ESTATE TAX
Submitted by: Culanculan, Joseph Jordan Padao, Inez Monika Zerrudo, Ariane Joy
Submitted to: Mr. Leonido T. Basilio
•
Basic Concepts of Succession and Will
•
Gross Estate
•
Deductions from the Estate
•
The Estate Tax Table
•
Net Taxable Estate
•
Administrative Provisions
BASIC CONCEPTS OF SUCCESSION AND WILL
Succession - Mode of acquisition acquisition by virtue of which the property, rights and obligations to the extent of value of the inheritance, of a person are transmitted through his death to another or others either by will or by operation of law (Art. 774, Civil Code of the Philippines).
Elements of Succession 1. Decedent – the person whose property is transmitted through succession, whether or not he left a will. 2. Heir/Successors – the person called to succession either by the provision of a will or by operation of law. 3. Estate/Inheritance – refers to all the property, rights and obligations of a person are not extinguished by his death. 4. Acceptance – mann manner er of acqu acquir irin ing g or refu refusi sing ng the the inhe inheri rita tanc nce. e. The The acceptance or repudiation of the inheritance is an act which is purely voluntary and free.
Kinds of Succession 1. Testamentary – succession which results from the designation of an heir, made in a will executed in the form prescribed by law. 2. 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.
3. Mixed – transmission of properties which is effected partly by will and partly by operation of law. Kinds of Successors in a Testamentary Succession 1. Legatee – heir to a particular personal property given by virtue of a will. 2. Devisee – heir to a particular real property given by virtue of a will.
Persons Authorized to Manage the Estate 1. 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. 2. 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.
Time of Succession - The rights to the succession are transmitted from the moment of death of the decedent.
Institution of Heir - An act by virtue of which a testator designates in his will the person or persons who are to succeed him in his property and transmissible rights and obligations.
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 compulsory heirs. The rules on legitime safeguard the rights of the compulsory heirs with respect to their legitimes.
The following are compulsory heirs: 1. Legitimate children and descendants, with respect to legitimate parents and ascendants. 2. In default of the foregoing, legitimate parents and ascendants, with respect to the legitimate children and descendants. 3. The widow or widower. 4. Acknowledged natural children and natural children by legal fiction. 5. Other illegitimate children.
Capacity to Succeed by Will or by Intestacy - Persons not incapacitated by law may succeed by will or
ab intestato .
In order
to be capacitated, they must be living at the moment the succession opens, except in the case of representation, when it is proper.
- Child already conceived at the time of death of the decedent is capable of succeeding provided it is born later.
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. - It is strictly a personal act.
Disqualifications to Make a Will a. Person below 18 years of age. b. Those who are not of sound mind at the time of execution. c. Two or more persons cannot make a will jointly.
Persons 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.
Notarized Will - A will acknowledged before a notary public by the testator and the witnesses.
Holographic Will - A will written entirely by the testator with his own hand and not witnessed or attested. - The testator’s handwriting is deemed a sufficient assurance of the will’s authenticity. Advantages and Disadvantages of a Holographic Will Advantages: a. Easier to make. b. Easier to revise. c. Easier to keep secret.
Disadvantages: a. Easier to forge by expert falsifiers. b. Easier to misunderstand since the testator may have been faulty in expressing his last wishes. c. No guaranty that there was no fraud, force, intimidation, undue influence, and no guaranty regarding the testators sound of mind.
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 a second will is made and 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 an instrument that amends (i.e. changes, modifies, or supplements) the provisions of a will. - Probate of a will is the court procedure by which a will is proved to be valid or invalid. It involves collection a decedent’s estate, liquidating liabilities, paying necessary taxes (e.g. estate tax), and distributing properties to heirs. 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 the case of wills; 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.
Disinheritance - A person that expects or is expected to inherit, but does not, the person is said to be disinherited. Disinheritance can be affected only through a will wherein the legal cause therefore shall be specified.
Legal or Intestate Succession - A person dies without leaving a will is said to have died intestate, a status known as intestacy. The government provides a default estate plan for it to be succeeded by the heirs.
- Takes place under the following circumstances: a. If the decedent has no will, void, or one which has subsequently lost its validity. b. When the will does not institute an heir to, or disposition of all the property belonging to the testator. In such case legal action shall take place only with respect to the remaining property. c. If the condition attached to the institution of heir does not happen or is not fulfilled, or if the heirs die before the testator, or repudiates the inheritance, there being no substitution, and no right of accretion takes place. d. When the heir instituted is incapable of succeeding, except in cases provided by the Civil Code.
When Distribution of Hereditary Estate Takes Place - The executor or judicial administrator has the task of making sure that the estate tax has been paid before he delivers a distributive share to any party interested in the estate. - Once the estate is closed and a final distribution of assets is made to the beneficiaries, the executors transfer the assets to be held in trust to the trustee.
GROSS ESTATE
Estate Tax •
excise 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
Theories Justifying the Imposition of Estate Tax 1. Benefit-received Theory o
The state collects tax because it renders services in the distribution of the decedent’s estate
2. Privilege theory (State Partnership Theory) o
The state is a “silent and passive partner” in the accumulation of property that can collect the share which is due to it
3. Redistribution of Wealth Theory o
The imposition of estate tax results to more equitable distribution of wealth in the society
4. Ability to Pay theory
o
The heirs are able and capable to pay taxes due the state because of the inheritance they received
Computation of Estate Tax - depends on the status of the decedent, whether he was single or married •
If decedent was single at the time of his death:
Gross Estate
Pxx
Less: Deductions Ordinary
Pxx
Special
xx
xx
Net taxable estate
xx
Multiply by the applicable rate
xx
Estate tax due
xx
•
If decedent was married at the time of death:
Conjugal/ Community
Exclusive
Total
Real properties
xx
xx
Personal properties
xx
xx
Gross estate
xx
xx
xx
xx
xx
(xx)
Less: Deductions Ordinary Special Net estate
(xx) xx
Less: Share of surviving spouse in the net conjugal/community property
(xx)
Net taxable estate
xx
Multiply by the appropriate tax rate
xx
Estate tax due
xx
GROSS ESTATE Gross Estate – Total value of property owned by a decedent at the time of his or her death, before any deductions are made
Composition of the Gross Estate A.
Real and personal property, whether tangible or intangible or mixed
B.
Decedent's interest in property
C.
Taxable transfers 1.
Transfer in contemplation of death
2.
Revocable transfer
3.
Transfers of property under general power of appointment
4.
Transfers for insufficient consideration
A. Real and Personal Properties Real Property - “immovable”
- consists of land, building or anything attached to the soil with permanence Personal Property – “movable” o
Tangible personal property – personal property that can be seen and touched
o
Intangible personal property – cannot be seen and touched and has no physical forms
B. Decedent’s Interest in Property - includes: 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 payable to a revocable beneficiary (and if the appointed beneficiary is the estate, executor, or administrator). 4. Right of usufruct if transferable to the heirs.
C. Taxable Transfers 1. Transfer in contemplation of death - the thought of death is the motivating factor for the transfer although death may not be imminent - 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.
2. Revocable Transfer - a transfer by trust or otherwise where the decedent may revoke, alter, amend, or terminate the terms of enjoyment of the property Trust – the legal relationship created when a grantor know as the trustor, transfers property with the intention that it be managed by a trustee for the benefit of a beneficiary or beneficiaries.
3. Transfer under general power of appointment Power of appointment – the right to designate by will or deed the person or persons who will succeed to the property of a prior decedent - may be: a. General – one which authorizes the donee of the power to appoint any person to possess or enjoy the property
b. Limited (Special) – one which authorizes the donee of the power to appoint only from a designated class or group of persons other than himself
4. Transfer for insufficient consideration - if any of the transfers, trusts, interests, rights, or powers mentioned is created 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, over the value of the consideration received
Properties Included In Gross Estate 1. Citizen or resident alien decedents: a) Real or immovable property, wherever located b) Personal property, tangible or intangible, wherever located 2. Non-resident alien decedents: a) Real or immovable property located in the Philippines. b) Tangible personal property located in the Philippines. c) Intangible personal property with situs in the Philippines subject to the rule of reciprocity exemption. The following are considered situated in the Philippines: o
Franchise which must be exercised in the Philippines
o
Shares, obligations or bonds issued by corporations organized or constituted in the Philippines
o
Shares, obligations or bonds issued by a foreign corporation 85% of the business of which is located in the Philippines
o
Shares, obligations or bonds issued by a foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines (i.e. they are used in the furtherance of its business in the Philippines)
o
Shares, rights in any partnership, business or industry established in the Philippines
Rule of Reciprocity - applies only to nonresident citizens, particularly
mortis causa
donations when
properties are intangible personal which are located within the Philippines - No estate tax shall be collected in respect of intangible personal property in the following instances: •
If the decedent at the time of his death was a citizen and resident of a foreign country which at the time of his death did not impose a transfer tax on intangible personal property of the citizens of the Philippines not residing in that country.
Summary: When Properties Are Included in Gross Estate Classification of
Citizen or resident
Nonresident alien
Nonresident alien
Property Real property Within Without Personal property Tangible within Tangible without Intangible within Intangible without
alien
(no reciprocity)
(with reciprocity)
Yes Yes
Yes No
Yes No
Yes Yes Yes Yes
Yes No Yes No
Yes No No No
Situs of Property Real property – place or country where it is situated Tangible personal property – place or country where it is actually located at the time of decedent’s death Intangible personal property – domicile or residence of the owner 1.
Accounts receivable – residence of the debtor
2.
Bank deposit – location of the depository bank
3.
Copyright, trademark, patent, & franchise – place or county where the intangible is exercised
Valuation of Property - the values of the gross estate are based on the values at the time of the decedent’s death
Real property: •
The appraised value of the real estate shall be whichever is higher of the fair market value, as determined by the Commissioner (zonal value) or the
fair market value, as shown in the schedule of values fixed by the Provincial or City Assessor. •
If there is no zonal value, the taxable base is the fair market value that appears in the latest tax declaration.
•
If there is an improvement, the value of improvement is the construction cost per building permit or the fair market value per latest tax declaration.
Personal property – also appraised at its fair market value, whether it is tangible or intangible
Fair market value – the price which a property will bring when it is offered for sale by one who desires, but is not obliged to sell, and is bought by one who is under the necessity of buying it
Stocks, Bonds, or other securities: •
If traded in the stock exchange, the fair market value shall be the mean between the highest and the lowest quotation of the security on the valuation date, on the date nearest the valuation date
•
If not traded in he stock exchange, the fair market value shall be the book value of the security on the valuation date, or on the date nearest the valuation date
Notes and accounts receivables:
•
appraised on the basis of the amount of principal and interest due and unpaid at the time of decedent’s death
Gross Estate (Property Relations Between Spouses) The property relations between spouses shall be governed in the following order: 1. By marriage settlements executed before the marriage; 2. By the provisions of the Family Code; and 3. By the local customs.
The future spouses may, in the marriage settlements agree upon any of the following regimes: A. Absolute Community of Property B. Conjugal Partnership of Gains C. Complete Separation of Property D. Any Other Regime 1. Property Regimes of Unions without marriage 2. Property Regime in Cohabitations of Spouses Who are Incapacitated to Marry Each Other
In the absence of marriage settlements, or when the regime agreed upon is void: 1. the system of conjugal partnership of gains shall govern marriages contracted before August 3, 1988; or 2. the system of absolute community of property shall govern marriages contracted on or after Aug. 3, 1988, the effectivity of the Family Code.
A. Absolute Community of Property The gross estate of a married decedent under this regime shall be composed of: 1. Exclusive property of the decedent; and 2. Absolute community (communal property)
Exclusive Property of Each Spouse 1. Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof; if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the communal property; 2. Property for personal and exclusive use of either spouse; however, jewelry shall form part of the communal property 3. Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property.
Communal Property Unless otherwise provided in the Family Code or in the marriage settlements, communal property shall consist of: 1. all the property owned by the spouses at the time of the celebration of the marriage; or 2. acquired thereafter.
B. Conjugal Partnership of Gains Under this regime, the spouses place in a common fund the proceeds, products fruits and income from their separate property and those acquired by either of both spouses through their efforts or by chance. Upon dissolution of the marriage or the partnership, the net gains or benefits obtained shall be divided equally between them, unless otherwise agree in their marriage settlements. The gross estate of a married decedent under this regime shall be composed of: 1. Exclusive property of the decedent; and 2. Conjugal property
Exclusive Property of Each Spouse The following shall be the exclusive property of each spouse: 1. That which is brought to the marriage as his or her own; 2. That which each acquired during the marriage by gratuitous title; 3. That which is acquired by right of redemption, by barter or by exchange with property belonging to only one of the spouse; and
4. That which is purchased with exclusive money of the wife or of the husband.
Conjugal Partnership Property All property acquired during the marriage, whether the acquisition appears to have been made, contracted or registered in the name of one or both spouses, is presumed to be conjugal unless the contrary is proved. The following are conjugal partnership property: 1. Those acquired by onerous title during the marriage at the expense of the common fund, whether the acquisition be for the partnership, or for only one of he spouses. 2. Those obtained from the labor, industry, work or profession of either or both of the spouses; 3. The fruits, natural, industrial, or civil, due or received during the marriage from the common property, as well as the net fruits from the exclusive property, of each spouse. 4. The share of either spouse in the hidden treasure which the law awards to the finder or owner of the property where the treasure is found; 5. Those acquired through occupation such as fishing or hunting;
6. Livestock existing upon the dissolution of the partnership in excess of the number of each kind brought to the marriage by either spouse; and 7. Those which are acquired by chance, such as winning from gambling or betting. However, losses therefrom shall be borne exclusively by the loserspouse.
Classifications of Properties under Conjugal Partnership of Gains and Absolute Community of Property Regime
I.
No agreement on marriage settlement
Date of Marriage Before August 3, 1988 On or after August 3, 1988
II.
Regime Conjugal Partnership of Gains Absolute community of property
Acquisition by gratuitous title (Donation/Inheritance)
Regime 1. Conjugal partnership a. Principal b. Fruits 2. Absolute community a. Principal b. Fruits
Before marriage
During marriage
Exclusive Conjugal
Exclusive Conjugal
Community Community
Exclusive Exclusive
III.
Properties brought into/acquired during the marriage
Regime 1. Conjugal Partnership a. Principal property b. Fruits 2. Absolute community a. Principal property b. Fruits
Brought into marriage
Acquired during marriage
Exclusive Conjugal
Conjugal Conjugal
Community Community
Community Community
Dissolution of Absolute Community and Conjugal Partnership Regime 1. Upon the death of either spouse; 2. When there is a decree of legal separation 3. When the marriage is annulled or declare void; or 4. In the case of judicial separation of property during the marriage under Art. 134 to 138 of the New Family Code.
C. Regime of Complete Separation of Property
The spouses shall be governed by complete separation of property if the future spouses agree in the marriage settlements that their relations during the marriage shall be governed by regime of separation of property Each spouse shall claim all earning from his or her profession and all fruits due or received during the marriage from his or her separate property.
D. Other Regimes 1. Property Regime of Unions Without Marriage When a man and a woman are capacitated to marry each other, live exclusively with each other as husband and wife without the benefit of marriage or under a void marriage: - wages and salaries shall be owned by them in equal shares - the property acquired by both of them through their work or industry shall be owned by them in equal shares
2. Property Regime in Cohabitations of Spouse Who are Incapacitated to Marry Each Other When common-law spouses suffer from legal impediments to marry or when they do not live exclusively with each other as husband and wife: - only the property acquired by both of them through their actual joint contribution shall be owned in common and in proportion in their respective contributions. Exclusions and Exemptions from the Gross Estate
Exempted under the Tax Code: 1. Merger of usufruct in the owner of the naked title. Usufruct – a real right, temporary in nature, which authorizes its holder to enjoy all the benefits which results from the normal enjoyment of another’s property, with the obligation to return, at the designated time, either the same thing or, in special cases, its equivalent
2. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary. Fideicommissary Substitution – is that by virtue of which a testator institutes a first heir, and charges him to preserve and transmit the whole or part of the inheritance later on to a second heir
3. Transmission from the first heir, legatee or donee in favor of another beneficiary in accordance with the desire of the predecessor.
4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual, provided that not more than 30% of which shall be used for administration purposes
Exempted under special laws:
1. Benefits received by members from GSIS and SSS because of death 2. Amounts received from the Philippine and U.S. governments for damages during the last war 3. Benefits received from the U.S. Veterans Administration 4. Proceeds of life insurance under a group insurance taken by employer
DEDUCTIONS FROM THE ESTATE
THE ESTATE TAX TABLE
NET TAXABLE ESTATE
ADMINISTRATIVE PROVISIONS
Notice of Death
1. When required: a) In all cases of transfer subject to tax; or b) Where, though exempt from tax, the value of the gross estate exceeds P20,000.00 2. Time of filing: a) Within two (2) months after the decedent's death, or b) Within two (2) months after the executor or administrator has qualified. 3. Who shall file notice of death: a) Executor b) Administrator c) Any of the legal heirs
Estate Tax Return
1. When required: a) In all cases of transfer subject to tax; or b) Where, though exempt from tax, the gross value of the estate exceeds P200,000. c) Regardless of the gross value of the estate, where the said estate consists of registered or registerable property.
2. Contents: a) The value of the gross estate of the decedent at the time of his death, or in the case of a nonresident alien, of that part of his gross estate situated in the Philippines; b) The deductions allowed from gross estate in determining the estate tax; c) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes
3. Statement duly certified by a CPA (when gross value exceeds P2,000,000) shall include: a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident alien, of that part of his gross estate situated in the Philippines; b) Itemized deductions from gross estate; and c) The amount of tax due whether paid or still due and outstanding
4. Persons required to file:
a) Executor b) Administrator c) Anyone of the legal heirs
5. Time for filing: a) Within six (6) months after decedent's death
6. Extension to File Return: a) Not exceeding thirty (30) days in meritorious cases.
7. Place of Filing: a) Office of the Commissioner of Internal Revenue b) Office of the Revenue District Officer, Collection Officer or authorized treasurer of the Municipality in which the decedent was domiciled at the time of death.
Documentary Requirements:
1. Notice of Death duly received by the BIR, if gross estate exceeds P20,000 for deaths occurring on or after Jan. 1, 1998; or if the gross estate exceeds P3,000 for deaths occurring prior to January 1, 1998 2. Certified true copy of the Death Certificate 3. Deed of Extra-Judicial Settlement of the Estate, if the estate is settled extrajudicially 4. Court Orders/Decision, if the estate is settled judicially; 5. Affidavit of Self-Adjudication and Sworn Declaration of all properties of the Estate 6. A certified true copy of the schedule of partition of the estate and the order of the court approving the same, if applicable 7. Certified true copy(ies) of the Transfer/Original/Condominium Certificate of Title(s) of real property(ies) (front and back pages), if applicable 8. Certified true copy of the latest Tax Declaration of real properties at the time of death, if applicable 9. "Certificate of No Improvement" issued by the Assessor's Office declared properties have no declared improvement or Sworn Declaration/Affidavit of No Improvement by at least one (1) of the transferees 10. Certificate of Deposit/Investment/Indebtedness owned by the decedent and the surviving spouse, if applicable 11. Photo copy of Certificate of Registration of vehicles and other proofs showing the correct value of the same, if applicable 12. Photo copy of certificate of stocks, if applicable
13. Proof of valuation of shares of stocks at the time of death, if applicable •
For listed stocks - newspaper clippings or certification from the Stock Exchange
•
For unlisted stocks - latest audited Financial Statement of issuing corporation with computation of book value per share
14. Proof of valuation of other types of personal property, if applicable 15. Proof of claimed tax credit, if applicable 16. CPA Statement on the itemized assets of the decedent, itemized deductions from gross estate and the amount due if the gross value of the estate exceeds two million pesos, if applicable 17. Certification of Barangay Captain for claimed Family Home 18. Duly notarized Promissory Note for "Claims against the Estate" arising from Contract of Loan 19. Accounting of the proceeds of loan contracted within three (3) years prior to death of the decedent 20. Proof of the claimed "Property Previously Taxed" 21. Proof of claimed "Transfer for Public Use" 22. Copy of Tax Debit Memo used as payment, if applicable
Payment of Estate Tax
1. Time of payment: a) Estate tax is payable at the time the return is filed (Within six (6) months after death) b) Extension to pay estate tax •
Two (2) years - Estate is settled extrajudicially
•
Five (5) years - Estate settled judicially.
2. Place of filing of return and payment of tax: a) Commissioner of Internal Revenue, or b) Regional Director, Revenue District Officer or Collection Officer of the city or municipality in which the decedent was domiciled at the time of his death.
3. Person liable to pay estate tax: a) Executor or administrator before distribution of estate. b) Heir or beneficiary subsidiarily liable to the extent of his distributive share.
Civil Penalties:
