ESTATE TAX

KEYWORDS NOTES
Estate Tax - Tax on gratuitous transmission of property caused by death from decedent to heir.
- Accrues as of the decedent’s death.
- Governed by the law in force at the decedent’s death
- Model:
Gross Estate P xxx xxx
Less: Deductions xxx xxx
Taxable Net Estate P xxx xxx

Gross Estate – pertains to the totality of the properties owned by the decedent at the point of his
death
Deductions – reductions in the inheritance of the heir such as expenses, obligations, losses of the
decedent and other exemptions.
Taxable Net Estate – the amount subject to estate tax.
Rate of six • Based on the value of the net estate of every decedent whether resident or nonresident of the
percent (6%) Philippines
Composition of 1. Properties, movable or immovable, tangible or intangible
Gross Estate 2. Decedent’s interest on properties
3. Proceeds of life insurance:
a. Designated as revocable to any heir
b. Regardless of designation, if the beneficiary is the estate, administrator or executor
4. Taxable transfer:
a. Transfer in contemplation of death
b. Revocable transfer, including conditional transfers
c. Property Passing Under General Power of Appointment
*For a nonresident decedent who was not a citizen at the time of his death, only the part of the
gross estate that is situated in the Philippines shall be included in his taxable estate
Decedent’s • To the extent at the time of his death
Interest
Proceeds of Life • Amount receivable by the deceased’s estate, his executor, or administrator, as proceeds from
Insurance insurance policies taken out by the decedent upon his own life irrespective of whether or not the
insured retained the power of revocation
• Amount receivable by any beneficiary of the insurance policy, except when it is expressly
stipulated that the designation of the beneficiary is irrevocable
Transfer in • The thought of death is the controlling motive for the transfer
Contemplation • The decedent has made a transfer, by trust or otherwise, in contemplation of death or a transfer
of Death of the possession or enjoyment of his property which is intended to take effect only upon his death
• The decedent has made a transfer, by trust or otherwise, but retained for his lifetime the
➢ Possession or enjoyment of, or the right to the income from the property
➢ Right, either alone or in conjunction with any person, to designate the person who shall possess
or enjoy the property or the income
• Does not apply in case of a sale for an adequate and full consideration in money or money's worth
Revocable • Transfers of possession over property during the lifetime of the decedent but not transfer of
Transfer ownership over said property.
• Except in case of a bona fide sale for an adequate and full consideration in money or money's
worth
Property Passing • A power of appointment is a right to designate by will or deed the person or persons who are to
Under General receive certain property from the estate of a prior decedent
Power of • The presence of the general power enables the holder of such property to do with the property
Appointment anything which he could do as if the property were his own.
• Does not apply in case of a sale for an adequate and full consideration in money or money's worth
Transfers for • Only the excess of the fair market value, at the time of death, of the property over the value of
Insufficient consideration received will be included in the gross estate
Consideration • In cases of transfers, trusts, interest, rights or powers enumerated in transfers in contemplation
of death, revocable transfers, and property passing under general power of appointment is made
for a consideration in money or money's worth, but is not a bona fide sale
Capital of the • Not be deemed a part of the decedent’s gross estate
Surviving Spouse
Exemption of • Usufruct - Merger in the owner of the naked title
Certain • Inheritance or Legacy - Transmission or delivery from the fiduciary heir or legatee to the
Acquisitions and fideicommissary
Transmissions • Transmission to another beneficiary - From the first heir, legatee or donee, in accordance with the
desire of the predecessor
• Donations to social welfare, cultural and charitable institutions - All bequests, devises, legacies or
transfers, not more than 30% of which can be used for administration purposes & net income of
the institutions does not inure to the benefit of any individual
• Proceeds of group insurance taken out by a company for its employees
• Proceed of GSIS policy or benefits from GSIS
• Accruals from SSS
• United States Veterans Administration (USVA) benefits – RA 136
• War damage payments
• Acquisitions and/or transfers expressly declared as non-taxable by law

Valuation of • Appraisal of properties: At its fair market value as of the time of death
Gross Estate • If real property, whichever is higher of:
➢ The value as determined by the Commissioner (zonal value)
➢ The value fixed by the Provincial and City Assessors (assessed value)
*if no zonal value, taxable base shall be the fair market value that appears in the latest tax
declaration
• Shares of stock:
➢ Preferred shares – at par value
➢ Unlisted common shares – book value using the adjusted net asset method
➢ Listed shares – closing price on the date of death or trading price at a date nearest to the date
of death
• Value of the right of usufruct, use or habitation, and annuities
➢ Take into account the probable life of the beneficiary in accordance with the latest Basic
Standard Mortality Table to be approved by the Secretary of Finance, upon recommendation
of the Insurance Commissioner
Gross Estate of Composed of:
Married • The decedent’s exclusive properties
Decedents • The common properties of the spouses
Conjugal • The properties of the spouses including fruits before marriage are their exclusive properties.
partnership of • All fruits of labor and fruits of properties of the spouses during the marriage starting from the date
gains (CPG) of celebration of the marriage are considered common properties.
• Gratuitous acquisitions such as donations or inheritance during marriage are separate properties
of the recipient spouse, unless the donor or the decedent designated the transfer for both spouses
Absolute • Marriage is viewed as a union of the present property of the spouses, including fruits of labor and
community of industries of the spouses during the marriage.
property (ACP) • Special Features of ACP:
➢ Retrospective feature - properties brought into the marriage will become common properties.
Exception: Properties acquired before marriage by a spouse with descendants in a prior
marriage
➢ Prospective feature - All properties acquired by the spouses during the marriage from their
separate or joint labor or industry shall be common. Exception: properties received by
gratuitous title & fruits of separate properties during marriage
*Exception to both prospectivity and retrospectivity features: properties acquired before or
during marriage for personal use is a separate property except jewelry
Acquisition of included as exclusive or common properties of the spouses but excluded in the computation of the
Exempt gross estate
Properties
Exempt the exempt foreign properties of a married non-resident alien decedent must be excluded in gross
properties of estate
Non-Resident
Alien Decedents

Classification of A. Ordinary Deductions – generally include items which diminish the amount of the inheritance.
Deductions from Exception: Deduction for “Property previously taxed” which is a tax incentive but classified as
Gross Estate ordinary deductions
B. Special Deductions – items which do not reduce the inheritance but are allowed by law as
deductions in determining the taxable net estate
C. Share of the Surviving Spouse – interest of the surviving spouse in the net conjugal or communal
properties of the spouses. This is not owned by the decedent and will not be transmitted as part
of the inheritance.
Ordinary 1. Claim against Insolvent Persons
Deductions 2. Indebtedness, such as claims against the estate and unpaid mortgage
3. Transfer for Public Use
4. Vanishing Deductions
Losses Pertain to losses of properties of the estate during the settlement of the estate which may arise
from fire, storms or from robbery, embezzlement when such losses aren’t compensated for by
insurance.

*Deductible only if at the time of the filing of estate tax return they have not been claimed as a
deduction for income tax purposes in an income tax return and that they incurred not later than
the last day for the payment of estate tax

Claim against Insolvent Persons – a form of loss but is presented as a separate item of deduction in
the tax return. The deductible amount is the unrecoverable amount of claim.

Classification (including claims against insolvent persons):

- based on the “Property classification Rule”
- loss of separate property: presented as a deduction against separate property
- loss of common property: presented as a deduction against common property
Claims Against Claims against the estate or indebtedness with respect to property may arise out of contract, tort,
the Estate or operations of law.
(Indebtedness) *Unpaid mortgages are claims against the estate but are separately reported under the category
“Unpaid mortgage” in the estate tax return.

Special rules on certain claims against the estate:

1. Unpaid Mortgage
– A deductible mortgage must have been incurred before death and still unpaid at the point of
death. The allowable deduction shall be the balance of the mortgage at the point of death.
2. Unpaid Taxes
– Including income taxes, business taxes, and property tax which have accrued and unpaid as of
the time of death. Only obligations existing at the point of death are deductible.
– Included under the category “Others” in the estate tax return
3. Accommodation loan
– Contracted by a person in behalf of another person with the contracting person merely
representing in behalf of the other person who will be the beneficiary of the loan proceeds
– Presented as a receivable in the gross estate and presented as a deduction.
Classification 1. Family Benefit Rule
Rule for Claims - If the obligation was contracted or incurred for the benefit of the family, the claim shall be
Against the classified as deduction against common property. Otherwise, the property classification rule
Estate shall be applied.
2. Property Classification Rule
- Claims follow the classification of the relevant property.
Transfer For Includes the amount of all bequests, legacies, devises or transfer to or for the use of the
Public Use Government of the Republic of the Philippines, or any political subdivision thereof, for the
exclusive public purposes. These must be indicated in the decedent’s last will and testament.
Property Where properties are transferred between persons in short periods of time causing a series of
Previously Taxed transfer taxation
(Vanishing Case 1: Donation before death (donor’s tax for the donation then estate tax at death)
Deduction) Case 2: Series of deaths (estate tax every transfer after decedent’s death)
A deduction, commonly known as “Vanishing Deduction”, for property previously taxed is allowed
by the law against gross estate to mitigate the impact of successive transfer taxation.
Requisites of 1. The present decedent must have died within 5 years from date of death of the prior decedent or
Vanishing date of gift.
Deduction 2. The property must have been previously subjected to a transfer tax.
3. The property must be identified as the same property received from prior decedent or donor or
the one received in exchange thereof, even if transformed into another kind of property.
4. The estate taxes on the transmission of the prior estate or the donor’s tax on the gift must have
been finally determined and paid.
5. No vanishing deduction on the property or the property given in exchange thereof was allowed
to the prior estate. This rule applies in the case of a series of deaths.
Procedural 1. Determine the initial value (fair market value of the property at the date of the first transfer or
Computations: the fair value at the date of death whichever is lower)
Vanishing 2. Determine the initial basis (Initial Value less Indebtedness assumed and paid by the present
Deduction decedent before his or her death)
 3. Determine the final basis:
Initial Basis less [ (Initial basis/Gross estate) x (Claim against Insolvent Persons, Indebtedness and
Transfer for public purpose) ]
4. Determine the vanishing deduction: final basis multiplied by the ff. vanishing percentages:
If the decedent died within: Vanishing percentage:
1 yr from receipt of property 100%
2 yrs from receipt of property 80%
3 yrs from receipt of property 60%
4 yrs from receipt of property 40%
5 yrs from receipt of property 20%
More than 5 years 0%
Special 1. Family home
Deductions 2. Standard deductions
3. Benefits under RA 4917
Family Home Includes the dwelling house, and the land on which it is situated, where the decedent and/or
members of his family reside; shall be characterized by permanency.
For purposes of availing of a family home deduction to the extent allowable, a person may
constitute only one family home.
A single decedent who is a head of a family can also claim deduction for family home.

Requisites for deduction of family home:

1. The family home must be the actual residential home of the decedent and his family at the time
of his death, as certified by the Barangay Captain of the locality where it is situated
2. The value of the family home must be included as part of the gross estate of the decedent
3. The allowable deduction must not exceed the lowest of fair market value of the family home as
declared or included in gross estate, the extent of the decedent’s interest therein, or
P10,000,000.
Standard A deduction in the amount of P5,000,000 shall be allowed as an additional deduction without the
Deduction need of substantiation for the benefit of the decedent.
Benefits under Retirement benefit or termination benefit received by employees of private firms is not subject to
RA 4917 attachment, levy, execution, or any tax whatsoever.
Any amount received by the heirs from the decedent’s employer as a consequence of the death of
the decedent-employee in accordance with Republic Act No. 4917 is allowed as a deduction
provided that the amount of the separation benefit is included as part of the gross estate of the
decedent.
Death benefits under RA 4917 may be indicated as an ordinary or special deduction under the
category “Others” in either classification.
Share of the One-half of the net conjugal or community properties of the spouses.
surviving spouse After deducting the allowable deductions appertaining to the conjugal or community properties
included in the gross estate, the share of the surviving spouse must be removed to ensure that
only the decedent’s interest in the estate is taxed.

- If RA 4917 death benefit is classified as an ordinary deduction, the amount of the benefits must
be included in conjugal or communal properties of the spouses but is removed in full under
ordinary deductions.
 - If RA 4917 death benefit is classified as a special deduction, the amount of the benefits must be
included in conjugal or communal properties of the spouses but the deduction for Benefits
under RA 4917 shall only be one-half of its value.
Deductions - Cannot claim special deduction. Can claim only the ff. deductions:
Allowed to Non- 1. Standard Deduction in the amount of P500,000
Resident Alien 2. Prorated Claim against Insolvent Persons and Indebtedness
Decedents • Prorated as: (Philippine gross estate/World gross estate) x (Claim against Insolvent Persons
and Indebtedness)
3. Property previously taxed (Vanishing Deductions)
• Same vanishing deduction shall be deductible provided that the property subject to
vanishing deduction is included as part of gross estate
4. Transfer for public purpose
• Deductible only if the properties being transferred to the Philippine government are
situated in the Philippines; cannot be claimed simultaneously with vanishing deduction
5. Share of the surviving spouse
• The deductible share of the surviving spouse of an non-resident alien decedent shall be
computed out of Philippine conjugal or communal properties.

Tax Credit for • In General – the tax imposed shall be credited with the amounts of any estate tax imposed by the
Estate Taxes authority of a foreign country.
paid to a Foreign • Limitations on Credit
Country ➢ Amount of the credit shall not exceed the same proportion of the tax against which such credit
is taken, which the decedent's net estate situated within such country taxable under this Title
bears to his entire net estate
➢ Total amount of the credit shall not exceed the same proportion of the tax against which such
credit is taken, which the decedent's net estate situated outside the Philippines taxable under
this Title bears to his entire net estate
Single Foreign The foreign tax credit shall be whichever is lower of the actual foreign estate tax paid and the
Country foreign estate tax credit limit computed as:

Foreign taxable net estate

X Philippine estate tax due
World taxable net estate
Multiple Foreign The lower of actual estate tax and the foregoing limit for each country is determined first.
Countries The final foreign tax credit shall be lower of the total of the tax credit allowable per country and
the world estate tax credit limit computed as:

Total foreign taxable net estate

X Philippine estate tax due
World taxable net estate

Requirements: • In all cases of transfers subject to tax

Estate Tax • In transfers exempt from tax but gross value of estate exceeds Two hundred thousand pesos
Returns (P200,000)
• In transfers of estate, regardless of the gross value, consisting of registered or registrable property
which requires clearance from the BIR before it can be transferred
• Shall be filed under oath in duplicate
Statement duly • When the estate tax return shows a gross value exceeding P5,000,000
certified by a • Contains:
CPA ➢ Itemized assets of the decedent, or of that part of his estate situated in the Philippines if a
nonresident, not a citizen of the Philippines, with their corresponding gross value at the time
of his death
➢ Itemized deductions from gross estate
➢ Amount of tax due whether paid or still due and outstanding
Time for Filing • Within 1 year from the decedent’s death
• A certified copy of the schedule of partition and the order of the court approving the same shall
be furnished to the Commissioner within thirty (30) days after the promulgation of such order
Extension of • Not exceeding 30 days
Time • Commissioner has authority to grant a reasonable extension in meritorious cases
Places of Filing • Accredited Agent Bank
• Revenue District Officer
• Collection Offices
• Duly authorized Treasurer of the city or municipality where the decedent was domiciled at the
time of his death
• Office of the Commissioner, for a nonresident decedent/ no legal residence in the Philippines
Payment of • "Pay as you file" - paid at the time the return is filed by the executor, administrator, or the heirs
estate tax
Extension of • If the commissioner finds that the payment on the due date of the estate tax or of any part of it
payment would impose undue hardship upon the estate or the heirs, he may extend the time of payment
of the estate tax or any part of it not to exceed:
➢ Five (5) years - if estate is settled in the courts, or
➢ Two (2) years - if settled extrajudicially
Payment by • In case the available cash of the estate is insufficient to pay the total estate tax due, payment by
Installment of installment shall be allowed within two (2) years from the statutory date of payment, without civil
Estate Tax penalty and interest
Liability for • Estate tax shall be paid by the executor or administrator before delivery to any beneficiary of his
Payment distributive share of the estate
• Beneficiary shall be subsidiarily liable for the payment of a portion of the estate tax as his
distributive share bears to the value of the total net estate
Tax before • No transfer to any new owner any share, obligation, bond or rights until taxes due have been paid
Transfer • If a bank has knowledge of the death of a person, who maintained a bank deposit account alone,
or jointly with another, it shall allow any withdrawal from the said deposit account, subject to a
final withholding tax of (6%)

Sample Problems:
A) Based on the following data, how much is the value of the decedent’s interest if he dies March 31, 2018?

Cash in bank, joint account of the decedent and his wife ₱ 254,000
Interest on the bank deposit (Jan 1 – June 30, 2018) 9,000
Dividends from a domestic corporation
Date of declaration – February 5, 2018
Date of record – April 15, 2018
Date of payment – May 15, 2018
Share in 2017 net profit of partnership, distributed to
Partners on April 15 9,000
Winnings in lotto (Bet, March 30; April 1, 2017, draw) 500,000
 SOLUTION:
Cash in bank (254,000/2) ₱ 127,000
Share in partnership profit (9,000/2) 4,500
Interest (9,000/2 x 3/6) 2,250
Winnings in lotto (500,000/2) 250,000
Decedent’s interest ₱ 383,750

The winnings in lotto is and the interest on bank deposit are presumed to be co-ownership of the spouses.

B) When Albino was informed by his physician that he was about to die of cancer, he sold his properties:
Market value- Market value-
Date of sale Selling price Date of death
Land ₱ 2,500,000 ₱ 1,500,000 ₱ 2,700,000
Jewelries 500,000 300,000 300,000
Shares of stocks 200,000 220,000 250,000
Transfer under limited power of
appointment 1,000,000 600,000 800,000

How much should be included in the gross estate of Albino upon his death?

Market value
upon death Selling price Gross estate
Land ₱ 2,700,000 ₱ 1,500,000 ₱ 1,200,000
Jewelries 300,000 300,000 -
Shares of stocks 250,000 220,000 -
Limited power of appointment 800,000 600,000 - j
Total 1,200,000

C) Decedent died leaving a family home composed of the following: House, conjugal property worth ₱3,000,000,
and the land in which he exclusively owned valued at ₱1,800,000. He also owns a vacation house in Baguio
worth ₱1,500,000.
COMPUTE for the deductible amount of the family home.
House, conjugal (3,000,000 x ½) ₱ 1,500,000
Land, exclusive 1,800,000
Deductible ₱ 3,300,000

D) The following data relates to Carl, married two (2) years ago, died leaving the following:

Gross estate ₱ 14,000,000

Land acquired by donation from his father 3 ½ years ago:
Market value, date of donation 200,000
Market value, date of death 300,000
Funeral expenses 35,000
Judicial expenses 15,000
Unpaid mortgage on the land at the time of donation 100,000
Unpaid taxes 10,000
Losses 25,000
Transfer for public purpose 35,000
 Carl paid ₱60,000 to the mortgagee of the land a year before his death.

COMPUTE for the total deductions from exclusive property assuming Carl was under conjugal partnership
of gains.

Deductions from exclusive property:

Unpaid mortgage on land (100,000 – 60,000) 40,000
Vanishing deduction 55,560
Transfer for public purpose 35,000
Total Deductions 130,560

Vanishing deduction computation:

Value date of donation (lower value) 200,000
Less: Mortgage paid 60,000
Initial basis 140,000
Less: Deductions (pro-rated)
Unpaid mortgage (100,000 – 60,000) 40,000
Unpaid taxes 10,000
Losses 25,000
Transfer for public purpose 35,000
Total 110,000
(140,000/14,000,000 x 110,000) 1,100
Base 138,900
Rate 40%
Vanishing deduction 55,560

E) Elopre, married June 5, 2016 died on April 29, 2018 with the following data: Gross estate – community
property, ₱ 5,000,000; exclusive, ₱ 2,000,000. Said amount includes a land which he received as gift from
his father a month before the marriage, valued at ₱ 540,000. His father mortgaged the land for ₱ 20,000
which was paid by Elopre. Elopre mortgaged also said land for ₱ 50,000 but was able to pay only ₱ 20,000
until his death. The allowable deductions claimed (excluding the unpaid mortgage) amounted to ₱ 170,000.
COMPUTE for the –

1. Vanishing deduction
2. Estate tax due

SOLUTIONS:

1. Value to take ₱ 540,000

Less: Mortgage paid (20,000 + 20,000) 40,000
Initial basis 500,000
Less: Deductions (pro-rated)
Amount claimed ₱ 170,000
Unpaid mortgage (50,000 – 20,000) 30,000
Total 200,000
(500,000 / 5,000,000) x 200,000 20,000
Base 480,000
Rate (more than 1 year; not more than 2 years) 80%
Vanishing deduction 384,000
 2. Community Exclusive Total
Gross Estate 5,000,000 4,000,000 9,000,000
Less: Deductions
Ordinary
Amount claimed 170,000
Unpaid mortgage 30,000
Vanishing deduction 384,000 (584,000)
Special (Standard deduction) (5,000,000)
Net estate 3,416,000
Less: Share of surviving spouse
Gross community 5,000,000
Less: Community expenses 584,000
Net community property 4,416,000
Share (4,416,000/2) 2,208,000
Taxable net estate 1,208,000
Rate 6%
Estate Tax Due ₱ 72,480

F) Manuel, a resident and citizen of Nabua, Camarines Sur, died testate on October 21. He was survived by
his dependent mother and sister. In the settlement of his estate, the following data were given:

Riceland in Sitio Masoso, San Isidro, Iriga City ₱ 1,600,000

Land in Albay 2,750,000
House and lot in Nabua, Camarines Sur (family home) 2,475,000
Car 1,550,000
Furniture and appliances 650,000
Shares of Stock in San Miguel Corporation 1,330,000
Jewelry 1,250,000

The following deductions were claimed:

Amount paid to Filgon Memorial Homes ₱ 95,000

Cost of burial plot and tombstone 35,000
Unpaid mortgage on house and lot 350,000
Unpaid taxes 45,000
Claims against insolvent person 180,000

The car was carnapped during the interment.

COMPUTE the net estate and estate tax due.

SOLUTIONS:

Riceland, Iriga City ₱ 1,600,000

Land 2,750,000
House and lot 2,475,000
Car 1,550,000
Furniture and appliances 650,000
Shares of Stock, San Miguel Corporation 1,330,000
Jewelry 1,250,000
Gross Estate ₱11,605,000
 Less: Deductions
Ordinary –
Unpaid mortgage ₱ 350,000
Unpaid taxes 45,000
Claims against insolvent person 180,000
Car loss 1,550,000
Special –
Family Home 2,475,000
Standard deduction 5,000,000 9,600,000
Taxable net estate 2,005,000
Rate 6%
Estate tax due ₱ 120,300

G) Leoncio died testate. The will provides that the usufruct over his land shall be inherited by his eldest son,
Asungot for the rest of his life, while the naked title shall go to his youngest son, Pusakal.

1. Is the transfer of the property from Leoncio to his children taxable?

Yes, the fact that the usufruct over the property has been inherited by Asungot and the naked title by
Pusakal, does not invalidate the transfer. It is, therefore, subject to estate tax.

2. What happens if Asungot dies ahead of Pusakal and the usufruct is transferred to the latter?
This is a case of a merger of the usufruct in the owner of the naked title, because Pusakal is not the
absolute owner of the property, in this case, the transfer is exempt from estate tax.
The exemption is premised on the fact that there is only one transmission of property, i.e. from the
testator to the owner of the naked title.
Moreover, the reason for the law is that the transfer had been previously subject to estate tax.

H) Fely died leaving a gross estate of P3,000,000 and allowed deduction of P2,500,000.

1. Is an estate tax return required to be filed on the estate of Fely?

Yes, because the transfer is subject to estate tax.

2. How about if the gross estate is P250,000 only?

Although exempt from tax, an estate tax return is necessary because the total value of the gross estate
is more than P200,000.

3. How about if the gross estate is P180,000 but this amount includes a care valued at P80,000?
Although the gross value of the estate is less than P200,000, an estate tax return is necessary because
the estate includes a car which is a registrable property.