Estate Tax

Tax on the right to transmit property at death and a certain transfer which are made by the
statute the equivalent of testamentary disposition and is measured by the value of property at
the time of death.

Included in the Estate

The estate consists of all the properties left behind by the deceased, including:
✔️Land and houses
✔️Bank accounts
✔️Investments (stocks, bonds, etc.)
✔️Vehicles
✔️Business interests
✔️Personal belongings (jewelry, art, etc.)

How Much is the Estate Tax

Since TRAIN Law (2018), the estate tax rate in the Philippines is a flat 6% of the net estate
(total assets minus allowable deductions).

The law in force at the time of death of the decedent governs.

✅ Formula:
Estate Tax = (Total Estate – Deductions) × 6%

Nature and Object of Estate Tax

Estate tax is a form of transfer tax imposed on the right of a deceased person to transfer
ownership of their properties to heirs or beneficiaries. It is not a tax on the properties
themselves but on the transfer of ownership due to death.

A. It is a Transfer Tax

It is not a tax on the property itself but on the act of transferring assets from the deceased to
heirs.

It applies to all types of assets owned by the deceased at the time of death.

B. It is an Excise Tax

Excise taxes are imposed on specific activities.

Estate tax is levied on the privilege of transferring ownership of assets upon death.

C. It is a Direct Tax

The estate itself is responsible for paying the tax before distribution.

Unlike income tax (paid by individuals), estate tax is paid by the estate as a whole.

Purpose of Estate Tax

Added Income to the Government

Estate tax is a source of revenue for the government.

The government uses the tax collected to fund public services like roads, schools, and
healthcare.

Benefit Received Theory

This theory states that the government provides services in the transfer and distribution of an
estate.

Examples of these services include:

✔ Issuing legal documents to transfer property
✔ Protecting the rights of heirs
✔ Regulating inheritance laws

Since heirs benefit from these services, they must contribute by paying the estate tax.

Privilege Theory (or State Partnership Theory)

This theory states that inheritance is not a right but a privilege given under government laws.

Since the state protects the estate (through property laws, courts, and enforcement), heirs must
pay for the privilege of inheriting assets.

Ability to Pay Theory

The government assumes that heirs who inherit assets can afford to pay taxes.

If someone inherits millions in property, they should be able to contribute a small portion to
taxes.
This ensures that wealthier individuals contribute more to government income.

Redistribution of Wealth Theory

Large inheritances increase wealth inequality because some people are born into wealth while
others are not.

Estate tax helps reduce wealth gaps by taxing large inheritances.

The government can use tax revenue for social services to support lower-income citizens.

Types of Asset Transfers That Are Taxable

A. Transfers Mortis Causa (After Death)

This just means anything the person leaves behind after they die (through a will or without a will)
is subject to estate tax.

B. Transfers Inter Vivos (While Still Alive)

Normally, gifts given while alive are taxed under donor’s tax (gift tax).

But some transfers are still counted as part of the estate for estate tax purposes:

1. If someone gives away property knowing they might die soon (to avoid taxes).

2. If they give an asset but still keep control (e.g., still earning money from it).

3. If they transfer an asset but can take it back anytime (not a true gift).

4. If they had the power to decide who gets the property (still counts as their asset).

5. If they sell an asset for a price that’s way too low (disguised gift).

Classification of Taxpayers

1. Citizens (Filipino nationals)

2. Aliens (Foreigners, or non-Filipinos)

Resident Citizens

These are Filipinos who live in the Philippines or stay outside for less than 183 days in a year.

Taxation: They are taxed on their worldwide income (income earned inside and outside the
Philippines).

Nonresident Citizens

These are Filipinos who stayed outside the Philippines for 183 days or more in a year.

Taxation: They are only taxed on income earned within the Philippines (not on foreign income).

Aliens Tax Rule

Foreigners (aliens) are only taxed on income earned within the Philippines and are classified
into

1. Resident Aliens

Foreigners who have lived in the Philippines for more than 1 year.

Taxation: Only taxed on income earned in the Philippines.

2. Nonresident Aliens

Foreigners who do not permanently live in the Philippines.

They are further divided into two types:

a) Nonresident Aliens Engaged in Trade or Business (NRAETB)

Foreigners who stayed in the Philippines for more than 180 days.

Taxation: They are taxed on income earned in the Philippines.

b) Nonresident Aliens Not Engaged in Trade or Business (NRANETB)

Foreigners who stayed in the Philippines for 180 days or less.

Taxation: They are also taxed on their Philippine income, but usually at a higher rate.

General Rule of Gross Estate

Under estate taxation, the gross estate includes all properties, whether real or personal, tangible
or intangible, wherever situated, that the decedent owned and had control over at the time of
death.

General Rule for Valuation:

The properties included in the gross estate must be valued based on their Fair Market Value
(FMV) at the time of the decedent's death.

This ensures an accurate representation of the estate's worth.

Valuation of Real Property:

For real properties (e.g., land, buildings), FMV is determined using:

Commissioner's FMV (set by the Bureau of Internal Revenue or BIR)

Schedule of values from provincial and city assessors

The valuation to be used is the higher of the two.

Why Use the Higher Value?

This rule prevents tax avoidance by undervaluing properties.

It ensures that estate tax is computed based on the most accurate and reasonable property
value.

Valuation of Gross Estate – Shares of Stock

This section explains how shares are valued when calculating the total estate of a deceased
person.

Listed Shares (stocks publicly traded on a stock exchange):

Their Fair Market Value (FMV) is determined by taking the average of the highest and lowest
stock prices on the date of death.

If there was no trading on that exact date, then the price from the nearest available trading day
is used.

Unlisted Shares (stocks not traded on an exchange):

Common shares (ordinary company shares) are valued based on book value, which is the net
worth of the company divided by its shares.

Preferred shares (which typically have fixed dividends) are valued at par value, which is the
fixed face value set by the company.

Quick Summary

Stocks are valued based on market price (if listed) or book/par value (if unlisted).

Understanding Gross Estate Simply:

The Gross Estate is the total value of everything a person owns (or has control over) at the time
of their death. This is important because it determines the amount of estate tax that needs to be
paid.

What’s Included in the Gross Estate?

Decedent’s Interest

When a person (decedent) dies, the law considers two types of property interests:

Owned Property: Anything legally owned by the decedent at the time of death.

Possessed Property: Any property the decedent had control over or had transferred but still had
some interest in.

Examples of Decedent’s Interest:

1. Dividends: If a company declares dividends before death but pays them after, they are still
considered part of the decedent’s estate.

2. Partnership Profits: Even if received after death, profits earned before the person passed
away are still included.

3. Life Insurance Proceeds: If the policy is payable to a revocable beneficiary, it might be part
of the estate.

4. Right of Usufruct: If the deceased had a legal right to use and benefit from a property, it
may still be considered part of the estate.

2. Transfers in Contemplation of Death

This concept applies when someone transfers property because they believe they will die soon.
The key point is that the transfer happens because of the thought of death rather than for
general financial or personal reasons.

Key Points:

The law does not set a specific time limit before death to define such transfers.

What matters is the intention: Was the transfer motivated by the expectation of death?

Transfers NOT Considered in Contemplation of Death

Some property transfers happen for other reasons, not because the person expects to die.
These include:

1. Relieving the Donor of Management Burden – Transferring property to avoid handling it.

2. Saving Taxes – Moving property to avoid high taxes.

3. Settling Family Disputes – To avoid legal battles.

4. Providing for Dependents – Giving assets to support family members.

5. Enjoyment While Alive – Ensuring children benefit from the property before death.

6. Protecting Business Operations – Keeping the family business stable.

7. Rewarding Services – Giving property to someone as a reward for their work.

Revocable Transfers

What it means: A person (transferor) gives away property but keeps the right to change, take
back, or cancel the transfer.

Effect: Since the transferor still has control over the property until their death, it is still
considered part of their estate.

General Power of Appointment

What it means: A "donee" (person given this power) can decide who gets a certain property,
without any restrictions.

Tax impact: If they use this power, the property is treated as theirs and will be included in their
estate for tax purposes.

Effect: The donee is basically like the owner of the property because they control who gets it.

Property Passing under General Power of Appointment

Requirements:

1. The power of appointment must exist (someone must have given it to the donee).

2. The donee must use it (e.g., in a will or legal document).

3. The property must actually be transferred because of this power.

Proceeds of Life Insurance

Who gets the money?

If the deceased (insured person) took out the policy, the money goes to their estate or
beneficiaries.

Tax rules:

Life insurance proceeds are NOT subject to income tax.

However, they ARE subject to estate tax if they are part of the deceased's estate.

Prior Interest?

It is a rule that ensures all assets, rights, and powers of a deceased person are included in their
taxable estate—whether those interests were created, exercised, or given up before or after the
law took effect.

The Prior Interest rule is like a safety net that ensures all relevant assets and rights are included
in taxation, preventing people from escaping estate taxes by making transfers in advance.

This prevents people from avoiding estate tax by saying:

“I gave up this property before the law was implemented, so it should not be taxed.”

“This trust was set up a long time ago, so it shouldn’t be included.”

Life Insurance is Taxable or Not

Taxable:

If the beneficiary is the deceased person's own estate, whether the policy was revocable or not.

If the beneficiary is someone else but the deceased had the power to change the beneficiary
(revocable).

Not Taxable:

If it's an accident insurance payout.

If the company pays for the group insurance of employees (because the deceased didn’t own
the policy).
If the beneficiary is irrevocably designated (because the deceased had no control).

If the policy is from GSIS or SSS (because government policies are tax-exempt).

Transfers for Insufficient Consideration

This applies when a person transfers property without getting a fair and full payment in return.

The transfer is taxable if it was:

1. Made in contemplation of death (i.e., given away before dying).

2. A revocable transfer (i.e., the deceased could take it back).

3. Given under a General Power of Appointment (i.e., the deceased controlled who would
receive it).

Rules:

If it's a bona fide sale (real sale for fair value), it's not included in the gross estate.

If it's not a real sale (the value received is too low), the difference is included in the estate.

If the transfer was fake or simulated, the entire value is included in the estate.

Special Power of Appointment

in estate planning and taxation refers to a legal authority given to a donee (recipient of the
power) to designate who will receive certain property after them

Example for Better Understanding

Imagine a father creates a trust and gives his daughter (donee) a special power of appointment.
The trust states that she can appoint the property only to her own children.

She cannot give it to a friend or charity.

When she passes away, the property does not count as part of her estate for tax purposes.

She only acts as a trustee, ensuring the property goes to her children as specified by the
original trust.