University of San Carlos

School of Business and Economics

Accountancy Department

Tax 502
Estate Tax Date:_____________________________

Transfer Taxes

Estate Tax Donor’s Tax

ESTATE TAXATION

Definition
Tax on the right to transmit property at death and on certain transfers, which are
made by the statute, the equivalent of testamentary disposition.

Nature and object of estate tax

It is an excise tax and its object is to tax the shifting of economic benefits
and enjoyment of property from the dead to the living.

It is a tax imposed on a person’s right to transfer his property at death.

Theories that justify the imposition of Estate Tax

Benefit Received Theory – the tax is in return for the services rendered by the
state in the distribution of the estate of the decedent and for the benefits that
accrues to the estate and the heirs.

State Partnership Theory – the tax is the share of the state as a “passive and
silent partner” in the accumulation of property.

Ability to pay Theory – the tax is based on the fact that the receipt of inheritance
creates an ability to pay and thus to contribute to government income; and

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.

Succession = Estate Tax

The Government’s right to collect estate tax arises only when there’s a
succession. Conversely, no succession no estate taxes. Ergo, it is necessary for
us to have a thorough and clear understanding of the concept that is
SUCCESSION.

Succession defined
 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.
 It is a mode of acquisition by virtue of which the property / estate of a
person are transmitted to his heirs, successors, and beneficiaries either by
his will or by operation of law. The right to succession is deemed
transmitted from the moment of the decedent’s death.
 SUCCESSION

Essential elements

Decedent Estate Heirs

Elements of Succession
Decedent
 Refers to the deceased person whose estate is transmitted through
succession. Also known as a Testator if he dies and left a valid last will
and testament.
Estate
 Refers to the property, which is the subject of succession.
 It represents the sum total of the decedent’s properties, which are
available for disposition to his heirs, successors or beneficiaries.
 Represented by an Executor or Administrator as the case may be.

a) Executor – a person designated in the last will and testament

to carry out the provisions of the decedent’s will. He also
performs a fiduciary duty, i.e. to take care of the decedent’s
estate prior to final disposition to the heirs.
b) Administrator – He is a person appointed by the court and
performs the same duty, in lieu of an executor, if the latter
refused to accept the appointment, failed to qualify under the
law or the last will and testament did not appoint one.

 As an inheritance, estate is classified into two kinds.

a) Legacy – personal property composing the estate. Recipient

is called a legatee; and
b) Devise – real property composing the estate. Recipient is
called a devisee.

TAX TABLE

The estate tax shall be computed on the basis of the value of the net
estate in accordance with the following graduated rates (effective Jan. 1, 1998)

If the net estate is

Over But not over The tax shall be

P200,000 0
P200,000 500,000 5% of the excess over P200,000
500,000 2,000,000 P15,000 + 8% of excess over P500,000
2,000,000 5,000,000 P135,000 + 11% of excess over P2M
5,000,000 10,000,000 P465,000 + 15% of excess over P5M
10,000,000 P1,215,000 + 20% of excess over P10M
Basic Concepts:

1. a mode of transferring and acquiring ownership,

rights, interest and obligations from a dead individual.
2. refers to all property, rights and obligations of a
person which are not extinguished by his death and also those
which accrued thereto since the opening of succession; subject
matter of succession.
3. a person whose property to transmitted thru the
succession whether or not he left a will
4. a person whose property is transmitted thru
succession with a will.
5. a person called to the succession either by will or by
provisions of law.
6. a person who inherits personal or movable property
by a will.
7. a document wherein an individual makes known his
wishes concerning the disposition of his estate after his death.
8. the person to whom the property or property rights is
transferred.
9. a person appointed by a testator to carry out the
provision of the will.
10. a person appointed by the court in the absence of an
executor.
11. one carried out according to the wishes of the testator
expressed in a will executed in a form prescribed by the law
(voluntary).
12. one that takes place by operation of law (involuntary).
13. succession affected partly by will and partly by
operation of law.
14. tax imposed upon gratuitous transfer of properties.
15. tax imposed upon gratuitous transfer mortis causa.

Gross Estate
Less: Deductions
Net Taxable Estate
X Estate Tax rate
Estate Tax
Gross Estate

In order to properly determine the decedent’s gross estate, the following

factors must be known:
1. With regard to the DECEDENT
a) Citizenship and residency of the decedent;
b) Civil status of the decedent prior to his death;
i. If married, the spouses’ property relationship.

2. With regard to the decedent’s ESTATE

a) Location or situs of the properties comprising his estate;
b) Kinds of properties comprising his estate.

Alien
Any person who is not a citizen of the Philippines
Resident of the Philippines
A person is a resident of the Philippines if he meets any of the following
criteria;

1. His domicile is in the Philippines; or

2. He may be found in another place or another country for a long period of
time either for business or pleasure, but he still intends to return to the
place of his residence.
Note: The important factor to determine a person’s residence is his intent.

Classes of Property in the Estate

1. As to location
a. Within the Philippines –
i. Those, which are physically in the Philippines.
ii. The following, among others, are intangible personal
properties located in the Philippines:
1. Franchise which must be exercised in the Philippines;
2. Shares, obligations or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its
laws;
3. Shares, obligations or bonds issued by any foreign
corporation eighty-five per centum (85%) of the
business of whom 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; and
5. Shares or rights in any partnership, business or
industry established in the Philippines.
b. Outside of the Philippines – Located outside the Philippines.

Property Not Physically in the estate

 It will be seen that in most of these transfers, the property remains
substantially that of the transferor during his lifetime notwithstanding the
transfer, as he still retains either the “beneficial ownership” or naked title to
the property. Hence, the transfer is essentially similar in respect to a
transmission by testamentary or intestacy upon the death of the owner.
 The law treats these transfers as a sham, as a means of evading the payment
of estate tax.
1) Transfers in contemplation of death
 It is the thought of death, as a controlling motive, which
induces the disposition of the property for the purpose of
avoiding the tax.
 Included within this concept is Donation Mortis Causa.
2) Donation mortis causa
 A donation mortis is that which becomes effective upon the
death of the donor.
 Donations mortis causa partake of the nature of testamentary
provisions, and shall be governed by rules established in the
Title on Succession. Therefore, should be subjected to estate
tax, not donor’s tax.
3) Transfer with retention or reservation of certain rights
 The decedent have transferred his property during his lifetime,
but retained for himself beneficial enjoyment of the thing or the
right to receive income from the same.
4) Revocable Transfers
 It is a transfer where the terms of enjoyment of the property
may be altered, amended, revoked or terminated by the
decedent.
 It is sufficient that the decedent had the power to revoke though
he did not exercise the power.
5) Transfers under a general power of appointment
 A power of appointment is the right to designate the person or
persons who will succeed to the property of the prior decedent.
 A power of appointment is general when it authorizes the donee
to appoint any person he pleases. It is a transfer of property
whereby the decedent /transferor empowers the transferee to
transfer the thing to any person whom which the latter elects.
 A power of appointment is special when the donee can appoint
only from a restricted or designated class of persons other than
himself
Note: Property transferred under a special power of appointment
should be excluded from the gross estate of the assignee.
6) Transfer for insufficient consideration
 Property transferred by virtue of a bona fide sale for a price less than
its fair market value at the time of sale.
 The excess of the fair market value of the transferred property at the
time of death over the value of the consideration received shall be
included in the gross estate.
Note: For purposes of this transfer; we shall make use of two FMVs: a)
FMV at the time of sale – to determine whether or not the
consideration was full and adequate. b) FMV at the time of death –
to determine the amount to be included in the gross estate if the
consideration received is less than full and adequate as compared
to the FMV at the time of sale.
7) Proceeds of life insurance
 The following are the requisition in order for the proceeds of life
insurance to be included in the gross estate:
1. It must be an insurance on the life of the decedent;
2. The beneficiary must be either of the following;
a. his estate;
b. his executor;
c. his administrator; and
d. any third person provided the designation is revocable.
Note: When the problem is silent, the designation of the beneficiary is
revocable; irrevocable designation of beneficiary is never presumed
and for it to be valid, must be in writing.
 Particulars Conjugal Absolute
Partnership Community
of Gains
(before Aug. 3, (Aug 3, 1988 and
1988) after)

1. Property Acquired before marriage

a) Gratuitous title E C
b) Onerous title E C
c) Of the spouse who has a legitimate E E
descendant from a previous marriage
2. Property Acquired during marriage
a) Gratuitous title E E
b) Onerous title C C
c) In exchange for exclusive property E E
d) In exchange for conjugal / community C C
property
e) Income from exclusive property C E
f) Income from conjugal / community property C C

EXEMPTIONS AND EXCLUSIONS FROM THE GROSS ESTATE

A. Under Sections 85 & 86, NIRC

1. Capital or exclusive property of the surviving spouse.
2. Properties outside the Philippines of a Non-Resident Alien decedent
3. Intangible personal property in the Philippines of a Non-Resident Alien
under the Reciprocity Law.
B. Under Section 87, NIRC
1. The merger of 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 fideicomissary.
3. The transmission from the first heir or legatee or donee in favor of another
beneficiary in accordance with the desire of the predecessor – similar to
transfers passing thru SPA
4. All bequests, devises, legacies, or transfers to social welfare, cultural,
charitable institutions, no part or the net income of which inures to the
benefit of any individual provided that not more than 30% of the said
bequests, devises, legacies, or transfers shall be used by such institution
for administrative purposes.
C. Under Special Laws
1. Benefits from GSIS by reason of Death
2. Benefits from SSS by reason of Death
3. Benefits from Philippines and US government for war damages
4. Benefits from US Veteran Administration
5. Retirement benefits of officials / employees of private firms
6. Life insurance proceeds on insurance policy upon his own life, where the
beneficiary is a third person, and the designation is irrevocable
7. Life insurance proceeds on insurance policy (group insurance) taken out
by the employer on the employee’s life regardless of who is the
beneficiary and the designation.

Gross Estate
Less: Deductions
Net Taxable Estate
X Estate Tax rate
Estate Tax
Allowed Deductions

Deductions from the gross estate are:

(a) ELITE
1. Funeral Expenses
 Funeral Expenses would be whichever is lower of the following
provided it does not exceed P200,000:
1. Maximum amount of P200,000;
2. 5% of the Gross Estate; or
3. Actual Funeral Expenses, composed of:
(a) Mourning clothes;
(b) Expenses of the wake preceding the burial;
(c) Fees for religious rites and ceremonies prior to interment;
(d) Cost of burial plot, tombstone, mausoleum; and
(e) Cost of publication of deceased’s obituary.
 To be considered actual, the funeral expense must be paid out by the
estate and not by somebody out of contributions from friends and
relatives.
2. Judicial expenses
 Expenses of testamentary or intestate proceedings which includes:
1. Actual judicial or court expenses;
2. Attorney’s fees; and
3. Expenses of administration including the compensation of executor
or administrator.
3. Claims against the estate
 The following are requisites in order for this deduction to be allowed as
such:
1. Must be enforceable against him when he was alive;
2. If with a debt instrument, it must be notarized;
3. If contracted within three (3) years from the date of death of the
decedent, there must be attached therewith a statement showing
the disposition of the proceeds of the loan.
 4. Claims against an insolvent person
 An insolvent is a person whose properties are not sufficient to satisfy,
whether fully or partially, his debts. For purposes of estate taxation a
judicial declaration of insolvency is not required.
 To be allowed as a deduction from the GE, the full amount owed by the
insolvent must first be included in the decedent’s GE.
 If the insolvent could only pay partial, the full amount owed shall be
included in the GE, and the amount uncollectible shall be allowed as a
deduction.
5. Unpaid mortgage or indebtedness on property
 This is a deduction allowed when the decedent leaves property
encumbered by a mortgage or indebtedness.
 To be allowed as a deduction, his gross estate must include the fair
market value of the property encumbered.
 The amount allowed as deduction would be the outstanding debt or
mortgage.
6. Taxes
 For taxes to be allowed as a deduction, it must have accrued prior to
the death of the decedent. Therefore, the following taxes are not
allowed as a deduction:
1. Income tax on income received after the death;
2. Property taxes accrued after death; and
3. Estate tax.
7. Losses
 Include all losses incurred during the settlement of the estate arising
from fires, storms, shipwreck or other casualties, or from robbery, theft
or embezzlement.
 To be allowed as deduction, the following requisites must all be
present:
1. Arising exclusively from:
(a) Acts of God: fire, storm, shipwreck and other similar casualty;
(b) Acts of Man: robbery, theft, and embezzlement.
2. Not compensated by insurance or otherwise;
3. Not claimed as a deduction in an income tax return of the estate
subject to income tax;
4. Occurred during the settlement of the estate; and
5. Occurred before the last day for the payment of the estate tax (6
months after the death of the decedent)
(b) Transfers for public use
 Disposition in a last will and testament or transfers to take effect after
the death in favor of the:
1. Government of the Philippines; or
2. Any political subdivision thereof e.g. Barangay, Municipality, City,
Province, Autonomous Region
 For exclusively public purposes.
(c) Vanishing deductions
 Referred to as deduction for “property previously taxed” in the Tax
Code.
 It is an amount allowed to reduce the taxable estate of a decedent
where the property:
1. Received by him from a prior decedent by gift, bequest, devise or
inheritance;
2. Transferred to him by gift
 Has been the object of previous transfer taxation.
  The rate of deduction gradually diminishes and entirely vanishes
depending upon the time interval between the two successive transfers
 The justification of the State in granting vanishing deduction is that the
deduction operates to ease the harshness of successive taxation of the
same property within a relatively short period of time (up to 5 years)
occasioned by the untimely death of the transferee after the receipt of
the property from a prior decedent or a donor, as the case may be.
 For vanishing deduction to be allowed, all the following requisites must
concur:
1. Death – The present decedent died within five (5) years from date
of death of the prior decedent or date of gift;
2. Identity of property – The property with respect to which deduction
is sought can be identified as the one received from the prior
decedent, or from the donor, or as the property acquired in
exchange for the original property so received;
3. Located in the Philippines – The property on which vanishing
deduction is being claimed must be located in the Philippines;
4. Inclusion of the property – the property must have formed part of
the gross estate situated in the Philippines of the prior decedent or
have been included in the total amount of the gifts of the donor
made within five (5) years prior to the present decedent’s death;
5. Previous taxation of the property – the estate tax on the prior
succession, or the donor’s tax on the gift must have been finally
determined and paid by the prior decedent or by the donor as the
case may be; and
6. No previous vanishing deduction on the property – no such
deduction on the property given in exchange therefore was allowed
in determining the value of the net state of the prior decedent.
(d) Family Home
 Family Home is the dwelling house where a person and his family
reside.
 For family home deduction to be allowed, the following requisites must
concur:
1. The decedent was married or if single, was a head of the family;
2. Along with the decedent either of the following person must be
dwelling in the family home;
(a) Spouse;
(b) Parents or ascendants;
(c) Children or descendants; or
(d) Brothers or sister.
3. The family home as well as the land on which it stands must be
owned by the decedent. Therefore, the FMV of the family home
should have been included in the computation of the decedent’s
GE.
4. The barangay captain of the locality where it is located must certify
it to as family home.
 The amount of family home deduction allowable would be the extent of
the decedent’s interest in the family home not exceeding P1,000,000.
(e) Standard deduction
 The law allows a standard amount of P1,000,000 as deduction. The
deduction does not apply to non-resident alien decedents.
(f) Medical Expenses
 For actual medical expenses to be allowed as a deduction, the
following conditions must be met:
1. Medical expenses incurred by the decedent within one (1) year
prior to his death; and
 2. Substantiated by receipts.
 The amount allowable as Medical expenses would be whichever is
lower of:
1. Actual medical expenses incurred by the decedent; or
2. P500,000.
(g) Amounts received by heirs under RA 4917
 Any retirement benefit or pension given by the decedent’s private
employer shall be exempt and allowed as a deduction from the GE.
Provide, the following conditions are present:
1. There is a private benefit plan maintained by the employer in favor
of his employees;
2. The employee (decedent) was 50 years old when at the time he
receives the retirement benefit;
3. The employee (decedent) was under the employ of the said
employer for a period not less than ten (10) year at the time he
receives the retirement benefit; and
4. The employee (decedent) receives his retirement benefit only once.

Summary of Allowable Deductions

Citizen or Non-resdient
Resident Not a citizen
a. ELITE I I*
1. Funeral Expenses I I*
2. Judicial Expenses I I*
3. Claims against the estate I I*
4. Claims against insolvent I I*
5. Unpaid mortgages or indebtedness I I*
6. Taxes I I*
7. Losses I I*
b. Transfers for public use I I
c. Vanishing deduction I I
d. Family Home I X
e. Standard deduction I X
f. Medical expenses I X
g. Amount received by heirs under RA 4917 I X

Note:
I – Include
X – Exclude

I* - with regard to a non-resident, not a citizen decedent, the ELITE allowable to

him would only be a pro-rata share of his GE in the Philippines over his
worldwide GE

Formula:

GE Phils
Total ELITE x
GE World

Stage II. Only if the decedent was married.

1. After identifying the deductions which allowed, we shall segregate them as
follows:
a. The deductions Funeral and Judicial expenses are always
deducted from Conjugal / Community Property.
b. All other deductions shall be deducted from the property to which
they are related to.