Chapter 1: Succession and Transfer Tax

Transfer taxes
 Imposed on gratuitous transfer of private properties and rights
o Gratuitous transfer – neither imposes burden on the transferee
 Types
o Estate tax
 Donation mortis causa – takes effect at the time of death of the donor
 Donation inter vivos – during the lifetime of both donor and done
 Nature
o Excise or privilege tax
 Accrues at the time of death of decedent
o Privilege of transferor to transfer properties – subject matter
 Succession
o Mode of acquisition the property, rights, and obligations that are not extinguished
at death are transferred
 Amount of obligation acquired should not be more than combined
properties and rights
o Types
 Testamentary or testate succession
 With designated heir and a will
 Legal or intestate succession
 Effected by operations of law
 Mixed succession
 Effected partly by will and partly by operation of law
 Law
o Governed by statute in force at the time of death of decedent
o Upon death, succession takes place and the right of State to tax instantly happens
upon death

Causes of Legal Succession

A. Person dies without a will, or with a void will, or a will that lost its validity
B. Will has no specific heir
C. Entire estate was not designated a will
D. Others
a. Heir is not capable of succeeding
b. Nonfulfillment of suspensive condition
c. Preterition
 d. Fulfillment of resolutory condition
e. Expiration of term
f. Noncompliance
g. Repudiation

Elements of Succession
A. Decedent
 Person whose property is transmitted through succession
i. Executor – designated in will to carry out decedent’s will
ii. Administrator – person appointed by law to carry out decedent’s will
B. Inheritance (Estate)
 Property, rights, and obligations not extinguished upon death
C. Successor (Heir)
 Person called to the succession
 Based on properties received
i. Devisee – real property
ii. Legatee – personal property
 Types:
i. Compulsory Heirs – succeed the legitime by force of law
 Primary – have precedence over and exclude other compulsory
heirs (legitimate children and descendants)
 Secondary – succeeds only in absence of primary compulsory heirs
 Concurring – succeeds together with primary or secondary
compulsory heirs
ii. Voluntary Heirs – succeed the free portion
iii. Legal or Intestate Heirs – succeed to estate by operation of law
Gross Estate
 Composition
a) Legitime
 75% estate
 To be inherited by compulsory heirs
 Part of testator’s property which cannot be disposed of
b) Free portion
 25% of estate
 To be inherited by compulsory and/or voluntary heirs
 Portion of estate which testator can freely dispose
 Order of intestate succession
 Legitimate children or descendants
 Legitimate parents or ascendants
 Illegitimate children or descendants
  Surviving spouse
 Brothers and sisters, nephews and nieces
 Other collateral relatives within the 5th degree
 State of the government
Consanguinity
 Relation of persons descending from the same stock
 Types
a) Lineal
 May be descending or ascending
 Direct line
b) Collateral
 Same ancestors but do not descend from one another

Wills
 Act wherein a person is permitted to control a certain degree the disposition of his estate
 Strictly a personal act
o Cannot be left in whole or in part of discretion of a third person
 Persons prohibited
o Below 18 years old
o Not sound of mind
 If silent, assume person is of sound mind
 Kinds
a) Notarial or Ordinary or Attested
 Executed in accordance with formalities prescribed by the law
 Requisites
 Must be in writing and executed in language known to testator
 Must be signed by testator himself or other person in his presence
 Must be attested by three or more witnesses
o Disqualified from being witnesses:
 Not domiciled in the Philippines
 Convicted of falsification, perjury, or false
testimony
b) Holographic
a. Must be written, dated, and signed by testator himself
b. Does not need to be witnessed
c. Insertion, cancellation, erasure, or alteration must be authenticated by
testator
 Codicil
o Supplement made after execution of a will
  Probate of a will
o Court procedure that proves if a will is valid or not
 Foreign wills
o Produces same effect in the Philippines

Revocation of will
 May be revoked by testator at any time before his death
 Modes of revoking a will
a) Implication of law
b) Will, codicil, or other writing executed
c) Burning, tearing, cancelling, or obliterating

Disinheritance
 When a compulsory heir is deprived of the inheritance
 Does not apply to voluntary heirs
 Requisites
a) Valid will
b) Cause expressly stated by law
c) Cause stated in will
d) Unconditional
e) Total
f) No doubt to identity of heir
 Common causes
o Attempt against life of testator
o Accused testator of a crime that has imprisonment of 6 years or more
o Made testator change will through fraud, violence, intimidation, or undue
influence
o Refusal without justifiable cause

Right of Representation
 Created by fiction of law where representative is raised to place and degree of person
represented
 Representatives shall not inherit more than the person they represent
 Takes place only in favor of children of brothers or sisters
o Only applies when decedent does not have descendants
 Arises because of:
a) Death
b) Incapacity
c) Disinheritance
 Not available to
a) Compulsory heirs
 In case of refusal
b) Voluntary heirs, legatees, and devisees who
 Predecease the testator; or
 Renounce inheritance
 Chapter 2: Gross Estate

Laws for Estate tax

 Act 2601
o July 1, 1916
o Imposes graduated tax rates
 RA 8424
o Tax Reform Act
o January 1, 1998
o Restructured tax base and rates
o Allowed deduction of medical expenses from gross estate
 RA 10963
o TRAIN Act
 Tax Reform for Acceleration and Inclusion Act
o January 1, 2018
o Changed to single rate of 6%
o Revised thresholds for standard deduction, family home, and other amendments

Justification for Imposition of Estate Tax

A. Benefit-Received Theory
o For performance of services rendered by the government
B. Privilege or State Partnership Theory
o Inheritance is not a right but a privilege granted by the state
C. Ability to Pay Theory
o Inheritance are assets in hands of heirs, thus, creating an ability to pay tax
D. Redistribution of Wealth Theory
o Reduces property received by successor to promote equitable distribution of
wealth

Classification of Decedents and Composition of Gross Estate

DECEDENT GROSS ESTATE
Citizen Real and Personal Properties
• within and without
Intangible Personal Properties
• within and without
Resident Alien Real and Personal Properties
• within and without
Intangible Personal Properties
• within and without
 Nonresident Alien Real Properties
• within
Tangible personal property
• within
Intangible personal property
• within (unless excluded on basis of
reciprocity)

Reciprocity Clause
 Excludes intangible personal property with situs in the Philippines
 In simple terms:
o If with reciprocity – EXCLUDE in gross estate
o If without reciprocity – INCLUDE in gross estate

Intangible Asset
 Identifiable nonmonetary asset without physical substance
 Derived from intellectual or legal rights
 Types
o Franchise – must be exercised in the Philippines
o Shares, obligations, or bonds – issued by a Philippine corporation
o Shares, obligations, or bonds – issued by a foreign corporation wherein 85% of
operations are located in the Philippines
o Shares or rights in a partnership – established in the Philippines

Situs of Tangible and Intangible Property

PROPERTY SITUS
Real property and tangible personal property Location of property
Shares, franchise, copyrights Where exercised
Receivables Residence of debtor
Bank deposit Location of depository bank

Valuation of Gross Estate

A. In general
 FMV at time of death
B. Real property
 Higher between FMV determined by commissioner and FMV from provincial and
city assessors
C. Personal property
  FMV at time of death
D. Shares of stock
 Types of shares:
o Unlisted common share – Book Value
o Unlisted preference share – Par Value
o Listed shares – mean between highest and lowest quotation
E. Units of participation
 Bid price nearest the date of death
F. Right to usufruct
 Latest Basic Standard Mortality Table

Exclusions from Gross Estate

A. Exclusions under Sec. 85 and 104
a. Exclusive property of surviving spouse
o Capital – husband
o Paraphernal – wife
b. Properties outside Philippines of a non-resident alien
c. Intangible personal property of a non-resident alien under Reciprocity Law
B. Exclusions under Sec. 87
a. Merger of usufruct
o Usufruct – right to enjoy use of another’s property
o 1st heir excluded in gross estate; 2nd heir included in gross estate
b. Transmission of delivery by fiduciary (1st) heir to fideicommissary (2nd) heir
o 1st heir excluded in gross estate; 2nd heir included in gross estate
o Elements
o Substitution must not go beyond one degree from original heir
o 1st heir and 2nd heir must both be alive at time of death of decedent
c. Transfer under Special Power of Appointment
o Decedent can only appoint to a designated class based on favor of
decedent
d. Transfers to charity
o Must be ≤ 30% for administrative purposes
C. Exclusion under Special laws
a. Amount received from GSIS
b. Amount received from SSS
c. Amount received from Philippines and US war damages
d. Amount received from USVA
e. Amount received of WW2 veterans’ heirs
f. Amount received from retirement benefits from private firms
 g. Amount received from PERA
h. Amount received of public health workers who contracted COVID-19

Composition of Gross Estate

 Consists of:
o Real property
o Personal tangible property
o Personal intangible property
 Shares of stock
 Bank deposit
 Dividends declared before death, but received after death
 Partnership profit accrued before death
 Usufructuary and rights
 According to Sec. 85
A. Property owned that are actually and physically present in estate at time of
death
 Decedent’s Interest
 Extent of equity on property physically existing and present in
gross estate
 Value of interest by decedent at time of death
B. Property not physically in estate but is still subject to payment of estate tax
a) Transfers in contemplation of death
 Disposition of property prompted by the thought of death
 Property transfers only effecting upon death
 Gift transfers only taking effect upon death
 Transfers with retention of certain rights
 No transfer in contemplation of death when transfer is a bonafide
sale for adequate and full consideration
b) Revocable transfers
 Enjoyment may be altered, amended, revoked, or terminated
c) Transfers under General Power of Appointment
 When done may appoint anyone he pleases
 Power of appointment may be exercised by donor-donee through:
i. Will
ii. Deed to take effect in possession after death
iii. Deed under which he has retained for his life
iv. Possession or enjoyment of property
 v. Right to designate persons who shall enjoy income
from property
d) Transfers for insufficient consideration
 Sale or transfer made for a price less than the FMV at time of death
 FMVs to consider:
 FMV at time of sale
 To determine whether or not consideration was full
and adequate
 FMV at time of death
 To determine amount included in gross estate
C. Miscellaneous items
a) Claims against insolvent persons
 Insolvent persons – properties are not sufficient to satisfy debts
 No need for judicial declaration, but insolvency must be
proven
 Full amount of claim against insolvent persons must be included
 Uncollectible part is to be deducted from the gross
estate
b) Proceeds of life insurance
 Proceeds from life insurance taken by decedent on his own life
should be included in the gross estate
 Requisites:
 Must be insurance on life of decedent
 Beneficiary must be: (if silent, presume revocable)
 Estate or executor (revocable or not)
 Any third person (revocable)

Proceeds of Life Insurance

Beneficiary Designation Gross Estate
Estate Revocable or Irrevocable Included
Executor Revocable or Irrevocable Included
Administrator Revocable or Irrevocable Included
3rd party Revocable Included
3rd party Irrevocable Excluded

Estate Tax
 Fixed 6% rate
 Filing and Payment
 o Primary responsibility – executor or administrator
o Secondary responsibility – any of heirs
 Filed under oath in:
o Transfer subject to estate tax
o Estate consists of registered or registrable property
 If exceeding 5,000,000
o Submit statement containing:
 Itemized assets
 Itemized deductions
 Amount of tax due
 Time for filing
o Required to be filed within 1 year from the decedent’s death
o Distinguished from accrual date of estate tax due
 Extension for filing
o Should not exceed 30 days after deadline
 Time for payment
o Within the 1year period allowed to file return
 Extension for payment
o Should not exceed 5 years if settled through courts
o Should not exceed 2 years if settled extrajudicially
 Chapter 3: Deductions from Gross Estate

Summary of Allowable Deductions from Gross Estate

DEDUCTION
CITIZEN/RESIDENT
A. Ordinary Deductions
LITE
Vanishing deduction
Transfer for Public Use
B. Special Deductions
Standard deduction
Family Home
RA 4917
C. Share of Surviving Spouse
***Total LITe x (GE Phil. / GE world)
DECEDENT
NONRESIDENT ALIEN
✓ ✓ (proportional)***
✓ ✓
✓ ✓
✓ (5,000,000) ✓ (500,000)
✓ NA
✓ NA
✓ ✓

ORDINARY DEDUCTIONS
A. LITe
a. Losses
 Casualty losses
o From acts of God
 Amount deductible is value of property lost
 Requisites
o Arising exclusively from acts of God
o Not compensated by insurance
o Not claimed as a deduction in an income tax return
o Incurred during settlement period
b. Indebtedness or Claims Against Estate
 Claims
o Demands which could have been enforced against decedent in his
lifetime
 Sources
o Contract
o Tort
 o Operation of Law
 Requisites
o Liability represents personal obligation of deceased
o Liability was contracted in good faith
o Liability must be a debt valid in law
o Debt must not have been condoned by creditor
 Substantiation requirements
o For simple loans
 Debt instrument must be notarized at time of indebtedness
 Duly notarized certification from creditor
 Partnership creditor – sworn certification of general partner
 Financial institution creditor – signed by branch manager
 Individual creditor – sworn certification of himself
 Proof of capacity of creditor to lend amount
 Statement under oath by administrator or executor if loan was
contracted 3 years prior to death of decedent
o For purchase of goods and services
 Evidence of purchase of goods and service
 Duly notarized certification of from creditor
 Corporation creditor – sworn certificate by president, vice
president, or other principal officer
 Partnership creditor – sworn certification of general partner
 Financial institution creditor – signed by bank manager
 Sole creditor – sworn certification of himself
 Copy of latest audited balance sheet of creditor
 Pertinent court documents (if settlement is made in court)
 Funeral, Medical, and Judicial expenses
o No longer allowed as deduction to gross estate
o Beginning January 1, 2018
 Unpaid mortgage or indebtedness on property
o Deductions allowed when a decedent leaves property encumbered by a
mortgage
o Must include fair market value of property
 Amount allowed as deduction is outstanding debt
 Accommodation loan
o Loan proceeds went to another person
 If with legal impediment, not allowed as deduction
c. Taxes
 Unpaid taxes accrued prior to death
  Not allowed as deduction:
o Income tax on income received after death
o Property taxes accrued after death
o Estate tax
d. Claims Against Insolvent Persons
 Receivables due from persons not financially capable of meeting obligations
 Requisites
o Incapacity of debtor
o Full amount owed must be included in gross estate, amount
uncollectible will be allowed as deduction
B. Transfer for Public Use
 Transfers in favor of the government
 Same amount must be included in gross estate
C. Vanishing Deductions
 Deduction for property previously taxed
 Amount allowed t reduce taxable estate wherein property included in gross
estate was received by him by:
o Inheritance
o Donation
 Remedy against indirect double taxation
 Requisites
o Death – decedent died within 5 years from date of 1st transfer
o Identity of property – either received through inheritance or donation
o Location – must be located in the Philippines
o Inclusion of property – must form part of previous owner’s gross estate
or gift
o Previous taxation of property – previous tax must be paid by prior owner
o No previous vanishing deduction in property

Vanishing Deduction Rates

PERIOD RATE
Within 1 year 100%
Beyond 1 to 2 years 80%
Beyond 2 to 3 years 60%
Beyond 3 to 4 years 40%
Beyond 4 to 5 years 20%
Proforma Computation
VALUE TO TAKE
 Lower between:
o gross estate or gift of prior owner
o gross estate of present decedent
LESS: MORTGAGE PAID (1st deduction)
 paid by present decedent from mortgage assumed)
INITIAL BASIS
LESS: PROPORTIONAL DEDUCTION (2nd deduction)
(Initial basis/Gross Estate) x LIT + Transfer for Public Use
FINAL BASIS
MULTIPLY: VANISHING DEDUCTION%
VANISHING DEDUCTION

SPECIAL DEDUCTIONS
A. Standard deductions
 If citizen or resident – 5,000,000
 If nonresident alien – 500,000
B. Family Home
 Can only be claimed by citizen and resident decedents
 Lot actually occupied as a family residence (permanency)
 Whichever is lower of 10,000,000 or FMV at time of decedent’s death
 Unmarried head of family
o Living with parents and with siblings not more than 21 years old
 Beneficiaries of family home
o Husband and wife, or head of the family
o Parents, ascendants, and descendants
 Limitation
o Person may only constitute 1 family home
 Requisites
o Must be the head of the family
o Land which house stands is owned by decedent
o Must be actual residential home
o Allowable deduction is amount equivalent to current FMV declared in gross
estate or extent of decedent’s interest
 Net share of surviving spouse
 o Equivalent to 50% of conjugal property after deducting obligations chargeable to
property
o Must be removed so only share of decedent is taxed
C. Amounts received by heirs under RA 4917
 Can only be claimed by citizen and resident decedents
 Same amount must be included in gross estate
 Chapter 4: Property Relations

Property relations
 Applicable only to married persons
 Used to distinguish a conjugal or community property from an exclusive property
 Governed in the following order:
a) Marriage settlements executed before marriage
b) Provisions of law
c) Local custom

Types of property relations or marriage settlements

 Future spouses may agree upon following systems of property relationship
a) Absolute community of property
 Most common regime
 Takes effect if there is no valid marriage settlement
 Spouses become co-owners of all property they bring in the. Marriage
 Presumed to belong to community unless proven to be exclusive
 Exclusive property; excluded from community property
o Property acquired through gratuitous transfer unless grantor
expressly provided that it be part of community
o Property for personal and exclusive use of either spouse
 Jewelry is part of community property
o Property acquired before marriage
b) Conjugal partnership of gains
 Spouses place proceeds, products, fruits, and income in a common
fund
 Upon dissolution, net gains are divided equally unless otherwise
agreed
 CPG applies:
o Future spouses agree to it
o Conjugal partnerships of gains already established between
spouses before Family code
 Exclusive property:
o Brought to marriage as his or her own
o Acquired through gratuitous transfer
o Acquired by right of redemption or exchange with property
o Purchased with exclusive money
 Conjugal Property
o Acquired by onerous transactions
 o Share in hidden treasure discovered during marriage
o Property acquired through hunting or fishing
o Acquired by chance
 Conjugal deductions
o Support of spouses, common children, and legitimate children
o Debts contracted during marriage by administrator
o Debts contracted by spouse without consent of other
o Taxes, liens, charges, and expenses on conjugal property
o Taxes and expenses for preservation of conjugal property
o Expenses for self-improvement
o Debts before marriage
o Value of donation by both spouse to legitimate children
o Expenses of litigation between spouses
c) Complete separation of property
 Both should agree
 Both shall bear family expenses in proportion to their income
d) Any other regime
 Must be made before celebration of marriage
 Must be in writing
 Shall not prejudice third persons unless registered in local civil and proper registry
where marriage contract is recorded

Law Governing Property Relations

 Family Code (E.O. 209) effected on August 3, 1988
 Civil Code shall govern for those married before August 3, 1988

Property Regime of Unions Without Marriage

A. Capacitated to marry
 Lives exclusively with each other as husband and wife without benefit of marriage
or under a void marriage, the following shall apply:
a) Wages and salaries are owned equally
b) Property acquired by both shall be governed by rules on co-ownership
c) Neither party can dispose through donation their share without consent of
the other
B. Incapacitated to marry
 Only property acquired by both through actual joint contribution is co-owned in
proportion to respective contributions
 Share of party that is married to another shall accrue to absolute community
 Chapter 5: Estate Tax Credit and Distributable Estate

Estate Tax Credit

 Taxpayer’s right to deduct from tax due amount of tax paid to a foreign country
o Amount can be claimed if taxes paid are pertaining to properties included in the
gross estate
o Allowed to lessen the harshness of international double taxation
 Nonresident alien are not entitled to estate tax credit

Philippine Estate Tax Due

ESTATE TAX DUE
LESS: TAX CREDIT FOR FOREIGN ESTATE TAXES PAID
PHILIPPINE ESTATE TAX PAYABLE

Statutory Formula for Computation of Estate Tax Credit

 Limit 1: If only one country (refer to p. 160)
(NET ESTATE, FOREIGN/NET ESTATE, WORLD) X PHILIPPINE ESTATE
TAX DUE – LIMIT
ACTUAL TAX PAID, FOREIGN – ACTUAL
ALLOWED TAX CREDIT (LOWER) – TAX CREDIT
 Limit 2: If more than one country: (refer to p. 161)
Step 1: Compute limit 1 per country
Step 2: Compute limit 2
(NET ESTATE, ALL FOREIGN/NET ESTATE, WORLD) X PHILIPPINR
ESTATE TAX DUE – LIMIT
ACTUAL TAX PAID, ALL FOREIGN – ACTUAL
LIMIT 2 (LOWER AMOUNT) – LIMIT 2
Step 3: choose lower amount between limit 1 and 2

Net Distributable Estate

 Amount arrived at from gross estate
Net Taxable Estate
 Result of application of law under estate taxation