GROSS ESTATE

Valuation of Gross Estate

REAL PROPERTY
PERSONAL PROPERTY

RIGHT TO USUFRUCT, USE OR

HABITATION & ANNUITY
IMPROVEMENT
 REAL PROPERTY

- fair market value (a) as determined

by the Commissioner or (b) as shown
in the schedule of values fixed by the
provincial and city assessors
WHICHEVER IS HIGHER
 PERSONAL PROPERTY

General Rule: FMV at the time of death

- whether tangible or intangible,

appraised at FMV. Sentimental
value is practically disregarded
 PERSONAL PROPERTY
Exception: Shares of Stocks
If listed FMV is the arithmetic mean
between the highest & lowest quotation
at a date nearest to the date of death,if
none is available on the date of death
itself
 PERSONAL PROPERTY
Exception: Shares of Stocks
If unlisted FMV is the par value in case
of preferred shares, and book value in
case of common shares.
 RIGHT TO USUFRUCT, USE OR
HABITATION & ANNUITY
shall be taken 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
 IMPROVEMENT

- the construction cost per building

permit or the FMV per latest tax
declaration
Any income from, or increase in the
value of the properties left by the
decedent after his death, will NOT
form part of the Gross Estate.
 INCLUSIONS IN THE GROSS ESTATE
1. Decedents interest
2. Transfer in contemplation of death
3. Revocable transfer
4. Property passing under a general power of appointment
5. Proceeds of life insurance
6. Property transfers for insufficient consideration
 1. Decedents interest

To the extent of the interest in

property of the decedent at the time of
his death.
2. Transfer in contemplation of death

A transfer motivated by the thought

of impending death although death
may not be imminent.
2. Transfer in contemplation of death

A transfer by which the decedent

retained for his life or for any period
which does not in fact end before his
Death.
 2. Transfer in contemplation of death
If during the lifetime of the decedent, he still retained in the
property of any of the following:

the possession or enjoyment thereof

the right to the income or the fruits notwithstanding the transfer

the right, either alone or in conjunction with any person, to

designate the person who shall possess or enjoy the property or
the income therefrom.
Exception: bona fide sale for an
adequate and full consideration in
money or moneys worth.
 3. REVOCABLE TRANSFER
A transfer is a revocable transfer where:

a. There is a transfer by trust or otherwise; and

b. The enjoyment thereof was subject at the date
of his death to any change through the exercise
of a power by:
 3. REVOCABLE TRANSFER
(1) The decedent alone;

(2) The decedent in conjunction with any other person

without regard to when or from what source the
decedent acquired such power, to alter, amend, revoke or
terminate; or

(3) Where any such power is relingquished in

contemplation of the decedents death
Exception: bona fide sale for an
adequate and full consideration in
money or moneys worth.
It is sufficient that the decedent had the
power to revoke, though he did not
exercise the power to revoke. (Ingles
Reviewer)
Irrevocable Transfers NOT Included
-Only revocable transfers shall be
included in the gross estate because of
the tremendous power & control which
the transferor can exercise.
 4. PROPERTY PASSING UNDER A GENERAL
POWER OF APPOINTMENT
It is the right to designate the person or
persons who will succeed to the property of
the prior decedent.
Requisites for Taxability:

1. Existence of a general power of appointment

2. Exercise of such power by the decedent by will
or by deed in certain cases
3. The passing of the property by virtue of such
exercise.
General Rule
-Property over which the decedent held
a power of appointment is not includible
in his gross estate unless such power is
general.
General Power of Appointment
-When it authorizes the donee
(decedent) to appoint any person he
pleases, including himself, thus having a
full dominion over the property as
though he owned it.
A Power is NOT general (specific)
-When the donee (decedent) can
appoint only among a restricted or
designated class or persons other than
himself.
 Exercised by the decedent:
1. By will
2. By deed executed in contemplation of, or
intended to take effect in possession or
enjoyment at or after his death
3. By deed under which he has retained for
his life or any period not ascertainable
without reference to his death
Exception: bona fide sale for an
adequate and full consideration in
money or moneys worth.
 5. PROCEEDS OF LIFE INSURANCE

Proceeds of life insurance taken by

the decedent on his own life shall be
included in the gross estate if the
beneficiary is:
 5. PROCEEDS OF LIFE INSURANCE
a. the estate of the decedent, his executor
or administrator (regardless whether the
designation is revocable or irrevocable);

b. a third person other than the estate,

executor or administrator where the
designation of the beneficiary is
revocable.
 Not Subject to Tax When:
(1) Beneficiary is other than the estate, his
executor or administrator; and
(2) The designation is irrevocable.
 Policy taken before marriage
-the source of funds determines ownership
of the proceeds of life insurance.
 Policy taken during marriage
(a) Beneficiary is the estate of the insured
proceeds are presumed conjugal; hence,
one-half share of the surviving spouse is not
taxable.
 Policy taken during marriage
(b) Beneficiary is a third person proceeds
are payable to the beneficiary even if
premiums were paid out of the conjugal
partnership.
Life insurance proceeds are always
excluded from gross income of the
recipient whether the designation of the
beneficiary is revocable or irrevocable.
 6. TRANSFERS FOR INSUFFICIENT CONSIDERATION

The value to be included in the gross estate

is the excess of the fair market value of the
property at the time of the decedents death
over the consideration received.
Exception: bona fide sale for an
adequate and full consideration in
money or moneys worth.
6. TRANSFERS FOR INSUFFICIENT CONSIDERATION

Formula:

(FMV of the property at the date of

decedents death) (Actual consideration
received by the decedent) = Amount
includible in decedents gross estate
 Example 1 Example 2
FMV at the time of
transfer
Php 2,000.00 Php 1,000.00
Consideration received
by the transferor-
Php 2,000.00 Php 400.00
decedent at the time of
transfer
FMV at the time of the
death of transferor
Php 4,000.00 Php 1,200.00

VALUE to be included in
the gross estate
0 Php 800.00
Deductions from the Gross Estate

a.Ordinary
b. Special
 Ordinary Deductions

A. Funeral Expenses, Judicial Expenses,

Claims against the Estate, Claims
against insolvent persons, Unpaid
mortgages, Unpaid Taxes, Losses
 Ordinary Deductions
B. Vanishing Deduction (property
previously taxed)

C. Transfer for Public Use

D. Net share of the surviving spouse in

the conjugal community property
Special Deductions
1. Family Home
2. Standard Deduction
3. Medical Expenses
4. Amount Received by heirs under
R.A. 4917
Citizens & Resident Aliens
1. Expenses, losses indebtedness and
taxes: Funeral Expenses, Judicial
Expenses, Claims against the Estate,
Claims against insolvent persons,
Unpaid mortgages, Unpaid Taxes,
Losses
2. Property previously taxed (Vanishing
deductions)
3. Transfer for Public Use
4. Family Home
5. Standard Deduction
6. Medical Expenses
7. Amount received under R.A. 4917
8. Net share of the surviving spouse in the
conjugal property
Non-Resident Aliens

1. Expenses, Losses, Indebtedness and

Taxes (ELIT)
2. Vanishing Deductions
3. Transfer for Public Use
4. Net share of the surviving spouse in
the conjugal property
 Computation for Allowable Deductions for
non resident aliens
Philippine
Allowable
Deductions = Gross Estate
________________ X ELIT
World
Gross Estate
Items NOT allowed as deductions to Non-
Resident Aliens

1. Family Home
2. Standard Deduction
3. Medical Expenses
4. Amount received by heirs under RA
4917
A. Funeral Expenses
The amount deductible is the lowest
among the following:
1. actual funeral expenses;
2. 5% of the gross estate; or
3. P200,000.
Deductible Funeral Expenses
1. Mourning apparel of the surviving spouse and
unmarried minor children of the deceased,
bought and used in the occasion of the burial.
2. Expenses of the wake preceding the burial
including food and drinks.
3. Publication charges for death notices.
4. Telecommunication expenses in informing
relatives of the deceased.
Deductible Funeral Expenses
5. Cost of burial plot. Tombstone monument or
mausoleum but not their upkeep. In case
deceased owns a family estate or several burial
lots, only the value corresponding to the plot
where he is buried is deductible.
6. Interment fees and charges.
7. All other expenses incurred for the
performance of the ritual and ceremonies
incident to the interment
Non- Deductible Funeral Expenses
Expenses incurred after the interment, such
as for prayers, masses, entertainment, or
the like are not deductible.

Any portion of the funeral and burial

expenses borne or defrayed by relatives
and friends of the deceased are not
deductible
Take Note: Cut-off point for funeral
expenses to be claimed as deduction is
interment.
B. JUDICIAL EXPENSES
Nature of Expenses that may be Deducted:
a. Incurred in the Payment of debts of the
estate
b. Incurred in the Administration of the estate
c. Incurred in the inventory taking of assets
comprising the gross estate
d. Incurred in the Distribution of the estate
among the heirs
Take Note: Judicial expenses must be
incurred during the settlement of the
estate but not beyond the last day
prescribed by law
Deductible Judicial Expenses

1. Fees of executor or administrator

2. Attorneys Fees
3. Court Fees
4. Accountants Fees
5. Appraisers Fees
6. Clerk Hire
7. Cost of preserving & distributing the estate
8. Brokerage fees
Notarial fees for extra-judicial settlement &
attorneys fee for guardianship proceedings
are allowed as deductions from gross estate
of decedent.
Non- Deductible Judicial Expenses

a. Expenditures incurred for the individual

benefit of the heirs, devisees or legatees
b. Compensation paid to a trustee of the
decedents estate when it appeared that
such trustee was appointed for the
purpose of managing the decedents
real property for the benefit of the
testamentary heir
Non- Deductible Judicial Expenses

c. Premiums paid on the bond filed by the

administrator as an expense of the
administration since the giving of a bond is
in the nature of a qualification for the office
& not necessary for the settlement of the
estate
Non- Deductible Judicial Expenses

d. Attorneys fees incident to litigation

incurred by the heirs in asserting their
respective rights.
C. CLAIMS AGAINST THE ESTATE
- generally construed to mean debts or
demands of a pecuniary nature which could
have been enforced against the deceased in
his lifetime and could have been reduced to
simple money judgments.

Claims against the estate or indebtedness in

respect of property may arise out of: 1. Contract;
2. Tort; or 3. Operation of Law.
Requisites for Deductibility
a. Must be a Personal Obligation of the
deceased existing at the time of death
b. Must be valid in law and Enforceable in Court
c. Must be incurred in good faith & for an
adequate consideration in money
d. Must not have been condoned by the creditor
Date of Death Valuation Rule: Provides
that the appropriate deduction is the
value that the claim had at the date of
the decedents death should be applied.
Post death developments should not be
considered in determining the net value
of the estate.
Substantiation Requirements
Simple Loans (including advances)

1. Debt instrument must be duly notarized

at the time debt was incurred
2. Duly notarized Certification from the
creditor as to the unpaid balance of the
debt
Substantiation Requirements
Simple Loans (including advances)
3. Proof of financial capacity of the creditor
to lend the amount at the time of loan was
granted.
4. Statement under oath executed by the
administrator or executor, reflecting
disposition of the loan, if said loan was
contracted within 3 years prior to death of
decedent
 If the unpaid obligation arose from the
purchase of goods or services:
1. Pertinent documents evidencing the
purchase of goods or services, as duly
acknowledged, executed & signed by
decedent debtor & creditor, and
statement of account given by the creditor
as duly received by the decedent-debtor
 If the unpaid obligation arose from the
purchase of goods or services:

2. Duly notarized Certification from the

creditor as to the unpaid balance of the
debt, including interest as of the time of
death
 If the unpaid obligation arose from the
purchase of goods or services:

3. Certified true copy of the latest audited

balance sheet of the creditor with a detailed
schedule of its receivable showing the
unpaid balance of the decedent-debtor.
Where the settlement is made through
the Court in a testate or intestate
proceeding, pertinent documents filed
with the Court evidencing the claims
against the estate, and the Court order
approving the said claims, if already
issued, in addition to the other
mentioned documents.
D. CLAIMS AGAINST INSOLVENT PERSONS
Requisites:
1. The amount thereof has been initially included
as part of his gross estate (for otherwise they
would constitute double deductions if they were
to be deducted)

2. The incapacity of the debtors to pay their

obligation is proven
E. UNPAID MORTGAGE
Requisites for Deductibility:
a. Value of the decedents interest therein,
undiminished by such mortgage or
indebtedness, is included in the value of
the gross estate
b. Mortgage were contracted bona fide &
for an adequate & full consideration in
money or moneys worth
F. UNPAID TAXES
Taxes which have accrued as of the
death of the decedent which were
unpaid as of the time of death,
regardless of whether or not it was
incurred in connection with trade or
business.
F. UNPAID TAXES
The following are NOT deductible:
1. income tax on income received
after death
2. property taxes not accrued before
death
3. estate tax
 G. LOSSES
Requisites for Deductibility:

1. It should arise from fire, storm,

shipwreck, or other casualty, robbery,
theft or embezzlement;
2. Not compensated by insurance or
otherwise
 G. LOSSES
Requisites for Deductibility:

3. Incurred not later than the last day for the

payment of estate tax
4. At the filing of the estate tax return, such
losses have not been claimed as a deduction for
income tax purposes
5. Incurred during the Settlement of the estate
VANISHING DEDUCTION
The deduction allowed from the gross
estate for properties that were previously
subject to donors or estate taxes. It is
called vanishing deduction because the
deduction allowed diminishes over a period
of five years. The rate of deduction depends
on the period from the date of transfer to
the death of the decedent, as follows:
Period of Time between the Percentage of Deduction
death of the prior decedent
and the death of the
decedent
1 year or less 100%
1 year 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 year 20%
Requisites:
1. the present decedent died within 5 years
from transfer of the property from a prior
decedent or donor.
2. The property must be located in the Phils.
3. The property formed part of the taxable
estate of the prior decedent, or of the
taxable gift of the donor.
Requisites:
4. The estate tax or donors tax on the gift
must have been finally determined and
paid.
5. The property must be identified as the
one received from the prior decedent, or
something acquired in exchange therefor
6. No vanishing deduction on the property
was allowable to the estate of the prior
decedent.
Formula:
Step 1. Compute Initial Basis

(Value of the Property Subject to VD) (any

mortgage paid on that property) = Initial
Basis
Formula:
Step 2. Computation of 2nd Deduction

Initial Basis
_______________________ x ELITT = 2nd Deduction
Value of Gross Estate
Formula:
Step 3. Computation of Final Basis

(Initial Basis) - 2nd Deduction = Final Basis

 Formula:
Step 4. Computation of Vanishing Deductions

Provided Vanishing
(Final Basis) x =
percentage Deduction
Example

Leni, inherited land from her father, Jesse, with fair

market value of Php 500,000.00 when inherited. Two
and half years later, Leni died due to Chronic
Lymphocytic Leukemia. The FMV of the land was Php
600,000.00 at that time. The gross estate, on which
the land was part, was 2M. Deductions from the gross
estate amounted to Php 400,000.00
Formula:
Step 1. Compute Initial Basis
(Value of the Property Subject to VD) (any
mortgage paid on that property) = Initial
Basis
=Php 500,000 (since no mortgage
mentioned)
Formula:
Step 2. Computation of 2nd Deduction

Initial Basis
_______________________
x ELITT = 2nd Deduction
Value of Gross Estate
500K
______ x 400K = 100K
P2M
Formula:
Step 3. Computation of Final Basis

(Initial Basis) - 2nd Deduction = Final Basis

500K - 100K = 400K

 Formula:
Step 4. Computation of Vanishing Deductions

Provided Vanishing
(Final Basis) x =
percentage Deduction

400K x 60% = Php240,000.00

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RAY JOHN AGREGADO

LLB 3B