Adsum Notes (Estate Tax)

ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E.
Tius Outline)
ESTATE TAX (Section 84 to 97, NIRC) I. Nature and Purposes of Estate Tax
PRELIMINARIES:
True or False. Only gratuitous transfers are subject to tax. FALSE. What makes it false? Would the opposite of gratuitous transfer, which is onerous transfer of property, be subject to tax? YES, its subject to income tax, VAT, percentage tax, other sales taxes.So whatever mode of transfer, whatever the reason for transferring of property is, it is always taxable. The difference is the type of tax.
True or False. If you transfer a property gratuitously or onerously, it is always subject to tax. TRUE.
True or False. If you transfer a property gratuitously, it is always subject to estate tax. FALSE, because gratuitous transfer, just like onerous transfer, can be branched out into different kinds of taxes. Now, gratuitous transfer can be made mortis causa or during lifetime inter vivos.
There are 2 types of gratuitous transfer: 1. During lifetime (inter vivos), If its during lifetime, donors tax. 2. Upon death (mortis causa), If its upon death, estate tax.
True or False. Only gratuitous transfers made mortis causa are subject to estate tax. FALSE. Although generally speaking, only gratuitous transfers made mortis causa are subject to estate tax because its presumely made upon death. However, there are inter vivos transfers or transfers made by the decedent during his lifetime that partake and is considered by the tax authorities as taking the form of a testamentary disposition of property. Page1
EXAMPLE
ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E. Tius Outline)
When the person is transferring a property during lifetime but the transfer is made in contemplation of death.
ILLUSTRATION You donated your property in contemplation of death. You paid donors taxes. A year after, you died. The tax authorities found out that the property was considered as part of the estate upon death because the motive was the thought of death. It will be considered as part of the estate subject to estate tax. Which is correct? a. Pay the difference between the donors tax that you have paid before and the estate tax due today. b. Paying full the estate tax. c. File for refund of the donors tax paid but still pay in full the estate tax. d. None of the above.
Answer: C, pay the estate tax in full and if you still have the time to file a claim for refund which is only 2 years from the date of payment of the donors tax, in this case it is allowed because it is only 1 year after payment of the donors tax when the decedent died, you can file a claim for refund of the donors tax paid. But if it happened more than 2 years ago, forget about claiming the refund but still pay the estate tax.
Why is the government interested in collecting the estate tax when the donors tax has already been paid and the purpose (tax on the privilege of transmitting property gratuitously) the smae?
Its because state taxes are higher in tax rates as against donors taxes.
The reason for the lower donors tax rates is to encourage the distribution of property in order for it to be productively used with the younger generations.
Is there an inheritance tax? Do you think imposing an inheritance tax is conscionable? Page1
Theres no inheritance tax. That has already been repealed. But before there was an inheritance tax and there was as well an estate tax. So the estate (giver) is taxed and
the recipient heirs are taxed for the same property. It became an issue of double taxation, therefore, it has already been repealed.
NATURE: it is an excise tax (catch all provision, tax on the conduct or exercise of a profession, doing or conduct of a business, and all others, which include the right to transmit property after death)
PURPOSE of imposing estate tax: primarily, to raise revenue, but for estate tax, there is a purpose of reducing the undue accumulation of wealth in one person or in a small group of persons.
WHO IS LIABLE for the payment: the estate itself. The liability falls on the estate, but a person should have to pay it in behalf of the estate.
THEORIES for collecting estate tax: a. benefits received theory the State should be remunerated for the services that it has rendered in the system of distribution of property.
b. state partnership theory the State is the silent and passive partner of the decedent in the increase or accumulation of his wealth. (Regalian doctrine lands belong to the State)
c. ability to pay theory the mere fact that the heirs are allowed to partake of the properties left by the decedent gives the estate the ability to pay the taxes due d. redistribution of wealth theory which is the reduction of social inequality. Spread out the wealth and estate of the decedent to the government for the government to render its services to the common good or community.
II. Applicable law in estate taxation Page1
LAW APPLICABLE: law at the time of the death of the decedent
NB: Succession takes effect at the time of death. By operation of the law, whatever properties are left by the decedent is transmitted to the heirs or to the successors. Although, for tax purposes, it requires some formal proceedings such as settlement and the payment of estate tax before partition takes effect.
So regardless of when the tax is supposed to be paid. Regardless of whether you have obtained an extension to pay the taxes, the computation of the estate tax liability would have to follow in effect the date that the tax accrued. And the tax accrues at the point of death of the decedent because it is at this time that his personality ceases.
III.Kinds of decedents a. Resident citizen (RC)- Filipino citizen residing in the Philippines b. Non-resident citizen (NRC)- Filipino citizen who is not residing in the Philippines (see Sec. 22 (E), NIRC). c. Resident alien (RA)- non Filipino citizen residing in the Philippines. d. Non-resident alien (NRA)Philippines. non Filipino citizen and not residing in the
TWO CLASSIFICATIONS OF DECEDENTS 1. Resident or Citizen (RC, NRC, RA) 2. Non Resident Non Citizen (NRA)
WHAT MAKES AN ALIEN A RESIDENT CITIZEN FOR ESTATE TAX PURPOSES? for estate tax purposes, residence means the domicile. So that if he is temporarily out of this country to stay in the Philippines, necessarily making the Philippines as his home country, then he may not be considered as a resident alien of the Philippines for estate tax purposes. Page1
IV. Properties covered by gross estate, in general
a. Real property b. Personal tangible property c. Personal intangible property Exemption to non-resident aliens, when available Real Personal Tangible Personal Intangible Resident or Citizen Within and without Within and without Within and without Non Resident Alien Within Within Within (General Rule)
EXAMPLES Personal Tangible Properties SHARES OF STOCKS OF DOMESTIC CORPORATION The domestic corporation being registered in the Philippines is expectedly receiving benefits although not necessarily direct benefits. Under the benefits-received theory, we consider the domestic corporations shares of stocks as having situs within. SHARES OF STOCK OF FOREIGN CORPORATION Even foreign corporations in some cases who have, will produce shares of stocks having situs in the Philippines, if the operation of such foreign corporation is atleast 85% here in the Philippines. Personal Intangible property of a NRA. GENERAL RULE, only properties located within. EXCEPTION: the rule on reciprocity applies. It is either: 1. The home country of the alien does not impose any transfer tax against the intangible, talking only of intangibles herein, tangible personal property of Filipinos not residing in their home country OR 2. It imposes transfer taxes on intangibles but then it allows an exemption similar to the exemption that we can give non-resident aliens in so far as intangible properties are concerned. NB: In all cases, the intangible personal properties of RC, NRC and RA decedent will form part of the gross estate. However, for NRA decedent, personal intangible properties are generally included in the gross estate, except when the reciprocity rule applies. V. Valuation of gross estate Page1
A. REAL PROPERTIES valued based on the Fair Market Value (FMV)
What is the source of fair market value in so far as real properties are concerned? According to Section 6-E of the tax code: Fair market value for tax purposes which would apply to fair market values for estate tax purposes would be the fair market value as determined by the Bureau of Internal Revenue Commissioner or the zonal values as determined by the local assessors in every local government unit, whichever is higher.
What is the reckoning point? Since estate taxes accrue at the time of the decedents death, you consider the FMV always, the FMV at the time of death of the decedent.
B. PERSONAL PROPERTIES- FMV in the market, i.e. the price at which the seller is not compelled to sell and the buyer is not compelled to buy.
EXAMPLE Mr. A has a motor vehicle and he owns a sole proprietorship. We know that sole proprietorships are owned by 1 sole proprietor, it becomes part of its assets. So when that sole proprietor dies, all assets of that sole proprietorship will be considered as part of the gross estate. If the sole proprietor has a computer, it was bought 2 years ago at Php 100K and you estimated the life of the computer for 5 years. So it was already 2 years old, so 2/5 years or Php 40K has already been depreciate. So the sole valued it at 60K in the books. If the sole proprietor dies and the FMV of the property is still 80K at the time of death, which fgure should be used the book value (60K), market value (80K) or the cost when purchased (100K)?
In so far as personal properties is concerned, we do not have a bench mark, the government cannot provide us with fixed standards and it does not even say in the tax code whichever is higher between the FMV or the book value of the personal property, therefore, since the law only provides that it is the FMV of the personal property at the time of death, then we go for 60K, the market value.
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C.
INTANGIBLE PROPERTIES
i. listed in the stock exchange- the average between the highest and the lowest price of the stock within the day of his death.
ii. not listed in the stock exchange- based on the book value of the shares.
VI. Estate tax formula, in brief

ESTATE TAX Less x Less Gross Estate (1) deductions (2) estate of the surviving spouse Net Estate Estate Tax due Tax Credits Estate tax payable
cf.: formula for income tax
VII.
Composition of the gross estate
a.
Decedents interest
So it is the value of any interest in the property or rights which accrues in favor of the decedent at the point of his death. It may be money that he is to collect or the rents due from his apartment that he is leasing out to other people. So the point of that is you have to recognize what may belong to the gross estate and it includes even receivables or claims against insolvent people.
all you have to do when somebody dies is to gather all information. The rights or properties which are in favor of the decedent will have to be included as part and what are not part of the gross estate. Page1
b.
Transfer in contemplation of death
PURPOSE WHY CONSIDERED PART OF GROSS ESTATE -it is for the purpose of not allowing the taxpayers to avoid the payment of estate tax
TIU: Transfer in contemplation of death covers those which are transfers during lifetime but are considered as part of the gross estate. If the motive behind the transfer is due to an impending death that he has been called or he perceives, then the transfers may be in contemplation of death and at the time of his death it will be considered as transfer in contemplation of death and it will be considered as part of his gross estate subject to estate tax. This is for the purpose not allowing decedents escape estate taxation on their properties.
So the transfer may be done days before, weeks before, even years before so long as the motive behind the transfer is the thought of an impending death. Before there was a bench mark of 3 years, if the transfer was made within 3 years, it will be considered as transfer in contemplation of death. But now, the 3 years has been scrapped off and it is based on the motive behind.
EXAMPLE Mr. A donated this property today, a week later, he died. Can we say that the transfer was made in contemplation of death? Will the property transfer form part of the gross estate?
we cannot automatically say that it was a transfer in contemplation of death. If the transfer was made today and he died, or he will die a week later you have to know the circumstances during the transfer and the circumstances at the time of death. If transferred without any thought of an impending death, it is NOT transfer in contemplation of death. If he died because there was an accident, without any thought of an impending death, no sickness etc, its not a transfer in contemplation of death.
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In some transfers in contemplation of death, the reason there is that these transfers are made conditional upon the wishes of the decedent as well. Its based on that, still if the property is still within the control of the decedent, it will form part of the gross estate at the time of his death.
c. Revocable transfer A revocable transfer is made when there is a transfer of property with the transferor or decedent retaining the rights to alter, amend, terminate or revoke the transfer during his lifetime whether or not such rights to revoke, terminate, amend or alter has been exercised
So long as that right remains until the day of his death, it is still under the control of the decedent, it is part of his properties because he actually will enjoy the income, the rights and the enjoyment of the property.
EXAMPLE CONDITIONAL TRANSFER of a property to an heir or another person and when the transfer will sit or the transfer predeceases, the property reverts back to the transferor. It is a conditional transfer, revocable transfer.
REVOCABLE TRANSFER vs. TRANSFER WITH RETENTION OF RIGHTS In revocable transfers, it the transfers of property with the transferor reserving his right to alter, amend revoke or terminate the enjoyment of the property by the transferor, and such property even if transferred will form part of the gross estate even if the transfer has not been exercised, the alteration, amendment, the termination or the revocation of the property. Point is, so long as the transfer will retain those rights until the day of his death, it is as if he has full dominion of his property and it is part of his gross estate.
Modified, there are transfers, as some books will call it, transfers with retention, transfer of a property still but with a retention or reservation of some rights. Not totally the same as revocable transfers but somewhat takes the form of a revocable transfer because there is a right that has been retained or reserved by the transferor during the time that the property has been transferred during his lifetime. So long as the transfer has retained those rights until the day of his death, he can still say that the transferor may have at anytime have taken back the property. So its equivalent to full dominion over the property, still part of his gross estate as if there was no transfer made.
NB: they are not the same but they have the same effect. Page1
GR: Inter vivos transfers taking the form of testamentary disposition (transfers made in contemplation of death, revocable transfers) are part of the gross estate. EXC: if the transfer is made BONA FIDE for an inadequate or insufficient consideration.
d.
Property passing under general power of appointment
When a property has passed on to the decedent and that decedent during his lifetime had a right to designate any person including himself, the executor, the administrator, or creditors of the estate, to designate his estate then we consider that a general power of appointment over him.
This is different from the other transfers discussed a while ago. In this case, the property is not totally in the name of the decedent. A property has passed on to him under a general power of appointment and that decedent has the right to designate over himself, his estate, his creditors, as if, if that happens, there are no restrictions as to how he will use the property, then that is a general power of appointment, not special, it will form part of his gross estate.
e.
Proceeds of life insurance
When a life insurance policy is taken out by the decedent upon his life, the rules are: 1. If the beneficiary is the ESTATE ITSELF, EXECUTOR OR THE ADMINSTRATOR, it forms part of the gross estate.
2. If the beneficiary is NOT other than estate, executor or administrator, it will form part of the gross estate or not form part of the gross estate depending on the designation:
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If the designation of that 3rd person is IRREVOCABLE: So it will all already belong to the 3rd person and not the executor, administrator or executor of the decedent, then an irrevocable designation of a 3rd person other than Estate, Executor or Administrator, means that it will NOT FORM PART of the gross estate.
But if the designation is REVOCABLE, which is the default in your insurance code, it will FORM PART of your gross estate.
f.
Prior interest
Prior interests is a catch all provision. The government is making sure that everything will be considered in determining the gross estate. So all transfers, trust estates, interests, rights, powers and relinquishments of powers made before or after the effectivity of the tax code will still be pulled in together but it doesnt matter now in determining the gross estate why?, because the tax code is already in effect 12 years ago.
g.
Transfer for insufficient consideration
There is no time frame wherein which transfers will be considered to be for insufficient consideration. So when a person dies and an issue is brought that the sale took place one, two, three or even 10 years ago and that the consideration was insufficient, it may still happen that the property that was sold for insufficient consideration will still form part of the gross estate today at the day of his death.
The scenario here is that a sale was made by the decedent during his lifetime and the exchange was for inadequate or insufficient consideration. It will form part of the estate of the decedent at the time of death.
VALUE THAT WILL FORM PART OF THE GROSS ESTATE
Properties which depreciate (difference between the FMV at the time of death and the consideration received): -what will form part of the gross estate is only the difference between the FMV at the time of death of the decedent vs. the consideration that he has actually received for the property.
EXAMPLE
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Property valued at 1M. Sold at 100K. FMV at the time of death was 900K. The amount included in the gross estate is 800K, i.e. the difference between the FMV at the time of death and the consideration reeived.
Properties which appreciate (difference between the FMV at the time of death and the consideration received): -what will form part of the gross estate is only the difference between the FMV at the time of death of the decedent vs. the consideration that he has actually received for the property.
However, this will be more burdensome for the estate because the property will not decrease in value.
EXAMPLE If the FMV at the time of death is 2M, it was transferred for 100K. Php 1.9M will form part of the gross estate of the decedent. It is treated as if there is no transfer actually made. Only an advance payment, which is the insufficient consideration given to the decedent.
Full amount forming part of the gross estate -If the transfer is tantamount to a fictitious sale or simulated sale, no consideration was given, the entire FMV at the time of death will be part of the gross estate of the decedent.
h.
Capital of surviving spouse
Another item which is not part of the gross estate is the CAPITAL PROPERTY of the husband. PARAPHERNAL PROPERTY of the wife. In short, the exclusive properties of the surviving spouse. This is included first then excluded in the formula because when somebody dies and that decedent is married not only will you account for the properties of the decedent but you will also include all the other properties in relation to conjugal spouse and the exclusive properties of the spouse. As you go along the computation, the capital properties of the surviving spouse and the paraphernal
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properties are weeded out. And as well of the surviving spouse from the conjugal properties.
VIII. Acquisition and transmissions not subject to estate tax
a. Merger of usufruct in the owner of the naked title
ILLUSTRATION A (previous owner) transferred a property to B (naked owner) with the right to usufruct transferred to C (usufructuary). When C dies, the use of the property or the enjoyment of the property is merged with the naked owner.
REASON WHY NOT SUBJECT TO ESTATE TAX Because this transfer has already been subjected to donors tax. When A transmitted the property to B [the title to B, separating the usufruct or the right to enjoy the property to another person C] and thereafter to be merged to B upon death of C, the first instance of transfer, the transfer between A and B was already taxed. This is merely a combination of the actual transfer made by A to be ultimately enjoyed by B. Therefore, the 2nd transfer between B and C is no longer subject to estate tax. b. Transmission by the fiduciary heir or legatee to the fideicommissary
ILLUSTRATION A (decedent) transferred a property to B (Fiduciary) who holds it in trust for C (fideicommisary).
The transfer between B and C will NOT be subject to estate tax.
TIU: this is a form of tax avoidance. Page1
c. Transmission from the first heir, legatee or done in favor of another beneficiary
ILLUSTRATION In a will of the decedent A, there is beneficiary B and C, was given to each. If B transfers his share to C, so that the share will become one whole, it will not be subject to estate tax.
REASON WHY NOT SUBJECT TO ESTATE TAX Estate tax has already been imposed on the first transfer.
d. Bequests, devises, legacies, or transfers to social welfare, cultural and charitable institutions, requisites
REQUISITES FOR NON TAXABILITY 1. Transfer to a social welfare, cultural and charitable institution.
2. No part of the income inures to the benefit of any individual.
3. Provided that not more than 30% of the said bequests, devises, legacies or transfers shall be used for administrative purposes.
Does this include bequests made to non-stock, non-profit educational institutions? YES, since Art. XIV Sec. 4(4) of the Constitution provides that bequests to be used actually, directly and exclusively for educational purposes shall be exempt from tax. However, the bequests must be used actually, directly and exclusively for educational purposes. Such bequest made does not need the requisites for exemption in bequests made to social welfare, cultural or charitable institutions.
NB: There might be donation during lifetime that can be considered as subject to estate tax but there is no donation mortis causa that can be subject to donors tax because the transfer is already upon death. Page1
e. Others
NB: First 200K of the net estate is exempt from estate tax.
What other transmissions of property or receipts/proceeds by the estate of the decedent that is not subject to estate tax? 1. Benefits received from SSS or GSIS
2. Benefits received from U.S. Veterans Administration
3. War benefits given by the Philippine government and U.S. government due to damages suffered during the war
4. Grants and donations to the Intramuros Administration
5. If the decedent holds a property in trust for someone else, usually a beneficiary, the general rule is that it does not form part of the estate of the decedent because ultimately, it will be in favor of the beneficiary, unless it falls under the general power of appointment over which the decedent has been holding on to it with the free reign to designate himself as the ultimate beneficiary (Tiu: something like that)
6. Transfers by way of bona fide sales
7. Life insurance proceeds from GSIS and from private insurance companies so long as the beneficiary designated irrevocably is a third person other than the estate, administrator, executor. It will never form part of the gross estate of the decedent.
8. Even if initially we consider what are the assets of both spouses during lifetime, we eventually exclude the exclusive properties of the surviving spouse (Capital of the surviving spouse)
IX. Deductions allowed to a citizen or a resident, requisites
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a. Expenses, losses, indebtedness and taxes
1.
Funeral expenses
EXTENT OF COVERAGE a.Mourning apparel of the surviving spouse and unmarried minor children of the deceased, bought and used on the occasion of the burial
b.
Expenses for the deceaseds wake, including food and drinks
c.Publication charges for death notices (obituaries)
d. Telecommunications expenses incurred in informing relatives of the deceased
e.Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In case the deceased owns a family estate or several burial lots, only the value corresponding to the plot where he is buried is deductible. f. Interment and/or cremation fees and charges
g. All other expenses incurred for the performance of the rites and ceremonies incident to interment
POINT WHERE THE EXPENSES WILL BE CONSIDERED DEDUCTIBLE FUNERAL EXPENSE Such expenses must be incurred from the moment of death until interment. SHOULD THE EXPENSES BE PAID? No, what is required is that such funeral expenses are INCURRED.
EXTENT OF DEDUCTIBLE AMOUNT Allowable deduction for funeral expenses is whichever is lower of the:
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a. actual funeral expenses (whether paid or not) up to the time of interment b. an amount equal to 5% of the gross estate c. 200K (maximum amount deductible)
ILLUSTRATION Decedent has a gross estate of 3M. The actual funeral expenses, both paid and unpaid, amounted to 180K. How much is the deductible funeral expense? 150K (5% of 3M), since this is lower than 200K and 180K. TIU: For funeral expenses, you should be guided by three choices, whichever is lower of the three. You go first with the actual funeral expense or 5% of the gross estate, whichever is lower, and which must never go beyond 200K (the maximum funeral expense that can be claimed as deductible against the gross estate). CAN THE FUNERAL EXPENSES IN EXCESS OF 200K BE DEDUCTIBLE AS CLAIMS AGAINST THE ESTATE? NO, because Revenue Regulations provide that the unpaid portion of the funeral expenses incurred which is in excess of the 200K threshold is NOT allowed to be claimed as a deduction under claims against the estate. The claims against the estate shall not include funeral expenses because it has been categorized differently. So whatever has been unsettled or any funeral expenses in excess of what can be claimed, for example, the 50K, it remains as funeral expenses not deductible from gross estate. MUST BE INCURRED BY FAMILY MEMBERS TO BE DEDUCTIBLE Funeral expenses to be deductible must be incurred by the family members. If the funeral expense has been paid for voluntarily or as a donation by someone else, it cannot form part as funeral expenses deductible. If somebody from a distant member of the family or a friend offers to shoulder the casket, then the cost of that casket can never form part as funeral expenses. Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of the deceased, such expenses are not deductible as funeral expenses. This rule is also applicable to judicial expenses. If judicial and funeral expenses are shouldered by someone else other than the immediate family, such expenses against the estate is not deductible.
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2. Judicial expenses
NATURE Judicial expenses in relation to: a. probate (testamentary) proceeding to settle the estate b. intestate (without a will) proceeding to settle the estate
EXTENT OF COVERAGE a. Fees of executor or administrator b. Attorneys fees c. Court fees d. Accountants fees e. Appraisers fees f. Clerk hire g. Costs of preserving and distributing the estate h. Costs of storing or maintaining property of the estate i. Brokerage fees for selling property of the estate TIU: So long as the expenses are in relation to the settlement of the estate, such as gathering of inventories, having the inventories appraised, payment to brokers in order to have the properties sold to liquidate the assets, even notarial fees, accountants fees, and in one case, it has been said that guardianship proceedings of one of the heirs in relation to the settlement of the estate of the decedent is also part of the judicial expenses.
EXPENSES FOR EXTRAJUDICIAL SETTLEMENT OF ESTATE DEDUCTIBLE so long as its in relation to the settlement of the estate with the ultimate goal of having the property distributed after payment of debts, expenses are recognized as deductible expenses.
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POINT WHERE THE EXPENSES WILL BE CONSIDERED DEDUCTIBLE JUDICIAL EXPENSE The judicial expenses must be incurred during the settlement of the estate but not beyond the last day prescribed by law, or the extension thereof, for the filing of the estate tax return.
EXCEPTION: EXPENSES INCURRED AFTER SIX MONTHS there is an exception wherein the Commissioner may extend the deadline of filing the estate tax return, which must not exceed 30 days. Expenses within such extension granted by the Commissioner are still deductible as judicial expenses. GR: It must be filed within 6 months from the decedents death. EXC: The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding 30 days for filing the return.
3.
Losses
KIND OF LOSS CASUALTY LOSSES (losses which arose from fires, storms, shipwreck or other casualties) or from ROBBERY, THEFT or EMBEZZLEMENT) TIME OCCURRENCE OF LOSS The loss should occur during the settlement of the estate but not later than the last day for payment of the estate tax ILLUSTRATION Mr. A went abroad. He left his house unattended. He will come back on Nov. 12 but on Nov. 11 his house was ransacked. His flight met an accident, thus he died on Nov. 12. Is the casualty loss deductible from his estate? NO, since the loss must occur after death.
REASON WHY THE LOSS SHOULD OCCUR AFTER DEATH Losses which occur before or prior to the death of the decedent will never become a deductible casualty loss for the simple reason that the gross estate that has been gathered at the point of death no longer includes the property that has been lost. In relation to the illustration, suppose the settlement of the estate takes 10 years, would the losses occurring on the 9th year prior to the final settlement of the estate be deductible losses? NO, since there is also a requirement that the losses were incurred not later than the last day for payment of the estate tax.
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REQUISITES FOR THE DEDUCTIBILITY OF CASUALTY LOSSES a. Were incurred after death and during the settlement of the estate. b. Arose from fires, storms, shipwreck or other casualties, or from robbery, theft or embezzlement c. Must not be compensated by insurance. Otherwise, if its compensated by insurance, its as if nothing has been lost. It was just converted into a monetary amount. d. Are not claimed as a deduction for income tax purposes in an ITR in favor of either the decedent or the estate itself. e. tax 4. Were incurred not later than the last day for payment of the estate
Claims against the estate
WHAT ARE CLAIMS? Theyre 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 judgment. They may arise out of contract, torts, or by operation of law. TIU: Claims against the estate is simply collectibles from the decedent but now reduced to claims against the estate because he already died. But not all claims can be deducted from the gross estate. There are certain strict requirements because you can just make a bogus claim in order to reduce the gross estate of the decedent.
REQUISITES FOR THE DEDUCTIBILITY OF CLAIMS AGAINST THE ESTATE a. Must be a personal obligation of the deceased existing at the time of his death (except unpaid funeral expenses and unpaid medical expenses) b. Liability must have been contracted in good faith and for adequate and full consideration in money or moneys worth Page1 EXAMPLE of debt contracted in bad faith: When the decedent obtained a loan at the time when he knew that he will only be living for 2 months. So such contracted debt will not form part of claims against the estate.
c. The claim must be a debt or claim which is valid in law and enforceable in court d. Indebtedness not condoned by the creditor or the action to collect from the decedent must not have prescribed e. General rule: Must be duly substantiated. Just like funeral expenses, you cannot claim funeral expenses w/o presenting receipts, invoices for the costs.
SPECIAL REQUISITES IF THE CLAIM AROSE FROM PROMISSORY NOTE OR LOAN a. The debt instrument must be duly notarized at the time the indebtedness was incurred EXCEPT: 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 c. 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 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 3 years prior to the death of the decedent. e. If the claims against the estate arose from a simple purchase of goods or services, it need not be substantiated by a contract or a promissory note. Its usually substantiated by invoices and receipts for the purchase of the goods or services a certification from the creditor still that the amount is collectible, including interest. CONDONATION OF CLAIM AGAINST ESTATE (Personal opinion: I was a bit confused of the discussion) GR: not deductible EXC: Case in 2008 (no case title or citation given) [find the case!] TIU: In that case in 2008, the SC pointed out the 2 views by the U.S. 1. First view is that condonation should be taken at the point of death. So if its condoned during the lifetime of the decedent, its not deductible. 2. If its condoned after death, during the settlement of the estate, it is deductible.
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The second view is supported by the IRS of the U.S., which is equivalent to our BIR. It stresses that if condonation came before death or even after death, it doesnt change the fact that the estate of the decedent will not be decreased. If the creditor forgives the indebtedness, the estate of the decedent will not be decreased when the condonation came before or after death. So it should not reduce the estate of the decedent. Which is more plausible? LIFEBLOOD DOCTRINE should be the second view, which is what was followed by IRS. But the SC followed the first view, which is against lifeblood doctrine. Nonetheless, we follow what the SC decided in 2008. 5. Claims against insolvent debtor
Claims against the estate somebody a third party creditor is claiming against the decedent-debtor.
Claims against an insolvent person its the decedent who is the creditor who has extended a loan but can no longer collect the loan because the debtor of the decedent is already insolvent. its a claim by the estate against someone else an insolvent person so its a receivable. Before such claim can be deducted against the gross estate, make sure that the receivable is included first in the gross estate, then deduct the portion that is not collectible.
when the decedent is a debtor having a payable in favor of a third person, there is no requirement that such amount of claim should be included first in the gross estate and thereafter, deducted. Here, someone is having a claim against the decedents/the estate and its a valid claim by that creditor, therefore, it will reduce the estate.
PRIMARY REQUIREMENT: MUST BE INCLUDED IN THE GROSS ESTATE TO BE DEDUCTIBLE The value of the decedents interest in the claim against the insolvent is included in the value of the gross estate. ILLUSTRATION Assuming he has receivables from 10 people. 5 of those have been declared as insolvent. Include the receivables from those 10 persons in the gross estate but deduct the receivable from those 5 persons who have been declared as insolvent or having the financial incapacity to settle the obligation. TIU: Page1
Make sure that we can support the insolvency of a person. When is a person insolvent? Insolvency would occur if his liabilities are more than his assets. If its equal, can we declare such person as insolvent? NO. 6. Unpaid mortgage
RATIONALE FOR DEDUCTIBILITY It is a payable on the part of the decedent in the form of a mortgage wherein the decedent is a mortgagor, therefore, it should be reduced. TIU: The scenario is that there is a claim against the estate in the form, not in the form of a promissory note, but mortgage. So the decedent here, during his lifetime, has mortgaged his property, you know when a property is mortgaged, there is a principal contract. In the principal contract, there is a loan. REQUISITES FOR THE DEDUCTIBILITY OF UNPAID MORTGAGE a. Value of the decedents interest in the property encumbered by such mortgage or indebtedness is included in the value of the gross estate To what extent of the value? The FMV at the time of death of the interest of the decedent on the mortgaged property b. Such deduction shall be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or moneys worth, if such unpaid mortgages or indebtedness were founded upon a promise or an agreement c. The mortgage must be contracted during the lifetime of the decedent If its the heirs who mortgaged the property, its another story. It should be an indebtedness of the decedent during his lifetime, just like claims against the estate. 7. Unpaid taxes
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REQUISITES FOR DEDUCTIBILITY OF UNPAID TAXES a. They must have accrued as of the death of the decedent or prior to death of the decedent
EXAMPLES 1. Property taxes accrued prior to decedents death 2. Unpaid taxes on income received by decedent before his death 3. Gift taxes on lifetime gifts (donation inter vivos) which are unpaid upon death DEDUCTIBLE INCOME TAX? In Tax I we learned that an individual person is governed by the calendar year basis of determining his income and his expense. Therefore, all decedents income earned during his lifetime until the moment of death will be considered one taxable person and from the time of death until the end of the year, Dec. 31, is one taxable person, which is the estate. So all taxes which accrue, meaning which are due on income earned up to the point of death, whether its paid, today, tomorrow or thereafter, will have to be considered deductible against the gross estate. Because what we are gathering at the point of death is his entire gross estate including the income he has earned until the date of his death. So all taxes which are due from those incomes up to the point of death are deductible taxes. NON DEDUCTIBLE INCOME TAX Any income earned after death, example, if its an income-producing property, will be considered as a separate taxable entity, the tax due here will not reduce the gross estate as of this point because the income after death has not been considered in the gross estate at the time of death. So its just matching the income and the tax at what point. DEDUCTIBLE REAL PROPERTY TAX Real property taxes which have accrued and remained unpaid up to the point of death are deductible unpaid taxes NON-DEDUCTIBLE REAL PROPERTY TAX Real property taxes which will accrue after death are non-deductible. TIU: But real property tax would have a different pay day. If you have learned that income taxes will be due to on or before the 15 th of April following the close of the taxable year. Real property taxes would only be due once, every January and payable before January 31 or if you choose quarterly, during the entire year. b. They were unpaid as of the time of death Page1
c. This deduction does not include income tax upon income received after death, or property taxes not accrued before his death, or the estate tax due from the transmission of his estate. b. Medical expenses
REQUISITES FOR DEDUCTIBILITY OF MEDICAL EXPENSES 1. The expenses were incurred by the decedent within 1 year prior to his death ILLUSTRATION If he died on Nov. 17, 2010, expenses must be incurred on Nov. 18, 2009 up to Nov. 17, 2010. 2. The expenses are duly substantiated with receipts if paid or if unpaid, adequate records such as invoices, billing statements, etc. by the doctor or the hospital 3. PROVIDED, that in no case shall the deductible medical expenses exceed 500K
TIU: So all medical expenses, whether paid or unpaid, are considered.
MEDICAL EXPENSES NEED NOT PERTAIN TO THE CAUSE OF DEATH Medical expenses need not be related to the cause of death of the decedent. It can be for any type of illness and the cause of death may be illness, accident or otherwise so long as the requisites are followed.
NB If the medical expense is more than 500K, even if unpaid, it shall not belong to the claims against the estate, just like funeral expenses.
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c. Family home
DEFINITION OF FAMILY HOME Arts. 152 & 153 of the Family Code It is 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. It is deemed constituted on the house and lot from the time it is actually occupied as the family residence and considered as such for as long as any of its beneficiaries actually resides therein.
WHAT CONSISTS OF A FAMILY HOME? It consists of the house and the lot in which the house is situated.
HOW MANY FAMILY HOME CAN A PERSON OWN? Only one.
WHO CAN HAVE A FAMILY HOME? The family husband and wife or a head of the family and their family members residing therein.
CAN A SINGLE INDIVIDUAL WITHOUT ANY DEPENDENT OWN A FAMILY HOME? No. Only head of the family (individual with dependents), whether single, widowed, divorced, and married individuals can claim family home as a deductible item against gross estate. If hes single who cannot be considered as head of the family, no family home can allowed as a deduction.
WHO IS A HEAD OF THE FAMILY? According to Revenue Regulations, a head of the family is the same as head of the family in income tax: 1. Its an individual who is single, legally separated or widowed, etc. who is chiefly supporting a child, whether legitimate, illegitimate, legally adopted or Page1
naturally acknowledged, not more than 21 years of age, such child is not gainfully employed, unmarried and he can be more than 21 if he is mentally incapacitated or physically disabled.
2. Its an individual who is single, legally separated or widowed, etc. with a parent living with him and chiefly dependent for support on such head of the family.
3. Its an individual who is single, legally separated or widowed, etc. with a brother or sister, dependent on him for chief support, living with him, not more than 21 years of age, unmarried, not gainfully employed.
4. Its an individual who is single, legally separated or widowed, etc. who is taking care of a senior citizen, 60 years of age or above and is not earning more than 5K per month, whether or not related to him.
TIU: For income tax purposes, all individuals would have the same exemption of 50K. So it wouldnt matter whether the individual is single, head of the family or married. What will differentiate is that if that taxpayer has a dependent child, which gives it an additional exemption of 25K each. So for income tax purposes, head of the family is no longer a useful definition. But that definition has been carried on to estate taxation.
So for income tax purposes, among the 4 types of dependent to make you a head of the family (child, brother or sister, parent or senior citizen), only a child can make you avail of the 25K deduction. The other 3 will not allow you to benefit for income taxation. But for estate taxes, if youre classified as a married individual or single but head of the family, then your family home can be considered as a deductible item.
REQUISITES FOR DEDUCTIBILITY OF FAMILY HOME 1. The family home must be actual residential home of the decedent and his family at the time of his death, as certified by the barangay captain of the locality. Page1
2. The total value of the family home must be included as part of the gross estate of the decedent.
3. Allowable deduction must be in an amount equivalent to the current FMV of the family home as declared or included in the gross estate but in no case shall the deduction exceed 1M (for both house and lot). AMOUNT DEDUCTIBLE actual value of the family home or an amount not exceeding 1M, whichever is lower.
ILLUSTRATION 1 Mr. A, single but head of the family. If Mr. A died, house is 750K and lot is 500K, how much family home can he deductible? 1M.
ILLUSTRATION 2 Mr. A, single but head of the family. House is 250K. Lot is 500K, how much family home can be deductible? 750K.
ILLUSTRATION 3 Mr. A is married. House is 300K. Lot is 500K. How much family home can be deducted? It depends. You have to know whether the property is conjugal property or exclusive property.
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Lets say both house and lot are exclusive properties, how much family home is deductible?
The entire 800K because both house and lot are exclusively belonging to the decedent. Since the 800K does not exceed the 1M-limit, then the entire 800K is deductible.
If both are conjugal? Only 400K [(300K/2) + (500K/2)] because the division between a husband and wife is always or 50% in the absence of a property relation before marriage.
If the house is exclusive and the lot is conjugal? 650K [(300K/2) + 500K]
If the house is 1.3M, conjugal and the lot is 500K, exclusive? 1.15M [(1.3M/2) + 500K] but since the limit is only 1M, then only 1M family home can be deductible.
TIU: It is possible that the lot is exclusive and the house is conjugal when for example, the wife acquired the lot through donation during marriage and both husband and wife build the house on the lot with their common funds. It is possible (but absurd) that the lot is conjugal and the house is exclusive when for example, the lot was acquired by both husband and wife with their common funds and the house was donated on the lot by the parents of the wife during marriage.
d. Property previously taxed
VANISHING DEDUCTION Deduction allowed on the property left behind by the decedent which he had acquired previously by inheritance or donation. Page1
Vanishing deductions involve a property that was previously inherited from a prior decedent or a property that has been received as a gift from a donor within 5 years from the death of the present decedent. We are concerned here with the taxability of the estate of the present decedent, not the prior decedent nor the donor of the present decedent. WHAT VANISHES IN VANISHING DEDUCTION Basically, what diminishes is the amount that is deductible against the gross estate because we are talking of deductible item.
What is vanishing here is the deduction, the rate of deduction that you can avail when you die within 5 years from getting the inheritance or gift.
REQUISITES FOR DEDUCTIBILITY OF VANISHING DEDUCTION 1. there is a prior decedent or donor who gave a property.
2. present decedent died within 5 years after receiving the inheritance from the prior decedent or gift from the prior donor.
3. identity of the property the property with respect to which deduction is sought can be identified as the one received from the prior decedent or the donor, or as the property acquired in exchange for the original property so received. So if Mr. Z transmitted property, a parcel of land, to Mr. A, it should be the same parcel of land that will form part of the gross estate of Mr. A.
4. the transmitted property should form part of the gross estate of the present decedent, Mr. A If Mr. A will inherit from Mr. Z, upon death as well of Mr. A, the parcel of land that he inherited from Mr. Z will also form part of the gross estate of Mr. A. Page1
5. previous taxation of the property the donors tax on the gift or estate tax on the prior succession (Mr. As succession) was finally determined and paid It may be subjected to donors tax when Mr. Z donated the property to A or estate tax when Mr. Z transmitted the property to A. 6. vanishing deduction only once no vanishing deduction on the property was allowed to the estate of the prior decedent
TIU: The concept of vanishing deduction is when a person who becomes a present decedent has a property in his gross estate which he has acquired within 5 years prior to his death from a prior decedent or a donor, that property is assumed to have already been subjected to transfer taxes, either estate tax or donors tax. 5 years is a small time frame within which to include the same property in Mr. As estate and be subjected to transfer taxation all over again. So in order to diminish the harshness of double taxation, the law allows Mr. A, the present decedent, to deduct the value of the parcel of land which he has inherited or acquired as a gift within 5 years considering that the same parcel of land has, within a relatively short period of time, already been subjected to transfer taxes. Both events must have took place within 5 years. Beyond 5 years, like 5 years and 1 day, no vanishing deduction is already allowed.
7. the property should be located in the Philippines
ILLUSTRATION 1 If Mr. A, after dying on Nov. 17, 2010, transmitted his property to Mr. B, the heir, the same property from Mr. Z and Mr. B died, the most present decedent, 2 years from the death of Mr. A. Can vanishing deduction be claimed against the gross estate of Mr. B if its found out that among the gross estate of Mr. B, the land inherited from Mr. A is among those properties? Can vanishing deduction be claimed by Mr. B on the same parcel of land? If Mr. A has claimed the vanishing deduction for such parcel of land, can Mr. B further claim vanishing deduction for the same parcel of land? NO. Vanishing deduction on one particular property can only be claimed once in the stage of Mr. A. If Mr. A has already claimed such vanishing deduction, B, even if he dies within 1 day after the death of Mr. A, no more vanishing
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deduction. Taxes would already have to be imposed on the part of Mr. Bs gross estate.
ILLUSTRATION 2 Lets say Mr. A, a RC, died in 2009. Among his properties, a motor vehicle, which was at the time of his death located in the U.S. Mr. B is an heir, also a RC. Mr. B received the motor vehicle which was subsequently transferred here in the Phils. Mr. B died within 1 year from Mr. As death. Can Mr. Bs estate claim vanishing deduction? Yes. It could have been different if the property has not been transferred to Philippine location, in which case, no vanishing deduction if it has not been transferred in the Philippines.
ILLUSTRATION 3 Lets say its vintage motor vehicle. So it appreciates its value over time. At the time of Mr. As death, the FMV of the motor vehicle was 1M. At the time of Mr. Bs death, the FMV is 1.2M. This 1.2M, unquestionably will form part of the gross estate of Mr. B. But will it be the same 1.2M that we will deduct as vanishing deduction if Mr. B died within 1 year from the death of Mr. A? If this is the case that the FMV of the property inherited was 1M at the time of the prior decedents death and its FMV increased to 1.2M, in all cases, 1.2M will be part of the gross estate of Mr. B. But the allowable deduction of vanishing deduction will be whichever is lower, lifeblood doctrine.
ILLUSTRATION 4 Mr. A, a NRA-decedent, has a motor vehicle located in the U.S. at the time of his death. It was transmitted as an inheritance to Mr. B, a RC of the Philippines, who died as well within 1 year from receiving the motor vehicle. The motor vehicle at the time of death of Mr. B was already in the Philippines. Is vanishing deduction allowed? NO. Even if it has been transferred in the Philippines, the problem is that Mr. A, when he died as a NRA, all his properties located outside of the Philippines are not covered by Philippine estate taxation, which means to say that it has not
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been subjected to a prior transfer tax. Not all requisites have been complied with, therefore, no vanishing deduction is allowed. FORMULA OF VANISHING DEDUCTION Initial Basis, FMV (Prior or present, whichever is lower) Less mortgage payment, if any
Less pro rata deductions (1/5 x total expenses) _______________________________________________________ BASIS X Vanishing deduction rate _______________________________________________________ Vanishing deduction allowed
DEDUCTIONS ALLOWED AGAINST THE PROPERTY INHERITED 1) If you paid any mortgage in the property taken out by the prior decedent, which actually reduces what you have inherited; 2) The pro rata deductions (1/5 x total expenses) the percentage of your property against your total gross estate on the expenses. It is assumed that your expenses, a portion of which has been spent for that property.
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TIU: In relation to Illustration No. 3, FMV is whichever is lower which is 1M. If and when Mr. B, during his lifetime, after inheriting the property, he has shelled out money to pay mortgage which was taken by the prior decedent. So if the motor vehicle that Mr. B inherited has an accompanying debt that Mr. A took and Mr. B assumed, it shall be deducted. It is logical because what you inherited as 1M is not really 1M when you are required to pay the mortgage taken out by the prior decedent. So what you really got in the end was only the net of the FMV and the debt that you paid. Assuming, to make it simple, the mortgage payments is 0 its debt-free. Then we have the pro rata deduction. The tax code and the tax authorities require you to reduce your initial basis to the extent of the pro rata deductions because a portion of your expenses, the principle behind this is that a portion of your expenses (ELIT expenses) that youre claiming pertains to the percentage of your property inherited for vanishing deduction over your total gross estate. It means to say that if the initial basis is 1M and your total gross estate is 5M, whats the rata? 1/5. 1/5 of your total expenses should reduce your initial basis. So if your total expenses deductible against the gross estate of Mr. B is 500K, 1/5 of 500K, which is 100K, should reduce the initial basis of 1M. Meaning to say that the vanishing deduction rate should only be computed against the 900K [1M 100K]. Thus, only 900K is deductible deductible for vanishing deduction out of the 1.2M. Can Mr. B fully deduct the 900K, if we use the facts here? YES. Since the present decedent died within 1 year from the death of the prior decedent, so the estate tax from Mr. As side has been recently paid. Its within 1 year, the full 100% will be deductible. If the present decedent dies within 1 year, its 100% deductible the basis of 900K. If the present decedent dies more than 1 year but not more than 2 years, its 80%. If the present decedent dies more than 2 years but not more than 3 years, its 60%. If the present decedent dies more than 3 years but not more than 4 years, its 40%. If the present decedent dies more than 4 years but not more than 5 years, its 20%. Assuming that Mr. B died more than 4 years after the death of Mr. A, so this is only 180K vanishing deduction [900K x 20%] NB Page1
Usually vanishing deduction is an exclusive property. Under the conjugal partnership of gains and absolute community of property, whatever you inherited during marriage is considered as an exclusive property so we dont need to divide the vanishing deduction by 2 as share of the surviving spouse.
e. Amount received by heirs under RA 4917 WHAT IS RA 4917? The amount that will be received by the heirs under Republic Act 4917, it will form part definitely of the gross estate.
Republic Act 4917, the retirement benefits will form part of the gross estate. Remember retirement benefits received under RA 4917, are exempt from income tax.
General Rule, it is exempt from income tax.
IS IT EXEMPT FROM ESTATE TAX? We just mentioned that its part of the composition of the gross estate. But further on, it is a deduction. So it will zero out actually and will not be subject to estate tax.
It is part of the gross estate but it is also part of the deduction from the gross estate. There is no deduction from the gross estate of the retirement benefits if you will not form part the retirement benefits in the gross estate. So whichever way, it is NOT taxable the estate tax. PRIMARY REQUIREMENT: MUST BE INCLUDED IN THE GROSS ESTATE TO BE DEDUCTIBLE Any amount received by the heirs from the decedents employer as a consequence of the death of the decedent-employee in accordance with RA 4917 this law provides that retirement benefits of private employees shall not be subject to attachment, levy, execution or any tax PROVIDED that such amount is included in the gross estate of the decedent. Page1 So it zeroes out in the end. The amount received by the heirs under RA 4917 is deductible so long as such amount has been included as part of the gross estate,
otherwise, not part of the gross estate, not deductible. In the end, its not a taxable asset of the decedent or the estate. f. Standard deduction
AMOUNT OF STANDARD DEDUCTION An amount equivalent to 1M shall be deducted from the gross estate without need of substantiation.
OF THE AMOUNT IF PROPERTY IS CONJUGAL Standard deduction shall be considered as automatic deduction against the gross estate of a decedent and if the decedent is a married individual, it is considered as a conjugal deduction shared by both spouses so effectively, only half.
g. Transfer for public use PRIMARY REQUIREMENT: MUST BE INCLUDED IN THE GROSS ESTATE TO BE DEDUCTIBLE The whole amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the RP, or any political subdivision thereof, for exclusively public purposes shall be deductible from gross estate, provided such amount or value had been included in the gross estate
ENTITIES COVERED: POLITICAL SUBDIVISIONS Political subdivisions (provinces, cities, municipalities, barangays, autonomous regions). Does not include GOCCs.
WOULD ALL TRANSFER TO THE GOVERNMENT BE DEDUCTIBLE? NO. It must be for public purposes. If the purpose of the transfer is for private purposes, it is not covered by transfers for public use. It is therefore not a deductible item. Page1
RATIONALE FOR DEDUCTIBILITY To encourage decedents to put into writing or in the will or to make transfers to the government. To give them incentives such as deductions and exemptions from tax.
TRANSFER TO CHARITABLE INSTITUTIONS AND TO SOCIAL WELFARE ENTITIES Transfers for public use pertain only to recipients among the categories of the government of the RP and political subdivision. It is a deductible item once the decedent makes such transfer. But in so far as social welfare, charitable and cultural institutions are exempt transmission of property a different category. When its exempt, you no longer include that as part of the computation. But if its a deduction, its included first as part of gross estate and subsequently deducted as a deductible item. If the transfer has been previously made during lifetime and prior to the death of the decedent, it will never form part of the gross estate of the decedent. h. Share of the surviving spouse in the conjugal property of the conjugal property
X. Deductions allowed to a non-resident alien, special requisites
The gross estate of a NRA includes only that part of gross estate located in the Philippines. All his real and personal properties, tangible properties, which are located in the Philippines, which means to say that his deductions would only be to the extent of what he has declared.
a. Expenses, losses, indebtedness and taxes (ELIT)
FORMULA IN THE COMPUTATION OF ELIT = ELIT deductible Page1 Philippine Gross estate ______________________ x ELIT
Worldwide estate
TIU: In so far as NRAs are concerned, ELIT that are deductible is limited only to the extent of the proportion of its Philippine gross estate that has been declared for Philippine tax purposes against its worldwide gross estate. If his Philippine gross estate, which means real, personal and tangible properties, intangible not covered under the reciprocity clause, is only 1M. His worldwide gross estate is 10M. Multiplied by his total expenses which is 10M as well, only 1M is deductible. [(1M/10M) x 10M = 1M deductible] So only the proportion or the ratio of his Phil. gross estate against his worldwide estate will the expense be deductible in the Philippines. b. Vanishing deductions YES, so long as the 7 requisites are met and one of those which seems to borderline NRA against RC or RA is a question of whether such property that is subject to vanishing deduction is located in the Philippines or not at the time of his death because usually, NRA would not have lots of properties located in the Philippines.
c. Transfer for public use In cases for transfers of public use, the government, of course seeking to encourage even foreigners to bequest properties to the government, does not seek to limit the allowable deduction for transfers for public use. The NRA can even entirely transmit the property to the Philippine government in so far as Philippine gross estate is concerned just so in order to avoid Philippine estate taxation. That is of course if it does not violate the national law of the decedent who is a NRA in the Philippines.
d. Share of the surviving spouse in the conjugal property Same as supra.
a. Single decedent (see Annex A for sample computation)
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XI. Gross/net estate tax rates
b. Married decedent (see Annex B for sample computation) Rules in property ownership between spouses XII. Net estate and estate tax rates
NET ESTATE Gross estate less deductions (inclusive of deducting share of the surviving spouse)
ESTATE TAX RATES Estate tax rates are in the range of 5%-20% when you are subject to estate tax beyond the first 200K. OVER 200,000 500,000 2 million 5 million 10 million BUT NOT OVER 200,000 500,000 2 million 5 million 10 million And over TAX IS Exempt 0 15,000 135,000 465,000 1,215,000 PLUS 5% 8% 11% 15% 20% OF THE EXCESS OVER 200,000 500,000 2 million 5 million 10 million
a. Exemption from estate tax The first 200K of the net estate is not subject to estate tax.
b. Estate tax credits TIU: We learned in income taxation that only RCs are allowed to offset foreign income taxes against Phil. income tax while all others are not allowed to claim income tax credits. However, in estate taxation, only NRAs are not allowed to offset foreign estate tax against Phil. estate tax while all others are allowed to claim estate tax credits. Page1 The reason why a NRC is allowed to claim foreign estate tax credit is to lessen the burden of double taxation on properties that are located outside the Philippines, NRCs are allowed to claim estate tax credits against the Philippine estate tax due under the
principle that the Philippine estate tax due refers to the tax on the worldwide properties. If you tax worldwide properties and the properties outside are also taxed, its as if theres double taxation although indirectly. In order to lessen such burden, we offset the foreign estate tax against a portion of the Philippine estate tax which refers to properties outside, which means to say that RCs who are also taxable on worldwide properties can claim tax credit. Income Tax Credits X X X Estate Tax Credits X
RC NRC RA NRA ESTA
NB: RA- can claim estate tax credits because theyre taxable as well on their worldwide properties so Residents or Citizens NRA- cannot claim estate tax credit because the Philippine estate tax due would only refer to properties located in the Philippines so there can be no double taxation. FORMULA General rule: Philippine estate tax due foreign estate tax due = estate tax payable
Exception 1: Per country limitation Net estate in foreign country _______________________ x Philippine estate tax = foreign estate tax credit Net estate worldwide Per country limitation the amount of the tax 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 decedents net estate situated within such country taxable under the NIRC bears to his entire net estate. Exception 2: Worldwide Limitation Net estate in all foreign countries ___________________________ x Philippine estate tax = foreign estate tax credit Net estate worldwide
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Worldwide or overall limitation the total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedents net estate situated outside the Phils. taxable under the NIRC bears to his entire net estate. XIII. Administrative matters a. Notice of death PURPOSE OF NOTIFYING THE CIR For purposes of the government to be prepared in computing estate tax, there should be a notice of death. IS NOTICE OF DEATH NECESSARY? Not in all cases. Only if the death would result to estate taxation, meaning it will be subject to tax beyond the 200K limitation. But it also extends to saying that even estates which are not subject to estate tax so long as the gross value of the property exceeds 20K, a notice of death is necessary to be given to the Commissioner or his alter-ego. INSTANCES WHEN NOTICE OF DEATH IS NECESSARY 1. In all cases of transfers subject to tax or 2. Where, though exempt from tax, the gross value of the estate exceeds 20K TIME WHEN NOTICE SHOULD BE GIVEN It should be given within 2 months after the death of the decedent or within a period after the executor or administrator qualifies as such b. Bank deposits of a decedent GR: NO WITHDRAWAL OF BANK DEPOSITS As a general rule, no withdrawals can be made unless a certification from the Commissioner is shown saying that all estate taxes have been paid but in some cases. ILLUSTRATION Decedent left a bank deposit. The heirs posted an obituary but the bank officials werent able to read it. It allowed a withdrawal after a SPA executed before death in favor of a child. The child withdrew the amount the full amount. Is the bank liable for allowing the withdrawal or not? Liable. The obituary is sufficient notice. The bank should not allow the withdrawal. Page1 cf. , under the unclaimed balances law that once money becomes dormant for 10 years no withdrawal, no claims, no deposits, etc. it will belong to the government escheated with the government.
EXC: MINIMUM WITHDRAWAL NOT EXCEEDING 20K it will allow withdrawals of not exceeding 20K even without the certification so long as the Commissioner or his alter-ego has authorized the withdrawal. REASON FOR ALLOWING THE WITHDRAWAL In order to cover for the expenses in the settlement of the estate because in some cases, a decedent may have left all tangible items excluding cash and the cash is in the bank. In order to answer for the costs or expenses, withdrawals may be made. c. Filing of estate tax due INSTANCES WHEN FILING OF ESTATE TAX RETURN IS REQUIRED 1. In all transfers where an estate tax has to be paid, meaning more than the first 200K net estate, an estate tax return has to be filed. Whenever the decedent has left property and the transmission of property would result to an estate tax liability, meaning a taxable transfer. 2. Whenever the gross value of the estate exceeds 200K, you have to file an estate tax return, even if youre not liable for estate tax. EXAMPLE Your gross estate is 250K. Standard deduction alone, 1M, so youre not liable for estate tax. But since the gross value of your estate exceeds 200K, you have to file an estate tax return. PURPOSE OF FILING OF ESTATE TAX RETURN the purpose is for the government to monitor whether or not the gross estate is indeed subject to estate tax. So it is a requirement for you to file an estate tax when required to do so in the NIRC even if youre not liable for paying estate tax. 3. Regardless of the gross value of the estate, when the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the BIR is required as a condition precedent for the transfer of ownership thereof in the name of the transferee. EXAMPLE These are the only properties left by the decedent: Motor Vehicle Bicycle 50K 50K Estate tax return X Page1
PURPOSE WHY ESTATE TAX RETURN IS NECESSARY FOR REGISTRABLE PROPERTIES
It is required as a condition precedent for the transfer of ownership in the name of the transferee. For example, if its a parcel of land, the RD will not transfer the ownership from the decedent down to the heirs unless proof is shown that the taxes have been paid. TIU: Now if it is not covered to taxation because the amount does not exceed the standard deduction of 1M, still there must be proof that estate tax return has been filed and the clearance from the tax authorities has been given so that transfer can smoothly be made. SPECIAL REQUIREMENT IF GROSS VALUE EXCEEDS 2M There must be a statement duly certified by a CPA containing the following: 1. 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. 2. Itemized deductions from gross estate allowed in Sec. 86; and 3. The amount of tax due whether paid or still due and outstanding d. Payment of the estate tax due 1. Person primarily liable to pay the estate tax TIU: It is the estate that is primarily charged for the estate taxes but it will have to be coursed through the executor or administrator who shall be considered as the person primarily liable to pay the estate tax DISCHARGE OF EXECUTOR/ADMINISTRATOR SEC. 92. Discharge of Executor or Administrator from Personal Liability. - If the executor or administrator makes a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability therefore, the Commissioner (as soon as possible, and in any event within one (1) year after the making of such application, or if the application is made before the return is filed, then within one (1) year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax in Section 203 shall not notify the executor or administrator of the amount of the tax. The executor or administrator, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in the tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge. NB After estate taxes have been paid and settled, the best thing for an executor or administrator to do is to ask the court a written discharge from personal liability on such settlement of estate so that if later on, it is found out that there have been miscalculations, he cannot be considered as personally liable.
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WHEN TO FILE ESTATE TAX RETURN Within 6 months from the date of death. EXTENSION OF FILING OF ESTATE TAX RETURN The Commissioner shall have authority, to grant, in meritorious cases, a reasonable extension not exceeding 30 days for filing the return. 2. Extension of time to pay estate tax EXTENSION OF PAYMENT OF ESTATE TAX However, the Commissioner may allow an extension of payment, if he 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. a. Judicial settlement- not to exceed 5 years; or b. Extra-judicial settlement- not to exceed 2 years. BOND: PROTECTION OF THE GOVERNMENT IN CASE OF EXTENSION If extension granted, the Commissioner may require the executor, or administrator, beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension. INSTANCES WHEN NO EXTENSION IS GRANTED No extension will be granted by the Commissioner, where the taxes are assessed by reason of: a. negligence, b. intentional disregard of rules and regulations, or c. fraud on the part of the taxpayer, 3. Motion filed with probate court 4. When to pay the estate tax WHEN TO PAY ESTATE TAX At the time the return is filed by the executor, administrator or the heirs, which is 6 months from the decedents death. 5. Where to pay the estate tax WHERE TO FILE AND PAY ESTATE TAX Except in cases where the Commissioner otherwise permits, the return shall be filed with: a. An Authorized Agent Bank (AAB) b. Revenue District Office (RDO), or Collection Officer, or c. Duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death, or
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d. If there be no legal residence in the Philippines, with the Office of the Commissioner Since we have delegated to AABs the right to collect taxes, we simply determine where the domicile of the decedent is and what RDO he belongs. So if he belongs to this RDO, determine what banks can accept payments the AABs, not just any bank. e. Penalties for non-compliance FILING AND PAYMENT AT THE WRONG VENUE 1. You may be imposed of a 25% surcharge for wrong-venue in payment and filing; or 2. You could totally be considered as no-payment in the proper venue, you have to pay the full amount 100% plus the surcharge of 25% in the proper venue. So what you can do is simply file a refund in the wrong venue where you make the payment. WHEN 25% SURCHARGE IMPOSED Surcharge would only come in for absolute non-compliance with the requirement. a. If you file the return late, you will be imposed of a 25% surcharge. b. If you filed an inaccurate return, you will be imposed of a 25% surcharge. WHEN 50% SURCHARGE IMPOSED If you filed a fraudulent return, you will be imposed of a 50% surcharge. NB: The surcharge will be totally based on the basic amount of taxes due and on top of that, interest from the time that money could have been collected by the government up to the time that the money was actually collected by the government. WHEN INTEREST IMPOSED If its a simple extension of time to pay, the add-on penalty would only be the interest.
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Adsum Notes (Estate Tax)

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Adsum Notes (Estate Tax)

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ADSUM Notes (Taxation II Lecture Transcript and Notes based on Atty. E.

II. Applicable law in estate taxation Page1

LAW APPLICABLE: law at the time of the death of the decedent

IV. Properties covered by gross estate, in general

VI. Estate tax formula, in brief

cf.: formula for income tax

Composition of the gross estate

Transfer in contemplation of death

Property passing under general power of appointment

Proceeds of life insurance

Transfer for insufficient consideration

VALUE THAT WILL FORM PART OF THE GROSS ESTATE

Capital of surviving spouse

VIII. Acquisition and transmissions not subject to estate tax

a. Merger of usufruct in the owner of the naked title

The transfer between B and C will NOT be subject to estate tax.

TIU: this is a form of tax avoidance. Page1

2. No part of the income inures to the benefit of any individual.

2. Benefits received from U.S. Veterans Administration

4. Grants and donations to the Intramuros Administration

6. Transfers by way of bona fide sales

IX. Deductions allowed to a citizen or a resident, requisites

Expenses for the deceaseds wake, including food and drinks

c.Publication charges for death notices (obituaries)

d. Telecommunications expenses incurred in informing relatives of the deceased

Claims against the estate

TIU: So all medical expenses, whether paid or unpaid, are considered.

HOW MANY FAMILY HOME CAN A PERSON OWN? Only one.

d. Property previously taxed

7. the property should be located in the Philippines

General Rule, it is exempt from income tax.

X. Deductions allowed to a non-resident alien, special requisites

a. Expenses, losses, indebtedness and taxes (ELIT)

d. Share of the surviving spouse in the conjugal property Same as supra.

a. Single decedent (see Annex A for sample computation)

XI. Gross/net estate tax rates

RC NRC RA NRA ESTA

PURPOSE WHY ESTATE TAX RETURN IS NECESSARY FOR REGISTRABLE PROPERTIES

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