ae of Succession and Estate Tax CHAPTER 13 THE CONCEPT OF SUCCESSION & ESTATp Tay Chapter Overview and Objectives This chapter discusses only the basic rules of Succession and Pong introduction to estate tax. ean: i, ‘After this chapter, readers are expected to understand: 1. The concept of succession 2. The types and elements of succession 3. The nature of estate tax 4. The types of decedents and their taxation rules 5._The model of estate taxation SUCCESSION “Succession” is a mode of acquisition by virtue of whi and obligations to the extent of the value of the inher transmitted through his death to another operation of law (Art 774, Civil Code), ich the Property, tance, of a per pe or others either by his Will ory The inheritance includes all the property, rights and Obligations ofa per ‘which are not extinguished by his death (Art. 776, Ibid) ‘The rights to the succession are transmitted from the moment of tthe deat ofthe decedent (Art 777, bid.). The decedent is a deceased or dead person TYPES OF SUCCESSION 1. Testate or Testamentary Succession ~ “<* Testamentary succession is that which results fr helr, made in a will executed in the form Cll Code) MH FPN HDI a 4 ‘om the designation oa prescribed by law. (Art 7 Mtr ar Legal or Intestate Succession el iste ee eeent dies without a will or with an invalid | distribution of the estate : shall be in accordance with the Provision of the Civil Code on succession, 446The Concept of Succession and Estate Tax crapte 3 iced Succession . Fgnsmission of the decedent properties shall be partly by virtue of a qransts* written will and partly by operation of law. will a will 18 prs cribed bY law, to control to a certain degree the disposi Yate, t0 take effect after his death (Art. 783, Ibid). ith the formalities an act whereby a person is permitted, wit tion of this willis a2 expression of the decedent's desire as:'to how his properties will pedistributed after his or her death. e ing of a will is a strictly personal act; it cannot be left in whole or in part of the discretion of a third person, or accomplished through the instrumentality of an agent or attorney. (Art 784, Ibid.) es of will 4, Holographic will - a will which is entirely written, the hand of the testator himself oe Notarial will -a notarized will signed by the decedent and witnesses 3, Codicil - a supplement or addition to a will, made after the execution of awill and annexed to be taken as a part thereof, by which disposition made in the original will is explained, added to, or altered (Art 825, Ibid.) lic by the testator and codicil needs to dated, and signed by be acknowledged before a notary publ phic will need not be witnessed. A ofa will to be valid. Every will must the witnesses. A hologra| be executed as in the case NATURE OF SUCCESSION Succession is a gratuitous transmission of pro} in favor of his successors. perty from a deceased person the net properties of the decedent. The heirs will inherit what remains of the decedent's property after satisfying the decedent's indebtedness and obligations including the estate tax. The heirs shall not inherit the debt of the decedent. Succession involves only ELEMENTS OF SUCCESSION 1. Decedent - the general term applied to the person whose property is whether or not he left a will. If he left a transmitted through succession, (Art. 775, Ibid.). will, he is also called the testator iof succession and Estate Tax cept ts and obligations of the = the property: This is also referred to as the roe : ished Gredecedent ‘on called to the Carne either by the proy : mt rain of law (Art 782, Ibid.). ol WHO ARE THE HEIRS? Chapter 13, =The Con Sion op may all be the following in desce, Her Mate succession, the heirs Sh Tiding 9 of priority: heirs oe 2 andes to fifth degree of consanguinity 3. Republic of the Philippines designated as “compu, .d certain persons which it song: rete on paid who will inherit the estate by default, Only by rl absence shall the estate be partitioned to other relatives. In the absent, relatives, the estate will go the government. Types of compulsory heirs ae 1 Primary ets Legitimate children and their direct descendants 2. Secondary heirs: Legitimate/illegitimate parents and ascendants 3. Concurring heirs: The surviving spouse and illegitimate descendants Definition of terms 1, Legitimate children are those born out of a legal marriage. . Direct descendants refer to children or, in their absence, grandchildren. ._ Legitimate parents refer to biological parents. . Illegitimate parents are adopting parents to an adopted child. The surviving spouse is the widow or widower of the decedent. Mlegitimate descendants are illegitimate children. Papen Note: Under the Revised Family Code, adoptiv secondary sharing 50:50 with biological parents, Paes Can BOW qualify ass ane secondary compulsory heirs shall inherit only in default of the prima) fees Normally, only the Primary heirs and concurring heirs shate in! orca ny estate. In the absence of primary heirs, the secondary helis# Concurring heirs shall share in the hereditary estate In the absence of # io ae following or der of prion heirs, the following shall inherit in 1. Collateral relatives up to the 2. The Philippine government fifth degree of consanguinity 448_The Concept of Succession and Estate Tax gaat print #6 given to collateral relatives in the closest degree- soot 7 of Rules: concurring heirs and ee pescendants, or in their default, ndants tives in the collateral line up to fifth (St) degree A resi of the Philippines ee uustration ‘ B3 i Re i 2™ Priority eS ws c2 A Spouse (A1) 4. j | ¢ AL C4 A2 4% Priority | | A3 a 3*4 Priority v Model: ‘AL-Children 2-24 degree relatives 42- Grandchildren (ie, brothers and sisters) 43- Great grandchildren 3 31 degree relatives Bi-Parents (uncle, aunt, niece, nephew) B2-Grandparents 4-4 degree relatives 33 - Great grandparents (1s*cousins, 1* cousins of grandparents) Priority Levels: 1*Priority - A = From A1 onwards in descending order of priority 2m Priority - B = From B1 onwards in descending order of priority $eProrty- C= From C2 0 C5 in descending order of priority Priority - Philippine government Note: + T soanil AL indudes both legitimate and illegitimate'children cond cousins are in the 6% degree in the collateral ‘ine; hence, they cannot inherit. 449Chapter 13 -The concent of Succession and Estate Tay: 1 : cnet Nex aoe He was survived by his wife and four chi, aren, brothers and one surviving parent. TED. My : ‘The compulsory heirs are: a Mrs.X b. The four children The surviving parent (secondary heirs) of Mr. X will not inh erit becaus, descendants (i.e, four children). th Mlustration 2 Ms. X died single and without a child. Ms. X’s parents, three brothers sisters were her surviving relatives. an The compulsory heirs are Ms, X’s parents. The collateral relatives Obroty sisters) cannot inherit since there are compulsory heirs, ty Illustration 3 Mr. Y died a bachelor. He had no child. His parents were al II dead lon death, He only had a brother and a sister, a first cousin, ele and a second cous Since there is no compulsory heir, the brother and sister in the collateral ines inherit. Without them, the first cousin shall inherit. Assuming further that only the second cousin is living, the governments inherit the estate. Succession in the collateral line cannot extend to the sem cousin because he/she is beyond the fifth degree of consanguinity, Basic Intestate Partition Procedures 1, The decedent and the surviving spouse shall first share in their com properties. The common properties net of expenses and obligations chargeable 0 common properties of the spouses is divided between the decedent ani surviving spouse. 2. Determination of the decedent's net interest. | The decedent's net interest comprising of the following is computed! a. Exclusive property of the decedent b. Share of the decedent in the net common properties . Partition of the decedent's net interest to the heirs: a. Surviving spouse b. Legitimate children c. Illegitimate children aia_The Concept of Succession and Estate Tax conte B ae surviving spouse and each of the children have one share each pa ite! imate child is entitled to a half share. his two gosration # 2 Richie Rich, a widower, died leaving P45,000,000 estate for Elon and wimate children, Harold and Alex, and two illegitimate children, be partitioned as follows: qheesate shall arold (legitimate) 10 1/3x P45,000,000 P 15,000,000 ex (legitimate) 1.0 1/3xP45,000,000 15,000,000 on (illegitimate) 0.5 — .5/3xP45,000,000 7,500,000 john (illegitimate) 0S — .5/3xP45,000,000 Total 3.0 2 245,000,000 nlustration 2 on Uyong died leaving behind his widow, Mrs. Uyong, his legitimate children, Maxand Rey, and illegitimate children, Joan, Sylvia and Eunice, as heirs. Mr. and Mrs Uyong had the following properties: Exclusive properties of Don Uyong _-P.18,000,000 Exclusive properties of Mrs. Uyong 16,000,000 36,000,000 Net common. properties ‘The net estate of the decedent shall be computed as follows: Exclusive properties of Don Uyong P 18,000,000 Share in net common properties (P36M/2) _ 18,000,000 236,000,000 Distributable estate Theestate shall be partitioned as follows: Mis. Uyong (spouse) 10° 1/45xP36,000,000 8,000,000 Max (legitimate) 10 1/45 xP36,000,000 8,000,000 Rey (legitimate) 10 — 1/4.5xP36,000,000 8,000,000 Joan (illegitimate) 05 —.5/4.5 x P36,000,000 4,000,000 Pe {illegitimate) 0.5 5/4.5xP36,000,000 4,000,000 ee (illegitimate) 0.5 — 5/45x36,000,000 — __4,000,000 236,000,000iccession and Estate Tax —— -13-The concept of ie Chapte! ee ofthe surviving spouse after the partition Shaly be, The total properties P16 i ‘Mrs. Uyong: a Exclusive properties oropertes (P36M/2) 180000 Share in net comm suite mt Share in the distributable e aon Total properties In testamentary succession, the heirs shall be the following: in Isory heirs Lotireist ti i f Pier jeeaie specified by the decedent in his will Legitime : ; lentime is that part of the testator's property which he Cannot dig, because the law has reserved it for certain heirs who are, therefore ! compulsory heirs (Art: 886; Ibid). The excess properties of the deceey i called “free portion”. By means of a last will and testament, a testator can designate the f portion of his estate for additional heirs irrespective of their relations, him but he cannot exclude or disinherit compulsory heirs without a va basis under the law. Disinheritance and Repudiation A decedent can actually disinherit an heir on certain grounds, Simila, heirs may repudiate their share in the inheritance of the decedent, The rules on legitime, free portion, disinheritance of an heir or repudiai| of inheritance are matters of law which are irrelevant to estate taxatit Hence, these topics will not be emphasized in our discussion. Readers vi particular interest in these matters are advised to consult Title I| V of Book) | of the Civil Code. The determination of the estate tax does not require prior identifica! the heirs. Once a person is dead, the estate of the decedent is a determined and reduced by deductions allowed by law. Then, the estat is computed out of the net estate. Neither does the validity or invalid the decedent's will nor the absence of an heir affect estate taxation. sf vd ena eriades even if the decedent does not have relatives ribut™ Furttien ‘more, the determination of the share of each heir in the dist” et estate is done only after all charges to the heredi tate, includins tax, had been deducted, ay eae\ oe 43-The Concept of Succession and Estate Tax. chat persons in succession 3 One ‘atee ~ a person whom gifts of personal prope! ode a x £ anisee ~aperson whom gifts of real property is given a utors ~ a person named by the decedent who s| 3. rovisions of his will 4. Mdministrators ~ @ person appointed by the court to manage the distribution of the estate of the decedent st taxation pertains to the taxation of the gratuitous transfer of ce the decedent to the heirs upon the decedent's death. properties of te taxation is governed by the law in force at the time of the decedent's d the accrual of ath. The estate tax accrues as of the decedent's death ant the taxis distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death. ty is given by virtue of by virtue ofa will hall carry out the Hence, Between January 1, 1998 to On or after January 1, Decedents who died December 31, 2017 2018 Shall be governed by The NIRC The TRAIN law Readers who are concerned about estate tax of decedents covered by the NIRC are hereby advised to consult the old edition of the book. NATURE OF ESTATE TAX: 1. Excise tax- estate tax is not a tax on the property but on the privilege to transfer property through death Revenue or general tax ~ estate tax is intended as a revenue or fiscal measure 3. Ad valorem tax - estate tax is dependent upon the value of the estate 4. National tax - estate tax is imposed by the national government 5. Proportional tax- estate tax is imposed as 6% on the net estate 6 One-time tax - estate tax applies to a person only once ina lifetime NX ¢2ssifcation of Decedents for Taxation Purposes | Resident or Citizen Decedents- taxable on properties located within or Outside the Philippines Non-resident Alien Decedents- taxable only on properties located in the Philippines, except intangible personal property when the Teciprocity rule applies 453and 13-B. “Deductions” generally pertain to reductions in the inheritance of the be, such as obligations of the decedent, and losses of Property dys, administration, but also include exemptions from the estate tax under law. Deductions are extensively discussed in Chapter 14, “Net taxable estate” is the net properties of the decedent after all pertin deductions allowable by law that is Subject to tax. Note that the net tac estate is not equivalent to the hereditary estate before estate tax becaus exclusions, exemption rules and deduction criteria imposed by the law. The determination of estate tax, including other pertinent tax report requirements, are extensively discussed in Chapter 15.