GROUP 5

TAXATION ON INCOME OF ESTATE AND TRUST

QUESTIONS

1. WHAT IS A TAXABLE INCOME?

- The term taxable income means the pertinent items of gross income specified in the Code,
less the deductions, if any, authorized for such type of income by the Code or other special
laws.
2. IS THE INCOME WHICH IS DERIVED FROM THE ESTATE OF THE DECEASED TAXABLE?
- Yes, Sec. 56 of R.A. 1983 provides that income received by estates of deceased persons
during the period of administration or settlement of the estate is taxable.
3. WHAT ARE THE RULES THAT GOVERN ON THE TAXABILITY OF AN ESTATE?
- Income Tax for individuals from January to the time of death (Secs. 24, 25, NIRC).
- Income Tax of the estate, if the estate is under administration or judicial settlement (Sec. 60,
NIRC).
4. HOW DO YOU CLASSIFY ESTATES FOR INCOME PURPOSES?
- For income purposes, estates are classified into:
o Estate under Judicial Administration; or
o Estate not under Judicial Administration.
5. WHAT IS THE RULE ON JUDICIAL SETTLEMENT OF AN ESTATE?
- GR: An estate under judicial settlement is subject to income tax in the same manner as
individuals. Its status is the same as the status of the decedent prior to his death.
o Exceptions:
 1. The entitlement to personal exemption is limited only to P20,000.
 2. No additional exemption is allowed.
 3. The distribution to the heirs during the taxable year of estate income is
deductible from the taxable income of the estate. Such distributed income
shall form part of the respective heirs’ taxable income.
6. WHAT SHALL BE INCLUDED IN THE GROSS ESTATE OF THE DECEASED?

A. For resident alien decedents/citizens:

Real or immovable property, wherever located
Tangible personal property, wherever located
Intangible personal property, wherever located
B. For non-resident decedent/non-citizens:
Real or immovable property located in the Philippines
Tangible personal property located in the Philippines
Intangible personal property - with a situs in the Philippines such as:
Franchise which must be exercised in the Philippines
Shares, obligations or bonds issued by corporations organized or constituted in the
Philippines
Shares, obligations or bonds issued by a foreign corporation 85% of the business of
which is located in the Philippines
Shares, obligations or bonds issued by a foreign corporation if such shares, obligations or
bonds have acquired a business situs in the Philippines (i.e. they are used in the
furtherance of its business in the Philippines)
Shares, rights in any partnership, business or industry established in the Philippines
7. WHAT ARE INCLUDED IN THE GROSS INCOME OF ESTATE?
- INCLUDED in the gross income of an estate are the following:
o Income received by the estate of the deceased person during the period of
administration or settlement of the estate;
o When prior to the settlement of the estate the executor or administrator sells the
property of a decedent’s estate for more than the appraised value placed upon it at
the death of the decedent, the excess is income taxable to estate.
8. WHAT ARE EXCLUDED IN THE GROSS INCOME OF ESTATE?
- Excluded in the gross income of an estate is the gain derived from the passage of property
to the executor or administrator on the death of the decedent, even though the property
may have appreciated in value since the decedent acquired it.
9. WHAT ARE THE RULES GOVERNING SPECIAL DEDUCTIONS IN GROSS ESTATE?
- There shall be allowed as a deduction in computing the taxable income of the estate or trust
the amount of the income of the estate or trust for the taxable year which is to be
distributed currently by the fiduciary to the beneficiaries, and the amount of the income
collected by a guardian of an infant which is to be held or distributed as the court may
direct. (NIRC, Section 61(A)).
- There shall be allowed as an additional deduction in computing the taxable income of the
estate or trust the amount of the income of the estate or trust for its taxable year, which is
properly paid or credited during such year to any legatee, heir or beneficiary. (NIRC, Section
61(B))
10. SHALL BE EXCLUDED FROM THE GROSS ESTATE OF THE DECEDENT?

 GSIS proceeds/ benefits

 Accruals from SSS
 Proceeds of life insurance where the beneficiary is irrevocably appointed
 Proceeds of life insurance under a group insurance taken by employer (not taken out
upon his life)
 War damage payments
 Transfer by way of bona fide sales
 Transfer of property to the National Government or to any of its political subdivisions
 Separate property of the surviving spouse
 Merger of usufruct in the owner of the naked title
 Properties held in trust by the decedent
 Acquisition and/or transfer expressly declared as not taxable
11. Donald Biden, an American Citizen, was a top executive of U.S. company in the Philippines.
After his retirement, he applied and was granted a permanent resident the following year. In
2004, during his vacation in USA, he suffered heart attack and died. At the time of his death,
he left the following properties: (a) bank deposits with Citibank Makati and Citibank Orlando,
Florida; (b) rest house in Orlando, Florida; (c) shares of stock in the Philippines; (d) U.S.
Treasury bonds; (e) proceeds from life insurance policy issued by a U.S. Corporation.

Which of the foregoing assets shall be included in the taxable gross estate in the Philippines?
Explain.
 - Being a resident of the Philippines at the time of his death, the gross estate of Donal Biden
shall include all his property, real or personal, tangible or intangible, wherever situated at
the time of his death (Sec. 85 of NIRC)
Thus the (a) bank deposits with Citibank Makati and Citibank Orlando, Florida; (b) rest house
in Orlando, Florida; (c) shares of stock in the Philippines; (d) U.S. Treasury bonds, shall be
included in his taxable gross estate in the Philippines.
The proceeds from the life insurance policy issued by a U.S. Corporation is included as part
of the gross estate if the designation of the beneficiary is revocable or irrespective of the
nature of the designation, if the designated beneficiary is either the state of the deceased,
his executor or administrator.
12. Jose Ortiz owns 100 hectares of agricultural land planted with coconut trees. He died on May
30, 1994. Prior to his death, the government, by operation of law, acquired under the
Comprehensive Agrarian Reform Law all his agricultural lands except 5 hectares. Upon the
death of Ortiz, his widow asked you how she will consider the 100 hectares of agricultural land
in the preparation of the estate tax return. What advice will you give her?
- The 100 hectares of land that Jose Ortiz owned but which prior to his death on May 30, 1994
were acquired by the government under CARP are no longer part of his taxable gross estate,
with the exception of the remaining 5 hectares which under Sec. 78(a) of the NIRC still forms
part of "decedent's interest".
13. HOW DO YOU DEFINE TRUST?
- A trust is a "fiduciary relationship with respect to property which involves the existence of
equitable duties imposed upon the holder of the title to the property to deal with it for the
benefit of another." A trust is either express or implied. Express trusts are those which the
direct and positive acts of the parties create, by some writing or deed, or will, or by words
evincing an intention to create a trust.
14. WHAT ARE THE RULES IN TAXABILITY OF INCOME TRUST?
- If the income:
o Is distributed to beneficiaries, the beneficiaries shall file and pay the tax.
o Is to be accumulated or held for future distribution, the trustee or beneficiary shall
file and pay the tax.
15. PROVIDE FOR THE RULES WHICH GOVERN THE EXCEPTION TO RULES ON TAXABILITY OF
INCOME TRUST.
- Exceptions:
o In a revocable trust, the income of the trust will be returned to the grantor (Sec. 63,
NIRC).
o In a trust where the income is held for the benefit of the grantor, the income of the
trust becomes income of the grantor (Sec. 64, NIRC).
o In a trust administered in a foreign country, the income of the trust, administered by
any amount distributed to the beneficiaries shall be taxed to the trustee (Sec. 61 [C],
NIRC).
16. WHAT ARE THE TWO CLASSIFICATION OF TRUST?
- Express or direct trust are created by the direct and positive acts of the parties, by some
writing, deed, will, or by oral declaration in words evidencing an intention to create a trust.
- Implied/indirect/involuntary or trusts by operation of law arise by legal implication based on
the presumed intention of the parties or on equitable principles
17. HOW DO YOU CLASSIFY TRUST FOR TAX PURPOSES?
- Classifications of trust for tax purposes
o Taxable and tax-exempt trust
o Irrevocable trust and revocable trust
o Trust administered in the Philippines and trust administered in a foreign country
18. ARE EMPLOYEE’S TRUST TAX EXEMPT?
- Employee’s trusts are tax-exempt, provided:
o Employee’s trust must be part of a pension, stock bonus or profit sharing plan of the
employer for the benefit of some or all of his employees;
o Contributions are made to the trust by such employer, or such employees or both;
o Such contributions are made for the purpose of distributing to such employees both
the earnings and principal of the fund accumulated by the trust; and
o The trust instrument makes it impossible for any part of the corpus or income to be
used for or diverted to, purposes other than the exclusive benefit of such employees
(Sec. 60[B], NIRC).
19. In the case of the employee’s trust which forms part of a pension, stock bonus or profit
sharing plan of an employer for the benefit of some or all of his employees, wherein
contributions are made to the trust by the employer or employees, or both, for the purpose of
distributing to such employees the earnings and principal of the fund accumulated by the trust
in accordance with such plan, what is the tax treatment of
a. The contributions made to the trust by the employer?
b. The retirement benefit paid to the employee under the retirement trust?
c. The income earned by the employee’s retirement funds which are held in trust?
d. The amount actually distributed to a non retiring employee during the year?

-a. The contribution made to the pension trust by the employer may be allowed as a deduction
against his gross income. (Sec. 34 [J], NIRC).
b. The retirement benefit received by the employee from the retirement fund of the trust shall
be excluded in his gross income and, thus, exempted from the withholding tax. (Sec. 32 [B][6][a],
NIRC).
c. The income earned by the retirement funds of private employees held by the trustor in their
behalf shall be exempted from income tax. (Sec. 60 [B], NIRC).
d. The amount actually distributed to the employee shall be taxable to him in the year in which
so distributed to the extent that it exceeds the amount contributed by such employee. (Sec. 60
[B], NIRC).

20. IS AN INCOME OF PENSION TRUST EXEMPTED FROM TRUST?

- Yes, Tax exemption is likewise to be enjoyed by the income of the pension trust; otherwise,
taxation of those earnings would result in a diminution of accumulated income and reduce
whatever the trust beneficiaries would receive out of the trust fund (CIR v. CA, G.R. No.
95022, March 23, 1992).
21. HOW IS TAXABLE INCOME OF ESTATE AND TRUST COMPUTED?
 - The taxable income of estate and trust shall be computed in the same manner as
individuals. The tax imposed by Title II, Tax on Income, of the NIRC of 1997, upon individuals
shall also apply to income of estates and trusts (Sec. 60 [A], NIRC).
22. Mary transferred a valuable 10-door commercial apartment to a designated trustee, Miriam,
naming in the trust instrument Santino, Mary's 10-year old son, as the sole beneficiary. The
trustee is instructed to distribute the yearly rentals amounting to P720,000.00. The trustee
consults you if she has to pay the annual income tax on the rentals received from the
commercial apartment.
a. What advice will you give the trustee? Explain.
b. Will your advice be the same if the trustee is directed to accumulate the rental income and
distribute the same only when the beneficiary reaches the age of majority? Why or why not?

a. I will advise Miriam that the yearly rental income distributed annually qualifies as a
deduction in computing the net income of the trust. And since net income is zero after
such deduction, there is nothing to be paid as annual income tax due from the trust.
(Sec. 61[A], NIRC).

b. NO. The trust may now have net income determined at the end of each year as a result
of accumulating its income instead of distributing the same to the beneficiary. The tax is
payable by the trust, as represented by the trustee, on the basis of such net income.
(Sec. 61[A], NIRC).

23. WHO SHALL FILE RETURNS OF ESTATE AND TRUST TAX?

- The following persons acting in any fiduciary capital shall file the income tax return for an
estate or trust:
o Guardians;
o Trustee;
o Executors;
o Administrators;
o Receivers;
o Conservators;
o All other person or corporations acting as fiduciary.

24. On 30 June 2000, X took out a life insurance policy on his own life in the amount of
P2,000,000.00 He designated his wife, Y, as irrevocable beneficiary to P1,000,000.00 and his
son, Z, to the balance of P1,000,000.00, but in a latter designation, reserving his right to
substitute him for another. On 1 September 2003, X died and his wife and son went to the
insurer to collect the proceeds of X’s life insurance policy. Are the proceeds of the insurance
subject to income tax on the part of Y and Z for their respective shares? Explain.
- No. The law explicitly provides that proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured are excluded from gross income and is exempt
from taxation. The proceeds of life insurance received upon death of the insured constitutes
a compensation for the loss of life; hence, a return of capital, which is beyond the scope of
income taxation (Sec. 32[B][1], NIRC).