INTRODUCTION TO TRANSFER TAXES

CLASSIFYING DONATION AS INTER VIVOS OR MORTIS CAUSA

The timing of the gratuitous transfer of ownership or legal title over the property to another
determines the classification of the transfer.
If gratuitous transfer of ownership Type of Transfer
occurs
During the lifetime of the transferor Inter vivos
Upon the death of the transferor Mortis Causa

Exceptional Rules Inter Vivos Mortis Causa

1. Transfer in contemplation of death X
2. Transfer to take effect at death X
3. Incomplete Transfer X X

Transfer in Contemplation of Death

- a donation that is inspired or motivated by the thought of death of the decedent is
donation mortis causa. There is a reservation of right. (subject to estate tax)
- Ex. Don Pedro is 80 years old and is having a cancer. He donated his house and lot to
his son, Juan saying that he may not live long enough.

Incomplete Transfer
- transfer with reservation of right
- inter vivos: if the condition is satisfied during the lifetime of the donor.
- mortis causa: if the condition is satisfied upon the death of donor.

Motives associated with life:

The following motives precludes a transfer from being classified as one in contemplation of
death:
1. to reward services rendered
2. to relieve the donor of the burden of management of the property 3. to save on income tax
4. to see children financially independent
5. to see children enjoy the property while the decedent still lives 6. to settle family disputes
*these are all subject to donor’s tax
*they are not considered as part of mortis causa

Donation whose motives is associated with life is a donation inter-vivos subject to donor's tax.

Transfer intended to take effect upon death

A donation that is made on the decedent's last will and testament is a donation mortis causa.

Incomplete Transfers - 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 will take effect in the future upon the happening of certain future events or
satisfaction of the condition. They are subject to transfer tax in the future when the actual
transfer of ownership occurs.
TYPES OF INCOMPLETE TRANSFERS:
1. Conditional transfer
- 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 transfer 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 gross estate of the
decedent subject to estate tax.

Revocable Transfer
- Where the donor receives the right to take back the donation.
- Part of the gross estate tax of the decedent, even without the decedent using his right to
revocable transfer.

Valuation Of Complex Incomplete Transfers

Mortis Causa Inter Vivos
Fair Market Value at the death less Fair Value at completion or perfection of
consideration upon transfer donation less consideration upon transfer
Non-Taxable Transfers
1. Void transfers
- are those that are prohibited by law or those that do not conform to legal requirements
of their validity. Void transfers do not transfer ownership over property and are therefore
not subject to transfer tax.
Ex.
a. Donation of properties not owned by the donor.
b. Donation between spouses
c. Donation which do not manifest all essential requisites to validity such as donations
refused by the donee
d. Donations that do not conform to formal requirements such as oral donation of real
properties.

2. Quasi-transfer
- There are transmission of property which will never involve transfer of ownership.
Ex.
a. transmission of the property by the usufructuary to the owner of the naked title
b. transmission of the property by the trustee to the real owner
c. transmission of the property from the first heir to the second heir in accordance with
the desire of the predecessor.

Adequate Disclosure Inadequate Disclosure

Land – Fair Market Value 1,000,000 1,000,000
- Selling Price 1,200,000 800,000
Total 200,000 gain (not subject to 200,000 loss (subject to
estate tax estate tax)

*If there is an adequate disclosure, there is an absolute sale.

INTRODUCTION TO SUCCESSION AND 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.

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.

2. Legal or Intestate Succession

- When the decedent did not execute a will or the will executed is invalid. The provision
of the civil code on succession shall be observed.
3. Mixed succession
- One which is partly testate and partly intestate.

Will - is 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.

Types of Will
1. Holographic Will
- will written, dated and signed by the the testator himself in his own handwriting.

2. Notarial Will
- a will which needs notarization
- Must be signed by the testator and witnesses.

3. Codicil
- instrument that amends the provisions of a will (may include addition, explanation or
alteration to the will previously made.

NATURE OF SUCCESSION - gratuitous transfer of property to take effect upon the death of the
decedent.

Elements Of Succession:
1. Decedent - a 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 TESTATOR.

2. Estate - refers to property, rights and obligations of the decedent to be transmitted

through succession.

3. Heirs - a person called to the succession either by the provision of the will or by
operation of law.

Devisee Legatee

*Devise – testamentary dispositon of real property

*Legacy – testamentary disposition of personal property

*not all heirs are devisee/legatee, but all devisee/legatee are heirs

*in inheritance, substitution is okay as long as it is within the descending line

Who are the heir under intestate succession?

The heirs shall be the following in descending order of priority:
A. Compulsory heirs
B. Relatives up 5th degree of consanguinity
C. Republic of the Philippines
Types of compusory heirs:
1. Primary heirs - legitimate children and their direct descendants
2. Secondary heirs- Legitimate/illegitimate parents and ascendants
3. Concurring heirs - suriviving spouse and illegitimate children

Definition of terms
1. Legitimate children - those born out of a legal marriage
2. Direct descendants - refer to children or, in their absence, grandchildren
3. Legitimate parents - refer to biological parents
4. Illegitimate parents - are adopting parents to an adopted child
5. The surviving spouse - a widow or widower of the decedent
6. Illegitimate descendants - illegitimate children

In the absence of compulsory heirs, the following shall inherit in the following order of
priority:
1. Collateral relative up to 5th degree of consanguinity
2. The Philippine government

Summary of Rules:
1. Concurring heirs and
A. Descendants, or in their default,
B. Ascendants
2. Relatives in the collateral line up 5th degree
3. Republic of the Philippines.

Heirs Under Testamentary Disposition

In testamentary succession, the heirs shall be the following:
1. Compulsory heirs
2. Other persons specified by the decedent in his will

Legitime - is that part of the testator's property which he cannot dispose of because the law has
reserved it for certain heirs who are, therefore, called compuslory heirs. The excess properties
of the decedent is called "free portion". (must be satisfied first)

Other persons in succession:

1. Legatee - a person whom gifts of personal property is given by virtue of a will
2. Devisee - a person whom gifts or real property is given by virtue of a will
3. Executors - a person named by the decedent who shall carry out the provisions of his will.
4. Administrators - a person appointed by the court to manage the distribution of the estate
of the decedent.

NATURE OF ESTATE TAX:

1. Excise tax - tax on privilege
2. Revenue or general tax - aimed at raising revenues for the government
3. Ad Valorem tax - dependent upon the value of the estate
4. National tax - imposed by the National Government
5. Proportional tax - tax rate is fixed at 6%
6. One time tax - once in lifetime

Classification of Decedents of for Taxation Purposes

1. Resident or Citizen Decedents - taxable on properties located within or outside the
Philippines.
2. Non-resident Alien Decedents - taxable only on properties located in the Philippines, except
intangible personal 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.

*obligation can only be inherited up to the extent of the value of the property. Thus, no
obligation can be inherited more than the value of inheritance of the decedent
*only transmissible rights can be transmitted.