Primer on Estate Tax

ESTATE TAX

What is Estate Tax?

ESTATE TAX is a tax levied, assessed collected, and paid upon the transfer of the net estate of a decedent. (Sec. 84, NIRC)

What is Gross Estate?

Gross Estate of a Philippine citizen consists of the value, at the time of the decedent's death, of all his property, real or personal, tangible or intangible, wherever situated.

In the case, however, of a foreigner who was not a resident of the Philippines, only his properties which are situated in the Philippines will be included in his taxable estate. (Sec. 85, NIRC) 

What does the Gross Estate consist of?

A. Decedent's interest at the time of his death. (Sec. 85, par. (A), NIRC)

B. Transfers made in contemplation of death - This refers to transfers (such as sales, donations, assignments) made by the decedent, by trust or otherwise, in contemplation of or with the intention of taking effect after his death. 

This also includes transfers, by trust or otherwise, of (1) the possession or enjoyment of, or the right to the income from the property; or (2) 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, which, the decedent may have retained for himself during his lifetime, or any period which does not end before his death.

However, a genuine sale made for an adequate and full consideration in money or money's worth, made during the lifetime of the decedent, does not form part of his Gross Estate. (Sec. 85, par. (B), NIRC)

C. Revocable transfers - This refers to transfers made by the decedent, by trust or otherwise, which would be subject to change (via alteration, amendment, revocation or termination) at the date of his death, through the exercise of a power by the decedent alone or in conjunction with any other person. (Sec. 85, par. (C), NIRC)

D. Property passing under general power of appointment - The general power of appointment may be exercised (1) by virtue of a will; (2) by deed executed by the decedent in contemplation of, or the enjoyment or possession of which is intended to take effect on or after his death; or (3) by deed executed by the decedent under which he has retained for his lifetime or a period not ascertainable without reference to his death or does not end before his death either the possession or enjoyment of, or the right to the income from the property; or the right, either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom. (Sec. 85, par. (D), NIRC)

E. Proceeds of life insurance - This refers to the amount of insurance which the decedent's estate, executor, administrator or designated beneficiary would receive, under an insurance policy taken by the decedent upon his own life. 

However, proceeds of life insurance do not form part of the decedent's Gross Estate where his beneficiary had been designated as irrevocable. (Sec. 85, par. (E), NIRC)

F. Transfers for insufficient consideration - This refers to transfers in contemplation of death, revocable transfers and property passing under general power of appointment, where such transfers, trusts, interests, rights or powers were made, created, exercised or relinquished for a consideration in money or money's worth, which is not, however, deemed a bona fide sale. The excess of the fair market value of the property, at the time of the decedent's death, over the value of the consideration received by the decedent shall be included in the decedent's Gross Estate. (Sec. 85, par. (G), NIRC)

How is the Value of the Estate determined?

(A) USUFRUCT

To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there 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 Commission.

(B) PROPERTIES

The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is the higher of --

(1) The fair market value as determined by the Commissioner, or

(2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. (Sec. 88, NIRC)

How is the Net Estate determined?

The value of the Net Estate is determined by deducting the following from the value of the Gross Estate:

1. Deductions allowed to the estate of a citizen or a resident, or deductions allowed to nonresident estates.
2. Transfers for public use.
3. Share in the conjugal property. (Sec. 86, NIRC)

What deductions are allowed to the estate of a citizen or a resident?

1. Expenses, Losses, Indebtedness, and Taxes (Sec. 86, par. (A) (1), NIRC)

(a) Funeral expenses - the amount of which shall be the lower amount between the actual funeral expenses incurred or five percent (5%) of the Gross Estate, and shall, in no case exceed Two Hundred Thousand Pesos (Php200,000.00). 

(b) Judicial expenses for testamentary or intestate proceedings.

(c) Claims against the estate - In order to qualify as a deduction, claims against the estate have to be evidenced by a duly notarized debt instrument, dated at the time the indebtedness was incurred. If the loan was incurred within three (3) years prior to the death of the decedent, the administrator or executor must submit a statement showing how the proceeds of the loan were disposed.

(d) 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.

(e) Unpaid mortgages or any indebtedness on property, where the value of the decedent's interest therein (undiminished by the mortgage or indebtedness) is included in the value of his Gross Estate. Income tax on income received after the death of the decedent, or property taxes accrued after his death, or any estate tax is not included.

(f) Losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. To qualify as a deduction, such losses must not be compensated for by insurance or otherwise; they must not have been claimed as a deduction for income tax purposes in an income tax return, at the time of the filing of the return; and such losses must be incurred not later than the last day for the payment of the estate tax.

2. Property Previously Taxed (Sec. 86, par. (A) (2), NIRC)

Where the property of any person, forming part of the gross estate and situated in the Philippines, has been received by the decedent by way of donation, or from a prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property, within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, an amount equal to the value specified below of such property, to wit:

a. One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

b. Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

c. Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

d. Forty percent (40%) of the value, if the prior decedent died more than  three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and,

e. Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death.

The foregoing deductions shall be allowed:

-Only where a donor's tax or estate tax was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be;

-Only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent; 

-Only to the extent that the value of such property is included in the decedent's gross estate; and,

-Only if, in determining the value of the estate of the prior decedent, no deduction was allowable for property previously taxed, in respect of the property or properties given in exchange therefor. 

Where a deduction was allowed of any mortgage or other lien in determining the donor's tax or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable for Property Previously Taxed shall be reduced by the amount so paid.

Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions for Expenses, Losses, Indebtedness, Taxes, and Transfers for Public Use, as the amount otherwise deductible as Property Previously Taxed bears to the value of the decedent's estate. Where the property consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction.

3. Transfers for Public Use (Sec. 86, par. (A) (3), NIRC)

The amount of all bequests, legacies, devises or transfers to or for the use of the Philippine Government, or any political subdivision thereof, for exclusively public purposes.

4. The Family Home (Sec. 86, par. (A) (4), NIRC)

An amount equivalent to the current fair market value of the decedent's family home, up to One Million Pesos (Php1,000,000.00). The excess of One Million Pesos (Php1,000,000.00) shall be subject to estate tax.

In order to avail of this deduction, the family home must have been the decedent's family home as certified by the barangay captain of the locality.

5. Standard Deduction (Sec. 86, par. (A) (5), NIRC)

An amount equivalent to One Million Pesos (Php1,000,000.00).

6. Medical Expenses (Sec. 86, par. (A) (6), NIRC)

Medical expenses, not exceeding Five Hundred Thousand Pesos (Php500,000.00), incurred by the decedent within one (1) year prior to his death, and substantiated with receipts.

7. Amount Received by Heirs Under Republic Act No. 4917 (Sec. 86, par. (A) (7), NIRC)

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 (An Act Providing That Retirement Benefits of Employees of Private Firms Shall Not Be Subject to Attachment, Levy, Execution, or Any Tax Whatsoever): Provided, That such amount is included in the gross estate of the decedent.

What deductions are allowed to the estate of a non-resident foreigner?

The following may be deducted from the value of that part of the gross estate of a non-resident foreigner, which at the time of his death is situated in the Philippines:

1. Expenses, Losses, Indebtedness and Taxes (Sec. 86, par. (B) (1), NIRC)

That proportion of the deductions allowed for citizens and residents (please refer to Sec. 86, par. (A) (1), NIRC), which the value of such part bears to the value of his entire gross estate, wherever situated.

2. Property Previously Taxed (Sec. 86, par. (B) (2), NIRC)

Where the property of any person, forming part of the gross estate and situated in the Philippines, has been received by the decedent by way of donation, or from a prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property, within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, an amount equal to the value specified below of such property, to wit:

a. One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

b. Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

c. Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

d. Forty percent (40%) of the value, if the prior decedent died more than  three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and,

e. Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death.

The foregoing deductions shall be allowed:

-Only where a donor's tax or estate tax was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be;

-Only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent; 

-Only to the extent that the value of such property is included in that part of the decedent's gross estate which at the time of his death is situated in the Philippines; and,

-Only if, in determining the value of the estate of the prior decedent, no deduction was allowable for property previously taxed, in respect of the property or properties given in exchange therefor.

  Where a deduction was allowed of any mortgage or other lien in determining the donor's tax or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable for Property Previously Taxed shall be reduced by the amount so paid.

Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions for Expenses, Losses, Indebtedness, Taxes, and Transfers for Public Use, as the amount otherwise deductible as Property Previously Taxed bears to the value of that part of the decedent's gross estate which at the time of his death is situated in the Philippines. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction.

3. Transfers for Public Use (Sec. 86, par. (B) (3), NIRC)

The amount of all bequests, legacies, devises or transfers to or for the use of the Philippine Government or any political subdivision thereof, for exclusively public purposes.

When shall deductions from the gross estate of a non-resident foreigner be permitted?

In the case of non-resident foreigners, deductions shall be allowed only if the executor, administrator, or any one of the heirs, as the case may be, includes in the Estate Tax Return the value, at the time of his death, of that part of the gross estate of the nonresident not situated in the Philippines. (Sec. 86, par. (D), NIRC)

May Estate Tax imposed in the Philippines be credited with Estate Tax paid to a foreign country?

Yes. Estate Tax imposed in the Philippines shall be credited with the amounts of any estate tax imposed by the authority of a foreign country. (Sec. 86, par. (E) (1), NIRC)

What are the limitations imposed in determining the amount of tax credit?

The amount of the credit taken shall be subject to the following limitations:

(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's taxable net estate situated within such country bears to his entire net estate; and

(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's taxable net estate situated outside the Philippines bears to his entire net estate. (Sec. 86, par. (E) (2), NIRC)

Are there any exemptions to the Estate Tax?

Yes. The following shall not be taxed:

(a) The merger of usufruct in the owner of the naked title;

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary;

(c) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and

(d) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual: Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes. (Sec. 87, NIRC)

In what cases shall the Notice of Death be filed? Who shall file the same? When shall the same be filed?

In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds twenty thousand pesos (Php20,000.00), the executor, administrator or any of the legal heirs, as the case may be, within two (2) months after the decedent's death, or within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner. (Sec. 89, NIRC)

When shall an Estate Tax Return be filed? What shall it contain?

In cases of transfers subject to the tax imposed herein, or where, though exempt from tax, the gross value of the estate exceeds Two Hundred Thousand Pesos (Php200,000.00), or regardless of the gross value of the estate, where the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee, the executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth:

(1) The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;

(2) The deductions allowed from gross estate in determining the estate; and,

(3) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes.

Estate Tax Returns showing a gross value exceeding Two Million Pesos (Php2,000,000.00) shall be supported with a statement duly certified to by a Certified Public Accountant containing the following:

(a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the the Philippines;

(b) Allowed itemized deductions from gross estate; and

(c) The amount of tax due whether paid or still due and outstanding. (Sec. 90, par. (A), NIRC)

When shall the Estate Tax Return be filed?

The Estate Tax Return shall be filed within six (6) months from the decedent's death. A certified true copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner within thirty (30) days after the promulgation of such order. (Sec. 90, par. (B), NIRC)

In what instance shall an extension of time be granted for the filing of an Estate Tax Return?

A reasonable extension not exceeding thirty (30) days for the filing of the return shall be granted by the Commissioner for meritorious cases. (Sec. 90, par. (C), NIRC)

Where shall the Estate Tax Return be filed?

Except in cases where the Commissioner otherwise permits, the Estate Tax Return shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner. (Sec. 90, par. (D), NIRC)

*This Primer has previously been published on http://www.ibrokermo.com/blogs/legalresources/archive/2012/10/25/primer-on-estate-tax.aspx with the consent of the Dico-Arias & Manlosa Law Firm.