5 estate tax myths
True, in the Tax Reform Act, it’s mainly tax increase, not tax reform. But the estate tax
situation has certainly improved, and even reformed. Given the new low tax rate of six
percent estate tax, is estate tax planning no longer required? You tell me as we go
along and understand, and hopefully debunk some of the Philippine estate tax myths.
For me, here they are:
Myth No. 1. The “survivorship” clause can survive death.
Survivorship clauses, which can be found in wills or bank arrangements, mean that
property jointly owned by two (or more) persons will pass to either of them (or the
named one) in case one dies. So in the case of a bank account jointly owned by two
persons with a survivorship clause, if one dies, the bank account becomes completely
owned by the surviving depositor – but not so fast.
Under our old tax law, technically, the survivor cannot withdraw the 50 percent of
account that belonged to the deceased unless it is shown that estate taxes have been
settled on the estate of the latter – based on the entire estate. Managing this is easier
now because 1) estate tax has been lowered to six percent, and 2) no one will stop you
from withdrawing the money because the bank is simply required to withhold six
percent on the amount withdrawn (that was owned by the deceased). Estate tax
returns are no longer required for withdrawal from the bank account of the deceased.
The survivorship arrangement does not avoid the estate tax because the last breath is
quicker to the draw. I mean, death kicks in first, before any transfer per contract
happens, hence the estate tax.
Myth No. 2. It’s better to just sell the property because it’s faster to do so.
Today, unless it’s for business reasons, transferring shares to a corporation then
selling those shares to the children is a thing of the past for estate tax planning. Capital
gains on sale of shares is 15 percent, which is much higher now than the reduced six
percent estate tax. But say it’s real property not used in business that you want to
transfer to your children. Many think it’s just faster to sell because the documentation is
easier. You can do a sale in a day, and you pay the same six percent capital gains tax
rate.
A bit easier, maybe, but more expensive. It’s not because a 1.5 percent documentary
stamp tax (DST) applies on sale, but because that generally applies to donation, too. It
is because, in addition to the sale, a donation also takes place – on the condoned
selling price if you do not collect that from your children. Well, I know, how will the BIR
know your children did not or will not pay you? Maybe the BIR won’t. You can take the
risk. Or you can just donate now the property, subject only to 6 percent tax (plus DST)
under the new tax law.
Myth No. 3. Since estate tax is now only six percent, there’s no need for estate
tax planning.
Capital gains tax, donor’s tax, and estate tax are all at six percent anyway. So why
bother? Because the tax rate may stay the same, but the market value of real property
will not. With our young growing population that will continue to occupy space, with the
build, build, build thrust that will augment property values, real estate prices will
continue to rise, and the BIR will make the zonal values catch up.
So if you can decide now and not rely on your longevity, transfer the property to your
children now, via donation.
Myth No. 4. Waive your right, skip succession line, and save tax.
You expect to inherit property, or say, shares of stocks. But you would want to pass
this on to your children anyway. So can you just waive your right to the inheritance and
let the inheritance go direct to your children, and pay just one tax?
The above is a situation that produces two taxable events. Technically, the waiver is
subject to donor’s tax, and the direct transfer of property from the grandparent to the
grandson is subject to excise tax. Note that one who inherits cannot substitute his
wishes over the law that transfers property sequentially along the succession lines. Nor
can one substitute his will for the testator’s will by waiving his right and assigning that
right to someone else. You need the estate owner’s will for that. So you need to coach
the estate owner on how to draw his will. But truth be told, if estate tax is paid on the
property, the BIR may not be interested in investigating who inherited a particular
piece. (I warned you, though of the technicalities.)
Myth No. 5. Estate tax payment is to transfer property, but formal transfer of
property among family members is not important.
Maybe, and maybe why people don’t pay estate tax because the property stays in the
family anyway. A property that remained titled to the original ancestor owner can have
conflicting claims. Spouses or relatives of the spouse, who are not really members of
the original family, can cause serious trouble, as I have observed. A property whose
title is also not in the name of the person who claims ownership may not get developed
or invested in, or even disposed. Its potential for value and revenue will be greatly
stunted.
So those who are content to leave property and let the heirs take care of the
formalities, you may just be leaving them with headaches. Fix it now. The estate tax
amnesty will come out soon. Avail it. If you can, transfer via donation now. In planning
for your children, do not let your last breath be the quicker draw.
(I would like to take this opportunity to thank everyone who supported the recently
concluded Isla Cup 2018, where the real winners are the children of public schools
through the Seat of Hope. These children may not be riding golf carts anytime soon,
but they will have brand new chairs in their classrooms. Cheers to the children, and
cheers to your generous hearts!)
