TAXATION OF

ESTATES AND TRUSTS

GROUP 5

Altavano, Marc Haru Napay, Krizia

Bristol, Camille Marie Pejo, Nikka Aillen
Dy, Angelica Joyce Salita, Rona
Javier-Barbacena, Ma. Cristina Vosotros, Joyce Amara
Estate
An estate refers to the mass of
properties and assets left behind by a
deceased person (2-A Domondon, supra at
74).
It 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. (Civil Code, Art.
781)
 Taxation of
Income of Estates
Rules on Taxability of Estate
1. Income Tax for individuals from
January to the time of death
(Secs. 24, 25, NIRC).
2. Income Tax of the estate, if the
estate is under administration or
judicial settlement (Sec. 60,
NIRC).
Taxable Income of Estates
 For income purposes, estates are
classified into:
A. Estate
under Judicial
Administration; or
B. Estate
not under Judicial
Administration.
ESTATES UNDER JUDICIAL
SETTLEMENT
Income received by estates of deceased persons during
the period of administration or settlement of the estate
is taxable.
Gross Income of Estate
The items of gross income taxable
to individuals under Section 32(A) of
the NIRC are also the same items of
gross income which are taxable to
estates.
Gross Income of Estate
INCLUDED in the gross income of an estate are the
following:
I. Income received by the estate of the deceased person
during the period of administration or settlement of
the estate;
II. When prior to the settlement of the estate the
executor or administrator sells the property of a
decedent’s estate for more than the appraised value
placed upon it at the death of the decedent, the
excess is income taxable to estate.
EXCLUDED in the gross income of an estate is the gain
derived from the passage of property to the executor or
administrator on the death of the decedent, even though
the property may have appreciated in value since the
decedent acquired it.
Deductions in the Gross Estate
1. An estate can take up the same items of deduction allowed
on individual taxpayers under Section 34. (NIRC, Section 61)
2. Special Deductions:
a) There shall be allowed as a deduction in computing the
taxable income of the estate or trust the amount of the
income of the estate or trust for the taxable year which is to
be distributed currently by the fiduciary to the beneficiaries,
and the amount of the income collected by a guardian of an
infant which is to be held or distributed as the court may
direct. (NIRC, Section 61(A))
b) There shall be allowed as an additional deduction in
computing the taxable income of the estate or trust the
amount of the income of the estate or trust for its taxable
year, which is properly paid or credited during such year to
any legatee, heir or beneficiary. (NIRC, Section 61(B))
ESTATES NOT UNDER
JUDICIAL SETTLEMENT
Pending the extrajudicial settlement, either of the
following situations may arise:
1. If the heirs contribute money, property, or industry to
the estate with the intention of dividing the profits
between/among themselves, an unregistered
partnership is created and the estate becomes liable
for the payment of corporate income tax (Evangelista
vs. Collector, GR No. L-9996, October 15, 1957); or
2. If the heirs, without contributing money, property or
industry to the estate, simply divide the fruits thereof
between/among themselves, a co-ownership is
created and income tax is imposed on the income
received by each of the heirs, payable in their
separate and individual capacity (Pascual vs.
Commissioner, GR No. L-78133, October 18, 1988).
 APPLICABLE LAW
 If decedent died prior January 1, 2018
 OLD TAX LAW is applicable (Republic Act
No. 8424 or the National Internal Revenue Code
of 1997)

 If decedent died on or after January 1,

2018
- TRAIN LAW is applicable
 Format of Computation

Gross Income XXX

Less: Deductions
Business Expenses XXX
Distribution of year’s income to the heir XXX

TAXABLE INCOME XXX

TAX DUE NIRC, Section 24(A)
(2a)
Tax Schedule Effective January 1,
2018 until December 31, 2022

 NIRC, Section 24(A)(2a)

Not over P250,000 0%

Over P250,000 but not 20% of the excess over
over P400,000 P250,000
Over P400,000 but not P30,000 + 25% of the
over P800,000 excess over P400,000
Over P800,000 but not P130,000 + 30% of the
over P2,000,000 excess over P800,000
Over P2,000,000 but P490,000 + 32% of the
not over P8,000,000 excess over P2,000,000
Over P8,000,000 P2,410,000 + 35% of the
excess over P8,000,000
Illustration The taxable income and tax due will
be computed as follows:

 The estate of Mr. Gross Income PHP 800,000

Indiano has PHP800,000 Less: Deductions
gross income before Business Expenses PHP 200,000
business expenses of Distribution of year’s PHP 300,000
PHP200,000. The income to the heir
estate administrator PHP 500,000
distributed PHP300,000
to the heirs in TAXABLE INCOME PHP 300,000
accordance with the
will of Mr. Indiano.
TAX DUE
Over P250,000 but not
over P400,000
20% of the excess over PHP 50,000 X 20%
P250,000
PHP 10,000
TRUST
 Trusts
A trust is a right to the property, whether real or
personal, held by one person for the benefit of
another. It is:
 A confidence given by a person, the grantor
(creator);
 Reposed in one person who is called fiduciary
(trustee);
 For the benefit of another who is called the
cestui que trust (beneficiary);
 Regarding property given by the grantor (creator)
to the fiduciary (trustee) for the benefit of the
cestui que trust (beneficiary).
Trusts are either EXPESS or
IMPLIED
 Express or direct trust are created by the
direct and positive acts of the parties, by
some writing, deed, will, or by oral
declaration in words evidencing an
intention to create a trust.
 Implied/indirect/involuntary or trusts by
operation of law arise by legal implication
based on the presumed intention of the
parties or on equitable principles
independent of the particular intention of
the parties.
Rules on Taxability of the
Income of a Trust
General Rule:
If the income:
1. Is distributed to beneficiaries, the
beneficiaries shall file and pay the
tax.
2. Is to be accumulated or held for
future distribution, the trustee or
beneficiary shall file and pay the
tax.
Rules on Taxability of the
Income of a Trust
 Exceptions:
1. In a revocable trust, the income of the
trust will be returned to the grantor
(Sec. 63, NIRC).
2. In a trust where the income is held for
the benefit of the grantor, the income of
the trust becomes income of the grantor
(Sec. 64, NIRC).
3. In a trust administered in a foreign
country, the income of the trust,
administered by any amount distributed
to the beneficiaries shall be taxed to the
trustee (Sec. 61 [C], NIRC).
 Format of Computation
Gross Income XXX
Less: Deductions
Business Expenses XXX
Distribution of year’s income to the heir XXX

TAXABLE INCOME XXX

TAX DUE NIRC, Section 24(A)
(2a)
 Items Comprising the Taxable Income of Trust
GROSS INCOME – same as individuals
 Deductions
ALLOWABLE DEDUCTIONS – same as individual
 Special Deductions
i. the amount of the income of the estate or trust for the
taxable year which is to be distributed currently by the
fiduciary to the beneficiaries;
ii. the amount of the income collected by a guardian of an
infant which is to be held or distributed as the court
may direct. The amount so allowed as a deduction shall
be included in computing the taxable income of the
heir, legatee or beneficiary; and
iii. the amount of the income of the estate or trust for its
taxable year, which is properly paid or credited during
such year to any legatee, heir or beneficiary
 BIR Ruling 233-86, November 7,1986
When no such distribution to the heirs is
made during the taxable year when the
income is earned and such income is
subjected to income tax payment by the
estate, the subsequent distribution thereof
is no longer taxable on the part of the
recipient.

Illustration
 Kevin designated in
irrevocable trust a property
in favour of Jay and
appointed KJ as trustee.
The property earned
PHP1,500,000 income
before expenses of
PHP200,000 and trust fees
of PHP50,000. In accordance
with the trust indenture, KJ
distributed PHP100,000 to
Jay.
The taxable income and tax due will
be computed as follows:
Gross Income PHP 1,500,000
Less: Allowable Deductions
Expenses PHP 200,000
Trust Fees PHP 50,000
Distribution to the heir PHP 100,000
PHP 350,000
TAXABLE INCOME PHP 1,150,000
TAX DUE
Over P800,000 but not
over P2,000,000
P130,000 + 30% of the PHP 130,000 +
excess over P800,000 (PHP 350,000 X 30%)
PHP 235,000
Several Trusts with a Common
Grantor and a Common Beneficiary
a. Filing of A separate return will have to be filed for each trust by the
Separate respective trustee or fiduciary.
Returns
b. Consolidated An income tax shall be computed on the consolidated income.
Income Tax
c. Apportionment The tax computed on the consolidated income shall be
of the apportioned to the different trusts, such that each trust shall have
Consolidated a share in the income tax on consolidated income.
Income Tax to the
Different Trusts Formula:
Taxable Income of the Trust multiplied Consolidated Income Tax
equals Taxable Income of All Trusts
d. Tax Payable of Each trust shall pay an income tax still due computed as follows:
Each
Income Tax Apportioned to the Trust XX
Less: Income Tax Already Paid by the Fiduciary of the Trust XX
Income Tax Still Due XX
 Illustration
 Don Jose designated three (3)
trusts all in favour to his son,
Joe.

Trust Designation Truste Income Distributio

e ns
1 Irrevocable AJ PHP300,000 PHP30,000
2 Irrevocable BJ PHP400,000 PHP40,000
3 Revocable CJ PHP500,000 PHP50,000
For purposes of income taxation, the income of Trust 1 & 2 will be consolidated

Operating Income PHP 700,000

(PHP300,000+PHP400,000)
Less: Allowable Deductions
Distribution to the heir PHP 70,000
(PHP30,000+PHP40,000) PHP 70,000
TAXABLE INCOME PHP 630,000

TAX DUE
Over P400,000 but not
over P800,000
P30,000 + 25% of the PHP 30,000 +
excess over P400,000 (PHP 230,000 X 25%)
PHP 87,500
Tax due will be apportioned to Trust 1&2 as follows:

Trust 1 ((300,000-30,000)/630,000)X87,500=PHP37,500
Trust 2 ((400,000-40,000)/630,000)X87,500=PHP50,000

NOTE:
Trust 3 is not taxable as it is revocable. The entire
PHP500,000 of Trust 3, including the PHP50,000
income distribution will be included in the taxable
income of Don Jose.
 Employee’s Trust
Employee’s trusts are tax-exempt, provided:
1. Employee’s trust must be part of a pension, stock
bonus or profit sharing plan of the employer for the
benefit of some or all of his employees;
2. Contributions are made to the trust by such
employer, or such employees or both;
3. Such contributions are made for the purpose of
distributing to such employees both the earnings and
principal of the fund accumulated by the trust; and
4. The trust instrument makes it impossible for any
part of the corpus or income to be used for or
diverted to, purposes other than the exclusive
benefit of such employees
MIGUEL J. OSSORIO PENSION FOUNDATION v. CA,
GR No. 162175, 2010-06-28

 Petitioner, a non-stock and non-profit corporation, was organized for the

purpose of holding title to and administering the employees’ trust or
retirement funds established for the benefit of the employees of Victorias
Milling Company, Inc. (VMC). Petitioner, as trustee, claims that the income
earned by the Employees’ Trust Fund is tax exempt under Section 53(b) of the
NIRC. Petitioner bought the MBP lot through VMC. Petitioner claims that its
share in the MBP lot is 49.59%. Petitioner’s investment manager Citytrust in
submitting its Portfolio Mix Analysis, regularly reported the Employees’ Trust
Fund’s share in the MBP lot. On 26 March 1997, VMC eventually sold the MBP
lot to Metrobank. Petitioner claims that it is a co-owner of the MBP lot as
trustee of the Employees’ Trust Fund, based on the notarized Memorandum of
Agreement. Petitioner maintains that its ownership of the MBP lot is supported
by the excerpts of the minutes and the resolutions of petitioner’s Board
Meetings. Petitioner further contends that there is no dispute that the
Employees’ Trust Fund is exempt from income tax. Since petitioner, as
trustee, purchased 49.59% of the MBP lot using funds of the Employees’ Trust
Fund, petitioner asserts that the Employees’ Trust Fund's 49.59% share in the
income tax paid (or P3,037,697.40 rounded off to P3,037,500) should be
refunded.
 MIGUEL J. OSSORIO PENSION
FOUNDATION v. CA,
GR No. 162175, 2010-06-28
 The CTA denied petitioner's claim for refund of withheld
creditable tax of P3,037,500 arising from the sale of
real property of which petitioner claims to be a co-
owner as trustee of the employees' trust or retirement
funds.
 CA agreed with the CTA that pieces of documentary
evidence submitted by petitioner are largely self-
serving and can be contrived easily. The CA ruled that
these documents failed to show that the funds used to
purchase the MBP lot came from the Employees’ Trust
Fund.
 MIGUEL J. OSSORIO PENSION
FOUNDATION v. CA,
GR No. 162175, 2010-06-28
 Issues:
 If petitioner or the Employees’ Trust Fund is not estopped,
whether they have sufficiently established that the
Employees’ Trust Fund is the beneficial owner of 49.59% of
the MBP lot, and thus entitled to tax exemption for its
share in the proceeds from the sale of the MBP lot. [Yes]
 MIGUEL J. OSSORIO PENSION
FOUNDATION v. CA,
GR No. 162175, 2010-06-28
 RULING
 The law expressly allows a co-owner (first co-owner) of a
parcel of land to register his proportionate share in the name
of his co-owner (second co-owner) in whose name the entire
land is registered. The second co-owner serves as a legal
trustee of the first co-owner... insofar as the proportionate
share of the first co-owner is concerned. The first co-owner
remains the owner of his proportionate share and not the
second co-owner in whose name the entire land is registered.
Article 1452 of the Civil Code provides:
 Art. 1452. If two or more persons agree to purchase a property
and by common consent the legal title is taken in the name of
one of them for the benefit of all, a trust is created by force
of law in favor of the others in proportion to the interest of
each.
Pension Trust
Tax exemption is likewise to be enjoyed
by the income of the pension trust;
otherwise, taxation of those earnings would
result in a diminution of accumulated
income and reduce whatever the trust
beneficiaries would receive out of the trust
fund (CIR v. CA, G.R. No. 95022, March 23,
1992).
Any amount received by an employee as
retirement benefits shall be excluded from
gross income subject to conditions set forth
under Sec. 32 [B] of the NIRC.
Income of Trust Taxed to
the Grantor
Any part of the income of a trust, which is,
or in the discretion of the grantor or of any
person not having a substantial adverse
interest in the disposition of such part of the
income may be:
1. Held or accumulated for future
distribution to the grantor;
2. Distributed to the grantor;
3. Applied to the payment of premiums
upon policies of insurance on the life of
the grantor.
Income of Trust Taxed to
the Trustee
1. those which is to be accumulated or held for
future distribution, whether consisting of ordinary
income or gain from the sale of assets included in
the corpus of the trust, must be returned by
trustee;
2. those whether created by will or deed, foor
accumulation of income, whether for an
unascertained person or persons with contingent
interests or otherwise; and
3. those under the terms of the will or deed, the
trustee may, in his discretion, distribute the
income or accumulate it, irrespective of the
exercise of his discretion.
Income of Trust Taxed to
the Beneficiaries
 The income of a trust for the taxable year
which is to be distributed to the
beneficiaries must be returned by will and
will be taxed to the respective
beneficiaries. There is creditable
withholding tax on payment to the heir of
15%. (R.R. No. 02-98, Section 2.57.2(F))
Tax Returns and Other
Administrative
Requirements
 Filing of Returns and Payment of
Tax (Estate and Trust)
1. Who shall file the return?
2. Gross income is more than PHP 50,000
or more
3. In case of two or more Joint Fiduciaries
The following persons acting in any
fiduciary capital shall file the income
tax return for an estate or trust:
a. Guardians;
b. Trustee;
c. Executors;
d. Administrators;
e. Receivers;
f. Conservators;
g. All other person or corporations
acting as fiduciary.
The return shall be filed if the estate or
trust has a gross income of PHP 50,000 or
more during the taxable year.
Return files by one of them shall be
sufficient compliance with the
requirements of the Tax Code.
BIR Form No. 1701
BIR Form No. 1701Q
Sources:

 THE NATIONAL INTERNAL REVENUE CODE OF THE

PHILIPPINE [Tax Reform Act of 1997]
 INCOME TAXATION LAW ILLUSTRATED AND SIMPLIFIED
(Josephrally I. Chavez)
THANK YOU!