CHAPTER 3

GROSS ESTATE
• Estate Tax

Is the tax on the right to transmit property at

death and on certain transfers which are made
by law the equivalent of testamentary
dispositions.
• Purposes of Estate Tax

Transfer taxes provide income to the government, there are other justification for
their imposition.
One theory is the benefit-received theory, it recognizes the role of the state in the
distribution of the estate of decedent to the heirs whether it be in accordance with
the decedent’s will or by operation of the law. For this service, estate tax is
collected.
Another theory is the privilege theory or state partnership theory. Since
inheritance is a privilege granted by the state and since estate acquired and
accumulated is under the states protection, it is but righteous that the state collect
its share.
 Gross estate

• A Decedent’s Estate - is defined as all property, wherever located, in which the

decedent owned a beneficial interest at the time of death.
• In case of real property, it may happen that the certificate of title or the tax
declaration of the property has not been transferred in the name of the
decedent and is still in the name of the previous owner.

• Example:
If the property was acquired by the decedent by purchase, deed of
absolute sale must be presented; if inherited, deed of extrajudicial settlement
or a count decision; or if by donation, deed of donation.
• Resident citizen, non-resident citizen and resident alien decedents.
• - The gross estate of a resident citizen, a non-resident citizen or a resident alien
decedent shall include all his properties and interests therein wherever situated.

• The following shall comprise his gross estate

1. A. Tangible personal property, personal property that can be seen and
touched. These include appliances, jewelry, car, and other movable property which
can be transported from one place to another.
B. Intangible personal property, personal property that cannot be seen
and touched because they have no physical form. Banks deposits, bonds, promissory
notes, copyright, trademark, mortgages, patent and license are intangible personal
property.
2. Real or immovable property. These consist of land, building or anything
attached to soil with permanence.
3. Taxable transfers. Although these transfers are inter vivos (i.E. During the
lifetime) in form, they are actually mortis causa in substance because they are
intended to take effect upon or after the death of the transferor.
A. Transfer in contemplation of death. In a transfer in contemplation of
death, the thought of death is motivating factor for the transfer although
death may not be imminent.
Illustration:
Mr. Fernan knows that he does not have enough time to live due to cancer.
With this mind, he executed a will transferring his property to his heirs.
B. Revocable transfer - is a transfer by trust or otherwise where the decedent may revoke, alter,
amend or terminate the terms of enjoyment of the property.
Trust – a trust is the legal relationship created when a grantor known as the trustor,
transfers property with the intention that it be managed by a trustee for the benefit of a
beneficiary or beneficiaries.

Illustration: Mr. Fernan transferred his property in trust, the income of such property is payable
to junior, his son. In case of junior’s death, the property including the income shall belong to any
junior’s children. However, Mr. Fernan is retaining the power to revoke this designation. Mr.
Fernan died without revoking the transfer. This revocable transfer in includible in the gross estate
although the power to revoke was not exercised.
• Proceeds of life insurance.
An insurance contract, often described as an insurance policy, is a common will-related document.
Insurance - is a contract of protection against a natural risk, such as death. In
exchange for the payment of premiums, an insurance company agrees to pay a
certain sum of money to a designated beneficiary if and when covered event occurs.

Illustration: Mr. Fernan took for himself a life insurance for 1 million. He designated
Mr. Mitra, the executor whom he appointed in his will, as beneficiary.

Since the designated beneficiary is the executor, the proceed of life insurance shall be
included in Mr. Fernan’s gross estate when he dies. This inclusions is irrespective of
whether the designated was revocable or irrevocable.
Illustration:
Mr. Fernan took for himself a life insurance for P1 million. He designated Mrs.
Fernan, his wife as beneficiary.

Since the designated is presumed revocable; hence, the proceeds of life insurance
shall be included in Mr. Fernan’s gross estate when he dies. But if it is expressly
stated that the designated is irrevocable, the proceeds shall not form part of the
gross estate.
• Non-resident alien decedent. If the decedent was a non-resident alien, only his
property located in the Philippines shall form part of his gross estate. His gross
estate shall include the following:
1. Franchise which must be exercised in the Philippines;
2. Shares, obligation, or bonds issued corporation or sociedad anonima
organized or constituted in the Philippines in accordance with its law;
3. Shares, obligation, or bond issued by any foreign corporation 85% of the
business which is located in the Philippines.
4. Shares, obligation, or bond issued by any foreign corporation if such shares,
obligations or bond have acquired a business situs in the Philippines; and
5. Shares or rights in any partnership, business or industry established in the
Philippines.
• Valuation of gross estate

The imposition of estate tax arises from the death of a person and the need for that
person’s property to be eventually distributed to his heirs. Without such death and property, no
estate tax can be imposed. The term “property” when used without qualification mat be
perceived to include rights, other intangibles physical things. It is at the time of death that the
heir legally succeeds to the inheritance hence the values of the gross estate are based on values
at the time of the decedent’s death.
• 1. Real property
- FMV (zonal value) as determined by the commissioner, or
- FMV as shown in the schedule of values fixed by the provincial and city assessors,
whichever is higher.
If there is no zonal value, the taxable base is the fair market value that appears in the latest tax
declaration. If there is an improvement, the value of improvement is the construction cost per
building permit or the fair market value per latest tax declaration.
2. Shares of stocks
- Unlisted shares
Common – book value
Preferred – par value
Listed shares (in the stock exchanges) - arithmetic mean between the highest and lowest
quotation at a date of death, if none is available on the date of death itself.
Situs of property
As a general rule, the situs of real property is the place or country where it is situated.
Generally, the situs of tangible personal property is the place or country where such is actually
located at the time of the decedent’s death.

As a general rule, the situs of tangible personal property is the domicile or residence of the owner. However,
this rule may not control when the property has, in fact, a situs elsewhere. In addition to the ones already
enumerated, the following tests situs apply:
1. Accounts receivable – residence of the debtor
2. Bank deposit – location of the depositor bank
3. Copyright, trademark, patent and franchise – place or country where the intangible is used or
exercised.
The tangible personal property of a non-resident alien decedent may not be subject to estate tax just once.
• Illustration:
A non-resident alien decedent held shares of stock of a corporation organized under
Philippine laws. The transfer to ownership of said shares of stocks are taxable in the
Philippines since these shares receive protection and benefits under our laws.

Thus, if this non-resident alien decedent at the time of death is a Japanese citizens who
resided in the united states, the transfer may also be taxed by the country (united states)
where he was a resident alien and may further be taxed by the country (japan) where he
was a non-resident citizen. Of course, the transfer taxes which may be imposed by the
other two countries would all depend on their existing tax laws.

The test of situs of property of a non-resident alien decedent is important because it tells
whether the property is subject to estate tax in Philippine or not.
Illustration:
Ms. Nila Banez, single, died leaving the following properties
Tangible and intangible properties Amount
A. House and lot in the Philippines P2,500,000
B. Building and land in Quezon city, Philippines 10,000,000
C. Car and jewelry in the Philippines 1,900,000
D. Bank deposit at BPI bank, Makati city, Philippines 5,000,000
E. ABS-CBN certificates of stocks kept in a safe in Australia 450,000
F. House and lot in Australia 3,000,000
G. Building and land in Australia 1,200,000
H. Car and jewelry in Australia 1,500,000
I. Business right in a corporation established in Macau, China 1,500,000
J. Jewelry in china 500,000
K. Bank deposit in Beijing, China 15,000,000
Total 42,550,000
• Required after determining the situs of each of the items, compute
for the gross estate if Ms. Banes died a/an:

1. Filipino residing in the Philippines

2. Filipino residing in Australia
3. Australian residing in the Philippines
4. Australian residing in Australia, with reciprocity
5. Australian residing in China
Solution:
Tangible and intangible properties Amount
A. House and lot in the Philippines P2,500,000 Within
B. Building and land in Quezon city, Philippines 10,000,000 Within
C. Car and jewelry in the Philippines 1,900,000 Within
D. Bank deposit at BPI bank, Makati city, Philippines 5,000,000 Within
E. ABS-CBN certificates of stocks kept in a safe in Australia 450,000 Within
F. House and lot in Australia 3,000,000 Without
G. Building and land in Australia 1,200,000 Without
H. Car and jewelry in Australia 1,500,000 Without
I. Business right in a corporation established in Macau, China 1,500,000 Without

J. Jewelry in China 500,000 Without

K. Bank deposit in Beijing, China 15,000,000 Without
Total 42,550,000
Answerrs:
1. Filipino residing in the Philippines:
The gross estate of Ms. Banes being a resident citizen of the Philippines shall
include all her property wherever situated, as enumerated in the illustration of
P42,550,000.
2. Filipino residing in Australia:
The gross estate of Ms. Banes, being a Filipino citizen residing in Australia is also
P42,550,000 because Filipino citizens, whether residing or not in the Philippines,
are subject to estate tax in the same manner.
3. Australian residing in the Philippines:
The gross estate of Ms. Banes, being Australian residing in the Philippines is also
P42,550,000 because resident of the Philippines, whether Filipino citizens or aliens
are subject to estate tax in the same manner.
4. Australian residing in Australia, with reciprocity:
The gross estate of Ms. Banes, being an Australian residing (non-resident alien
in the Philippines but resident citizen in Australia) shall consist only of her
property situated in the Philippines.

The reciprocity rule may apply in this case because Ms. Banes at the time of
her death is a resident and citizen of Australia and has intangible personal
property located in the Philippines.

Where there is a reciprocity, the transmission of intangible personal property

located in the Philippines of a non-resident alien decedent is not subject to tax.
Solution:

Computation of Ms. Banes’ gross estate:

Tangible and Properties Amount

a. House and lot in the Philippines P2,500,000 Within

b. Building and land in Quezon City, Philippines 10,000,000 Within

c. Car and Jewelry in the Philippines 1,900,000 Within

Total 14,400,000
5. Australian residing in China:
The gross estate of Ms. Banes, being an Australian residing in china (non-resident
alien in the Philippines while non-resident citizen in Australia) consist only of her
property situated in the Philippines.

The reciprocity rule cannot apply in this case because Ms. Banes, although a non
resident alien in the Philippines is not a resident and citizen of one foreign
country. So that the reciprocity rule may apply, the non-resident alien must be a
resident and citizen of one particular foreign country at the time of his death.

When there is no reciprocity, the transmission of intangible personal property

located in the Philippines of a non-resident alien decedent is subject to tax.
Computation of Ms. Banes’ gross estate:

Tangible and Intangible Properties Amount

a. House and lot in the Philippines P2,500,000 Within

b. Building and land in Quezon City, Philippines 10,000,000 Within

c. Car and Jewelry in the Philippines 1,900,000 Within

d. Bank deposit at BPI Bank, Makati City, Philippines 5,000,000 Within

E. ABS-CBN certificates of stocks kept in a safe in Australia 450,000 Within

Total 19,850,000
THANK YOU!