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 (Art. 774, New Civil Code).

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

Kinds of Succession

Testamentary. Testamentary succession is that which results from the designation of an heir, made in a will executed in the form prescribed by law (Article 779, Civil Code).
Legal or intestate. Type of succession which is effected by operation of law.
Mixed. Mixed succession is that effected partly by will and partly by operation of law (Article 780, Civil Code).

What is a 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 this estate, to take effect after his death (Article 783, Civil Code).

Kinds of Will

Notarial (Ordinary/Attested) Will. One which is executed in accordance with the formalities prescribed by law.
Holographic Will. One which is entirely written, dated, and signed by the hand of the testator.

Instances of Legal or Intestate Succession

If a person dies without a will, or with a void will, or one which has subsequently lost its validity;
When the will does not institute an heir to, or dispose of all the property belonging to the testator. In such case, legal succession shall take place only with respect to the property of which the testator has not disposed;
If the suspensive condition attached to the institution of heir does not happen or is not fulfilled, or if the heir dies before the testator, or repudiates the inheritance, there being no substitution, and no right of accretion takes place;
When the heir instituted is incapable of succeeding, except in cases provided in this Code. (912a)

Elements of Succession

Decedent who is the person who died and whose property is transmitted through succession.
Successor or the heir or person to whom the property or property rights is to be transferred.
Inheritance refers to the properties or property rights of a decedent, which is the subject matter of succession.

Successors or Heirs

An heir is a person called to the succession either by the provision of a will or by operation of law (Art. 782, New Civil Code).

Kinds of Successors

Compulsory heirs
Voluntary heirs

Compulsory Heirs. Compulsory heirs are those for whom the legitime is reserved by law, and who succeed whether the testator likes it or not.

They cannot be deprived by the testator of their legitime except by disinheritance properly effected.

A person's compulsory heirs are the following:

legitimate children and descendants, with respect to their legitimate parents and ascendants;
in default of the foregoing, legitimate parents and ascendants, with respect to their legitimate children and descendants;
the widow or widower; and
acknowledged natural children and natural children by legal fiction
other illegitimate children

Voluntary Heirs. Voluntary heirs are those other than compulsory heirs.

The devisee is the person to whom a gift of real property is given by virtue of a will while a legatee is a person to whom a gift of personal property (bequest) is given by virtue of a will.

Inheritance

The inheritance includes all the property, rights, and obligations of a person which are not extinguished by his death (Article 776, C).

Principles, Concepts involving Estate Taxation

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.

It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death of the owner.

Purpose of Estate Tax

To avoid the undue accumulation of wealth or fortune to an individual
To raise revenue for use of government

Justification for the Imposition of Estate Tax

Benefit-Received Theory. The law considered the service rendered by the government in the distribution of the estate of the decedent either by law or in accordance with his wishes.

Privilege or State Partnership Theory. Inheritance is not a right but a privilege granted by the State and legatees have been acquired only with the protection of the State.

The State as a passive silent partner in the accumulation of property has the right to collect the share which is properly due it.

Ability to Pay Theory. Receipt of inheritance which is in the nature of an unearned wealth or windfall is placing assets into the hands of the heirs and beneficiaries.

Redistribution of Wealth Theory. The receipt of inheritance is a contributing factor to the inequalities in wealth and income.

Estate Tax vs. Donor's Tax

	Estate Tax	Donor’s Tax
Subject	Right to transfer	Right to transfer
Taxpayer	Estate (Only natural persons)	Donor (Natural and Juridical)
Liability to pay	Administrator, Executor, or Legal Heir	Donor
Effectivity of Transfer	Upon the death of the decedent	During the lifetime of donor and done
Tax Base	Taxable Net Estate	Taxable Net Gift
Exemption	-	P250,000
CPA	May be required	Not required
Filing	Within 1 year	Within 30 days from date of donation
Rates	6% of taxable net estate	6% gifts in excess of P250,000
Extension	With extension (5 years or 2 years)	Without extension

Classification of Decedent

Estate Tax applies only to individuals. The decedent may be classified into:

Resident Citizen
Non-resident Citizen
Resident Alien
Non-resident Alien

Net Estate

Applicable Law

It is a well-settled rule that estate taxation is governed by the statute in force at the time of death of the decedent. The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death.

Date of Death	Applicable Law
July 1, 1939 – September 14, 1950	Commonwealth Act No. 466
September 15, 1950 – December 31, 1972	R.A. No. 579
January 1, 1973 – July 27, 1992	P.D. 69
July 28, 1992 – December 31, 1997	R.A. No. 7499
January 1, 1998 – December 31, 2017	R.A. No. 8424
January 1, 2018	R.A. 10963 (TRAIN)

Net Taxable Estate

= Gross Estate - Allowable Deductions - Net Share of the Surviving Spouse

Computation of the Net Estate of a Non-Resident Alien Decedent

The value of the net estate of a decedent who is a non-resident alien in the Philippines shall be determined by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines the following items of deductions:

1. Standard deduction. – A deduction in the amount of Five Hundred Thousand Pesos (P500,000) shall be allowed without need of substantiation. The full amount of P500,000 shall be allowed as deduction for the benefit of the decedent.

2. The proportion of the total losses and indebtedness which the value of such part bears to the value of his entire gross estate wherever situated. Losses and indebtedness shall include the following:

Claims against the estate
Claims of the deceased against insolvent persons where the value of the interest therein is included in the value of the gross estate
Unpaid mortgages, taxes and casualty losses

3. Property previously taxed

4. Transfers for public use

5. Net share of the surviving spouse in the conjugal property or community property.

Composition of Gross Estate

The gross estate of a decedent shall be comprised of the following properties and interest therein at the time of his/her death, including revocable transfers and transfers for insufficient consideration, etc:

Residents and citizens

Residents and citizens – all properties, real or personal, tangible or intangible, wherever situated.

The gross estate of a citizen or resident alien decedent shall consist of

Real properties located within and outside the Philippines;
Tangible personal properties located within and outside the Philippines; and
Intangible personal properties located within and outside the Philippines

For example, Mr. A left the following estate to his son who is residing in the Philippines:

House and lot in the Philippines, P4,000,000
Three-door apartment in Australia, P5,000,000
Shares of stock of a foreign corporation where 90% of the business operation is in the Philippines, P1,500,000
Franchise exercisable in Australia, P500,000

How much is the gross estate if the decedent is a Resident Citizen, Non-Resident Citizen, or Resident Alien?

Answer: P11,000,000

= P4,000,000 + P5,000,000 + P1,500,000 + P500,000

= P11,000,000

For Resident Citizen, Non-Resident Citizen, or Resident Alien Decedent, the gross estate shall include all properties, real or personal, tangible or intangible, wherever situated.

Non-resident Aliens

Non-resident aliens – only properties situated in the Philippines provided, that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity provided for under Section 104 of the NIRC.

The gross estate of a nonresident alien decedent shall consist of

Real properties located in the Philippines;
Tangible personal properties located in the Philippines; and
Intangible personal properties located in the Philippines, unless excluded on the basis of reciprocity

For example, Mr. B left the following estate to his son who is residing in the Philippines:

How much is the gross estate if the decedent is a Non-Resident Alien (No Reciprocity)?

Answer: P5,500,000

= P4,000,000 ~~+ P5,000,000~~ + P1,500,000 ~~+ P500,000~~

= P5,500,000

For Non-Resident Alien Decedent, the gross estate shall include only properties situated in the Philippines.

House and lot in the Philippines, P4,000,000

~~Three-door apartment in Australia, P5,000,000~~

Shares of stock of a foreign corporation where 90% of the business operation is in the Philippines, P1,500,000

~~Franchise exercisable in Australia, P500,000~~

Reciprocity Clause

There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death:

Did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; OR
Allowed a similar exemption from transfer tax in respect of intangible personal property owned by citizens of the Philippines not residing in that country

If there is reciprocity, the intangible personal property of an NRA shall not be included in his gross estate. If there is no reciprocity, such intangible personal property will be included. [Sec. 104, NIRC]

For example, Mr. C left the following estate to his son who is residing in the Philippines:

How much is the gross estate if the decedent is a Non-Resident Alien (With Reciprocity)?

Answer: P4,000,000

= P4,000,000 ~~+ P5,000,000 + P1,500,000 + P500,000~~

= P4,000,000

For Non-Resident Alien Decedent with Reciprocity, the gross estate shall include only real and tangible properties situated in the Philippines. Intangible properties wherever situated shall not be subject to estate tax.

House and lot in the Philippines, P4,000,000

~~Three-door apartment in Australia, P5,000,000~~

~~Shares of stock of a foreign corporation where 90% of the business operation is in the Philippines, P1,500,000~~

~~Franchise exercisable in Australia, P500,000~~

Intangible Properties

Intangible Properties which are considered situated in the Philippines.

Franchise which must be exercised in the Philippines;
Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws;
Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines;
Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines;
Shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines.

Valuation of the Gross Estate

The properties comprising the gross estate shall be valued according to their fair market value as of the time of decedent’s death.

Valuation of Real Property

If the property is a real property, the appraised value thereof as of the time of death shall be, whichever is the higher of –

The fair market value as determined by the Commissioner, or
The fair market value as shown in the schedule of values fixed by the provincial and city assessors, whichever is higher.

For example, Mr. D left a parcel of land to his son as follows:

Zonal Value as determined by City Assessors, P3,000,000

Fair Market Value as determine by the Commissioner of Internal Revenue, P2,500,000

Fair Market Value as determined by independent real property appraisers, P3,300,000

Unpaid real property tax assumed by the donee, P250,000

Mortgaged assumed by the donee, P500,000

How much is the gross estate?

Answer: P3,000,000, Zonal Value as determined by City Assessors

Only the valuations as determined by the Commissioner or as shown in the schedule of values fixed by the provincial and city assessors, whichever is higher, are considered. The valuation by the independent real property appraisers is not prescribed by the NIRC.

For purposes of prescribing real property values, the Commissioner is authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers, both from the private and public sectors, determine the fair market value of real properties located in each zone or area.

Valuation of Stocks

In the case of shares of stocks, the fair market value shall depend on whether the shares are listed or unlisted in the stock exchanges.

Unlisted common shares are valued based on their book value while unlisted preferred shares are valued at par value. In determining the book value of common shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares, if there are any. On this note, the valuation of unlisted shares shall be exempt from the provisions of RR No. 06-2013, as amended.

For example, the decedent owns 100,000 shares of DRL Corporation at the time of his death. At that time, DRL has outstanding shares of 1,000,000 with P10 par value and Retained Earnings amounting to P5,000,000. How much is the gross estate?

Answer: P1,500,000

= (Capital Stock + Retained Earnings/No. of Shares) x No. of Shares

= (P10,000,000 + P5,000,000)/1,000,000 x 100,000

= P15/share x 100,000

= P1,500,000

For shares that are listed in the stock exchanges, the fair market value shall be the arithmetic mean between the highest and lowest quotation at a date nearest the date of death, if none is available on the date of death itself.

For example, the decedent died on Saturday leaving 10,000 shares of DRL Corporation. The shares were traded on Friday in the Philippine Stock Exchange with the highest and lowest quotations per share of P600 and P400, respectively. It has a book value of P450 per share. How much is the gross estate?

Answer: P5,000,000

= 10,000 shares x (P600 + P400)/2

= 10,000 shares x P500

= P5,000,000

Valuation of Units of Participation

The fair market value of units of participation in any association, recreation or amusement club (such as golf, polo, or similar clubs), shall be the bid price nearest the date of death published in any newspaper or publication of general circulation.

Valuation of Uusufruct

To determine the value of the right to usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest basic standard mortality table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner.

Gift	Valuation at the time of death
Cash	Value or face amount
Personal property	Fair Market Value
Real property	Higher between fair market value fixed by the Provincial City Assessor or the fair market value as determined by the BIR Commissioner
Shares of stocks
Listed	Fair market value shall be the arithmetic mean between the highest and lowest quotation at a date nearest the date of death, if none is available on the date of death itself.
Unlisted	Book value if common stocks Par value of preferred stocks
Units of participation in any association	Bid price nearest the date of death published in any newspaper or publication of general circulation
Right to usufruct, use or habitation, as well as that of annuity	Probable life of the beneficiary shall be taken into account.

Inclusion in the Gross Estate

The following items shall be included in determining gross estate:

Decedent’s Interest
Transfer in Contemplation of Death
Revocable Transfer
Property Passing under the General Power of Appointment
Proceeds of Life Insurance
Prior Interests
Transfers for Insufficient Consideration

Moreover, the following are deductible only if included in the gross estate:

Claims against insolvent person
Unpaid mortgages
Property previously tax
Family home
Amounts received under RA 4917

Decedent’s interest

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible to the extent of the interest therein of the decedent at the time of his death.

This includes any interest having value or capable of being valued which is owned by the decedent existing at the time of death, such as dividend declared on or before death, but is received by the estate after death, partnership profits which have accrued before his death, but received after death. This also includes those transferred by the decedent at the time of his death.

For example, the decedent had a 5-year, 10%, P500,000 promissory note, received 3 years ago. Both the principal and the interest are due at the maturity of the loan. How much shall be included in the gross estate?

Answer: P650,000

= principal + accrued interest (at the time of death)

= 500,000 + 500,000 x 10% x 3 years

= 500,000 + 150,000

= P650,000

Transfers in contemplation of death

The term “in contemplation of death” means that the thought of death or the imminence of death (not the general expectation of death) is the controlling motive for the transfer of the property. This refers to the following transfer:

by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or
by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from the property, or (b) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom;

For example:

Mr. A has been bedridden from almost six months due to COVID-19, and because his very ill situation, he transferred his commercial building valued at P5,000,000

Mr. B donated his three-door apartment valued at P2,000,000 to his favorite friend where the deed of donation will take effect only after his death.

Mr. C executed a deed of donation of his two-hectare fishpond in favor of his neighbor. Under the terms of the donation, the income of the property will still accrue to Mr. C while he is still alive.

These transfers should be without or with insufficient considerations. Transfers in contemplation of death does not include bonafide sale for an adequate and full consideration in money or money's worth.

The following are examples of Transfer Not in Contemplation of Death

To relieve the donor from burden of management
Save income or property taxes
To settle family litigated or unlitigated disputes
To provide independent income for dependents
To see the children enjoy the property while the donor is still alive
To protect the family from hazards of business operations
To reward services rendered

Revocable transfers

The transfer was made by way of trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power by the decedent alone or by the decedent in conjunction with any other person to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death.

As long as there is reservation that the transfer is revocable, then it is sufficient that it is part of the gross estate to the extent of any interest therein. The revocability of the transfer is not affected by the following:

requirement of prior notice before the power to alter, amend or revoke is exercised
the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power
the failure of the decedent to give notice or to exercise power to alter, amend or revoke.

For example, P transferred all his real properties worth P10,000,000 to J. P reserved his right to terminate the transfer anytime. P died. How much should be included in P’s gross estate?

Answer: P10,000,000, P is still regarded as the owner of the property at the time of his death.

Upon the death of P, J inherited the property. In case J died after P's death, the inherited property will be included in J's estate.

What if it was J who died first, how much should be included in J’s gross estate?

Answer: Nil, a revocable transfer does not convey ownership.

Moreover, revocable transfer does not include bonafide sale for an adequate and full consideration in money or money's worth.

Property Passing under a General Power of Appointment

General Power of Appointment gives the decedent the power to appoint any person he pleases including himself. Unlike in revocable transfer where the decedent is the transferor, in property passing under a general power of appointment, the decedent is the transferee. The property is transferred to the decedent during his lifetime under a power of appointment couched in general terms where he can designate any person who shall possess or enjoy the property or the income therefrom.

Included in the gross estate if the property arises under a general power of appointment exercised by the decedent:

By will; or
By deed executed in contemplation of or intended to take effect in possession or enjoyment at or after his death; or
By deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death – (a) The possession or enjoyment of, or the right to the income from the property; or (b) The right either alone or in conjunction with any person, to designate the persons who shall enjoy or possess the property or the income therefrom.

If the property is transferred to the decedent under special power of appointment, the property is excluded from this gross estate. Special Power of Appointment refers to appointment where the decedent

can appoint only among a designated class of persons other than himself, his estate, the creditors of his estate, or
if the power of appointment is expressly not exercisable in favor of the decedent, his estate, his creditors, or creditors of his estate.

Proceeds of life insurance

Proceeds of life insurance taken out by the decedent on his own life shall be included in the gross estate in the following cases:

Beneficiary is the estate of the deceased, his executor or administrator, irrespective of whether or not the insured retained the power of revocation; or

For example, K got a P5,000,000 life insurance policy on himself paying an annual premium of P100,000. He designated his friend, L, as the beneficiary. How much should be included in K’s gross estate upon his death?

Answer: P5,000,000, the designation is silent, hence, deemed revocable.

Beneficiary is other than the decedent’s estate, executor or administrator, when designation of beneficiary is not expressly made irrevocable.

For example, K got a P5,000,000 life insurance policy on himself paying an annual premium of P100,000. He designated his executor, L, as the beneficiary. The designation was irrevocable. How much should be included in K’s gross estate upon his death?

P5,000,000, the beneficiary was the executor.

Beneficiary	Designation	Gross Estate
Estate, Executor, Administrators	Revocable or irrevocable	Included
other than the decedent’s estate, executor or administrator	Revocable	Included
other than the decedent’s estate, executor or administrator	Irrevocable	Excluded

Proceeds from life insurance are not taxable in the following circumstances:

Irrevocably designated
Accident insurance proceeds as the Tax Code specifically mentions only life insurance policies
Proceeds of a group insurance policy taken out by a company for its employees.
Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured. The transfer is absolute, and the insured did not retain any legal interest in the insurance
Proceeds of insurance policies issued by the GSIS to government officials and employees, which are exempt from all taxes
Benefits accruing under the SSS law
Proceeds of life insurance payable to heirs of deceased members of military personnel

For example, K got a P5,000,000 life insurance policy on himself paying an annual premium of P100,000. He designated his friend, L, as the beneficiary. The designation was irrevocable. How much should be included in K’s gross estate upon his death?

P0, the beneficiary was a friend and the designation was irrevocable.

Prior interests

Transfer in Contemplation of Death, Revocable Transfer, Proceeds of Life Insurance shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this NIRC.

Transfers for insufficient consideration

The transfer for insufficient consideration must fall under any of the following, otherwise, the tax imposed is donor’s tax.

Transfer in contemplation of death;
Revocable transfer, or
Property passing under a GPA.

The consideration in money or money’s worth is not a bona fide sale for an adequate and full consideration in money or money’s worth.

The excess of the fair market value of the property at the time of the decedent’s death over the consideration received shall be included in the gross estate of the decedent.

Note that the FMV at the time of sale/transfer is used to determine whether the consideration was full and adequate while the FMV at the time of death is used to determine the amount to be included in the gross estate.

	Case 1	Case 2	Case 3
FMV, time of transfer	P1,000,000	P1,500,000	P1,000,000
FMV, time of death	P500,000	P1,000,000	P1,500,000
Consideration received	P300,000	P0	P1,000,000
Amount to be included in the Gross Estate	P200,000	P1,000,000	P0

Exclusions from Gross Estate under NIRC

Exclusive property of the surviving spouse;
Amounts withdrawn from the deposit accounts of a decedent subjected to the 6% final withholding.
Properties abroad in case of non resident alien decedent;
Intangible personal property in the Philippines in case of non resident alien decedent with reciprocity clause;

Capital of the surviving spouse

The exclusive property of the surviving spouse of a decedent shall not be deemed a part of his or her gross estate.

If ACP governs property relations the community of property shall consist of all the property owned by the spouses at the time of the celebration of the marriage or acquired thereafter. The following are excluded from the community property:

Property acquired 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 community property.
Property for personal and exclusive use of either spouse; however, jewelry shall form part of the community property.
Property acquired before the marriage by either spouse who has legitimate descendants from a former marriage, and the fruits as well as the income, if any, of such property. [Art. 92 Family Code]
Property acquired during the marriage is presumed to belong to the community, unless it is proved that it is one of those excluded therefrom.

If CPG governs property relations The husband and wife place in a common fund the proceeds, products, fruits, and income from their separate properties and those acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage or of the partnership, the net gains or benefits obtained by either or both spouses shall be divided equally between them, unless otherwise agreed in marriage settlements. The following are exclusive property of each spouse:

That which is brought to the marriage as his or her own
That which each acquires DURING the marriage by gratuitous title
That which is acquired by right of redemption, by barter or by exchange with property belonging to only one of the spouses
That which is purchased with exclusive money of the wife or the husband [Art. 109, Family Code]
Property bought on instalments paid partly from exclusive funds of either or both spouses and partly from conjugal funds belong to the buyer or buyers if full ownership was vested BEFORE the marriage subject to reimbursement advanced by the conjugal partnership or by either or both spouses. [Art. 118, Family Code]
Whenever an amount or credit payable within a period of time belongs to one of the spouses, the sums collated during the marriage in partial payments or by instalments on the principal are considered the exclusive property of the spouse. However, interest falling due during the marriage on the principal belong to the conjugal partnership.
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 belong to the conjugal partnership, unless it is proved that it pertains exclusively to the husband or to the wife.

Exemptions under special laws

Benefits received by members from the GSIS and the SSS by reason of death
Amounts received from the Philippines and US governments for damages suffered during the last war.
Benefits received by beneficiaries residing in the Philippines under laws administered by the US Veteran Administration
Bequests, legacies, or donations mortis causa to social welfare, cultural, or charitable organizations. Bequests to be used actually, directly and exclusively for educational purposes are also exempt from tax.
Grants and donations to the Intramuros Administration

Withdrawn Bank Deposits Subjected to 6% Final Withholding Tax

Those amounts withdrawn from the deposit accounts of a decedent subjected to the 6% final withholding tax imposed under Section 97 of the NIRC, shall be excluded from the gross estate for purposes of computing the estate tax.

Allowable Deductions

The value of the net estate of a citizen or resident alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction:

Standard deduction

A deduction in the amount of Five Million Pesos (P5,000,000) shall be allowed without need of substantiation. The full amount of P5,000,000 shall be allowed as deduction for the benefit of the decedent. The presentation of such deduction in the computation of the net taxable estate of the decedent is properly illustrated in these Regulations.

For example, X left real and personal properties worth P5,000,000. How much is his net estate?

Answer:

= P5,000,000 – P5,000,000

= P0

If X left real and personal properties worth P10,000,000. How much is his net estate?

Answer:

= P10,000,000 – P5,000,000

= P5,000,000

Claims Against the Estate

The word “claims” is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgements. Claims against the estate or indebtedness in respect of property may arise out of (1) Contract; (2) Tort; or (3) Operation of Law.

For example, a resident decedent died on November 1, 2021. During his lifetime, he availed of a P10,000,000 loan from a cooperative. How much may be deducted from the gross estate?

Answer: P10,000,000

The Requisites for Deductibility of Claims Against the Estate are the following:

The liability represents a personal obligation of the deceased existing at the time of his death;
The liability was contracted in good faith and for adequate and full consideration in money or money’s worth;
The claim must be a debt or claim which is valid in law and enforceable in court;
The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed.

If the obligation has been condoned or prescribed at the time of the decedent's death, the claim against the estate cannot be deducted from the gross estate.

For example, a resident decedent died on November 1, 2021. During his lifetime, he availed of a P10,000,000 loan from a cooperative. The obligation has already been prescribed at the time of his death. How much may be deducted from the gross estate?

Answer: P0, to be deductible, the creditor’s right to collect from the decedent must not have been prescribed.

However, if the claim has been condoned or prescribed after the death of the decedent, the claim can still be deducted from the gross estate.

For example, a resident decedent died on November 1, 2021. During his lifetime, he availed of a P10,000,000 loan from a cooperative. The obligation was condoned by the cooperative six months after his death. How much may be deducted from the gross estate?

Answer: P10,000,000, the obligation is still subsisting at the time of the death.

The condonation of claim against the estate may be subject to donor's tax or income tax as the case may be.

Documentary Requirement

All unpaid obligations and liabilities of the decedent at the time of his death are allowed as deductions from gross estate. Provided, however, that the following requirements/documents are complied with/submitted:

a. The debt instrument must be duly notarized at the time the indebtedness was incurred, such as promissory note or contract of loan, except for loans granted by financial institutions where notarization is not part of the business practice/policy of the financial institution-lender

b. Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. If the creditor is a corporation, the sworn certification should be signed by the President, or Vice- President, or other principal officer of the corporation. If the creditor is a partnership, the sworn certification should be signed by any of the general partners. In case the creditor is a bank or other financial institutions, the Certification shall be executed by the branch manager of the bank/financial institution which monitors and manages the loan of the decedent-debtor. If the creditor is an individual, the sworn certification should be signed by him. In any of these cases, the one who should certify must not be a relative of the borrower within the fourth civil degree, either by consanguinity or affinity, except when the requirement below is complied with.

When the lender, or the President/Vice-president/principal officer of the creditor-corporation, or the general partner of the creditor-partnership is a relative of the debtor in the degree mentioned above, a copy of the promissory note or other evidence of the indebtedness must be filed with the RDO having jurisdiction over the borrower within fifteen days from the execution thereof.

c. In accordance with the requirements as prescribed in existing or prevailing internal revenue issuances, proof of financial capacity of the creditor to lend the amount at the time the loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. In case the creditor is an individual who is no longer required to file income tax returns with the Bureau, a duly notarized Declaration by the creditor of his capacity to lend at the time when the loan was granted without prejudice to verification that may be made by the BIR to substantiate such declaration of the creditor. If the creditor is a non-resident, the executor/administrator or any of the legal heirs must submit a duly notarized declaration by the creditor of his capacity to lend at the time when the loan was granted, authenticated or certified to as such by the tax authority of the country where the non-resident creditor is a resident;

d. A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within three (3) years prior to the death of the decedent

If the unpaid obligation arose from purchase of goods or services:

a. Pertinent documents evidencing the purchase of goods or service, such as sales invoice/delivery receipt (for sale of goods), or contract for the services agreed to be rendered (for sale of service), as duly acknowledged, executed and signed by decedent debtor and creditor, and statement of account given by the creditor as duly received by the decedent debtor;

b. Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. If the creditor is a corporation, the sworn Certification should be signed by the President, or Vice- President, or other principal officer of the corporation. If the creditor is a partnership, the sworn certification should be signed by any of the general partners. If the creditor is a sole proprietorship, the sworn certification should be signed by the owner of the business. In any of these cases, the one who issues the certification must not be a relative of the decedent-debtor within the fourth civil degree, either by consanguinity or affinity, except when the requirement below is complied with.

When the lender, or the President/Vice-President/principal officer of the creditor-corporation, or the general partner of the creditor-partnership is a relative of the debtor in the degree mentioned above, a copy of the promissory note or other evidence of the indebtedness must be filed with the RDO having jurisdiction over the borrower within fifteen days from the execution thereof.

c. Certified true copy of the latest audited balance sheet of the creditor with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. Moreover, a certified true copy of the updated latest subsidiary ledger/records of the debt of the debtor-decedent, (certified by the creditor, i.e., the officers mentioned in the preceding paragraphs) should likewise be submitted.

Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing the claims against the estate, and the Court Order approving the said claims, if already issued, in addition to the documents mentioned in the preceding paragraphs.

Claims of the Deceased Against Insolvent Persons

For estate tax purposes, an insolvent is a person whose properties are not sufficient to satisfy, whether fully or partially, his debts. A judicial declaration of insolvency is not required but the incapacity of the debtor should be proven.

As a rule, regardless of the amount the debtor is unable to pay, the full amount of the claim against the insolvent person should be included in the gross estate of the decedent.

The portion of the claim which is not collectible should be allowed as a deduction from the gross estate.

For example, J is indebted to P for P1,000,0000. In 2020, J experienced financial difficulty and his assets are no longer sufficient to settle his liabilities. Consequently, J could only pay P500,000. How much should be included in the gross estate? How much can be deducted from gross estate?

Answer: Gross Estate, P1,000,000; Claims Against Insolvent Person, P500,000.

In case the debtor has insufficient assets to pay the creditors, the rule on preference on credit will apply.

Unpaid Mortgages

Unpaid mortgages upon, or any indebtedness in respect to, property where the value of the decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth.

In case unpaid mortgage payable is being claimed by the estate, verification must be made as to who was the beneficiary of the loan proceeds. If the loan is found to be merely an accommodation loan where the loan proceeds went to another person, the value of the unpaid loan must be included as a receivable of the estate. If there is a legal impediment to recognize the same as receivable of the estate, said unpaid obligation/mortgage payable shall not be allowed as a deduction from the gross estate.

In all instances, the mortgaged property, to the extent of the decedent’s interest therein, should always form part of the gross taxable estate.

For example, D died in 2021. He left properties worth P10,000,000 which he mortgaged two years ago for P3,000,000 as an accommodation for his brother. How much should be included in the gross estate? How much can be deducted from gross estate?

Answer: Gross Estate, P10,000,000; Unpaid Mortgages, P3,000,00

Unpaid Taxes

Taxes which have accrued as of the death of the decedent which were unpaid as of the time of death.

This deduction will not include

income tax upon income received after death, or
property taxes not accrued before his death (property taxes accrued after death), or
the estate tax due from the transmission of his estate.

Taxes that Could be Deducted

Unpaid income tax attributable to the decadent’s income before his/her death;
Unpaid income tax attributable to the estate’s income;
Unpaid donor’s tax on donations made during the previous or current year;
Unpaid business tax (VAT) before death
Tax assessment/deficiencies prior to death

Casualty Losses

There shall also be deducted losses incurred during the settlement of the estate arising from

fires,
storms,
shipwreck, or
other casualties, or
from robbery, theft or embezzlement

Requisites for Deductibility

when such losses are not compensated for by insurance or otherwise, and
if at the time of the filing of the return such losses have not been claimed as a deduction for income tax purposes in an income tax return, and
provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91, NIRC.

For example, H had a commercial building valued at P10,000,000. Two months after his death, the building was completely razed by fire. At the time of the incident, the property was not insured. How much should be included in the gross estate? How much can be deducted from gross estate?

Answer:

Gross Estate, P10,000,000;

Casualty Losses, P10,000,00

If the property was insured for P9,000,000, how much should be included in the gross estate? How much can be deducted from gross estate?

Answer:

Gross Estate, P10,000,000;

Casualty Losses, P1,000,00

If the property was completely razed by fire two years after the decedent's death and the said property was not insured, how much should be included in the gross estate? How much can be deducted from gross estate?

Answer:

Gross Estate, P10,000,000;

Casualty Losses, P0

Property Previously Taxed (Vanishing Deductions)

This deductible item is given as a relief or consolation for having to pay a death tax on his property which has been recently and previously subjected to Philippine tax or donor’s tax within a relatively short period of time.

To claim Vanishing Deduction, the following requisites must be present:

Death – The present decedent died within 5 years from the date of the prior decedent OR date of gift.
Identity of the property – The property with respect to which deduction is sought can be identified as the one who received from prior decedent, or from the donor, or as the property acquired in exchange for the original property so received.
Inclusion of the property – The property must have formed part of the gross estate situated in the Philippines of the prior decedent, or have been included in the total amount of the gifts of the donor made within 5 years prior to the present decedent’s death.
Previous taxation of property – The estate tax on the prior succession, or the donor’s tax on the gift must have been finally determined and paid by the prior decedent or by the donor, as the case may be.
No previous vanishing deduction on the property – No such deduction on the property, or the property given in exchange therefor, was allowed in determining the value of the net estate of the prior decedent. This is intended to preclude the application of the vanishing deduction on the same property more than once.

Vanishing deductions may be computed as follows:

Value of Property

Less: Mortgage debt paid if any

Initial basis

Less: Proportional deduction

Final basis

Multiply: Applicable vanishing deduction rate

Vanishing deduction

Value of Property

The deduction is limited by the value of property previously taxed or the aggregate value of such property if more than one item, as finally determined for the purpose of the prior estate tax (or gift tax) or the value of such property in present decedent’s gross estate, whichever is lower.

Mortgage Debt Paid if any

The initial value shall be reduced by the total amount paid, if any, by the present decedent on any mortgage or other lien on the property where a deduction was allowed, by reason of the payment, of such mortgage or other lien from the gross estate of the prior decedent, or gift or donor, in determining the estate tax of the prior decedent or the donor’s tax.

Proportional Deduction

The value as reduced in mortgaged paid shall be further reduced by an amount which bears the same ratio to the amounts allowed as deductions for:

Losses, Indebtedness, and Taxes
Transfers for public use as the amount otherwise deductible for property previously taxed bears to the value of the decedent’s gross estate

Applicable Vanishing Deduction Rate

An amount equal to the value specified below of any property forming part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received:

Vanishing Deduction	More than	But not more than
100%	0	1
80%	1	2
60%	2	3
40%	3	4
20%	4	5

Finally, the vanishing deduction shall be the net amount multiplied by the applicable vanishing deduction rates.

For example, Pedro received a car as a gift from Juan in December 2018. The value of the car at the time it was donated to Pedro was P2,000,000. However, Pedro assumed a P400,000 mortgage on the car. The corresponding donor’s tax was paid by Juan. Pedro paid a total of P200,000 on the mortgage in 2019 and 2020. On January 1, 2021, Pedro died. His gross estate at the time of his death amounted to P10,000,000, including the car received from Pedro valued at P1,400,000. The following deductions were also claimed by his beneficiaries.

Losses, P200,000

Unpaid mortgaged (including the mortgage on the car), P400,000

Unpaid taxes before death, P200,000

Donations mortis causa to Quezon City for public purposes, P1,000,000

How much is the allowable vanishing deduction?

Answer: P590,400

1. The value to take is P1,400,000, which is the lower value. The value of the car at the time it was donated to Pedro was P2,000,000. Its value at the time of the death is P1,400,000.

2. Pedro assumed a P400,000 mortgage on the car. Pedro paid a total of P200,000 on the mortgage in 2019 and 2020.

3. The initial basis is P1,200,000 computed as follows:

= Value to Take - Mortgage Paid

= P1,400,000 - P200,000

= P1,200,000

4. The proportional deduction is P216,000.

= initial basis / gross estate x (ULTI + TPP)

= 1,200,000 / 10,000,000 x (400,000 + 200,000 + 200,000 + 1,000,000)

= 12% x 1,800,000

= P216,000

5. Final Basis is P984,000

= Initial Basis - Proportional Deduction

= P1,200,000 - P216,000

= P984,000

6. The Vanishing Deduction is P590,400

= Final Basis x Applicable Vanishing Deduction Rate

= P984,000 x 60%

= P590,400

Pedro received a car as a gift from Juan in December 2018. On January 1, 2021 or more than 2 years after but not more than 3 years, Pedro died. The Applicable Vanishing Deduction Rate is 60%.

Transfers for Public Use

The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines or any political subdivision thereof, for exclusively public purposes.

The amount shall be included first in the computation of the gross estate.

Family Home

Family home refers to the dwelling house, including the land on which it is situated, where the husband and wife, or a head of the family, and members of their family reside, as certified to by the Barangay Captain of the locality. The family home is deemed constituted on the house and lot from the time it is actually occupied as a family residence and is considered as such for as long as any of its beneficiaries actually resides therein.

Temporary absence from the constituted family home due to travel or studies or work abroad, etc. does not interrupt actual occupancy. Family home is generally characterized by permanency, that is, the place to which, whenever absent for business or pleasure, one still intends to return.

The family home must be part of the properties of the absolute community or of the conjugal partnership, or of the exclusive properties of either spouse depending upon the classification of the property (family home) and the property relations prevailing on the properties of the husband and wife. It may also be constituted by an unmarried head of a family on his or her own property.

For purposes of availing of a family home deduction to the extent allowable, a person may constitute only one family home.

The beneficiaries of a family home are:

The husband and wife, or the head of a family; and
Their parents, ascendants, descendants including legally adopted children, brothers and sisters, whether the relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support.

Allowed Family Home Deductions

The following are the conditions for the allowance of family home as a deduction from the gross estate:

The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the family home is situated;
The total value of the family home must be included as part of the gross estate of the decedent; and
Allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate, or the extent of the decedent’s interest (whether conjugal/community or exclusive property), whichever is lower, but not exceeding P10,000,000.

For example, if the Family Home of P5,000,000 was exclusive, the allowed deduction is P5,000,000;

If the Family Home of P15,000,000 was exclusive, the allowed deduction is P10,000,000;

If the Family Home of P15,000,000 was conjugal, the allowed deduction is P7,500,000 (15,000,000/2);

If the Family Home of P15,000,000 of which P8,000,000 was exclusive and P7,000,000 was conjugal, the allowed deduction is P10,000,000 (Decedent’s interest is P11,500,000 [8,000,000 + 7,000,000/2]);

If the Family Home of P12,000,000 of which P6,000,000 was exclusive and P6,000,000 was conjugal, the allowed deduction is P9,000,000 (Decedent’s interest is P9,000,000 [6,000,000 + 6,000,000/2]).

Amount Received by Heirs under Republic Act No. 4917

Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent- employee in accordance with Republic Act No. 4917 is allowed as a deduction provided that the amount of the separation benefit is included as part of the gross estate of the decedent.

Net Share of the Surviving spouse in the Conjugal Partnership or Community Property

After deducting the allowable deductions appertaining to the conjugal or community properties included in the gross estate, the share of the surviving spouse must be removed to ensure that only the decedent’s interest in the estate is taxed.

The amount deductible is the net share of the surviving spouse in the CPG. The net share is equivalent to ½ of 50% of the conjugal property after deducting the obligations chargeable to such property.

Tax Due and Tax Credits

The net estate of every decedent, whether resident or non-resident of the Philippines, as determined in accordance with the NIRC, shall be subject to an estate tax at the rate of six percent (6%).

Estate Tax Due = Net Taxable Estate x 6%

Foreign Tax Credit

Only the estate of a decedent who was a citizen or a resident of the Philippines at the time of his death can claim tax credit for any estate tax paid to a foreign country.

The amount of the credit shall be subject to Specific Country Limitation and Global Limitation.

Specific Country Limitation is the amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under the tax code bears to his entire net estate.

Global limitation is the total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under the tax code bears to his entire net estate.

Tax Return Preparation and Filing and Tax Payments

When is Filing Required

In all cases of transfers subject to the tax imposed herein, or
Regardless of the gross value of the estate, where the said estate consists of registered or registrable property (e.g., Real property, Motor vehicle, Shares of stock, Other similar property) for Certificate Authorizing Registration from the BIR is required.

Who shall File

The Estate Tax Return (BIR Form 1801) shall be filed in triplicate by:

The executor, or administrator, or any of the legal heir/s of the decedent, whether resident or non-resident of the Philippines, under any of the following situations;
If there is no executor or administrator appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent

When to File

The Estate Tax Return (BIR Form 1801) shall be filed within one (1) year from the decedent's death.

For example, the decedent died on April 1, 2021, when should the estate tax return be filed?

Answer: The Estate Tax Return should be filed on or before April 1, 2022.

Note that under Art. 13, par. 3, Civil Code, in computing a period, the first day shall be excluded, and the last day included.

Moreover, as amended by the Administrative Code of 1987, one year period means 12 months whether it be a regular year or a leap year.

Hence, if the decedent died on April 1, 2021, the computation of time shall start on April 2, 2021 and shall end on April 1, 2022 or 12 months thereafter.

Extension of Time to File

In meritorious cases, the Commissioner shall have the authority to grant a reasonable extension not exceeding thirty (30) days for filing the return.

When to Pay

As a general rule, the estate tax imposed under the NIRC shall be paid at the time the return is filed by the executor, administrator, or the heirs.

Extension of Time to Pay

When the Commissioner of Internal Revenue finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed

Five years if the estate is settled through the courts,
Two years in case the estate is settled extrajudicially.

No Extension of Time to Pay

Where the request for extension is by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner.

Bond Requirement

If an extension is granted, the Commissioner or his duly authorized representative may require the executor, administrator, or beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the amount of the tax.

Interest on Extension

Any amount paid after the statutory due date of the tax, but within the extension period, shall be subject to interest but not to surcharge.

Payment by Installment

In case of insufficiency of cash for the immediate payment of the total estate tax due, the estate may be allowed to pay the estate tax due through

Cash installment within 2 years from the filing of the estate tax return,
Partial disposition of estate and application of its proceeds to the estate tax due.

Where to File and Pay

The return shall be filed with any

Authorized Agent Bank (AAB) of the Revenue District Office (RDO) having jurisdiction over the place of domicile of the decedent at the time of his death.
If the decedent has no legal residence in the Philippines, the return shall be filed with the Office of the Commissioner (RDO No. 39, South Quezon City).
In case of a non-resident decedent with executor or administrator in the Philippines, the return shall be filed with the AAB of the RDO where such executor/administrator is registered or is domiciled, if not yet registered with the BIR.
Payments may also be made thru the epayment channels of AABs thru either their online facility, credit/debit/prepaid cards, and mobile payments.

Where to File Request for Extension

The request for extension of time to file the return, extension of time to pay estate tax and payment by installment shall be filed with the Revenue District Officer (RDO) where the estate is required to secure its TIN and file the estate tax return.

This request shall be approved by the Commissioner or his duly authorized representative.

When CPA Certificate is Required

Estate tax returns showing a gross value exceeding P5 million shall be supported with a statement duly certified by a CPA containing the following:

Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;
Itemized deductions from gross estate allowed in Section 86; and

The amount of tax due whether paid or still due and outstanding

Liability for Payment

The estate tax imposed under the NIRC shall be paid by the executor or administrator before the delivery of the distributive share in the inheritance to any heir or beneficiary.

Where there are two or more executors or administrators, all of them are severally liable for the payment of the tax.

Subsidiary Liability

The executor or administrator of an estate has the primary obligation to pay the estate tax, but the heir or beneficiary has subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the total net estate.

The extent of his liability, however, shall in no case exceed the value of his share in the inheritance.

Final Estate Tax

The amounts withdrawn from the deposit accounts of a decedent subjected to the 6% final withholding tax imposed under Section 97 of the NIRC, shall be excluded from the gross estate for purposes of computing the estate tax.