Tax 42
Chapter 3
Properties included in decedents estate
Properties to be included in the estate
1. Properties that are still owned by decedent at the
time of his death, to the extent of his equity or
interest in such property, whether as exclusive
owner, conjugal or community property owner or
common owner
2. Assets or properties owned by decedent during
his lifetime but were no longer owned by him at
the time of his death, because these properties
have been transferred during his lifetime by way
of taxable transfer as follows:
a. Transfer in contemplation of death
b. Revocable transfers
c. Property passing under the general power of
appointment
d. Transfer for insufficient consideration
The inheritance of a person includes not only
the property and the transmissible rights and
obligation existing at the time of his death, but also
those which have accrued thereto since the opening
of the succession.
Decedents interest
1. Dividends declared by a corporation before death
of stockholder although paid after death, if the
decedent was living on the record date
2. Partnership profits even if paid after death of
partner
3. Proceeds of life insurance policy payable to a
recoverable beneficiary
4. Right of usufruct if transferable to the heirs
Transfer in contemplation of death
means that it is the thought of death, as a
controlling motive, which includes the disposition of
the property for the purpose of avoiding estate tax
the main reason behind this provision is to reach
ingenious schemes to evade the estate tax liability,
by the use of other forms of conveyances rather
than by succession or transfer mortis causa
The following are examples of circumstances
which may be taken into consideration whether
the transfer was made in contemplation of death
a. Age and health of the decedent at the time of the
gift, especially where he was aware of a serious
illness
b. Length of time between the gift and the date of
death. A short interval suggests the conclusion
that the thought of death was in the decedents
mind, and a long interval suggests the opposite
c. Concurrent making of a will or making a will within
a short time after the transfer
Thus, there is a transfer in contemplation of death
when:
a. The decedent transferred the possession or
enjoyment of his property to another, but this
transfer was intended to take effect only upon his
death
b. The decedent transferred title to the property but
retained for his lifetime the right to possess or
enjoy the property of the income thereform, or the
rights to designate whom shall possess or enjoy
the same
This does not apply when the sale is in good faith and
for an adequate and full consideration.
Illustration 3-1
When the doctor informed Concha that she is
suffering form terminal cancer, she decided to donate
her house and lot worth P1,000,000 to her friend,
Migay.
1. Is this a transfer in contemplation of death?
Yes, because the thought of death induced
Concha to donate her property. Considering that the
transfer was made in contemplation of death, it is
subject to estate tax and not donors tax.
2. How about if the house and lot were sold at its
actual value of P1,000,000 and after the sale,
Concha spent the entire amount before her
death?
There is no transfer in contemplation of death
subject to estate tax because there was a bona fide
sale for an adequate and full consideration in money
or moneys worth.
Moreover, the proceeds from the sale of
property is not included as part of the gross estate
because the amount has been fully spent before her
death.
3. How about if after selling the house and lot,
Concha dies without being able to spend money,
will the amount from part of her gross estate?
Yes, it is included in the gross estate as part
of decedents interest.
4. If shortly before she died, she lent the entire
amount to her friend Boy Ngato, who issued a
promissory note. Will the receivable note form part
of her gross estate?
Yes, the value of the note receivable shall be
included in her gross estate (whether Boy Ngato is
insolvent or nor), but under decedents interest.
Revocable Transfers
This contemplates a situation where the
decedent transfers the enjoyment of his property to
another, subject to his right to revoke the transfer at
will, with or without notifying the transferee, anytime
before he dies.
Thus, the gross estate shall include the value
of any property which the decedent has at any time
made a transfer by trust or otherwise:
a. With reserved power to alter, amend, revoke or
terminate
Where the enjoyment thereof was subject at
the date of his death to any chance through the
exercise of a power (in whatever capacity
exercisable) by the decedent alone or by the
decedent in conjunction with any other person
(without regard to when or form what source the
decedent acquired such power) to alter, amend,
revoke or terminate
b. With such power relinquished
When any such power which would bring the
property in the taxable estate, is relinquished in
contemplation of the decedents death.
It should be noted that revocable transfers
shall not be included as part of the gross estate
where the transfer is a bona fide sale for an adequate
and full consideration in moneys worth.
Illustration 3-2
Atong donated real property worth P500,000
to Bardagol during his lifetime. An item in the deed,
however, grants the donor the right to revoke the
donation at will.
1. Is the P500,000 subject to donors tax or to estate
tax?
The revocability of the donation at will of the
donor made the donation ambulatory. Furthermore,
no right was vested in the donee while the donor is
alive. Therefore, the donation is subject to estate tax.
2. Suppose the deed of donation contains a
condition that Atong could reacquire only the land
upon the giving of a 30-day notice to Bardagol. Is
the donation subject to donors tax or to estate
tax?
The donation is still mortis causa donation,
subject to estate tax because the requirement of
notice has not changes the ambulatory nature of the
donation.
3. Suppose that Atong found out one day that he has
a terminal cancer and had only 6 months to live.
He then relinquished his right to revoke under the
donation for a consideration of P1.00/ Does this
subject now the donation to donors tax instead of
estate tax?
This is still a revocable transfer because the
relinquishment of the right to revoke was made in
contemplation of death. Therefore the donation
remains subject to estate tax.
Property passing under general power of
appointment
A power of appointment is a right to designate
by will or deed the person or persons who are to
receive certain property form the estate of a prior
decedent.
A power of appointment may be either
general or limited (special).
Special power of appointment: one which
authorizes the donee or holder of the power to
appoint only among a restricted class or designated
class persons other than himself
If he can only appoint beneficiaries other than himself,
his estate, his creditor or the creditors of his estate,
then the power of appointment is a special one
because his power to appoint is limited to a certain
class of persons only.
General power of appointment: If the donee can
appoint any beneficiary including (A) himself, (b) his
estate, (c) his creditor, or (d) the creditors of his
estate, then the power of appointment is a general
one.
If the power of appointment is general, the decedent
is practically the owner of the property, and so the
property is deemed part of his gross estate. But if the
power is specific, the decedent is only trustee to the
property, and so it should not be included in his
estate.
Illustration 3-3
Alaskador died living a will whereby it was
stipulated that his lot situated in Cagayan de Oro City
shall go to Buskador, and that should the latter decide
to transfer the property, he is free to give it to
anybody.
1. Is the power of appointment general or special?
Since the power of appointment granted by
Alaskador to Buskador is not limited by any
restriction, the power of appointment is general. It is,
therefore, subject to estate tax.
2. How about is the will expressly provides that
Buskador can appoint only either of his parents?
The power of appointment is special because
the right of Buskador to appoint transferred to the
property is restricted to certain person/s.
Transfers for insufficient consideration
If any of the above transfers, trusts, interest,
rights or powers enumerated and described (transfer
in contemplation of death, revocable transfer, property
passing under general power of appointment) is
made, created, exercised or relinquished for an
adequate consideration in money or moneys worth,
there shall be included in the gross estate only the
excess of the fair market value, at the time of
death, of the property otherwise to be included on
account of such transaction, over the value of the
consideration received therefore by the decedent.
If an inter vivos transfer of the decedent is
proven to be fictitious, the total value of the property
at the time of death shall be included in the gross
estate.
Illustration 3-4
Mama Mathay sells her car worth P500,000
to Mommy Milli for P200,000 in an arms length bona
fide transaction.
1. Is the difference of P300,000 between the fair
market and the selling price includible in the gross
estate of Mama Mathay upon her death?
No, because the transfer of the property does
not fall under any of the following: transfer in
contemplation of death, revocable transfer, and
property passing under general power of
appointment.
Hence, the difference of P300,000 is subject
to gift tax.
2. Suppose it turns out later that Mama Mathay sold
her car for insufficient consideration because she
knew she was dying. At the time of her death, the
value of the car has appreciated to P600,000. Is
the difference subject to gift tax?
No, because the transfer was made in
contemplation of death. Therefore, the difference
between the fair market value at the time of death and
the selling price must form part of the gross estate.
The amount of gift tax paid, if any, can be claimed as
a tax refund.
3. How about if it is proven that no consideration was
given not eh transfer of the property?
In that case, the entire value of the property
at the time of death (P600,000) and not the difference
between the fair market value and the selling price
shall form part of the gross gift.
Proceeds of Life Insurance
This takes place when a person takes out an
insurance policy in his own life and appoints
somebody as beneficiary.
The proceeds of life insurance covering the
life of the insured are includible in the gross estate,
except when:
1. The beneficiary appointed in the policy is not the
estate of the deceased, his executor or
administrator; and
2. The person designated as beneficiary is
irrevocable
It should be noted that there is a need to
expressly stipulate the irrevocability of the designation
because in the absence of any stipulation, the law
provides that the designation is revocable.
 The rule applies even if the proceeds never The rule on taxability or non-taxability of life
formed part of the estate because they were paid by insurance proceeds is illustrated in the following table:
the insurer to the beneficiary of the estate

The proceeds of life insurance payable to the Matrix 2

persons estate, on which the premiums were paid by
the conjugal partnership, constitute conjugal property,
and the other half pertains to the surviving spouse. Case Policy Beneficiary Taxable
If the premiums were paid partly with 1 Revocable Yes Yes
paraphernalia and partly conjugal funds, the proceeds
are in like portion paraphernalia in part and conjugal 2 Revocable No Yes
in part.
3 Irrevocable Yes Yes
4 Irrevocable No No
Illustration 3-5 5 Silent No Yes

Phil insured his life for P1,500,000. IN the

The beneficiary is the estate of the deceased, his
policy, he appointed Stan as the beneficiary. executor or his administrator

1. In case of death of Phil, will the proceeds form the
insurance policy be subject to estate tax?
It depends.
If Stan is the executor or administrator of the
estate of Phil, the proceeds shall be included in the
gross estate and, therefore subject to estate tax. This
rule holds true whether the designation of Stan as
beneficiary is revocable or irrevocable.
If Stan is neither the executor nor the
administrator, the proceeds of insurance shall be
exempt from estate tax provided that his designation
as beneficiary is irrevocable. Otherwise, it shall be
subject to estate tax.
If the policy is silent, his designation is
revocable. Hence the proceeds shall be subject to
estate tax.
2. Supposing the designation of Stan is revocable,
will the proceeds from part of the conjugal or of
the exclusive property of Phil?
If the premiums were paid out of the conjugal
funds, then the proceeds are conjugal. However, if the
money used in paying the premiums were taken from
the exclusive properties of Phil, then the proceeds
shall be considered as exclusive properties.
The law speaks of policies taken out by the
decedent upon his own life. Thus, proceeds of a
group insurance policy taken out by the company for
its employees are not subject to estate tax.
Moreover, proceeds of accident insurance
are not also includible in the gross estate because the
tax code specifically mentions only like insurance
policies.
Estate of an Absentee
Absentee
a person who disappears from his domicile, his
whereabouts being unknown, and without leaving
an agent to administer his property, or when the
power conferred to an agent has expired
after an absence of seven years, it being
unknown whether or nor the absentee still lives, he
shall be presumed dead for all purposes, except
for those of succession
the absentee shall not be presumed dead for the
purpose of opening his succession till after an
absence of 10 years. If he disappeared after the
age 75 years, an absence of 5 tears shall be
sufficient in order that his succession may be
opened.
 The following shall be presumed dead for
all purposes, including the division of the estate
among the heirs:
1. A person on board the vessel lost during a sea
voyage, or an aeroplane which is missing, who
has not been heard of for 4 years since the loss of
the vessel or aeroplane.
2. A person in the armed forces who has taken part
in war, and has been missing for 4 years;
3. A person who has been in danger of death under
other circumstances and his existence who has
not been known for 4 years.
If the absentee appears, or without appearing
his existence is proved, he shall recover his property
in the condition in which it may be found, and the
price of any property that may have been alienated or
the property acquired therewith; but he cannot claim
either fruits or rents.
Illustration 3-6
On May 20, 2004, a ship named MV Pricess
of the Pacific sailed from Matnog, Sorsogon. Lalo was
seen to have boarded the ship but since then nothing
was ever heard of him. He was not also seen to have
alighted the ship when it reached the port if Allen,
Samar.
Q1: For purposes of succession when is Lalo
presumed to be dead?
The absentee is presumed dead for purposes
of succession on May 20, 2014 or 10 years after his
absence, unless he disappeared at an age of more
than 75 years in which case 5 years is sufficient in
order that his succession may be opened.
Q2: How about if the ship sunk somewhere in San
Bernadino Strait and his body was never recovered.
For purposes of succession, when was Lalo
presumed to have died?
On May 20, 2014, the exact date that the ship
sunk.
Effect of absence upon the contingent rights of
the absentee
Whoever claims a right pertaining to a person
whose existence is not recognized must prove that he
was living at the time his existence was necessary in
order to acquire said right.
Upon the opening of succession to which an
absentee is called, his share shall accrue to his co-
heirs, unless he has heirs, assigns, or a
representative, they shall, as the case may be, make
an inventory of the property.
The provisions of the preceding paragraph
are understood to be without prejudice to the action of
petition for inheritance or other rights which are
vested in the absentee, his representative or
successors in interest.
These rights shall not be extinguished save
by lapse of time fixed for prescription. In the record
that is made in the Registry of the real estate which
accrues to the co-heirs, the circumstance of its being
subject to the provisions of this articles shall be
stated.
Those who may have entered upon the
inheritance shall appropriate the fruits received in
good faith so long as the absentee does not appear,
or while his representatives or successors in interest
do not bring the proper actions.
Illustration 3-7
Antonino and Barcadero are the sons of
Calayucay. When Calayucay died, Antonio has been
presumed dead under the law.
Q1: Who is entitled to the inheritance of Antonino
from Calayucay?
Barcadero unless Antonino has an heir,
assignee or a representative. In which case, the
representative may register the property in his own
name but Antonino may later on recover if he turns
out to be alive, unless he lost the right by prescription.
Q2: Who is entitled to the fruits of the inheritance?
The rights to the fruits is given to the person
who was awarded the property so long as the
absentee has not reappeared, or while his
representatives or successors in interest do not bring
the proper actions. This right ceases when either the
absentee reappears or the proper action has been
brought.