciprocity - The intangible personal property of non-resident alien situated in the Philippines are not included in the gross estate
When there is no reciprocity - The intangible personal property of non-resident alien situated in the Philippines are included in the gross estate

c. Intangible properties considered situated in the Philippines

The following shall be considered as situated in the Philippines (among others):

1) Franchise which must be exercised in the Philippines;

2) Shares, obligations or bonds issued by any corporation or sociedad anonima organized and constituted in the Philippines in accordance with its
law;
3) Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines;
4) Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the
Philippines;
5) Shares or rights in any partnership, business or industry established in the Philippines.

D. COMPOSITION OF THE GROSS ESTATE OF A DECEDENT

G ross estate (SEC. 85) - The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all
property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a non-resident decedent who at the
time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be
included in his taxable estate.

1. Properties owned and possessed by the decedent

2. Properties transferred (Taxable Transfers)

 These are properties which at the time of the death of the decedent are not part of the decedent’s assets because these were already
transferred by him during his lifetime.
 The values of these properties will be included in determining the value of the gross estate even though such properties are not anymore the
part of the assets of the decedent.

a. Transfer in Contemplation of Death

Transfer in contemplation of death is a transfer of property motivated by the thought of death, althought death may not be imminent.

Examples of a transfer made in contemplation of death

1) When the transferor of property is at an advanced age.
2) When the transferor of property is terminally ill or with incurable disease.
3) When a person concurrently makes a will and transfer a property.

Examples of motives that preclude a transfer from the category of one made in contemplation of death (Motives associated with life)
1) To relieve donor from the burden of management
2) To save income or property taxes

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 3) To settle family litigate and un-litigated disputes
4) To provide independent income for dependents
5) To see the children enjoy the property while the donor is alive
6) To protect the family from hazards of business operations, and
7) To reward services rendered

b. Revocable Transfer.
A revocable transfer is a transfer where the enjoyment of the property maybe altered, amended or revoked.

c. Property Passing Under General Power of Appointment

d. Transfers of Property for an Insufficient Consideration

e. Transfer with retention or reservation of certain rights (possession or enjoyment of, or the right to the income from the property, or the
right to designate a person who may exercise such right)

3. Interests

a. Proceeds of Life Insurance

1). The amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent
upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by
any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is
irrevocable.

2) The following are also not taxable:

a) proceeds/benefits coming from SSS
b) proceeds/benefits coming from GSIS.
c) the proceeds coming from group insurance.
3) When the designation of the beneficiary is not stated or is not clear, the Insurance Code assumes revocable designation.

b. Claims against insolvent persons

1) Claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross estate
2) The full amount of the claims is included in the gross estate.
3) The uncollectible amount of the claims is deducted from the gross estate.
c. Amount received by heirs under R.A. No. 4917
1). Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee in accordance with
Republic Act No. 4917. It shall also be allowed as deduction from the gross estate provided, that such amount is included in the gross estate
of the decedent.
2) R.A. No. 4917 is entitled ‘An Act providing that retirement benefits of employees of private firms shall not be subject to attachment, levy,
execution, or any tax whatsoever’.

d. Family Home
The family home refers to the dwelling house , including the land on which it is situated, where the husband and the wife, or an unmarried
person who is the head of the family and members of the family reside, as certified by the Barangay Captain of the locality.

e. Prior interest/Decedent’s Interest

Refers to the value of any interest in property or rights accrued in favor of the decedent on or before his death which have been received only
after his death. (Sec. 85 (A) NIRC)

As a rule, the interest must exist at the time of the decedent’s death to be included as part of the gross estate.
Examples
1. Dividends declared on or before the death of the stockholder, and received by the estate after said stockholder’s death.
2. Partnership’s profit earned prior to death of the partner, received by the estate after the partner’s death.
3. Accrued interest and rents on or before the time of death, but collection was made after death.

Exercises:
a. Determine which of the following transactions are taxable transfers.
Transaction Answer
1) Property transferred inter vivos, transferor is of advanced age and died within 3 years after the date of transfer.
2) Property sold for adequate and full consideration, transferor/seller died after one day because of incurable disease.
3) Property sold for P1, 000,000. The FMV of the property sold was P 1,100,000.
4) Property transferred, transferor has the right to take back the property.
5) Property transferred, transferor has the right to take back the property. The transferor has waived the right before he died.
6) Property transferred, the transferee has the power to appoint or transfer to anybody the said property.
7) Property transferred, the transferee has the power to appoint or transfer to anybody the said property as designated by the
transferor.
8) Property transferred, the transferor has the right to the income of the property transferred while he is still alive.
9) Property donated, Donor’s tax paid. In the deed of donation, the donor expressly reserved for himself the usufruct over the Revocable transfer
property (yes)

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b. Determine the value to be included in the gross estate for each of the cases below.
Case FMV, time of transfer Consideration received FMV, time of death Amount included in the
gross estate
1 P2,000,000 P 1,500,000 P1,700,000
2 P2,000,000 P 2,000,000 P1,000,000
3 P2,000,000 None P1,700,000
4 P2,000,000 P 3,000,000 P3,500,000
5 P2,000,000 P 1,500,000 P1,200,000

c. Identify which of the following cases of proceeds of life insurance will be included in the gross estate.
1) Proceeds of life insurance, daughter of the insured was irrevocably designated as beneficiary of the life insurance.
2) Proceeds of life insurance, wife of the insured was revocably designated as beneficiary of the life insurance.
3) Proceeds of life insurance, the beneficiary’s designation was not stated in the insurance policy.
4) Proceeds of life insurance, the administrator of the estate was revocably designated as beneficiary of the life insurance.
5) Proceeds of life insurance, the executor of the estate was irrevocably designated as beneficiary of the life insurance.
6) Benefits received from SSS, beneficiary was irrevocably designated as beneficiary.
7) Benefits from GSIS, beneficiary was revocably designated as beneficiary.
8) Proceeds of life insurance, the estate was designated as beneficiary of it.
9) Proceeds of life insurance from group insurance.

D. GROSS ESTATE OF MARRIED DECEDENTS

1. Properties included in the gross estate of the married decedent
Conjugal partnership of gains Absolute community of properties
Exclusive properties of the decedent Included Included
Exclusive properties of the surviving spouse Not included Not included
Common properties Included Included

2. Common types of property regimes:

a. Absolute separation of property (ASP) - All properties of the spouses are separate properties, except those properties which they may acquire
jointly.
b. Conjugal partnership of gains (CPG)- All properties that accrues as fruit of their individual or joint labor and fruits of their properties during the
marriage will be common properties of the spouses.
c. Absolute community of property (ACP)- All present properties owned by the spouses at the date of celebration of the marriage shall become
common properties of the spouses including future fruit of their separate or joint industry or fruits of
their common properties.`

3. In the absence of pre-nuptial agreement - (Date of Marriage):

Before August 3, 1988 On or after August 3, 1988
Conjugal partnership of gains Absolute community of properties

4. Separate property of the Husband and Wife

Capital Property Property owned solely by the husband
Paraphernalia Property Property owned solely by the wife

Capital/ Paraphernalia Property (exclusive property) of surviving spouse – The capital/ paraphernalia of the surviving spouse of a decedent
shall not be deemed a part of the gross estate of the decedent.

5. Conjugal partnership of gains

Exclusive Properties Conjugal Properties
a. Properties brought into the marriage as either of the spouse’s own. a. Properties acquired by onerous title during the marriage at the
expense of the common fund, whether the acquisition is for the
partnership or for only one of the spouses.

b. Properties acquired by gratuitous (or lucrative) title during marriage. b. Properties obtained from labor, industry, work or profession of either
or both of the spouses.

c. Properties acquired by right or redemption or by exchange with c. The fruits, natural, industrial or civil, due or received during the
other property belonging to only one of the spouses. marriage from the common property, as well as the net fruits from
the exclusive property of each spouse.

d. Properties acquired with the exclusive money of either spouse. d. The share of either spouse in the hidden treasure which the law
awards to the finder or owner of the property where the treasure is
found.

e. Properties acquired through occupation such as fishing and hunting.

f. Livestock existing upon the dissolution of the partnership in excess

of the number of each kind brought to the marriage by of either
spouse.

g. Properties acquired by chance, such as winnings from gambling and

betting.

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