Introduction to transfer taxes and estate taxes

A. Introduction to Transfer Tax

Transfer tax is a tax imposed upon the gratuitous transfer of property ownership. It is a privilege tax which is
imposed on the act of passing ownership of property and not a tax on the property itself.

Donor’s Tax Transfer of ownership may take effect during lifetime

Estate Tax Transfer of ownership may take effect upon the death of a person

1. Estate tac is a tax imposed on the privilege to transmit property upon one’s death, while donor’s tax is a
tax imposed upon one’s privilege to transfer property during lifetime.
2. The rates of tax in estate tax and donor’s tax are the same at six percent (6%).
3. In estate tax, extension for filing and payments including payment of tax by installments are allowed,
while in donor’s tax these are not allowed.
4. The exemption from donor’s tax per year is P250,000 of net gift, while in estate tax there is no such
exemption.
Effect of misnomer on the instrument
The nature of a donation is not determined by the title given to it by the donor, but by what is expressed therein.
The donor may entitle his donation as one “mortis causa”, but if it is in reality a donation inter vivos, its validity
and revocability will be determined by the rules for the latter kind of donations.” On the other hand, the donation
may be termed “inter vivos” by the donor, but if it is essentially a disposition mortis causa, it will be held void if
not made in the form and with the solemnities of a will.

B. Introduction to Estate Tax

Estate tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and
beneficiaries at the time of death, and on certain transfers which are made by law as equivalent to testamentary
disposition.
Estate tax is levied upon the transfer of the net estate of a decedent to his heirs.
It is an estate tax because it is imposed on the exercise of the right to transfer ownership over the property.
It is not a tax on the property transferred.
The estate tax accrues at the moment of death of the decedent.
Moreover, the law in force at death of the decedent is controlling, notwithstanding postponement of the actual
possession or enjoyment of the property by the beneficiary.

The following theories have been identified to justify the imposition of estate tax:
1. Benefit-received theory
2. Privilege theory (State Partnership theory)
3. Redistribution of wealth theory

Computation of estate tax

The computation of the estate tax will depend on the status of the decedent, whether he was single or married.
1. Decedent was single, unmarried or legally separated at the time of his death:
Gross estate P xx
Less: Deductions
Ordinary Pxx
Special xx xx
Taxable net estate xx
Multiply by the tax rate 6%
Estate tax due xx
Less: Tax credit xx
 Estate tax payable P xx

2. Decedent was married at the time of death:

Conjugal/Communal Exclusive Total
Real properties xx xx
Personal properties xx xx
Gross estate xx xx Pxx
Less: Ordinary deductions
Claims against the estate xx xx
Claims of the deceased against insolvent
persons xx xx
Unpaid mortgages, taxes and losses xx xx
Vanishing deduction xx xx
Transfer for public use xx (xx)
Estate after ordinary deductions xx
Less: Special deductions
Standard deduction (xx)
Family home (xx)
RA 4917 (xx)
Net estate xx
Less: Share of surviving spouse in the net
conjugal/communal property (xx)
Taxable net estate xx
Multiply by the tax rate 6%
Estate tax due xx
Less: Tax credit xx
Estate tax payable Pxx

Basic Concepts of succession and will

A. 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 by will or by operation
of law.

Elements of Succession
a. Decedent. The person whose property is transmitted through succession, whether or not he left a will.
b. Heir. The person called to the succession either by the provision of a will or by operation of law.
c. Estate. Refers to all the property, rights and obligations of a person which are not extinguished by his
death.
Kinds of Succession
a. Testamentary. Succession which results from the designation of an heir, made in a will executed in the
form prescribed by law.
b. Legal or intestate. Transmission of properties where there is no will, or if there is a will, the same is void
or nobody succeeds in the will.
c. Mixed. Transmission of properties which is effected partly by will and partly by operation of law.
Kinds of Successors in a testamentary succession
a. Legatee. An heir to a particular personal property given by virtue of a will.
b. Devisee. An heir to a particular real property given by virtue of a will.
Persons authorized to manage the estate
 a. Executor is the person nominated by a testator to carry out the directions and requests in his will and to
dispose of his property according to his testamentary provisions after his death.
b. 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.
As a matter of distinction, an executor is appointed in the will while an administrator is appointed by court.

The rights to the succession are transmitted from the moment of death of the decedent.

B. 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 his estate, to take effect after his death.

Disqualifications to make and to witness a will

All persons who are not expressly prohibited by law may make a will. The persons prohibited by law to make a
will are those below 18 years of age and those who are not of sound mind at the time of its execution.
Two or more persons cannot make a will jointly, or in the same instrument, either for their reciprocal benefit or for
the benefit of a third person.
The following are disqualified from being witnesses to a will:
a. Any person not domiciled in the Philippines
b. Those who have been convicted of falsification of a document, perjury or false testimony.
Holographic will
As a rule, every will must be acknowledged before a notary public by the testator and the witnesses, in which case
it is called a “notarized will”.
However, the testator may make a will which he wants to keep it secret which is known as holographic will.
A person may execute a holographic will which must be 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.
Revocation of will; codicil
A will may be revoked by the testator at any time before his death. Any waiver or restriction of this right is void.
If after making a will, the testator makes a second will expressly revoking the first, the revocation of the second
will does not revive the first will, which can be revived only by will or codicil.
A codicil is 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 any disposition made in the original will is explained, added to, or altered.

No will shall be revoked except in the following cases:

1. By implication of law; or
2. By some will, codicil or other writing executed as provided in case of wills; or
 3. By burning, tearing, canceling, or obliterating the will with the intention of revoking it, by the testator
himself, or by some other person in his presence, and by his express direction.
If burned, torn, cancelled, or obliterated by some other person, without the express direction of the testator, the
will may still be established, and the estate distributed in accordance therewith, if its contents, and due execution,
and the fact of its unauthorized destruction, cancellation, or obliteration are established according to the Rules of
Court.

Properties included in decedent’s estate

1. Properties that are still owned by decedent at the time of his death
2. Assets or properties owned by decedent during his lifetime but were no longer owned by him at the time
of his death, because these properties have been transferred during his lifetime by way of taxable transfer
as follows:
a. Transfer in contemplation of death
b. Revocable transfers
c. Property passing under the general power of appointment
d. Transfer for insufficient consideration
The inheritance of a person includes not only the property and the transmissible rights and obligations
existing at the time of his death, but also those which have accrued thereto since the opening of the
succession.

Decedent’s interest
Decedent’s interest includes up to the extent of the decedent’s interest therein in the properties at the time of his death. It
shall include the following:
1. Dividends declared by a corporation before death of stockholder although paid after death, if the decedent
was living on the record date
2. Partnership profits even if paid after death of partner
3. Proceeds of life insurance policy payable to a revocable beneficiary
4. Right of usufruct if transferable to the heirs
Transfer in contemplation of death
This means that it is the thought of death, as a controlling motive, which includes the disposition of the property for the
purpose of avoiding estate tax.
There is a transfer in contemplation of death when:
a. The decedent transferred the possession or enjoyment of his property to another, but this transfer was intended to
take effect only upon his death
b. The decedent transferred title to the property but retained for his lifetime the right to possess or enjoy the property
or the income therefrom, or the rights to designate whom shall possess or enjoy the same.

This does not apply when the sale is in good faith and for an adequate and full considerations.
Revocable transfers
This contemplates a situation where the decedent transfers the enjoyment of his property to another, subject to his right to
revoke the transfer at will, with or without notifying the transferee, anytime before he dies.
Thus, the gross estate shall include the value of any property which the decedent has at any time made a transfer by trust
or otherwise:
a. With reserved power to alter, amend, revoke or terminate
b. With such power relinquished
It should be noted that revocable transfers shall not be included as part of gross estate where the transfer is a bona fide sale
for an adequate and full consideration in money’s worth.
Property passing under general power of appointment
A power of appointment is a right to designate by will or deed the person or persons who are to receive certain property
from the estate of a prior decedent. A power of appointment may be either general or limited.
  Special power of appointment is one which authorizes the done or holder of the power to appoint only among a
restricted class or designated class persons other than himself.
 General power of appointment – if the done can appoint any beneficiary including (a) himself, (b) his estate, (c)
his creditor, or (d) the creditors of his estate.
If the power of appointment is general, the decedent is practically the owner of the property, and so the property is deemed
part of his gross estate. But if the power is specific, the decedent is only a trustee to the property, and so it should not be
included in his estate.
Transfers for insufficient consideration
If any of the above transfers, trusts, interests, rights or powers enumerated and described (transfer in contemplation of
death, revocable transfer, property passing under general power of appointment) is made, created, appointment) is made,
created, exercised or relinquished for an adequate consideration in money or money’s worth, there shall be included in the
gross estate only the excess of the fair market value, at the time of death, of the property otherwise to be included on
account of such transaction, over the value of the consideration received therefore by the decedent. If an inter vivos
transfer of the decedent is proven to be fictitious, the total value of the property at the time of death shall be included in
the gross estate.
Proceeds of life insurance
This takes place when a person takes out an insurance policy in his own life and appoints somebody as beneficiary.
The proceeds if life insurance covering the life of the insured are includible in the gross estate, except when:
1. The beneficiary appointed in the policy is not the estate of the deceased, his executor or administrator;
and
2. The person designated as beneficiary is irrevocable
The rule of taxability or non-taxability of life insurance proceeds is illustrated in the following table:
Matrix 2
Case Policy Beneficiary * Taxable?
1 Revocable Yes Yes
2 Revocable No Yes
3 Irrevocable Yes Yes
4 Irrevocable No No
5 Silent No Yes
*The beneficiary is the estate of the deceased, his executor or his administrator
The law speaks of policies “taken out by the decedent upon his own life”. Thus, proceeds of a group insurance policy
taken out by the company for its employees are not subject to estate tax.
Moreover, proceeds of accident insurance are not also includible in the gross estate because the tax code specifically
mentions only life insurance policies.
Estate of an absentee
An absentee is a person who disappears from his domicile, his whereabouts being unknown, and without leaving an agent
to administer his property, or when the power conferred to an agent has expired.
After an absence of seven years, it being unknown whether or not the absentee still lives, he shall be presumed dead for all
purposes, except for those of succession.
Effect of absence upon the contingent rights of the absentee
Whoever claims a right pertaining to a person whose existence is not recognized must prove that he was living at the time
his existence was necessary in order to acquire said right.
Upon the opening of succession to which an absentee is called, his share shall accrue to his co-heirs, unless he has heirs,
assigns, or a representative, they shall, as the case may be, make an inventory of the property.