Benedicto, Kim Gabriel M.

ECO101 REPORT/QUIZ
Palines, Estifano Sir. De Los Reyes

ESTATE AND TRUST

Trust

• Usually refers to an arrangement created by will or by inter vivos (lifetime) declaration

• Trustee takes title to property for purpose of protecting or conserving it for beneficiary.

• Used to achieve various financial and other goals.

Creation of Trust

• Typically, involves at least three parties:

– The grantor – transfers selected assets to trust entity.

• Sometimes referred to as settlor of donor.

– The trustee – charged with the fiduciary duties associated with the trust.

• Usually is either an individual or corporation.

– The beneficiary – designated to receive income or property from the trust.

Living or Testamentary

• A living trust – also called an inter-vivos trust – is a written document in which an

individual's assets are provided as a trust for the individual's use and benefit during his
lifetime. These assets are transferred to his beneficiaries at the time of the individual's
death. The individual has a successor trustee who is in charge of transferring the assets.

• A testamentary trust, also called a will trust, specifies how the assets of an individual are
designated after the individual's death.

Revocable or Irrevocable

• A revocable trust can be changed or terminated by the trustor during his lifetime.
An irrevocable trust, as the name implies, is one the trustor cannot change once it's
established, or one that becomes irrevocable upon his death.

• Living trusts can be revocable or irrevocable. Testamentary trusts can only be

irrevocable. An irrevocable trust is usually more desirable. The fact that it is unalterable,
 containing assets that have been permanently moved out of the trustor's possession, is
what allows estate taxes to be minimized or avoided altogether.

Common Purposes for Trusts

• Trusts can also be used for estate planning. Typically, the assets of a deceased individual
are passed to the spouse and then equally divided to the surviving children. However,
children who are under the legal age of 18 need to have trustees. The trustees only have
control over the assets until the children reach adulthood.

• Trusts can also be used for tax planning. In some cases, the tax consequences provided
by using trusts are lower compared to other alternatives. As such, the usage of trusts
has become a staple in tax planning for individuals and corporations.

Common Motivations for Creating a Trust

• Life insurance Trust

– Holds life insurance policies on the insured.

– Removes proceeds of policies from gross estate (if irrevocable trust)

– Safeguard against receipt of the proceeds by a young or inexperienced

beneficiary.

Common Motivations for Creating a Trust

• “Living” (revocable) Trust

– Manages assets

– Reduces probate costs

– Provides privacy for asset disposition

– Protects against medical or other emergencies, and

– Provides relief from the necessity of day to day management of the underlying
assets.

Common Motivations for Creating a Trust

• Trust for minors

 – Provides funds for college education

– Shifts income to lower-bracket taxpayers

– Allows parents to retain some control over children’s use of assets

Common Motivations for Creating a Trust

• “Blind” trust

– Holds assets of grantor without his/her input or influence (e.g., while grantor
holds political office or some other sensitive position.

• Retirement trust

– A special tax-except trust that manages asset contributions under a qualified

retirement plan.

Common Motivations for Creating a Trust

• Divorce trust

– Manages assets of an ex-spouse and ensures they will be transferred on a

prescribed schedule to named beneficiaries.

• Liquidation trust

– manages assets and final dissolution of a corporation undergoing a complete

liquidation.

Estate

• Created upon a death of an individual

– Collect’s and conserves an individual’s assets, satisfies all liabilities, and

distributes the remaining assets to heirs.

Nature of Trust and Estate Taxation

• In general, taxable income of trusts or estates is taxed to the entities or to its

beneficiaries to the extent that each have received the accounting income of the entity.
 – Whoever receives the accounting income of the entity, or some portion of it, is
liable for the income tax that results.

Tax Accounting Periods, Methods, and Payments

• Tax year

– Estates can use calendar year or fiscal year.

– Trust must use a calendar year.

Tax Accounting Periods, Methods, and Payments

• Estimated tax payments

– Trust and Estates are required to make quarterly estimated tax payments using
same schedule as individuals.

• Applies to estates and grantor trusts only for tax years ending two or
more years after date of decedent’s death.

• Charitable trust and private foundations are excempt from making

estimated tax payments.

Taxation of Estates and Trusts

• Generally, estates and trusts act as conduits for income received , and taxation is at
beneficiary level.

– This is codified through allowance of a distribution deduction

Taxation of Estates and Trusts

• Exceptions:

– Complex trust accumulate income for specified times (e.g., until beneficiary is
age 30)

– Estates are not always required to make current distributions

• In theses cases, or other cases where the entity is not required to distribute current
income, the entity itself is taxed.
 THE NATIONAL INTERNAL REVENUE CODE OF THE PHILIPPINES

[Tax Reform Act of 1997] Republic Act No. 8424 AN ACT AMENDING THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.

TITLE IITAX ON INCOME

CHAPTER XESTATES AND TRUSTS

SEC. 60. Imposition of Tax. -

(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the
income of estates or of any kind of property held in trust, including:

(1) Income accumulated in trust for the benefit of unborn or unascertained person or persons
with contingent interests, and income accumulated or held for future distribution under the
terms of the will or trust;

(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income
collected by a guardian of an infant which is to be held or distributed as the court may direct;

(3) Income received by estates of deceased persons during the period of administration or
settlement of the estate; and

(4) Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.

(B) Exception. –

The tax imposed by this Title shall not apply to 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 (1) if contributions are made to the trust by such 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, and (2) if under the trust instrument it
is impossible, at any time prior to the satisfaction of all liabilities with respect to employees
under the trust, for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his
employees: Provided, That any amount actually distributed to any employee or distributee shall
be taxable to him in the year in which so distributed to the extent that it exceeds the amount
contributed by such employee or distributee.
 (C) Computation and Payment. -

(1) In General. - The tax shall be computed upon the taxable income of the estate or trust and
shall be paid by the fiduciary, except as provided in Section 63 (relating to revocable trusts) and
Section 64 (relating to income for the benefit of the grantor).

(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more trusts,
the creator of the trust in each instance is the same person, and the beneficiary in each
instance is the same, the taxable income of all the trusts shall be consolidated and the tax
provided in this Section computed on such consolidated income, and such proportion of said
tax shall be assessed and collected from each trustee which the taxable income of the trust
administered by him bears to the consolidated income of the several trusts.

SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the
same manner and on the same basis as in the case of an individual, except that:

(A) 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,
but the amount so allowed as a deduction shall be included in computing the taxable income of
the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction
under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in
the same or any succeeding taxable year cralaw

(B) In the case of income received by estates of deceased persons during the period of
administration or settlement of the estate, and in the case of income which, in the discretion of
the fiduciary, may be either distributed to the beneficiary or accumulated, 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 but the amount so allowed as a
deduction shall be included in computing the taxable income of the legatee, heir or
beneficiary.cralaw

(C) In the case of a trust administered in a foreign country, the deductions mentioned in
Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any
income included in the return of said trust shall not be included in computing the income of the
beneficiaries.cralaw
SEC. 62. Exemption Allowed to Estates and Trusts. –

For the purpose of the tax provided for in this Title, there shall be allowed an exemption
of Twenty thousand pesos (P20,000) from the income of the estate or trust.

SEC. 63. Revocable Trusts. –

Where at any time the power to revest in the grantor title to any part of the corpus of
the trust is vested (1) in the grantor either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus or the income
therefrom, or (2) in any person not having a substantial adverse interest in the disposition of
such part of the corpus or the income therefrom, the income of such part of the trust shall be
included in computing the taxable income of the grantor.

SEC. 64. Income for Benefit of Grantor.-

(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of
any person not having a substantial adverse interest in the disposition of such part of the
income may be held or accumulated for future distribution to the grantor, or (2) may, or in the
discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income, be distributed to the grantor, or (3) is, or in the
discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income may be applied to the payment of premiums upon
policies of insurance on the life of the grantor, such part of the income of the trust shall be
included in computing the taxable income of the grantor.

(B) As used in this Section, the term 'in the discretion of the grantor' means in the
discretion of the grantor, either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of the part of the income in question.

SEC. 65. Fiduciary Returns. –

Guardians, trustees, executors, administrators, receivers, conservators and all persons

or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the
income of the person, trust or estate for whom or which they act, and be subject to all the
provisions of this Title, which apply to individuals in case such person, estate or trust has a gross
income of Twenty thousand pesos (P20,000) or over during the taxable year. Such fiduciary or
person filing the return for him or it, shall take oath that he has sufficient knowledge of the
affairs of such person, trust or estate to enable him to make such return and that the same is,
to the best of his knowledge and belief, true and correct, and be subject to all the provisions of
this Title which apply to individuals: Provided, That a return made by or for one or two or more
joint fiduciaries filed in the province where such fiduciaries reside; under such rules and
regulations as the Secretary of Finance, upon recommendation of the Commissioner, shall
prescribe, shall be a sufficient compliance with the requirements of this Section.

SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. –

Trustees, executors, administrators and other fiduciaries are indemnified against the
claims or demands of every beneficiary for all payments of taxes which they shall be required to
make under the provisions of this Title, and they shall have credit for the amount of such
payments against the beneficiary or principal in any accounting which they make as such
trustees or other fiduciaries.

How to compute Estate Tax?

To know how much is the is the net estate of your deceased relative you must compute for the
gross estate. Gross Estate is the value of all the properties under his name at the time of death.

Next, is to deduct all the debt incurred by the deceased. Other than the debt, the following
could also be deducted such as Taxes, Funeral Expenses, Medical Expenses, Share in the
Conjugal Property etc.

Therefore, the formula is Gross Estate – Deductions = Net Estate.

Example:
Assuming that the Gross Estate is Php 1 Million and the total deduction is Php 400,000.000. By using the
formula,

1 Million – 400,000.00 = Php 600,000.00

The Net asset value is Php 600,000.00.

To determine the estate tax, we need to use the BIR Estate Tax Table.

Based on the table, the net estate Php 600,000.00, is within the range of Php 500,000.00 to Php
2,000,000.00.

Thus, the total estate tax to be paid will be Php 15,000.00 PLUS 8% of the net estate which is
Php 48,000.00 because the amount exceeded Php 500,000.00.

Finally, the total amount to be paid for the estate tax will be Php 15,000.00 + Php 48,000.00
= Php 63,000.00.

In summary, this is the formula on how to compute for estate tax.

 ESTATE TAX = Net Estate + Plus (Percentage of the excess based on BIR Estate Tax Table)
 Net Estate = Gross Estate – Deductions
Based on the computation, the estate tax can be a burden on the part of the heirs of the
deceased. However, there are legal ways on how to limit the amount of estate tax and this is
called Estate Planning which can only be done when a person is still alive.

And just a reminder, in filing your estate tax, it’s best to consult first with a Public Attorney or
Estate Tax Expert for proper guidance.

Net income represents the amount of money remaining after all operating expenses,
interest, taxesand preferred stock dividends (but not common stock dividends) have been
deducted from a company's total revenue.
HOW IT WORKS (EXAMPLE):

Net income is also referred to as the bottom line, net profit or net earnings. The formula for net
income is as follows:

Total Revenue - Total Expenses = Net Income

Net income is found on the last line of the income statement, which is why it's often referred to
as the bottom line. Let's look at a hypothetical income statement for Company XYZ:

By using the formula we can see that:

Net Income = $100,000 - $20,000 - $30,000 - $10,000 - $10,000 = $30,000

Trust
Resort

Income per month Net Deduction per month

Entrance fee = 450,000 Salary = 112,500
Beverages/Foods = 500,000 Water bill = 25,000
Cottage = 600,000 Electric bill = 15,000
Gross Income = 1,550,000 Maintenance = 5,000
-167,000 Internet bill = 10,000
Income = 1,383,000 = 167,000
1,383,000 – Resort Tax (12%)
1,383,000 x .12 = 165,960
1,383,000 – 165,960 = 1,217,040
Total Net Income = 1,217,040

Estate Expenditures

1. House and Lot = 2,500,000 1. Burial = 450,000

2. Grocery Store = 2,000,000 2. Loan = 2,500,000

3. Piggery Farm = 2,000,000 = 2,950,000

4. Bus Liner = 10,000,000

5. Resort = 2,000,000
Gross Estate = 18,000,000
18,000,000 – 2,950,000 = 15,050,000
15,050,000 x estate tax (20%) = 3,010,000
15,050,000 – 3,010,000 = 12,040,000
Net Estate = 12,040,000