Intro to Transfer taxes

Types of Transfers

Transfer taxes:
Gratuitous transfer (donor and estate tax) – free (donation)

Business taxes:
Onerous transfer (excise tax) – May consideration, not free (sale, barter or exchange) Excise tax

Transfer tax: transfer without consideration; donation

2 types of donation Effectivity tax

1. Donation inter-vivos during the lifetime of the donor and done donor’s tax
2. Donation Mortis Causa Upon death of the donor Estate tax

Nature of transfer taxes

 The subject matter of a transfer tax is the privilege of the transferor to gratuitously transfer
property or rights which takes effect at the date of death of the transferor (estate tax) or during
lifetime of the donor and done (donor’s tax). Although the amount of transfer tax is based on
the net estate or net gifts, it shall not be construed as a property tax. On the basis, transfer tax is
classified as “excise tax” or privilege tax imposed on the act of passing the ownership of
property and not on the value of the property or rights.
Law governing estate tax
 It is a well settled rule that estate taxation is governed by the statute in force at the time of the
death of the decedent. The estate tax accrues as the date of death of the decedent and the
accrual of the tax is distinct from the obligation to pay the same. Upon the death of the
decedent, succession takes place and the right of the state to the tax the privilege to transmit
the estate vests instantly upon death (section 3, RR2-2003)

Note: Estate tax should due or accrued to the time of death

BY RAZ:

TRANSFER TAXES

 Transfer taxes are excise taxes (privilege taxes)

 Impose gratuitous transfer during or after life

DONOR’S TAX
Nature: It is an excise tax imposed on the right to transfer gratuitously one’s lifetime. It is a tax imposed
in the right of the donor to donate, and not on the donor himself.

Purpose: prevent the escape of payment of estate tax throughout lifetime transfer of property that
would have been transferred by will or through death of the donor.

ESTATE TAX
Nature: The object of estate tax is the right to transfer the economic benefits and enjoyment of property
from a decedent to the heir. The state protects the right of the individual on his property and supervises
its transfer from one generation to the next.

JUSTIFICATION OF ESTATE TAX (why there should be an estate tax?)

 Redistribution of wealth theory

-inheritance received by the heir contributes to the unequal distribution of wealth and earnings
because the heir has not actually worked for it.
-the imposition of death taxes (estate taxes) helps redistribute some of the economic benefits
which should have been solely enjoyed by the heir.
 Benefit-received theory
-the government provides services for the transfer of the estate of the decedent, either by law
or by the will.
-it is therefore fair that the government to collect equivalent compensation in proptecting
individual persons and property rights.
 Privilege or state partnership theory
-the state is a passive and silent partnership in the accumulation of wealth a it protects every
individual within its territory.
-hence, it has the right to collect the share which is properly due to it.
 Ability-to-pay theory
-every inheritance receives by an heir is in the nature of unearned wealth
-the effect of inheritance increases the wealth of the heir thereby creating an ability to pay the
tax, and thus contributing to government income.

WHEN DOES ESTATE TAX ACCURE?

 Generally speaking, all transfer taxes accrue at the time of transfer

 Hence, for the donor’s tax, it accrues upon completion of the gift whereby the donor does not
reserve or retain power over the gift.
 But for Estate tax, the transfer happens immediately at the time of the death; hence estate tax
accrues as of the time of death o f the deceased.
PRINCIPLES OF SUCCESSION AND
ESTATE TAX
What is Succession?

(Article 774, NCC) Succession is a mode of acquisition by virtue of which, the property, rights, and
obligations to the extent of the value of the inheritance, of a person are transmitted through his death
to another or others either by his will or by operation of law.

(Article 776, NCC) The inheritance includes all properties, rights and obligations of a person which are
not extinguished by his death.

MODES OF ACQUIRING PROPERTY

 Occupation
 Intellectual creation
 Law
 Donation
 Tradition
 Contract
 Prescription
 Succession

KINDS OF SUCCESSION
 Testamentary succession- if may last will, designation of heir
 Intestate Succession / legal succession– by operation of law, if no will or have will but have void
 Mixed succession

ELEMENTS OF SUCCESSION
1. Decedent
2. Estate
3. Heirs

TYPES OF HEIRS

1. COMPULSORY OR FORCED HEIR --Those that succeed by the force of law to some portion of the
inheritance, in an amount predetermined by law.

Estate: 75% legitime for compulsory heir, 25% free if there is last will testament/voluntary heir.

50% to children, 25% spouse, half of legitimate child to the Illegitimate

 Primary compulsory
a. Legitimate children and their legitimate descendants.
b. Surviving spouse
c. Illegitimate children and descendants, legitimate or illegitimate
Secondary compulsory
a. Legitimate parents and legitimate ascendants (they only inherit only in default of A)
b. Illegitimate parents (no other descendants). They only inherit only in default of A and C

2. VOLUNTARY HEIR --those institutes by the estate in his will to succeed to the inheritance of the portion
thereof which the testator can freely dispose.

3. LEGAL OR INTESTATE

ORDER OF INTESTATE SUCCESSION (free portion)

 Legitimate children or descendants
 Legitimate parents or ascendants
 Illegitimate children or descendants
 Surviving spouse
 Brothers and sisters, nephew or niece
 Other collateral relatives within 5th degree
 State
PRINCIPLES OF ESTATE TAX
DEFINITION OF ESTATE TAX
 A tax imposed on the privilege that a person is given in controlling to a certain extent, the
disposition of his property to take effect upon death.
 It is an excise tax imposed on the act of passing the ownership of property at the time of death
and not on the value of the property or rights.
 Since estate tax accrues as of death, the right of the state to tax privilege to transmit the estate
vests instantly upon death.

ACCRUAL VS. DUE DATE OF ESTATE TAX

Accrual: right upon death of the decedent
Due date: within one year from death

WHO IS THE TAXPAYER OF ESTATE TAXATION?

 The estate as a juridical person

WHO HAS THE PERSONAL OBLIGATION TO FILE AND PAY THE ESTATE TAX?

Order of priority:

a. The administrator or executor

b. Any of the heir(s)
c.

COMPOSITION OF THE GROSS ESTATE

Citizen or resident Estate within and without the PH Real property wherever
Situated, tangible
Personal property
Wherever, intangible
Personal property wherever

Nonresident alien Estate within the PH only all property in PH unless

Excluded on the basis of reciprocity
Clause in intangible
GROSS ESTATE COMPUTATION:
Gross Estate Pxx
Less: allowable deduction xx
Taxable net estate Pxx
6% xx
Estate tax payable Pxx
 INTANGIBLE ASSETS WITH SITUS WITHIN PH

 Franchise which is exercised in ph

 Shares, obligations or bonds issued by any corporations or constituted in PH law
 Shares, obligations or bonds issued by any foreign corporation, 85% of the business is in the PH.
 Shares, obligations or bonds issued by foreign corporation if such have acquired a business situs
in the PH
 Shares of rights In any partnership, business or industry established in the PH

VALUATION OF GROSS ESTATE

Gross estate Pxx

Allowable deduction (xx)
Net taxable estate Pxx
X Estate tax % 6%
Estate tax due Pxx
Less: Estate tax credit (xx)
Estate tax payable Pxx

Valuation (RR 2-2003; RR 12-2018)

In general: the fair market value upon death

In real property: The higher between
 The FMV determined by the commissioner (zonal value) BIR
 The FMV as shown in the schedule of values fixed by the provincial and city assessors (assessed
value)PROVINCIAL OR CITY
In Shares f stocks:
 Unlisted common shares: book value per share
 Unlisted preference shares: par value
 Listed shares: FMV shall be the arithmetic mean between the highest and lowest quotation at a
date nearest the date of death if none is available on the date of death itself
In right to usufruct, use or habitation and annuity:
 In accordance with the latest BASIC STANDARD MORTALITY TABLE taking into account the
probable life of the beneficiary, to be approved by the Secretary of Finance upon
recommendation of the insurance commissioner
ADDITION TO GROSS ESTATE
Taxable transfers made during the lifetime

1. Transfer in contemplation of death

2. Revocable transfers
3. Transfers passing under GPA (General power of appointment
4. Transfers for insufficient consideration (applies to personal properties)
5. Proceeds of life insurance with revocable beneficiary

OTHERS:

1. Decedent’s interest accrued at the date of death

2. Usufruct right transferable to the decedent’s heir
3. Claims against insolvent persons
4. Amount received by the heir under RA 4917

1 IN CONTEMPLATION OF DEATH

I. Death must be contemplated and the thought of death must be the impelling cause of transfer
II. The following are deemed in contemplation of death transfer;
 Where a donation was made with the execution of the will
 Where donation was made due to the decedent’s age and/or the decedent’s known
serious illness at the time of gift.
 Where the time between the making of a gift and the death of the donor was relatively
close.

EXAMPLE

On December 2019, due to a severe prostate cancer, C donated his land to X, his paramour. A
week after, C died. The land, although already in the hands of X, shall be included in the
computation of gross estate of C.

2 REVOCABLE TRANSFERS

I. Transfer of property with retention or reservation of rights over the property by the donor
(decedent) while he still lives
 By gift where the donor has reserved the power to alter, amend and revoke donation.
 The donor retains the option to relinquish such power in contemplation of death.
 Conditional transfers where attached conditions are not completed by the done prior to
the donor’s death.
EXAMPLE:

On June 2021, B gave his car to D, younger brother who’s going to take the CPA board exam on October
2021, with a condition that when D should fail to become CPA in two years, the car shall be taken back
by him (B). B, however, died on September 2021. The transfer is revocable, thus included in the gross
estate of B.

3 TRANSFERS UNDER GPA

I. General power appointment means that the decedent must have power exercisable in
favor of himself, his state or creditors of his estate.
II. A power is ‘special’ if it is expressly not exercisable in favor of the decedent, his estate
or creditors of his estate.
EXAMPLE:
-the power is special if the grandfather has control to the grandson
-The power is general if the
-The power is general if the father can decide who to inherit in his grandsons.

4 SALE OR TRANSFERS FOR INADEQUATE CONSIDERATION

I. If it is a valid sale (in good faith, at arm’s length and free from any donatives’
intent) made during the lifetime of the decedent with full and adequate
consideration, no amount shall be included in the gross income

Example:

G, in contemplation of death, sold his properties to H for 250,000 on November 2019. G died later on
December 2019. If the fair market value at the time of sale was 200,000 and the fair market value at the
time of death is 400,000, how much would be included in the gross estate?

Zero. The sale was valid with insufficient consideration.

II. If it is a sale during lifetime of the decedent but the consideration received is less
than adequate and there was a donation intent, the amount to included in the
gross estate is the difference between the FMV at the time of death less the
consideration received.

Example:

G, in contemplation of death, sold his property to H for 250,000 on November 201. G died on December
2019. In FMV at the time of sale was 370,000 and the fair market value at the time of death is 300,000,
how much would be included in the gross estate?
 300,000 – 250,000 equals 50,000

III. If the transfer made during the lifetime of the decedent is without consideration,
as in the case of in contemplation of death, revocable transfers and transfers
under the GPA, the amount be included is the FMV at the time of death

EXAMPLE:

G, in contemplation of death, transferred his properties to H for 250,000 on December 1, 2019. G died
on December 10, 2019. If the FMV at the time of transfer is 370,000 and the FMV at the time of death
300,000, how much would be included in gross estate?

300,000. The fair market value at the time of death

5 PROCEEDS OF LIFE INSURANCE (not subject to income tax, but taxable in estate tax)

For estate taxation, the following rules shall apply as regards the proceeds of life insurance:

I. If the beneficiary is any third person other than the estate executor or administrator and the
designation is IRREVOCABLE, excluded in the gross estate.
II. If the beneficiary is any third person other than the estate, executor or administrator but the
designation is REVOCABLE, included in the gross estate.
III. If the beneficiary is the estate, executor or administrator, regardless whether the
designation is revocable or irrevocable, included in the gross estate.

EXAMPLE:
Juan took himself a life insurance from sun life insurance in 2015 with a policy value of
2,000,000. He designated his wife Maria and his son Pedro as his irrevocable beneficiaries.
Five years later, in 2020, Juan died and sun life gave the beneficiaries the entire proceeds of
insurance worth 2,000,000. How much should be added in Juan’s gross estate?

Beneficiaries: third person

Designation: Irrevocable
Gross estate: NOT INCLUDED IN HIS ESTATE, EXEMPTED.

Juan took himself a life insurance from sun life insurance in 2015 with a policy value of
2,000,000. He designated his wife Maria and his son Pedro as his beneficiaries, but such
designation is revocable in favor of Juan. Five years later, in 2020, Juan died and sun life
gave the beneficiaries the entire proceeds of insurance worth 2,000,000. How much should
be added in Juan’s gross estate?

Beneficiaries: third person

Designation: Revocable
Gross Estate: 2,000,000

Juan took himself a life insurance from sun life insurance in 2015 with a policy value of
2,000,000. He designated his executor of his will as his irrevocable beneficiary. Five years
later, in 2020, Juan died and sun life gave the beneficiaries the entire proceeds of insurance
worth 2,000,000. How much should be added in Juan’s gross estate?

Beneficiaries: Executor
Designation: Irrevocable
Gross Estate: 2,000,000
OTHER ADDITIONS TO GROSS ESTATE

1 DECEDENT’S INTEREST ACCRUED AT THE DATE OF DEATH

I. A “decedent’s interest” is described as the person’s estate or wealth that he would have
possessed, enjoyed, and disposed had he lived.
II. Also refers to the value of interest in the properties or rights accrued in favor of him on
or before his death which is received only after his death.
III. EXAMPLES ARE: Dividends, profit shares in partnership, accrued interest on deposits or
loans, and rents accrued before his death.

EXAMPLE:
Juan, deceased, is a partner of JBL Engineering Office with a capital investment worth
300,000, and shares in the profit and losses thereof at 40%.He is also a stockholder of
ABC corporation holding 3,000 shares with a fair value of 500,000.

At the time of his death, JBL engineering has an undistributed profits of 500,000, while a
week prior his death, ABC corporation declared a 15.00 cash dividend to all its
shareholders.

Capital investment in JBL 300,000

FV of his shares at ABC
(3,000 shares held) 500,000
ADDITIONS:
Share in JBL’s profit (500,000 x 40%) 200,000
Cash dividend from ABC
(3,000 Shares x 15) 45,000

GROSS ESTATE 1,045,000

2 CLAIMS AGAINST INSOLVENT PERSON

I. These claims refer to the receivable let by decedent which the court found the related
debtor insolvent. (proven by the court that it is insolvent)
II. A claim against an insolvent person must be reported a part of the decedent’ gross estate in
full amount.
III. However, due to the insolvency of the debtor, the same amount may also be deducted from
the gross estate (discussed under deductions from gross estate)
 EXAMPLE:
Juan lent money to Maria an amount of 1,000,000 as a result of her promise to pay him in 3
years time. Three years later, Maria paid only 30% of the amount and went insolvent, which
the court found true upon audit. Hearing this, Juan got a heart attack which caused his
demise.

Answer:
Principal amount loaned 1,000,000
Times: percent of payment 30%
Paid amount 300,000
Unpaid amount 700,000

The unpaid balance of 700,000 is treated as a claim against insolvent person as is therefore
added in Juan’s gross estate. Should there be any interest accrued prior to his death which
also left unpaid shall likewise be added as such. The amount may also be deducted later on
in the computation of his taxable estate.

3 AMOUNTS RECEIVED UNDER RA 4917 (included in gross estate, deduction later)

I. RA 491 is an act providing that retirement benefits of employees of private firm shall not be
subject to attachment, levy, execution, or any tax whatsoever.

 The retirement benefits received by the officials and employees of private firms,
whether individuals or corporate, in accordance with a reasonable private benefit
plan maintained by the employer shall be exempt from all taxes and shall not be
liable to attachment, garnishment, levy or seizure by or under any legal or equitable
process whatsoever except to pay a debt of the official or employee concerned to
the private benefit plan or that arising from liability imposed in a criminal action.

 Provided that the retiring official or employee has been in the service of the same
employer for at least 10 years and is not less than fifty years of age at the time of his
retirement:

 Provided, further, that the benefits granted under this act shall be availed of by an
official or employee only once.

 Provided, finally, that in case of separation of an official or employee from the

service of the employer due to death, sickness or other physical disability of for any
cause beyond the control of the said official or employee, any amount received by
him or by his heirs from the employer as a consequence of such separation shall
likewise be exempt as hereinabove provided.
EXCLUSIONS FROM GROSS ESTATE
What are excluded from Gross Estate?
Under Section 85 and 86 of NIRC
 Capital or exclusive property of the surviving spouse
 Properties outside of the PH of NRA decedent
 Intangible personal property of NRA in the PH when the rule of reciprocity applies.
Under section 87 of NIRC
 Merger of usufruct in the owner of the naked title
 Transmission or delivery of the inheritance or legacy of the fiduciary heir pr legatee to the
fideicommissary
 Transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance
with the will of the predecessor

EXAMPLE:
Merger of usufruct in the owner of the naked title

 Juan died in 2020 leaving his only property, house and lot, to Maria and Pedro, his son and
daughter, with the stipulation that Maria shall inherit the title of ownership while Pedro
will benefit the use of property (usufruct)

If Pedro died after Juan was no heir other than his sister, Maria, there would a merger of
usufruct right in the owner of the naked title (MARIA), hence, non-taxable because Maria is
the rightful owner of the property.

If Maria died before Pedro and there is no heir other than him, he latter will inherit the
property. However, this time it would be subject to estate tax because there is a need to
transfer the ownership from Maria to Pedro.

EXAMPLE:
Transmission of fiduciary heir to the fideicommissary

 Juan died in 2020 leaving his only property, house and lot, to Maria as his fiduciary heir. In
case of death of Maria, she shall transfer the same property to Pedro who is at that time is a
minor brother of Maria.

This will be excluded to Maria’s gross estate, included in Juan’s gross estate

All bequest, devices, legacies or transfers to social welfare, cultural and charitable institutions provided:

 No part of the net income of said institution inure to the benefit of any individual
 Not more than 30% of such transfers shall be used for administration purposes.
UNDER SPECIAL LAW

 Proceeds of life insurance and benefit received by members of the GSIS (RA 728)
 Benefits received by member of SSS by reason of death (RA 1792)
 Amounts received from ph and united states government for war damages
 Amount received from United States Veterans administrations.
DEDUCTIONS FROM GROSS ESTATE
Ordinary deductions:
Losses, Indebtness and taxes
ALLOWABLE DEDUTIONS FROM GROSS ESTATE
 In the computation of net taxable estate, the gross estate of the decedent shall be reduced by
items allowed in the TAX CODE, as amended, to be deducted.
 These items are categorized three;
 Ordinary
 Special
 Share of the surviving spouse

Residents and Citizens NRA

Ordinary Deductions:
o LIT YES YES
o Transfers for public use YES YES
o Vanishing Deductions YES YES
Special Deductions:
o Family home YES (10M) NO
o Standard deductions YES(5M) YES(500K)
o Benefits under RA 4917 YES NO
Share of surviving spouse YES YES

POINTS TO REMEMBER!!!!!
1. Deductions related to exclusive properties are deducted from the exclusive properties
and deductions related to the conjugal/communal properties are also deducted from
such.
2. Deductions which are unattributable to whether exclusive or conjugal are presumed
deductible from conjugal property.
3. All deductions must be duly substantiated, except the Standard deduction

ORDINARY DEDUCTIONS
Losses, Indebtness, and taxes (LIT)

Losses incurred during the settlement of the estate

 May arise from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement and may be claimed as deductions.
 Provided that, such losses are not compensated for by insurance or if insured, only the amount
to the extent not covered for by the insurance may be claimed.
  Such losses have not been claimed as deductions for the income tax purposes in an income tax
return.
 Such losses were incurred not later than the last day for the payment of the estate tax (within
one year)

EXAMPLE:

Juan, married to Maria, died on February 10, 2020 leaving a total estate of 25,000,000 of which
17,000,000 were classified as communal, while the 8,000,000 were exclusive to Juan. The following
losses were incurred:

Property Date incurred Amount of Loss

Office building (communal) July 31, 2020 970,000 non deductible
Personal gadgets (exclusive) July 31, 2020 120,000 120,000 deductible
Vehicle (exclusive) February 15, 2021 500,000 non deductible
(sobra na one year)
Apartment (communal) February 17, 2020 900,000 500,000
 The loss from the office building was claimed as an itemized deduction on his income tax for
year 2020; all other losses were claimed for estate tax.
 The vehicle was insured for an amount of 200,000
 Apartment building was also insured for 400,000

Indebtness

 Indebtness are any amount o debts which remains unpaid upon the death of the decedent.
 They could be;
o Claims against the estate
o Claims of the deceased against insolvent persons
o Unpaid mortgages or any Indebtness

Indebtness: Claims against the estate

 These obligations of the decedent to creditors which remain unpaid upon

the death of the decedent.
 The Indebtness was duly notarized, and, if the loan was contracted within
three years before the death of the decedent, the administrator or executor
shall submit a statement showing the disposition of the proceeds of the
loan.
 A verification as to the beneficiary of proceeds must be made
 In case of accommodation only, the amount must also be claimed as
receivables included in the gross estate.
EXAMPLE:

Juan is a resident of Pasig who died due to an accident on March 25, 2021. On his death, several
creditors claimed repayments fro Juan’s outstanding obligations which were as follows:

Creditor Purpose Date contracted Amount of debt

Pedro House renovation July 31, 2016 1,000,000 (not prior in 3
(communal) years)
Maria Used in his exclusive September 31, 2020 1,400,000 (included)
farm
ABC Bank Hospitalization of Wife February 15, 2021 2,500,000 (included)
DEF bank For his brother, Wan, as November 2, 2020 1,000,000 (included in
an accommodation Gross Estate, but also
an allowable deduction)

Indebtness: claims against Insolvent Persons

 These are the loans and obligations of debtors to the decedent which remains unpaid and for
which the court found the related debtor insolvent.
 For claims of the deceased against insolvent persons where the value of the decedent’s interest
therein is included in the value of the gross estate.

EXAMPLE:

Juan is a resident of Pasig who died due to an accident on March 25, 2021. On his death, he had several
claims against debtors who still have not fully paid their Indebtness to him as follows;

Debtors Status of the debtor Date contracted Amount of debt

John Capable of paying July 31, 2020 500,000 (not
deductible)
Maria Found insolvent by the September 31,2020 300,00 (deductible)
court
Peter Nowhere to be found February 15, 2018 700,000 (not
deductible)
Luke Asking for Payment November 4, 2019 400,000 (not included)
extension
(All included in Gross estate, only Maria can be deducted.)

Indebtness: Unpaid Mortgages

 Unpaid mortgages or any Indebtness shall be limited to the extent that they were contracted and
for an adequate and full consideration in money or money’s worth.
 For unpaid mortgages in respect to a property, the value of the decedent’s interest therein must
be included in the gross estate, undiminished by such mortgage or Indebtness.
EXAMPLE:
The gross estate of Juan, who was married decedent, was 3,500,000 wherein 820,000 were inherited
from his mother who died four years ago. The inherited property has an unpaid mortgage of 200,000,
whereby 60% of it was paid during the lifetime of Juan.

The remaining unpaid mortgage which is 40% of the 200,000 may be claimed as a deduction against the
exclusive gross estate, the property inherited being exclusive.

CASUALTY LOSSES BY TABAG:

Requisites:
 Incurred during the settlement of the estate.
 Within one year after death if after 2018. 6 months if before 2018
 Arising from fires, storms, shipwreck, or other casualties, or from robbery, theft and
embezzlement.
 Not compensated by insurance
 Not claimed as deduction for income tax purposes
CLAIMS AGAINST INSOLVENT PERSONS
 Requisites:
1. Value of the claims is included in the gross estate
2. The insolvency is proven
 Amount deductible- the amount of receivables that impossible to collect.

ACCRUED AND UNPAID TAXES

Unpaid taxes:

 Requisites- the tax must have accrued before the death of the decedent.
 Amount deductible- unpaid taxes that accrued before the decedent’s death but not including;
1. Any income tax upon income received after death
2. Property taxes not accrued before death
3. Estate tax from transmission of his estate.

Taxes must have accrued but not paid as of the time of death.

The following taxes are non-deductible:

 Income tax for income received after death

 Property tax not accrued prior death
 Estate tax
EXAMPLE:
Juan, married, died on January 2, 2021 with few unpaid taxes below
Accrued tax Tax object Date due Amount of tax
Income tax Juan’s net income in April 15, 2021 300,000 (deductible)
2020 because already
accrued in income tax
Property tax Real property of Juan April 20, 2021 100,000 (not
 (exclusive) for year deductible)
2021
Percentage tax For Juan’s 2020 4th January 25, 2021 250,000 (not
quarter sale deductible) because
related to business
Estate tax For Juan’s taxable January 2, 2022 400,000 (not
estate deductible)

Ordinary deductions:
Transfers for public use and vanishing
 These are donations and contributions, by virtue of death to;
o Government/political subdivisions
o Non-government org (accredited)
o Charitable/religious institutions
 These are actually exemptions to estate tax provided that not more than 30% are used
for administrative purposes and income of such institutions does not inure to the benefit
of private individuals (such as distribution of profits through dividends)

EXAMPLE:
Juan, on his last will, made a donation to the Ph Red Cross in the form of cash amounting
2,000,000, and a transfer of his idle real property to the city government of Butuan. The
property has a fair value of 10,000,000. All transfer will be taken from the estate’s free
portion.

How will these transfers be exempted from estate tax?

Answer:
The donation to the Red Cross (cash) and the transfer to the City Government of Butuan
(real property) will be both exempted from estate tax and thus be deducted from the GE if
the following conditions are met:
 Not more than 30% of the cash donations are used for administrative purposes (PH red
cross)
 Not more than 30% of the property donations are used for administrative purposes (For
the city government of Butuan)
 The income of such institutions does not inure to the benefit of the private individuals.

VANISHING DEDUCTIONS (property previously taxed)

 Vanishing deductions, also known as property previously taxed, are allowed to be

deducted from the decedent’s gross estate but the amount to be deducted are
diminished depending on the years gap prior to transfer.
 EXAMPLE:
Juan died on November 1, 2018 and transferred his only property left to Pedro, his
don, three years later, Pedro dies due to car accident. The only property left by
Pedro was that property he inherited from his father.

THERE IS NO DOUBLE TAXATION HERE. BECAUSE THE TAXED HERE IS THE RIGHT AND
NOT THE PROPERTY. In this case, the property from the first transfer (Juan to Pedro) was
already subjected to transfer tax (estate tax). And three years after, the same property will
again be subjected to another transfer tax (estate tax) when Pedro died.

PURPOSE OF VANISHING DEDUCTION

o To minimize the effects of a double tax on the same property within a short
period of time.

CONDITIONS FOR ALLOWANCE

 There is a property forming a part of the gross state of the present decedent
situated in the PH.
 The present decedent acquired the property by his inheritance or donation within 5
years prior to his death.
 The property was previously taxed upon inheritance or gift

AMOUNT OF VANISHING DEDUCTION

 The amount to be deducted as vanishing deduction may be claimed as follows
depending on the interval between the prior transfer (inherited or gift) to the death of
the current decedent.

More than Note more than Percentage

0 1 year 100%
1 year 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%
5 years xxx 0

ILLUSTRATION:
The following information is provided by the executor of a married decedent:

a. Exclusive property (FMV of 1,450,000 when inherited 3 and a half years ago was
subjected to a mortgage of 450,000 at that time); FMV at the time of death 1,300,000.
b. Conjugal properties of the decedent husband and surviving wife, 4,700,000.
c. Unpaid mortgage on inherited property, 350,000.
 d. Judicial expenses incurred after the death in connection with the estate
settlement,320,000
e. Other obligations, 570,000

VANISHING DEDUCTION?

Step 1: Compute gross estate:

a. Exclusive property (FMV of 1,450,000 when inherited 3 and a half years ago was
subjected to a mortgage of 450,000 at that time); FMV at the time of death 1,300,000.
b. Conjugal properties of the decedent husband and surviving wife, 4,700,000.
c. Unpaid mortgage on inherited property, 350,000.
d. Judicial expenses incurred after the death in connection with the estate
settlement,320,000
e. Other obligations, 570,000
The total GE is 6,000,000 (1,300,000 in exclusive and 4,700,000 in conjugal)

Step 2: Determine the initial value of the property previously taxed:

 An initial value is the lower between the fair value at the time of transfer (inherited or
gift) and the fair value at the time of death of the decedent.

Exclusive property (FMV of 1,450,000 when inherited 3 and a half years ago was subjected to
a mortgage of 450,000 at that time); FMV at the time of death 1,300,000.

Step 3: determine if there are any mortgages paid by the decedent prior to his death.

 If there are any paid mortgages, the initial value shall be reduced by the paid mortgage.
 Exclusive property (FMV of 1,450,000 when inherited 3 and a half years ago was
subjected to a mortgage of 450,000 at that time); FMV at the time of death 1,300,000

The property was subjected to a mortgage of 450,000 but at the time of death of the decedent
the mortgage was only 350,000. Thus, the decedent had already paid 100,000.

Hence, the initial value shall be reduced by 100,000. Therefore, the new initial basis shall be
1,200,000 (initial value 1,300,000 minus 100,000 mortgages)

Step 4: the new initial basis shall be further reduced by a portion of LIT pus Transfer for public
use.

 The new initial basis shall reduce by a portion of LIT and transfer for public use.
 In the problem, the following were given:
o Unpaid mortgage on inherited property, 350,000
o Judicial expenses incurred after death in connection with the estate settlement,
320,000
 o Other obligations, 570,000

There was no transfer for public use, thus, only the unpaid mortgage and other obligations shall
be used.

Unpaid mortgage on inherited property 350,000

Other obligations 570,000
Total 920,000
Multiply by: NIB/TGE 1.2M/6M
Deductible portion from new initial basis P 184,000

The Final Basis shall be 1,016,000 (1,200,000 less 184,000)

Step 5: determine the interval between the prior transfers to the present death.

Exclusive property (FMV of 1,450,000 when inherited 3 and a half years ago was subjected to a
mortgage of 450,000 at that time); FMV at the time of death 1,300,000

More than Note more than Percentage

0 1 year 100%
1 year 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%
5 years xxx 0

SUMMARY OF STEPS IN COMPUTING VANISHING DEDUCTION

 SPECIAL DEDUCTIONS:
Standard deductions, family home and RA 4917

SPECIAL DEDUCTIONS

 Only resident and citizen have the privilege of claiming this special deduction.
 RA 10963 (train law), NRA could now enjoy a standard deductions of 500,000 while
other could deduct an amount of 5,000,000

STANDARD DEDUCTION

 In the case of citizen or resident of the PH, by deducting from the value of 5,000,000 in
the GE
 NRA could deduct 500,000 in GE which given they has an estate in the PH.
 The standard deduction may be deducted without need of substantiation.

FAMILY HOME

 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 brgy captain.
 The family home, at its fair value at the time of death, must be declared and included in
the gross estate of the decedent.
 The amount deductible must be equivalent to the current fair market value of the
decedent’s family home, but not to exceed ten million pesos (10,000,000 maximum)
 If the family is conjugal, it must be divided by two.

EXAMPLE: Family home as exclusive property

1. Juan died leaving his only property, residential house and lot, to his wife, Maria. The fair
value of the property was 8,000,000.

In Juan’s exclusive GE, the property must be included so he can deduct the same. The max
deductible amount is 8M.

2. Juan died leaving his only property, residential house and lot, to his wife, Maria. The fair
value of the property was 11,000,000.

In Juan’s exclusive GE, the property must be included so he can deduct the same. The max
deductible amount is 10M.

EXAMPLE: Family home as communal.

 1. Juan died leaving his only property, residential house and lot, to his wife, Maria. The
property was part of the community property and fair value of the property was
15,000,000.

In Juan’s communal GE, the property must be included to deduct the same. 15,000,000 divide 2
equals 7,500,000. Maximum deduction is 7,500,000.

2. Juan died leaving his only property, residential house and lot, to his wife, Maria. The
property was part of the community property and fair value of the property was
21,000,000.

In Juan’s communal GE, the property must be included to deduct the same. 21,000,000 divide 2
equals 10,500,000. Maximum deduction is 10,000,000.

Example: Partly exclusive and communal

Juan, is married to Maria since 2005, died leaving a property, their residential house an
lot, to his wife. The following information was given:

Lot gift from father to Juan in 2006, FMV is 4,500,000

House construction using conjugal funds
Construction cost (completed 2007) 8,000,000
Fair value upon death 10,000,000

Computation:
Lot gift from father to Juan in 2006, FMV is 4,500,000
Fair value upon death 10,000,000
AMOUNT INCLUDED IN GE 14,500,000

DEDUCTIBLE FAMILY HOME:

Lot gift from father to Juan in 2006, FMV is 4,500,000
½ of fair value of the house (communal) 5,000,000
Deductible amount 9,500,000

RA 4917 RETIREMENT BENEFIT TAX (exempted in Tax but should

be included in GE)

 The same amount must be deducted from the GE under special deductions.
 SHARE OF THE SURVIVING SPOUSE:

 For single and unmarried decedent, the computation of estate tax is simple and
straightforward as there is no need to determine whether properties or deductions are
exclusive or communal.
 Married decedent, the share of the surviving spouse from conjugal or communal
property is allowed as deduction from GE estate to arrived t net taxable estate.

ILLUSTRATION:

Juan, married to Maria, died leaving the following”

a. Family home, exclusive to Juan 13,000,000

b. Other exclusive property 7,600,000
c. Communal property 15,000,000

Deductions claimed:

d. Unpaid obligations 1,500,000

e. Losses on communal properties, occurred 3 months
After death due to fire, with 100,000 insurance 500,000
f. Donation mortis causa to city government of Makati f
From exclusive properties 780,000

SOLUTION: If the family home is exclusive to Juan

SOLUTION: if the family home is Communal

GROSS ESTATE OF MARRIED DECEDENT

 PROPERTY OF RELATION:

RULES IN DETERMINING THE PROPERTY OF RELATIONSHIP

1. Agreement on marriage settlement (prenuptial)

2. If there was no prenuptial agreement:
 The date of marriage took place before August 3, 1988, conjugal partnership of
gains.
 Date of marriage took place after August 3, 1988, absolute community of
property.

GENERAL ASSUMPTIONS:

 Property for personal and exclusive use of the either the spouse shall be exclusive,
however, jewelry, shall form part of the communal property.
 Property acquired in exchange of exclusive property shall be exclusive.
 Any property acquired during marriage is presumed to be communal, unless proven
otherwise.
 PROPERTY REGIMES (general rule)

ABSOLUTE SEPERATION OF PROPERTY

Exemption:

1. Property which they acquired jointly

2. Properties donated or inherited designated to both of the spouse.

CONJUGAL PROPERTY OF GAINS

1. All property before marriage is Exclusive

2. All property after or during marriage in Common
3. ALL FRUITS ARE COMMON (either exclusive or common)

Exemption:
1. Property derived from donation or inheritance received exclusively

Personal property: ALL EXCLUSIVE BEFORE OR AFTER MARRIAGE

ABSOLUTE COMMUNITY OF PROPERTY

First marriage: common, common

Next marriage and has descendants in prior marriage: exclusive, common

EXEMPTION:
1. Properties derived from inheritance or donation to either spouse- EXCLUSIVE
2. IF PROPERTY IS COMMON, FRUIT IS COMMON, IF PROPERTY IS EXCLUSIVE THE FRUIT IS
EXCLUSIVE
Personal Property: Exclusive except Jewelry, but can be exclusive if thru inheritance/donation.
ESTATE TAX PAYABLE (COMPUTATION)
UNMARRIED DECEDENT:

LEGAL BASIS: According to Sec. 84 of the National Internal Revenue Code, as amended by RA
10963-whether resident or nonresident of the PH a tax rate of 6% base on the value of Gross
Estate.

ILLUSTRATION:
Juan, single, a citizen of the PH and a resident of Bohol, died on January 26, 2021 leaving the
following properties:

 Agricultural land in Bohol, inherited from the father

two and a half years ago when the FMV was 10,000,000, FMV
today is 12,000,000
 Personal properties 3,600,000
 Family home 7,000,000
 Claims against insolvent person 1,000,000
 Proceeds of life insurance, the estate being the beneficiary 1,400,000

Deduction claimed:

 Unpaid mortgage on real property inherited, the mortgage

Assumed at that time was 1,000,000, but the remaining balance now is 400,000
 Other obligations contracted last two years 550,000
 Accrued and unpaid taxes at the time of his death 300,000
 Losses incurred on his farm in Bohol on March 3, 2021 350,000
 Donation to Charity to take effect on his death, a cash worth 500,000

COMPUTATION:

Step 1: Compute GE

Agricultural Land (FMV in the time of death) 12,000,000

Personal properties 3,600,000
Family home 7,000,000
Claims against insolvent person (can be included to deduction) 1,000,000
Proceeds on life insurance (not deductible bcs beneficiary is
not a third party 1,400,000
TOTAL GE: 25,000,000

Step 2: compute the ordinary deduction

(Losses, Indebtness, Taxes and transfer for public use)

Ordinary deduction
Losses incurred on his farm on March 3, 2021 350,000
Unpaid mortgage 400,000
Other obligation contracted the last two years 550,000
Claims against Pedro, an insolvent person 1,000,000
Accrued and unpaid taxes at the time of his death 300,000
Donation to charity 500,000
Total ordinary deduction before vanishing deduction 3,100,000

Step 3: compute the vanishing deduction

Initial basis
FMV at the time of transfer (lower than the FMV at the time of death) 10,000,000
Less: paid mortgage by Juan (600,000)
NEW INITIAL BASIS 9,400,000
Less: deduction portion of LIT AND TPU
9,400,000 x 3,100,000
25,000,000 (1,165,600)
FINAL BASIS 8,234,400
Multiply by: applicable rate 60%
VANISHING DEDUCTION 4,940,640

Step 4: compute the estate tax

Total GE 25,000,000
Less:
Ordinary Deduction before VD (3,100,000)
Vanishing Deduction (4,9640,640)
Estate after Ordinary Deduction 16,959,360
Less: Special deductions
Standard Deduction (5,000,000)
Family home (7,000,000)
NET TAXABLE ESTATE P 4,959,360
Multiply by: estate tax rate 6%
ESTATE TAX PAYABLE P 297,561.60
 MARRIED DECEDENT:

ILLUSTRATION:
Juan, married to Maria, died laving the following:
 Family home, communal 13,000,000
 Exclusive Personal properties 10,600,000
 Exclusive real properties inherited from
Mother 1 and a half year ago 5,000,000
 Communal properties 11,400,000

Deduction claimed:
 Unpaid mortgage on real property inherited, the
Mortgage assumed at the time was 800,000, but
The balance now is 200,000
 Unpaid obligations 1,500,000
 Losses on communal propertied, occurred 3 months
After death due to fire, with 100,000 insurance 500,000
 Donation mortis causa to city government
Of Makati from exclusive properties 780,000

SOLUTION:
Step 1: compute for GE

Exclusive communal total

Family home 13,000,000 13,000,000

Exclusive Personal properties 10,600,000 10,600,000
Exclusive real properties inherited 5,000,000 5,000,000
Communal properties 11,400,000 11,400,000
GROSS ESTATE 15,600,000 24,400,000 40,000,000

Step 2: compute ordinary deduction before vanishing deduction

Exclusive communal total

Unpaid mortgage on property

Inherited 200,000 200,000
Unpaid obligation 1,500,000 1,500,000
Losses on communal properties 400,000 400,000
Donation to Makati 780,000 780,000
ORDINARY DEDUCTIONS 980,000 1,900,000 2,880,000
Step 3: Compute the vanishing deduction

Initial Basis: FMV at the time of death because FMV

on the time of transfer is not given 5,000,000
less: mortgage paid (600,000)
NEW INITIAL BASIS 4,400,000
Less: portion of LIT AND TPU
4,400,000 x 2,880,000
40,000,000 (316,800)
FINAL BASIS 4, 083,200
Multiply by: Applicable rate 80%
TOTAL VANISHING DEDUCTION 3,266,560

Step 4: compute the estate tax

Exclusive communal total

Family home, communal 13,000,000 13,000,000

Exclusive properties 10,600,000 10,600,000
Exclusive property inherited 5,000,000 5,000,000
Communal properties 11,400,000 11,400,000
GROSS ESTATE 15,600,000 24,400,000 40,000,000
LESS: Ordinary deduction
Unpaid mortgage on property
Inherited (200,000) (200,000)
Unpaid obligation (1,500,000) (1,500,000)
Losses on communal properties (400,000) (400,000)
Donation to Makati (780,000) (780,000)
Vanishing deduction (3,266,560) (3,266,560)
ESTATE AFTER ORD. DEDUCTION 11,535,440 22,500,000 33,853,440
LESS: Special deduction
Standard Deduction (5,000,000)
Family home (13,000,000/2) (6,500,000)
SHARE OF THE SURVIVING SPOUSE (22,500,000/2) (11,250,000)
NET TAXABLE ESTATE 11,250,000
Multiply by: estate tax rate 6% 6%
ESTATE TAX PAYABLE 666,206.40
 NON-RESIDENT ALIEN DECEDENT:

DEDUCTION ALLOWED FOR NRA

 Standard deduction- 500,000
 Proportion of the LIT which value of the part bears to the value of his entire gross estate
wherever situated;
 Vanishing deduction (situated in PH)
 TPU (situated in PH)
 Share of the surviving spouse in the communal property (situated in the PH)

ILLUSTRATION
John, resident and citizen of Hungary, died leaving the following properties (amount in peso);

PH HUNGARY TOTAL

 Family home 13,000,000 13,000,000

 Personal properties 7,00,000 10,600,000 17,600,000
 Other properties 4,000,000 4,000,000
 Cash deposits 2,400,000 3,000,000 5,400,000

Deduction claimed:
 Unpaid mortgage on
Family home 800,000 800,000
 Other unpaid obligations 1,500,000 500,000 2,000,000
 Losses to personal properties 1,200,000 2,000,000 3,200,000
 Estate tax paid in Hungary 1,000,000 1,000,000

Step 1: compute for the GE

PH HUNGARY TOTAL

Family home 13,000,000 13,000,000

Personal properties 7,000,000 10,600,000 17,600,000
Other properties 4,000,000 4,000,000
Cash deposits 2,400,000 3,000,000 5,400,000
GROSS ESTATE 9,400,000 30,600,000 40,000,000
Less: Allowable deduction
Unpaid mortgage on
Family home (800,000)
Other unpaid obligations (2,000,000)
Losses to personal properties (3,200,000)
6,000,000 x 9,400,000 (1,410,000)
40,000,000

Standard deduction (500,000)

NET TAXABLE ESTATE 7,490,000
Multiply by: 6%
ESTATE TAX PAYABLE 449,400
 DECEDENT WITH PROPERTIES WITHIN AND OUTSIDE THE PHILIPPINES:

Juan, a resident of Cebu, married to Maria, died leaving the following;

PH JP

 Family home 13,000,000

 Exclusive personal properties 7,000,000 10,600,000
 Other properties, exclusive to Juan 4,000,000
 Cash deposits, from exclusive money 2,400,000 3,000,000
 Investments, communal 5,000,000 8,000,000

Deduction claimed:
 Unpaid mortgage on family home 800,000
 Other unpaid obligations 1,500,000 500,000
 Losses on personal properties 1,200,000 2,000,000
 Estate Tax paid in Japan 1,000,000

SOLUTION:

Step 1: classify each property located within and outside as exclusive or communal, then solve
for GE.

Philippines Japan TOTAL

Exclusive Communal Exclusive Communal
Family home, 13,000,00 13,000,000
communal
Exclusive Personal 7,000,000 10,600,000 17,600,000
Properties
Other personal 4,000,000 4,000,000
properties,
exclusive
Cash deposits 2,400,000 3,000,000 5,400,000
Investment, 5,000,000 8,000,000 13,000,000
communal
GROSS ESTATE 9,400,000 18,000,000 17,600,000 8,000,000 53,000,000

PHILIPPINE ESTATE (9,400,000 + 18,000,000) P27, 400,000

JAPAN ESTATE P25, 600,000
TOTAL GROSS ESTATE 53,000,000