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TAX

2
Estate Tax

I.

THE GROSS ESTATE

A"y. Terence Conrad H. Bello

A. Introduc:on

A. Introduc:on

Lorenzo v. Posadas
1. When does the estate tax accrue?
Upon the death of the decedent. Inheritance
taxa:on is also governed by the statute in force
at the :me of the death of the decedent

2. What is the nature of the estate tax?


It is in the nature of an excise tax imposed upon
the right or privilege to succeed to, receive, or
take property by or under a will or the intestacy
law, or deed, grant, or giK, to become opera:ve
at or aKer death
A"y. Terence Conrad H. Bello

Slide No. 3

3. At what point is the value of the gross estate


measured for purposes of imposing the
estate tax?
Because succession takes place and the right of
the state to impose estate tax accrues upon the
death of the decedent, the tax should be
measured by the value of the estate as it stood
at the :me of the decedents death, regardless
of any subsequent con:ngency aec:ng value or
any subsequent increase or decrease in value.
Lorenzo v. Posadas; NIRC 85
A"y. Terence Conrad H. Bello

Slide No. 4

A. Introduc:on

B. General Deni:on of Gross Estate

4. Does the postponement of possession postpone the


payment of the estate tax as well?
No. A transmission by inheritance is taxable at the :me
of the predecessors death, notwithstanding the
postponement of the actual possession or enjoyment of
the estate by the beneciary, and the tax is measured by
the value of the property transmi"ed at that :me
regardless of its apprecia:on or deprecia:on.
Thus, the estate tax is payable even where a testator
provided in his will that his real proper:es be held for a
period of 10 years aKer his death then, thereaKer, the
real proper:es shall go to his nephew. Lorenzo v.
Posadas
A"y. Terence Conrad H. Bello

Slide No. 5

C. Cons:tu:on of Gross Estate

A"y. Terence Conrad H. Bello

Slide No. 6

C. Cons:tu:on of Gross Estate: Property in which Decedent had an Interest

1. What shall be included in gross estate?


Proper&es physically in the estate
a. Property in which decedent had an interest
b. Proceeds of life insurance (unless designa:on of
beneciary is irrevocable)
Proper&es no longer physically in the estate
a. Transfers in contempla:on of death
b. Transfers taking eect at death
c. Transfers with retained interest
d. Revocable transfers
e. Property passing under general power of appointment
f. Transfers for insucient considera:on
A"y. Terence Conrad H. Bello

1. What is generally included in the gross estate of a resident


ci:zen decedent?
All property, real or personal, tangible or intangible,
wherever situated (i.e., taxed on a worldwide basis)
(NIRC 85)
2. Nonresident ci:zen? Worldwide basis
3. Resident alien? Worldwide basis
Beam v. Yatco
4. Nonresident alien?
Only that part of his en:re gross estate which is situated
in the Philippines (see, however, special rules in 104 for
certain intangible property)
CIR v. Campos Rueda

Slide No. 7

1. What is covered by property in which decedent had


an interest (85(A))?
Covers property benecially owned by the decedent
(includes property wherein legal :tle is not in the
name of the decedent but is benecially owned by the
decedent)
E.g., land registered in the name of a trustor or a
dummy
Stock cer:cates in the name of the decedents
stock broker or held by a bank in trust for the
decedent
Cash deposits in a numbered account in the
Cayman Islands
A"y. Terence Conrad H. Bello

Slide No. 8

C. Cons:tu:on of Gross Estate: Property in which Decedent had an Interest

1. What is covered by property in which decedent had


an interest?
Conversely, if the decedent merely holds :tle to a
property only as a guardian or trustee or in some other
duciary capacity (i.e., mere naked :tle), he would not
be considered as having an interest in such property

A"y. Terence Conrad H. Bello

Slide No. 9

C. Cons:tu:on of Gross Estate: Transfers in Contempla:on of Death

1. An example of property no longer physically in the


patrimony of the decedent at the :me of death (because
there was an inter vivos transfer) but by c:on of law is
brought back into the patrimony of the decedent (i.e.,
deemed inclusion) 85(B)
2. The law only targets gratuitous transfers. Hence, transfers
for a full and adequate considera:on in money or moneys
worth is not covered by the inclusion (theory of
conversion)
Reason: the transfer amounts only to a subs:tu:on or
exchange of assets and therefore the gross estate is
not reduced, and no estate tax is avoided
A"y. Terence Conrad H. Bello

Slide No. 10

C. Cons:tu:on of Gross Estate: Transfers in Contempla:on of Death

3. What is meant by a transfer in contempla:on of death?


The transfer was mo:vated by the thought of death
e.g., decedent suers a stroke but survives; a day
aKer he is discharged from the hospital, he donates
his proper:es to his children (or sells the
proper:es for an insucient considera:on)
the donated property, while no longer physically in
the estate of the decedent at the :me of his death,
would s:ll result in inclusion because the transfer
was mo:vated by the thought of death

A"y. Terence Conrad H. Bello

C. Cons:tu:on of Gross Estate: Transfers in Contempla:on of Death

Slide No. 11

4. How do you know whether the transfer was made in


contempla:on of death?
Determined using a facts and circumstances test
(therefore, subjec:ve). Some factors considered:
Age (advanced age at the :me of transfer?)
Health (terminally ill at the :me of transfer or in
the pink of health?)
Length of :me between the transfer and death
Concurrent making of a will
And other similar circumstances

A"y. Terence Conrad H. Bello

Slide No. 12

C. Cons:tu:on of Gross Estate: Transfers in Contempla:on of Death

C. Cons:tu:on of Gross Estate: Transfers Taking Eect at Death

5. Since the law covers only transfers mo:vated by the


thought of death, if the mo:ve for the transfer is
something else other than the thought of death, the
transfer will not result in inclusion. Some non-death
factors:
Reduce annual income tax liability of the transferor
Relieve the transferor from the burden of
management
To protect the family from the hazards of business
opera:ons
Or other valid business reasons

A"y. Terence Conrad H. Bello

Slide No. 13

C. Cons:tu:on of Gross Estate: Transfers Taking Eect at Death

These transfers are essen:ally equivalent to


testamentary disposi:ons. The eect is the
same as when transfers are provided for in a last
will and testament of the decedent

A"y. Terence Conrad H. Bello

Slide No. 14

C. Cons:tu:on of Gross Estate: Transfers Taking Eect at Death

2. What is the test to determine whether a transfer


takes eect at death?
The possession or enjoyment is condi:onal upon
surviving the decedent. Thus, if the transferee of
a property interest can get possession or
enjoyment while the decedent transferor is
living, the property shall not be included in the
decedents gross estate
Can possession or enjoyment of the property be
obtained without surviving the decedent? If yes,
property is excluded from the gross estate. If no,
property is included in the gross estate
A"y. Terence Conrad H. Bello

1. What is the ra:onale for inclusion?

Slide No. 15

3. Thus a joint survivorship agreement (e.g.,


and/or account) is considered a transfer
taking eect at death
The survivorship agreement is in eect a
dona:on morCs causa made by the deceased co-
depositor during his life:me but eec:ve upon
death because the acquisi:on by the survivor of
the remaining balance is a considered a bequest.
BIR Rul. 10-03 dated Sept. 8, 2003

A"y. Terence Conrad H. Bello

Slide No. 16

C. Cons:tu:on of Gross Estate: Transfers Taking Eect at Death

C. Cons:tu:on of Gross Estate: Transfers with Retained Interest

4. Illustra:on:
Sr. donates house and lot to Jr. in a Deed of
Dona:on purportedly transferring ownership
over the house and lot to Jr.
In a side agreement, however, it was agreed that
:tle to the house and lot and possession would
be transferred only to Jr. upon the death of Sr.
In the mean:me, Sr. would con:nue to live in
the house and lot and retain possession un:l his
death

A"y. Terence Conrad H. Bello

Slide No. 17

C. Cons:tu:on of Gross Estate: Transfers with Retained Interest

A"y. Terence Conrad H. Bello

Slide No. 18

C. Cons:tu:on of Gross Estate: Transfers with Retained Interest

3. Illustra:ons: period
a. For life: decedent transfers property to a trust with the
income therefore payable to himself for as long as I live and,
upon his death, the corpus shall be distributed to his children
b. For a period not ascertainable without reference to the
decedents death: decedent transfers property to a trust, with
income therefrom payable to himself quarterly for life but,
under the trust agreement, the decedent is to receive none of
the trust income for the calendar quarter in which he dies
c. For a period which does not in fact end before decedents
death: decedent, aged 40, transfers property to a trust with
the trust agreement providing that decedent shall receive the
trust income for 10 years, at the end of which period, the trust
terminates and the corpus shall be distributed to the
decedents children. The decedent dies, however, within the
10-year period
A"y. Terence Conrad H. Bello

1. The decedent must have retained an interest in the property


for a specied period
2. Two-fold test to determine whether decedent made a
transfer with retained interest:
a. Has the decedent retained an interest (i) for his life; or (ii)
for a period not ascertainable without reference to his
death; or (iii) for a period that does not in fact end before
his death?
b. Did the decedent retain (i) possession or enjoyment of
the property; or (ii) the right to the income from the
property; or (ii) the right to designate (either alone or in
conjunc:on with any other person) the person who shall
possess or enjoy the property; or (iv) the right to
designate (either alone or in conjunc:on with any other
person) the person who shall receive the income?

Slide No. 19

4. Illustra:ons: interest retained


a. Possession or enjoyment of the property:
Decedent donated a Juan Luna pain:ng to the
Na:onal Museum but reserved the right to keep
it for life
Decedent sold his house and lot to his son (for a
song), but reserved the right to live in it for life
Ra&onale: with the transferor retaining for
himself essen:ally full life:me benets from the
transferred property, the ul:mate shiKing of
enjoyment upon the death of the decedent is
akin to a testamentary disposi:on of property,
hence, jus:fying the imposi:on of estate tax at
that :me
A"y. Terence Conrad H. Bello

Slide No. 20

C. Cons:tu:on of Gross Estate: Transfers with Retained Interest

C. Cons:tu:on of Gross Estate: Transfers with Retained Interest

4. Illustra:ons: interest retained


b. Right to the income from the property: decedent
transfers property to a trust, with the income
payable to him for life, or to a dependent of the
decedent whom the la"er would otherwise have
to support (note: the decedent need not directly
receive the income. The income may also be
paid to a third party in discharge of the
decedents obliga:on to the la"er)

A"y. Terence Conrad H. Bello

Slide No. 21

C. Cons:tu:on of Gross Estate: Transfers with Retained Interest

A"y. Terence Conrad H. Bello

Slide No. 22

C. Cons:tu:on of Gross Estate: Transfers with Retained Interest

4. Illustra:ons: interest retained


c. Right to designate person (either alone or in
conjunc:on with any other person) who shall
possess or enjoy property or income therefrom:
Exercisable in conjunc:on . . .: the decedent
creates a trust wherein B had the right to the
income but the decedent retains for life the right
to designate, with Bs consent, another person as
an income beneciary
Tax policy: Congress wary of family
transac:ons, which are always suspected of
tax avoidance mo:ves
A"y. Terence Conrad H. Bello

4. Illustra:ons: interest retained


c. Right to designate person (either alone or in
conjunc:on with any other person) who shall
possess or enjoy property or income therefrom:
Exercisable alone: the decedent transfers
property to a trust, retaining for his life the
right to say who may enjoy the transferred
property or the income therefrom

Slide No. 23

4. Illustra:ons: interest retained


c. Right to designate person (either alone or in
conjunc:on with any other person) who shall
possess or enjoy property or income therefrom:
Exercisable in conjunc:on . . .: If decedent names
a 3rd party as trustee and gives the trustee the
right to designate who shall enjoy the property or
the income, the decedent has not retained the
prescribed control. BUT, if the decedent has the
right to discharge the trustee and name himself
trustee with the same right, he has indirectly
retained the prescribed control
A"y. Terence Conrad H. Bello

Slide No. 24

C. Cons:tu:on of Gross Estate: Revocable Transfers

C. Cons:tu:on of Gross Estate: Revocable Transfers

1. Elements of 85(C)
a. Transfer of property was made (by trust or otherwise);
b. but, the enjoyment thereof was subject to change (at the
date of decedents death);
c. through the exercise of a power (in whatever capacity
exercisable and without regard to when or from what
source the decedent acquired the power);
by the decedent (alone or in conjunc:on with any
other person);
d. power exercised is the power to alter, amend, revoke or
terminate the transfer;
e. or where any such power is relinquished in
contempla:on of death
A"y. Terence Conrad H. Bello

Slide No. 25

C. Cons:tu:on of Gross Estate: Revocable Transfers

v 85(C) may overlap with 85(B) (transfers with retained


interest)
A"y. Terence Conrad H. Bello

Slide No. 26

C. Cons:tu:on of Gross Estate: Revocable Transfers

3. What is meant by subject to change in enjoyment?


If the decedent could take back un:l death property
transferred, interests given are subject to change
If the decedent could name another income beneciary,
even if subject to consent of originally named beneciaries
The enjoyment of the property transferred is subject to
change if the decedent could accelerate the beneciarys
enjoyment of the property
Example: under the trust, A shall receive income for 10
years, and at the end of the period, the corpus shall go
to A. The trust, however, provides that the trustor may
terminate the trust earlier and have the corpus
delivered to A or his estate
A"y. Terence Conrad H. Bello

2. The kind of power which brings about inclusion,


includes any power aec:ng the :me or manner of
enjoyment of the property or its income, even though
the decedent could not benet from its exercise and
even though the iden:ty of the beneciary is unaected
Example: A creates a trust to pay income to B for life,
with remainder to C, but reserves the right to invade
corpus and accelerate enjoyment in Cs favor
Here C does not have full enjoyment and it is the
retained power to accelerate the enjoyment which
results in inclusion

Slide No. 27

4. Example of power to revoke:


A creates a trust to pay income to B for life, with
remainder to C, but reserves the right to take
back the property altogether
5. Examples of power to alter/amend:
Name new beneciaries
Change propor:onate interests among
beneciaries
Remove the trustee and appoint himself

A"y. Terence Conrad H. Bello

Slide No. 28

C. Cons:tu:on of Gross Estate: Revocable Transfers

C. Cons:tu:on of Gross Estate: Revocable Transfers

6. Example of power to terminate:


D creates a trust, with income payable to B for
life, remainder to C or Cs estate, but reserves
the right to terminate the trust, eec:ng an
immediate distribu:on of corpus to C
Here Bs enjoyment of the income is subject
to change because the trust may be
terminated
Cs right to possess the property and enjoy
the income thereof is subject to change
because his en:tlement to the property may
be accelerated
A"y. Terence Conrad H. Bello

Slide No. 29

C. Cons:tu:on of Gross Estate: General Power of Appointment

A"y. Terence Conrad H. Bello

Slide No. 30

C. Cons:tu:on of Gross Estate: General Power of Appointment

1. A power of appointment is the right to designate the


person or persons who will succeed to, or will become
benecial owners of, the property of a prior decedent.
A power of appointment may be a general power of
appointment or a limited power of appointment
2. Personali:es involved:
Prior decedent/donor the grantor of the power of
appointment
Decedent the grantee of the power of
appointment
Successor/s the person/s who will succeed to the
property
A"y. Terence Conrad H. Bello

7. Where power to alter, amend, etc. is relinquished in


contempla:on of death:
The relinquishment of the power results in the inclusion
of the same interest in property in the decedents gross
estate
Except: if relinquishment was an adequate and full
considera:on in money or moneys worth
Example: decedent relinquishes power to alter, amend,
etc. upon realiza:on that he is terminally ill
Reason: since the law treats the power to alter, amend,
etc. as equivalent to a property interest, the
relinquishment of said power in contempla:on of death
is no dierent from a transfer of property in
contempla:on of death, hence, includable

Slide No. 31

3. Illustra:on:
A transfers property to a trust, with B as income
beneciary, and granted C the right to direct the trustee, by
will, to transfer the property to anybody whom C
nominates. The anybody could be C (i) himself, (ii) his
creditors, (iii) his estate, (iv) the creditors of his estate, or
(v) anybody else in the world
A: prior decedent (grantor of power of appointment)
C: decedent (grantee of power of appointment)
Anybody: successors who will succeed to the property
Thus, if C (the decedent) exercised or released the general
power of appointment by will or by deed in certain
instances, the property subject to the power will be
included in Cs gross estate
A"y. Terence Conrad H. Bello

Slide No. 32

C. Cons:tu:on of Gross Estate: General Power of Appointment

C. Cons:tu:on of Gross Estate: General Power of Appointment

4. Ra:onale for inclusion:


The right to determine who may become the benecial
owner of a property is such an important a"ribute of
outright ownership that a ques:on may be raised
whether for estate tax purposes, it should be considered
the equivalent of an ownership interest includable in the
decedents gross estate
As a general rule, mere possession of a power of
appointment over property is not considered an interest
in property. Therefore if the holder of the power dies
possessed of such power, there is no property in which
the decedent had an interest in that would result in its
inclusion in gross estate
By the same token, if the holder/grantee exercised the
power of appointment during his life:me, the holder/
grantee has made no transfer of an interest in
property which may be taxed under 85(A)
A"y. Terence Conrad H. Bello

Slide No. 33

C. Cons:tu:on of Gross Estate: General Power of Appointment

A"y. Terence Conrad H. Bello

Slide No. 34

C. Cons:tu:on of Gross Estate: Proceeds of Life Insurance

6. Property over which the decedent held a power of


appointment is not includible in his gross estate unless such
power was general
A power is general when it authorizes the grantee/
decedent (of the power of appointment) to appoint
anyone, possibly including himself, his estate, his creditors
or creditors of his estate.
A power is special where the grantee/decedent can appoint
only a restricted or designated class of persons other than
himself. Property which passes under a special power of
appointment is not includible in the gross estate
Example: A leaves his property in trust for his son, B, for life
and then in trust for such children of B as B shall by will
appoint
The power of appointment is a special power of
appointment, thus the value of the property is
excludible from the gross estate of B
A"y. Terence Conrad H. Bello

4. Requisites for inclusion of property passing under GPA:


a. Existence of a general power of appointment;
b. An exercise of such power by the decedent by will or
by deed in certain cases (i.e., life:me transfer (i) in
contempla:on of death, or (ii) taking eect at death,
or (iii) with retained interest); and
c. The passing of the property by virtue of such
exercise
5. For exercise or release of GPA to result in inclusion, it
must be by will or by a life:me transfer which if it were
a transfer of actual property would result in its inclusion
in gross estate as in contempla:on of death, or under
the other life:me transfer rules

Slide No. 35

1. Proceeds of insurance under policies taken out by


the decedent upon his life shall be includable if the
beneciary is:
a. The estate of the decedent, his executor or his
administrator; or
b. A third person, unless the designa:on of the
beneciary is irrevocable
2. When are proceeds of life insurance excludable?
When the beneciary is a third person (e.g., wife
or kids of the insured) and the designa:on is
irrevocable
A"y. Terence Conrad H. Bello

Slide No. 36

A. Valua:on of Taxable Transfers

II. VALUATION OF ESTATE AND


AMOUNT TO BE INCLUDED IN CASES
COVERED BY 85(B), (C) AND (D)
A"y. Terence Conrad H. Bello

37

1. In a (1) transfer in contempla:on of death, (2) transfer


taking eect at death, (3) transfer with retained
interest, (4) revocable transfer, and (5) property passing
under a general power of appointment, the value to
include in gross estate shall be determined under the
following rules:
a. If the transfer was in the nature of bona de sale for
an adequate and full considera:on in money or
moneys worth, no value shall be included in the
gross estate
b. If the considera:on received on the transfer was
insucient, the value to include in the gross estate
shall be the excess of the FMV of the property at the
:me of the decedents death over the considera:on
received
A"y. Terence Conrad H. Bello

Slide No. 38

A. Valua:on of Taxable Transfers

2. If there was no considera:on received on the


transfer (as in dona:on morCs causa), the value
includible shall be the FMV of the property at the
:me of death
3. Illustra:on:

FMV at the :me of transfer


Considera:on received
FMV at :me of death
Amt. includable

A"y. Terence Conrad H. Bello

100,000
100,000
180,000
None

100,000
60,000
180,000
120,000

100,000
None
180,000
180,000

Slide No. 39

III. EXEMPT TRANSFERS

A"y. Terence Conrad H. Bello

40

A. Exempt Transfers

A. Exempt Transfers

1. What are the types of exempt transfers?


a. The merger of usufruct in the owner of the naked :tle;
b. The transmission or delivery of the inheritance or legacy
of the duciary heir or legatee to the deicomissary
c. The transmission from the rst heir, legatee or donee in
favor of another beneciary, in accordance with the will
of the predecessor
d. All bequests, devices, legacies or transfers to social
welfare, cultural and charitable ins:tu:ons no part of the
net income of which inures to the benet of any
individual: provided not more than 30% of the said
bequests, legacies or transfers shall be used by such
ins:tu:ons for administra:on purposes
A"y. Terence Conrad H. Bello

Slide No. 41

2. Examples:
P died leaving a piece of land to Q in usufruct
(right to enjoy the fruits), and to R in naked
ownership (without the right to the fruits). The
land is subject to estate tax in the estate of P.
Upon the death of Q, the usufruct shall be
merged into the naked ownership of R, who shall
then become the absolute owner of the
property. The transmission of the usufruct from
Q to R shall be exempt from estate tax

A"y. Terence Conrad H. Bello

Slide No. 42

A. Exempt Transfers

2. Examples:
S died leaving a piece of land to T, a grandson, to be
owned by him for 4 years, with the obliga:on to preserve
it, aKer which, one-half shall be given to U, a great
grandson, and the other half to be retained by T. This is
deicomissary subs:tu:on. The duciary heir, T, is
entrusted with the obliga:on to preserve the property
and transit it to the deicomissary heir, U, with the
subs:tu:on not going beyond one degree from the heir
originally ins:tuted, and both heirs being alive at the
:me of the testators death. The transmission from S to
T is subject to estate tax. The transmission from T to U
shall be exempt from estate tax
A"y. Terence Conrad H. Bello

Slide No. 43

IV. DEDUCTIONS FROM GROSS


ESTATE
A"y. Terence Conrad H. Bello

44

Deduc:ons from Gross Estate

Deduc:ons from Gross Estate

1. What are the deduc:ons from the gross estate of a


ci:zen and resident decedent?
a. ELITE (expenses, losses, indebtedness, taxes, etc.)
b. Vanishing Deduc:on
c. Transfers for Public Use
d. Family Home
e. Standard Deduc:on
f. Medical Expenses
g. Benets Received from Employer by Reason of
Death
h. Share in the Conjugal Property
A"y. Terence Conrad H. Bello

Slide No. 45

A. ELITE

A"y. Terence Conrad H. Bello

Slide No. 46

A. ELITE

1. Funeral expense
a. Actual funeral expense
b. 5% of gross estate
c. P200,000
Whichever is the lowest among a, b, or c
Rule of thumb: cut o point is the interment or
burial; expenses incurred aKer the burial or
interment will not be deduc:ble

A"y. Terence Conrad H. Bello

2. What are the deduc:ons from the gross estate of a


nonresident alien decedent?
a. Pro-rated ELITE: [Phil. gross estate/worldwide
gross estate] x [ELITE]
b. Vanishing Deduc:on
c. Transfers for Public Use

Slide No. 47

What are examples of funeral expense?


Mourning apparel of surviving spouse and minor children
Expenses during the wake (e.g., food and drinks)
Cost of obituary
Telecommunica:on expenses incurred for informing rela:ves
of the decedent (e.g., overseas calls)
Cost of burial plot, tombstone, monument or mausoleum (but
not their upkeep)
Interment or crema:on fees
All other expenses incurred for the performance of the rites
and ceremonies incident to the interment (expenses aKer the
interment, such as prayers, masses, 9th day, 40th day, etc., are
not deduc:ble)
A"y. Terence Conrad H. Bello

Slide No. 48

A. ELITE

A. ELITE

2. Expenses for testamentary or intestate proceedings


Expenses incurred during the se"lement of the
estate (e.g., inventory taking, payment of debts
of the estate, distribu:on of estate to heirs)
Cut-o point is the last day prescribed by law, or
the extension thereof, for the ling of the estate
tax return
Expenses incurred aKer the cut-o point are not
deduc:ble

A"y. Terence Conrad H. Bello

Slide No. 49

A. ELITE

A"y. Terence Conrad H. Bello

Slide No. 50

A. ELITE

3. Claims Against the Estate

To be deduc:ble, claim must have been enforceable


against the decedent if he were living
If claim is a simple loan, there must be a debt instrument
which was notarized
If the loan was contracted within 3 years from the
decedents death, the executor or administrator is
required to submit a statement showing the disposi:on
of the proceeds of the loan

Examples:
a. Fees of executor or administrator
b. A"orneys fees
c. Court or ling fees
d. Accountants fees
e. Appraisers fees
f. Clerk hire
g. Cost of preserving and distribu:ng the estate
h. Costs of storing or maintaining the property
i. Brokers fees/commissions for selling the property

Deduc:ble amount of claim is valued as of the death of


decedent irrespec:ve of post-death developments

Thus where the claims are reduced or condoned through


compromise agreements entered into by the estate with its
creditors resul:ng in the reduc:on of the amount actually paid
post-death, the deduc:ble claim would s:ll be valued as of the
date of death. Dizon v. Court of Tax Appeals, G.R. 140944, May
6, 2008

A"y. Terence Conrad H. Bello

Slide No. 51

4. Claims Against Insolvent Persons provided the


value of the decedents interest in the claim is
included in the gross estate
5. Unpaid Debts/Mortgages Upon Property provided
the decedents interest in the property,
undiminished by the debt/mortgage, is included in
the gross estate
6. Taxes which have accrued as of the death but not
yet paid; does not include income tax upon income
received aKer the death, property taxes not accrued
before death, or the estate tax
A"y. Terence Conrad H. Bello

Slide No. 52

A. ELITE

B. Vanishing Deduc:on

7. Casualty Losses
Arising from re, storm, shipwreck, or other
c a s u a l : e s , o r f r o m r o b b e r y , t h e K o r
embezzlement
Must not be compensated for by insurance or
otherwise
Must not have been deducted for income tax
purposes
Losses were incurred not later than the :me
required to pay the estate tax (6 mos.)
A"y. Terence Conrad H. Bello

Slide No. 53

B. Vanishing Deduc:on

A"y. Terence Conrad H. Bello

Slide No. 54

B. Vanishing Deduc:on

Condi:ons for deduc:bility:


a. The present decedent died within 5 years from receipt of
the property from a prior decedent or donor;
b. The property on which vanishing deduc:on is being
claimed must be located in the Philippines;
c. The property must have formed part of the taxable
estate of the prior decedent, or of the taxable giK of the
donor;
d. The estate tax on the prior succession or the donors tax
on the giK must have been nally determined and paid;
e. The property on which vanishing deduc:on is being
taken must be iden:ed as the one received from the
prior decedent, or from the donor, or something
acquired in exchange therefore; and
f. No vanishing deduc:on on the property was allowable to
the estate of the prior decedent
A"y. Terence Conrad H. Bello

8. Vanishing deduc:on
Property may change hands several :mes within a very
short period of :me by reason of death of the owner
shortly aKer receiving the property by giK or inheritance
Example: Father dies in 2010 leaving a house and lot,
survived by an only son. The son inherits the the H&L.
in 2011, the son died in a vehicular accident. The H&L
will form part of the sons estate which will again be
subject to estate tax
This subjects the property to double taxa:on, because the
tax is imposed on each transfer
The vanishing deduc:on is meant to mi:gate the eects of
double taxa:on

Slide No. 55

Amount deduc:ble:
100% of value: if prior decedent died within one
year;
80%: > one year < two years
60%: > two years < three years
40%: > three years < four years
20%: > four years < ve years

A"y. Terence Conrad H. Bello

Slide No. 56

C. Transfers for Public Use

D. Family Home

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 poli:cal
subdivision thereof, for exclusively public purposes

A"y. Terence Conrad H. Bello

Slide No. 57

E. Standard Deduc:on

A"y. Terence Conrad H. Bello

Slide No. 58

F. Medical Expenses

1. Available as a deduc:on in addi:on to the other


deduc:ble items
2. Amount deduc:ble is P1 million

A"y. Terence Conrad H. Bello

1. Dwelling house where a person and his family


resides, and the land on which it is situated (follows
deni:on in the Family Code)
Cons:tuted jointly by husband and wife or by an
unmarried head of family
2. To be deduc:ble, must be cer:ed to as such by
Barangay Chairman where family home is located
3. Total value is included in gross estate
4. Amount deduc:ble is the FMV or P1 million,
whichever is lower

Slide No. 59

1. Incurred within one year from death (whether paid


or unpaid); cap is P500,000.00; must be
substan:ated

A"y. Terence Conrad H. Bello

Slide No. 60

G. Death Benets from Employer

H. Capital of Surviving Spouse

1. Any amount received by an ocial or employees


heirs from the employer as a consequence of the
death of the said ocial or employee under NIRC
32(B)(6)(b)

A"y. Terence Conrad H. Bello

Slide No. 61

Capital of the surviving spouse of a decedent (e.g.,


conjugal share) shall not form part of the gross
estate of the decedent

A"y. Terence Conrad H. Bello

Slide No. 62

Foreign Tax Credits

1. Purpose: the net taxable estate of a decedent who


was a resident or ci:zen of the Philippines includes
his net taxable estate within and without the
Philippines. It is possible that the decedents net
estate without the Philippines was subjected to
transfer taxes as well by the country where the
property is located. There is therefore a possibility
of double taxa:on of the same property.
2. The purpose of the estate tax credit is to avoid or
mi:gate the eects of double taxa:on.

V. FOREIGN TAX CREDITS

A"y. Terence Conrad H. Bello

63

A"y. Terence Conrad H. Bello

Slide No. 64

Administra:ve Provisions

1. Tax rate schedular rate of 5% - 20%. Top rate of


20% applies to net estates with a value of P10M
and above

VI. ADMINISTRATIVE PROVISIONS

A"y. Terence Conrad H. Bello

65

Administra:ve Provisions

Personal Proper:es

P2,000,000.00
--

Family Home
Taxable Transfers

Conjugal
P5,000,000.00
--
6,500,000.00

--

--

Total
P7,000,000.00
--
6,500,000.00
--

GROSS ESTATE

2,000,000.00

11,500,000.00

13,500,000.00

Less: Deduc:ons (ELITE, etc.)

(500,000.00)

(2,000,000.00)

(2,500,000.00)

Estate AKer Deduc:ons

1,500,000.00

9,500,000.00

11,000,000.00

Less: Family Home

(1,000,000.00)

(1,000,000.00)

Standard Deduc:on

(1,000,000.00)

(1,000,000.00)

Medical Expenses

(500,000.00)

(500,000.00)

Sub-total

7,000,000.00

Less: Share of Surviving Spouse


(Net Conjugal Estate 2)
NET TAXABLE ESTATE
A"y. Terence Conrad H. Bello

A"y. Terence Conrad H. Bello

Slide No. 66

Administra:ve Provisions
Exclusive

Real Proper:es (excluding


Family Home)

Husband and wife. Husband died


Conjugal real proper:es P5M; exclusive real property
P2M (subject to P500k mortgage)
Family home P6.5M (subject to P2M mortgage)
Medical expenses P500k
Compute net taxable estate and estate tax due

(3,500,000.00)

NET TAXABLE ESTATE

P5,000,000.00

ESTATE TAX DUE


On rst P2M
On excess over P2M (11%)

P135,000.00
330,000.00

465,000.00

Less: tax credits/payments


Foreign Estate Tax Paid

--

Tax Paid in Return Originally


Filed, if this is an Amended
Return

--

Total
TAX PAYABLE

--
P465,000.00

(3,500,000.00)
5,000,000.00
Slide No. 67

A"y. Terence Conrad H. Bello

Slide No. 68

Administra:ve Provisions

2. No:ce of Death within 2 months


3. Estate Tax Return within 6 months; extendible for
up to 30 days
4. Payment of Estate Tax pay as you le; extendible
for up to 2 year (extrajudicial se"lement) or 5 years
(judicial se"lement), if payment would impose
undue hardship upon estate or any of the heirs
5. Consequences of Non-Payment surcharge,
interest, compromise penalty

A"y. Terence Conrad H. Bello

TAX 2
Donors Tax

Slide No. 69

A. Meaning of GiK

A. Meaning of GiK

CIR v. Duberstein
Illustra:on of a non-taxable giK vs. taxable
compensa:on for services rendered
Court found that the Cadillac was a recompense
for Dubersteins past services, or an inducement for
him to be of further service in the future

CIR v. Duberstein

When is a payment a non-taxable giK and when


is a payment taxable compensa:on for services
rendered?

A"y. Terence Conrad H. Bello

Slide No. 71

Mere absence of a legal or moral obliga:on to make


such a payment does not mean it is a giK
If the payment proceeds primarily from the
constraining force of any moral or legal duty, or
from the incen:ve of an:cipated benet of an
economic nature, it is not a giK
A giK in the statutory sense, on the other hand,
proceeds from a detached and disinterested
generosity, out of aec:on, respect, admira:on,
charity or like impulses

A"y. Terence Conrad H. Bello

Slide No. 72

A. Meaning of GiK

B. Composi:on of Gross GiKs

When conveyance of property is mo:vated by a


sense of gra:tude, or out of pure liberality, and not
addi:onal compensa:on for past services rendered,
the transfer is a giK subject to donors tax
Thus, the renuncia:on by a company of the
proceeds of a life insurance policy in favor of the
heirs of a deceased ocer out of gra:tude for his
past services is a giK subject to donors tax.
Pirovano v. CIR

A"y. Terence Conrad H. Bello

Slide No. 73

B. Composi:on of Gross GiKs

A"y. Terence Conrad H. Bello

Slide No. 74

B. Composi:on of Gross GiKs

3. Reciprocity rule on intangible personal property --


a. General rule: intangible personal property located in the
Philippines belonging to a non-resident alien donor is included
in gross giKs
b. Excep:on: not includible under the reciprocity clause
i. if the donor at the :me of the dona:on was a resident of
a foreign country which at the :me of the dona:on did
not impose a transfer tax of any character in respect of
intangible personal property of ci:zens of the Philippines
not residing in that foreign country; or
ii. if the laws of the foreign country of which the donor was a
resident at the :me of dona:on allows a similar
exemp:on from transfer taxes of every character in
respect of intangible personal property owned by ci:zens
of the Philippines not residing in that foreign country
A"y. Terence Conrad H. Bello

1. In case of a resident or ci:zen donor, the gross giKs


would consist of:
a. Real property, regardless of loca:on
b. Tangible personal property, regardless of loca:on
c. Intangible personal property, regardless of loca:on
2. In case of a non-resident alien, the gross giK would
consist of:
a. Real property located in the Philippines
b. Tangible personal property located in the Philippines
c. Intangible personal property located in the
Philippines

Slide No. 75

4. Examples of intangible personal property located in the


Philippines:
a. Franchises which must be exercised in the Philippines;
b. Shares, obliga:ons or bonds issued by a domes:c
corpora:on;
c. Shares, obliga:ons or bonds issued by a foreign
corpora:on 85% of the business of which is located in
the Philippines;
d. Shares, obliga:ons or bonds issued by a foreign
corpora:on, if such shares, obliga:ons or bonds have
acquired a business situs in the Philippines; and
e. Shares or rights in any partnership, business or
industry established in the Philippines
A"y. Terence Conrad H. Bello

Slide No. 76

B. Composi:on of Gross GiKs

C. Valua:on of Gross GiKs

5. Transfers for insucient considera:on (if transfer


was eec:ve during donors life:me) excess of
FMV over considera:on received considered a
dona:on (Sec. 100)

A"y. Terence Conrad H. Bello

Slide No. 77

D. Deduc:ons from Gross GiKs

A"y. Terence Conrad H. Bello

Slide No. 78

D. Deduc:ons from Gross GiKs

1. Deduc:ons allowed for resident or ci:zen donor,


and non-resident alien donors:
a. GiKs made to or for the use of the Na:onal
Government or any en:ty created by any of its
agencies which is not conducted for prot;
b. GiKs in favor of an educa:onal and/or charitable
and/or religious corpora:on, ins:tu:on,
founda:on, trust or philanthropic organiza:on or
research ins:tu:on or organiza:on: provided,
however, that not more than 30% of said giKs
shall be used by such donees for administra:on
purposes
A"y. Terence Conrad H. Bello

1. If a dona:on is made in property, FMV of such property


at the :me of dona:on shall be the value of the gross
giK
a. In case of real property, value shall be:
i. Current FMV, as shown in schedule of values
xed by the local assessor; or
ii. FMV as determined by CIR
b. In case of personal property recently acquired by the
donor, the purchase price may indicate the FMV
c. In the case of personal property not recently
acquired by the donor, there should be some
evidence of FMV

Slide No. 79

2. Deduc:ons allowed for resident or ci:zen donors only:


a. Dowries or giKs made on account of marriage and
before its celebra:on, or within one year thereaKer, by
parents to each of their legi:mate, recognized natural
or adopted children, to the extent of the rst P10,000
QuesCon: Mr. and Mrs. H are making a joint giK of
P40,000 out of community funds to Mr. I, a legi:mate
child, on account of marriage and before its
celebra:on. How much is the deduc:on?
Answer: there are 2 dona:ons, one by Mr. H, in the
amount of P20,000 as gross giK, from which he is
en:tled to a P10,000 deduc:on, and another by Mrs.
H, in the amount of P20,000 of gross giK, from which
she is en:tled to her own deduc:on of P10,000
A"y. Terence Conrad H. Bello

Slide No. 80

E. Net GiKs and Imposi:on of Donors Tax

E. Net GiKs and Imposi:on of Donors Tax

1. The donors tax for each calendar year is computed


on the basis of the total net giKs made during the
calendar year (NIRC 99(A) and 103(A))
2. Donors tax return is led within 30 days from the
giK; pay-as-you-le (NIRC 103(B))
3. Formula for compu:ng the donors tax on the rst
donaSon for the calendar year
Gross giKs made
Less: deduc:ons_
Net giKs made
A"y. Terence Conrad H. Bello

Slide No. 81

F. Donors Tax Rates

1. Donee is not a stranger schedular rates 2% -


15% (top rate of 15% applies to net giKs of
P10M and above)
2. Donee is a stranger at rate of 30%
A stranger is a person who is not a:
Brother, sister (whether by whole or half
blood), spouse, ancestor, lineal descendant
Rela:ve by consanguinity in the collateral line
within the 4th degree of rela:onship

A"y. Terence Conrad H. Bello

Slide No. 83

4. Formula for compu:ng the donors tax on the


subsequent donaSon for the same calendar year:
Gross giKs made on this date
Less: deduc:ons__________
Net giKs made on this date
Add: all prior net giKs within the year
Aggregate net giKs

Donors tax on aggregate net giKs
Less: donors tax on all prior net giKs within the year
Donors tax on the net giKs on this date
A"y. Terence Conrad H. Bello

Slide No. 82