THE GROSS ESTATE

The starting point in computing Philippines estate tax liability is the determination and
valuation of gross estate.

The gross estate consists of all properties (real or personal- tangible or intangible) owned by a
decedent at the time of his death. (Sec. 85, NIRC); however, it shall not include the separate
(exclusive) properties of the surviving spouse.

The property is called a gross estate because it is to be reduced by the decedent's debts
(including taxes), funeral expenses, share of the surviving spouse, and other permissible
deductions to arrive at a net taxable estate.

Composition of the Gross Estate

In general, all properties, real or personal, tangible or intangible, wherever located, in the case
of decedent citizens and resident aliens, shall be included as part of the gross estate.(Sec. 3,
Rev. Reg.2-2003; Sec. 85,NIRC)

In case of non-resident aliens, only properties located in the Philippines upon death are subject
to Philippine estate tax, unless the property is subject to reciprocity. (Sec. 85 & 104, NIRC)

Decedent Location of property

Within Without
Filipino citizen or resident alien Yes Yes
Non-resident alien Yes No

Classification of Properties

For estate tax purposes, there are generally three forms of property, namely;
1. Real property includes land, building, or any Building even equipment permanently attached
to the land.
2. Tangible personal property is a property with physical that could be seen or touched such as
vehicles, artwork , jewelry, clothing, equipment, and furniture.
3. Intangible personal property IS a property other than re, and tangible personal properties. It
has no physical form and its value lies in the rights Conveyed in it. For example cash bank
deposit, receivables, insurance, goodwill, franchise' patents, trademarks, bonds, stock
certificates and other investment securities.
Illustration
Supposing the following properties are listed as part of the estate of Dina Gising:

Farm land in the Philippines, jewelry pawned in a pawnshop in the Philippines, Bonds issued by
a Philippine corporation, bank deposit in a Philippine bank, shares of stock of a Philippine
corporation, shares of stock of a foreign corporation, investment. in partnership established in
the Philippines, copyright and franchise exercised in the Philippines, and car in USA.
Under assumption that Dina Gising is a (a) citizen or resident alien, and under assumption that
she is a (b) nonresident alien, her gross estate would be listed as follows:

Properties:
(a) Citizen or Resident (b) Non-resident Alien
1. Farm in the Philippines Yes Yes
2. Jewelry in the Philippines Yes Yes
3. Bonds issued by Philippine corporation Yes Yes
4. Bank deposit in the Philippines Yes Yes
5. Shares of stock in Philippine corporation Yes Yes
6. Shares of stock in foreign corporation Yes No
7. Investment in partnership established in the Philippines Yes Yes
[Link] being exercised in the Philippines Yes Yes
[Link] being exercised in the Philippines Car in USA Yes Yes
[Link] in USA Yes No

Below the summary of properties to be included in the gross estate for estate tax in the
Philippines :

Figure 3.1
 SUMMARY OF PROPERTIES INCLUDED IN THE GROSS ESTATE

Included in the Gross Estate Resident/Filipino Non-resident

Alien
1 Real or immovable property situated
(a)in the Philippines xxx xxx
(b)outside the Philippines
xxx
2 Tangible personal property
situated xxx xxx
(a)in the Philippines xxx
(b)outside the Philippines

3 Intangible personal property with

situs xxx xxx
(a)in the Philippines xxx
(b)outside the Philippines
4 Franchise exercised
a)in the Philippines xxx xxx
(b)outside the Philippines
xxx
 Shares obligations or bonds issued by
corporations organized or constituted xxx xxx
under the Philippine laws
 Shares, obligations or bonds issued by
Any Foreign corporations (85% of xxx xxx
business located in the Philippines)
 Shares, obligations or bonds
issued by Foreign corporations xxx xxx
that acquired business situs in the
Philippines
 Shares or rights in partnership
business or industry established xxx xxx
in the Philippines
Notes:

[Link] a general rule, the saws of a property of the domicile or residence of the owner (51 Am Jur
484-495).
[Link] of stocks acquired by a non-resident alien from domestic corporation are taxable in
the Philippines,(Coll vs. Fisher, L- 1162,January 28 1961; wells Fargo Bank vs. Coll., 70 Phil. 505
[Link], mortgages, and certificates of stocks are taxable at the place where they are physically
located. (Bumet vs. Brooks, 288 US 378)
[Link] statutory provision which exempt bonds, notes, bills and the applicable to the estate
tax since this tax is an excise tax on transfer and not on the property transferred.
[Link] personal property located within the Philippines of a non-resident alien is subject
to the rule of reciprocity. If there is reciprocity it is not subject to estate tax in the Philippines.
(Sec.85 an Sec. 104 of the NIRC)

VALUATION OF THE GROSS ESTATE

For the purpose of computing the estate tax, it is necessary that the gross estate of the
decedent be appraised or valued at time of death. (Sec.88 (B), NIRC; Sec. 5, Reg. 2-2003)

The date of valuation is at the time of death because the transfer of properties from the dead
to the living takes effect at the moment of death. ( Art. 777, Civil Code)

The following rules shall be observed in the valuation of the gross estate:

1. In general, the gross estate shall be valued at its fair market, value at the time of the
decedent, death. . (Sec. 88, NIRC)

The property is to be valued as of the decedent's death upon the date the tax accrues
regardless of any subsequent contingency affecting the estate. (Lorenzo vs. Posadas, 64,)
Phi.353)

Illustration
The estate of a decedent, Mr. Dido, has a fair value , P5,000,000 at the time of his death. He
inherited this property from his father 10 years ago when its fair value was P2,000,000.
The amount to be included in the gross estate of Mr. Dick would be valued at P5,000,000.

[Link] properties should be valued at the current fair market value (FMV) as shown in the
schedule of values fixed by the Provincial/City Assessors, or the fair market value determined
by the B1R Commissioner, whichever is higher. (Sec. 88, NIRC)

Illustration
Mr. Todas died leaving the following real properties in Baguio City:
Fair market values by
Baguio City BIR
Assessors Commissioner
House and lot P10,000,000 P12,000,000
Subdivision lots 20,000,000 P19,000,000
Totals P30,000,000 P31,000,000

The value of the real properties of Mr. Todas to be included in his gross estate would be
P32,000,000, determined as follows:
Fair market values by Higher values
Baguio City BIR Reportable
Assessors Commissioner Gross Estate
House and lot P10,000,00 P12,000,000 P12,000,000
Subdivision lots 20,000,000 P19,000,000 20,000,000
Totals P30,000,000 P31,000,000 P32,000,000
[Link] properties should be reported at the acquisition cost for the recently acquired
properties or the current market price for the previous acquired properties.

Illustration
Mr. Pahiga died leaving a car which he purchased for P1,000,000 five years ago. At the time of
his death, the car has a book value of P500,000 but can be sold only for P400,000.

The car should be included as part of the gross estate at a current market value of P400,000.

4. Stocks, bonds and other securities

a. If listed in the local stock exchange - the value is the mean between the highest and the
lowest quoted selling prices at the date nearest the date of death, if none is available on the
date of death.

b. If not listed in the local stock exchange:

1) Unlisted common shares should be valued at book value at the date of death.
2) Unlisted preferred shares are valued at par value.
In determining the book value of the unlisted common shares investment acquired at P110,000
from San Pedro Corporation.

At the time of death, the stockholders. equi, of San Pedro Corporation shows the following
information:
Capital stock
Common. 100,000 shares. par P100 P10,000,000
Preferred, 60.000 shares at P200 12,000,000
Reserves:
Revaluation surplus 400,000
Additional paid-in capital - common shares 600,000
Additional paid-in capital -preferred shares 1,000,000
Retained earningas 6,000.000
Total Stockholders' equity P30,000,000

The liquidating value of preferred shares is P220 per share.

Required: Determine the reportable value of investment In common stock as part of the gross
estate if the securities are:
[Link] in the local stock exchange assuming that each common share has an initial sales price
of P140 and closing sales of P160 at the time of death.
2. Not listed in the local stock change.

Answers:
1. If listed in the local stock exchange, the value of investment to common stock to be reported
as part of the gross estate would be:

Average selling price per share (P140+P160)/2 P 150

Multiplied by No. of common shares invested 10,000
Value of securities as part of gross estate P1,500,000

2. If listed in the local stock exchange, the value of investment to common stock to be reported
as part of the gross estate would be:

Total stockholders’ equity P30,000,000

Less :Liquidating value of preferred stock
 (P220 x 60,000 shares) 13,200,000
Revaluation surplus 400,000
Total book value to common shares P16,400,000
Divided by outstanding common shares 100,000
Book value per share P 164
Multiplied by number of Mr. Tulog’s
Investment in common shares 10,000
Value of securities as part of gross estate P 1,640,000

ADDITIONS TO THE GROSS ESTATE

In addition to the properties rights that are easily and physically identifiable, there are still
some rights or properties which are not physically included in the estate at the date of death,
but are still to be included as part of the gross estate of the decedent for estate tax
computation.

The following are some of the unidentifiable rights or properties to be added in the gross
estate:

1. Taxable transfers:
(Transfers during the lifetime of the decedent)
a. Revocable transfers:
b. Transfers in contemplation of death; and
c. Property passing under general power of appointment.
d. Transfers for insufficient consideration;

2. Others:
a. Decedent's interest accrued at the date of death;
b. Proceeds of life insurance with revocable beneficiary:
c. Claims against an insolvent person; and
d. Amount received by heirs under R.A. No. 4917.
Note: Inheritance includes not only the property and the transmissible obligations existing at
the time of death, but also those which have tiled thereto since the opening of the succession.
(Art. 781, Civil Code)

Revocable Transfer
Revocable transfer refers to a transfer of property with or reservation of rights over the
property by the donor (decedent while he still lives. The following instances describe revocable
transfers:
I. By gift where the donor has reserved the power to alter amend, and revoke donation. (Sec.
85 C(1), NIRC)
2. The donor retains the option to relinquish such power in contemplation of death. (. (Sec. 85
C(1), NIRC)

As a general rule, if the enjoyment of property transferred decedent is subject at the date of his
death to any change through the exercise of a power to revoke, alter, amend, or terminate the
transfer, the transferred property is included in the decedent's estate. (Jur 2d, p. 788)

Illustration
John, 79 years old, donated a parcel of land with a fair value of P1,000,000 in favor of his son,
Peter. John, however, retained the power to amend or terminate the transfer at will. Peter died
ahead of John. Upon the death of John, will the parcel of land be included as part of John's
gross estate?

Yes. Upon the death of John, the parcel of land shall be included as part of his gross estate
because he retained the power to revoke the transfer, and such he is still the owner of the
property.

It has been held that mental incompetence of the decedent does not destroy the power to
revoke transfers neither does the appointment of a conservator for his property. The power
continues to exist even though the decedent may not have been capable of exercising it. At
most it remains in abeyance until such time as he regained his capacity. (Hurd vs.
Commissioner, 160 F (d) 610, Round, Jr. vs. Commissioner, 332 F. (2d) 570)

Notes:
1. Revocable transfers cover the following properties:
a. Transfer with retention of interest to income or with right to designate persons
who will enjoy income or property . (Sec. 85B, NIRC)

b. Donations mortis causa even without retention of interest while the decedents
still lives. (Puig. Vs. Penaflorida, L-15939, January 31, 1966)
c. Conditional transfer if the transferee predeceased the transferor, the property
shall return to the transferor. (Hackett vs. Bankers Trust Co.,122 Conn. 107)

2. Exceptions:
 a) When a transferor of a corporate stock In trust for his children reserves the right to
vote during his lifetime to aid his children gradually;, assume financial responsibilities
(Re Prange's Will. 231 Mt 271)

b) If the decedent's power could be exercised only with the consent of all parties having an
interest m the transferred property, and if the power does not affect the rights of all the
parties, the property transferred would not be included as a revocable transfer. (34 Am
Jur 2d. p 789)

c) c . Where the decedent has been completely stripped of the power at the time of his
death, the property will not be included as a revocable transfer. (Ibid.)

d) d. Where the exercise of the power by the decedent was subject to ,contingency beyond
the decedent's control which did not occur before his death, the property will not be
included in the gross estate as revocable transfer. (34 Am Jur. 2d. pp. 789 - 790: see
Hollander vs. US., 248 F (2d)247)

Transfers in Contemplation of Death

These properties are not physically available in the estate at the time of death because the
decedent transferred them during his lifetime in anticipation of his death.

“Death must be oh must be contemplated and the thought of death , as distinguished from
purposes associated with life , must be the impelling cause of transfer. “ (34 Am. Jur 2d., 780)

The following transfers are held to be in contemplation of death:

1. Where a donation was made s=currently with the execution of a will (Vidal de Roces vs.
Posadas, 58 Phil 108); or
2. Where the donation was made due to decedent’s age and/ or the decedent’s known serious
illness at the time of the gift; or

3. Where the time between the making of gift and the death of the donor was relatively close.
(Dizon vs. Posadas, 57 Phil ,465)

Note: the law does not specify the number of years prior to the decedent’s death within which
the transfer can be considered in contemplation of death. ( BIR Ruling No. 261, September
2,1987)
The purpose of including transfers in contemplation of death as part of the gross estate is to
prevent evasion from estate tax liability by the use of other conveyances rather than by
succession or transfer mortis causa.

Based on section 85b of the NIRC there is a transfer contemplation of death when the following
instances are present:

1. While still alive, the decedent transfer his property in favor of another person, but the
transfer was intended to take effect only upon the former's death.

Illustration

Miss Lily Taw became very sick, old unfavorable health condition, she properties to her favorite
nephew which shall take effect upon her death.

It is a testamentary disposition subject to estate tax because the final transfer will take effect
only upon the death of Miss Lily T. A such, the value of the properties transferred her nephew
will still be included in the computation of Miss Taw's gross estate for estate tax purposes.

2. By gift intended to take effect at death, or after death. under which the donor reserved the
income or the right to designate the persons who should enjoy the income.

illustration

Mr. Tuso Segurista donated his apartment building to his friend, Mr. Antay Nalang. The deed of
donation was executed under the condition that while Mr. Segurista is still living, he retains the
rights over the property and its income.

Upon his death, Mr. Segurista has a total intangible proper, amounting to P5,000,000. The fair
market value of the property donated was 1,,000,000 and the related accrue, rent income on or
before his death amounted to P1,000,000 Bow much is the amount applicable as part of the
gross estate?

The gross estate of Mr. Segurista for estate tax purposes is P15,000,000, computed as follows:

Total intangible property P5,000,000

Apartment 9,000,000
Accrued income from the apartment 1,000,000
Gross estate P15,000,000

The donations is mortis causa because the donor retains rights over the property until his
death.

In order that the donation shall not be included as pan of gross it should not be in
contemplation of the donor's death and the transfer should not be conditional upon the wishes
of the donor.

Property Passing under General Power of Appointment

The phrase "general power of appointment" means that the decedent must have had a power
exercisable in favor of himself. his estate, or creditors of his estate.

A power is "special" A it is expressly not exercisable in favor of the decedent, his estate, his
creditors, or creditors of his estate (43 Am Jur 2d., 791), or the decedent appointed only among
a restricted or designated class of persons other than himself, his estate. his creditors, or
creditors of his estate. (Morgan vs. Comm , 309 US 78)

As a rule if the power released by the decedent is a special power of appointment, the property
subject to such power shall be excluded from the gross estate because the decedent had
already relinquished interest over the property.
.
Accordingly, if the decedent possessed, exercised, or released a general power of appointment,
the property subject to the power all be included in the gross estate because in substance, he
owns the property.

Decedent's Interest
A decedent’s interest Is commonly though, of as a ,ers.11, estate, the wealth that he would
have possessed, enjoyed and disposed, had he lived.

It also refers to the value of any interest in property or rights accrued in favor of the decedent
on before his death which have been received only after his death. (Sec. 85 (A), NIRC)

Examples of decedent's interest as follows:

d. Dividends declared on or before the death of the stockholder’s death and

received by the estate after said stock holder’s death;
 e. Partnership's profit earned prior to of the partner received by the estate after
the partner’s death; and

f. Accrued interest and rents on or before the time of death but collection was
made after death.

As a rule, the interest must exist at the time of the decedent’s to be ncluded as part of the
gross estate.

Illustration
Mr. Geller Rant is a partner in the Law Office for 5O% interest capitalization and profit and loss
distribution. He is shareholder of Bag-Sack Corporation for 1,000 shares value of P500 per
share.

At the date of death of Mr. Ram, TALI Law Office has P.5,0.0! undistributed income which is not
yet credited to the capital account of Mr. Ram P600,000.

One-month prior to the death of Mr. Ram, Bag-Sack Corporation declared cash dividend of
P100 per share. At the date of death et Mr. Rain, the average selling price of Bag-Sak
Corporation's share was P600 per share.

The gross estate of Mr. Ram would consist of the following:

Interest of TAH Law Office P6,000,000

Shares of Stock in Bag-Sak Coporation
(P600 x 1,000 shares) 6,000,000
Additions:

Undistributed income (P500,000 x 50 %) 250,000

Cash dividend (P100 x 1,000 shares) 100,000 350,000
Gross estate P1,550,000

Proceeds of Life Insurance with Revocable Beneficiary

Life insurance covers all description of insurance including death benefits and accidents
insurance. (34 Am. Jur 2d., p800, Noel., 380 U.S 678, 14 L. ed 2d. 19)

The following rules shall observed with regard to proceeds of life insurance policy;

[Link] from the gross estate if the beneficiary is irrevocable.

2. Include in the gross estate if the beneficiary is:
g. Revocable. Or
h. the decedent's estate, his administrator or his executor.*Sec. 85e,NIRC).

Illustration

The life insurance policy of Mr. Puma Naw designates his wife as the revocable beneficiary.
Upon the death of Mr. Naw, the insurance company paid Mrs. Naw P5.000.000 as the proceeds
of Mr. Naw's life insurance.

In addition. Mrs. Naw, as a revocable beneficiary. received PI.000.000 as proceeds of life

insurance from SSS of her husband. An amount of P500,000 as proceeds of life insurance was
received by the estate administrator designated as revocable beneficiary. What would the
amount of proceeds of life insurance to be included as part of Mr. Nat. gross estate?

The amount to be included as part of the gross estate from the Proceeds of life insurance would
be P5.500.000. computed as follows:

Beneficiary -wife (revocable) P5,000,000

Beneficiary-estate administrator 500.000
Proceeds of life insurance include as gross estate P5,500,000

Notes:
1. Proceeds of life insurance is generally subject to estate tax, except when:
a. A third person is designated as irrevocable beneficiary.
b. The proceeds or benefits are from SSS and GSIS.
c. The proceeds are from group insurance taken by the employer because what the law
requires to be the proceeds under policies “taken out by the decedent upon his own
life.”

[Link] the designation of the beneficiary is not stated or is not clear, the Insurance Code
assumes revocable designation.
[Link] the insured transfers a life insurance policy in contemplation of death, the amount to
be included in the gross estate is the face value of the policy not the cash surrender value.
(Estate of Hull, 38 T. C 512)
[Link] of life insurance taken out by the decedent on his own life, when included in the
gross estate, shall be an exclusive funds and shall be a conjugal property if the premiums were
paid out of conjugal funds.

Transfers for Insufficient Consideration

A property (other than real property referred to in Section 24 (D) of NIRC) is transferred for
insufficient consideration if sold or disposed for less than its prevailing market value. To
he value to be included in the gross estate shall be determined under the following rules:

1. If the transfer was in the nature of a bona fide sale for an adequate and full consideration in
money or money's worth, no value shall be included in the gross estate.

2. If the consideration received is less than adequate and full consideration, the value to be
included in the gross estate shall be the excess of the fair market value of the property at the
time of the decedent's death over the consideration

3. If there was no consideration received on the transfer (as in donation mortis causa), the
value to be Included in the gross estate shall be the fair market value of the property at the of
the decedent's death.

4. If the transfer is not shown to have bell made in contemplation of death or to take effect
upon the decedent's demise, the transfer is subject to donor's tax under Section of the Tax
Code.

Illustration

One month prior to his death,' Mr. Dad° Rip. who was with 3 serious health problem, sold to his
son his Ferrari with a market value of P6,000,000 for only P100,000 Mr. Rip believed that since

The buyer of the Ferrari is his son, it is proper that he must not make any profit out of its sale.

At the date of his death, the Ferrari remains to have a market value of P6,000,000.

The above situation could be construed as a transfer in completion of death with insufficient
financial consideration.
The Ferrrari should be part of the gross estate of Mr. Rip at the amount of P5,900,000,
computed as follows:

Market value of the Ferrari at the time

of the decedent's death P6,000,000
Less: Amount of consideration given
at the date of transfer 100,000
Value to be included in the gross estate P5,900,000

Claims Against Insolvent Persons

These refer to receivables left by the decedent but the court consequently finds the related
debtor insolvent.

A claim against an insolvent person must be reported as part of the gross estate in the full
amount of the receivable. This should be reported as an exclusive or a conjugal property
depending on whether the claim is derived from an exclusive or a conjugal property.

Illustration

When the decedent died, he had existing collectibles from vitriol.. debtors amounting to
P500,000. A month after the decedent's death, Mr. Bala Subas, one of the debtors of the
decedent, was Proven and declared by the court insolvent and the 1500,000 claim against him
could no longer be collected. I low much should be included in the gross estate of the
decedent? The entire amount of P500,000 collectibles should still 'Ported as part of the gross
estate of the decedent. However, the claims against insolvent person shall be part of ordinary
deductions against the gross estate in the determination of the net taxable estate.

Amount Received by Heirs under Republic Act. No. 4197

The amount by heirs from the decedent’s employer as a consequence of the death of the
decedent-employee shall be included in the gross estate of the decedent. This amount is also
allowed as a deduction from gross estate. (Sec.86 (7), NIRC)

This topic is fully discussed in the nest chapter- Deductions from Gross Estate.
EXEMPTIONS FROM ESTATE TAX

The term “exemptions from estate tax" is synonymous with the term “exclusion from gross
estate." It refers to properties, rights, or transfers that are specifically declared by the law as
free from the burden of estate tax.

As a rule, properties or transfers, which are exempt by law from estate tax, are not considered
in the determination of the amount of the gross estate.

1. Section 87 of the NIRC provides that the following acquisitions and transmission shall not be
subjected to estate tax.

a) The merger of usufruct in the owner of 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 an of another beneficiary, in
accordance with the desire ,predecessor; and

d) All bequest, devises, legacies or transfers to social and, charitable institutions, no part of
VI which goes to the benefit of any individual; provided, however, that not more than
30% of the said bequest, devises, legacies, or transfers shall be used by such institutions
for administration purposes.

2. bequest to be used actually, directly, and exclusively for educational purposes. (Art. XIV, Sec.
4 (4) of the Philippine Constitution)

3. Proceeds of life insurance

a) Where the beneficiary is irrevocable appointed.

b. under a group insurance taken by the employer in favour of the employee.

4. The transfer by way of bona fide sales.

5. Properties held in trust by the decedent;

6. Separate property (capital of husband or paraphernal of wife f the surviving spouse (Sec. 85
(H), NIRC);
7. Exemptions under reciprocity clause of estate tax law;

8. Exemptions under special laws such as;

a) Benefits received from SSS (PD 1161, such as amended), or GSIS (PD 1146, as
amended);

b) Benefits received from U.S Veterans Administration (RA 360);

c) War benefits given by the Philippines government an U.S government due to damages
suffered during the war (RA 227); and

d) Grants and donations to the Intramuros Administration ([Link]. 1616)

Merger of Usufruct in the Owner of Naked Title

Usufruct is the legal right to use and enjoy the benefits and profits of something belonging to
another. (Black’s Law Dictionary)

There are two persons involved in the usufruct , (1) Usufructuary, and (2) the owner of the
naked title.

Usurfructuary is the person who has the right of enjoying the use and the fruits of the property
belonging to another. He can draw all profit, utility, and advantage which the usufruct property
may produce, provided that he has to preserve on the maintain the substance of the thing.
(lbid.)

On the other hand, the owner of the naked title is the person who is vested with the ownership,
dominion, or title of property under the usufruct agreement. He has the right enjoy the
property consistently with the enjoyment of the thing by the Usufructuary. However, he is not
the absolute owner of the property because he has to respect the right of the Usufructuary
over the fruits and use of the property. (2 Tolentino,272)

When the same persons becomes a Usufructuary and an owner of the naked title, there is a
merger of the usufruct in the owner of the naked title which makes him/her the absolute owner
of the property.

Illustration

Mr. Luciano Tan died with a testamentary will which provides that his daughter, Luci, shall
inherit the usufruct over his property, while his son, Lucio, shall inherit the naked title.
From the above case , the transfer for the property shall be subjected to estate tax by the fact
that the transfer of the property is caused by death.

However, after the death of Mr. Luciano Tan, Luci subsequently died and the usufruct was
transferred to Lucio. In this case, there is a merger of the usufruct in the owner of the naked
title because Lucio becomes the absolute owner of the property. The transfer exempted from
estate tax.

Transmission of Legacy by the Legatee (Fiduciary Heir) to the

Fideicommissary

In a strict sense, legacy” is a gift or bequest by will of personal property, whereas a “devise” is a
testamentary disposition of real estate. Such distinction will not be permitted to defeat the
intent of a testator, and such term may be construed interchangeably or applied indifferently to
either personal or real estate if the context of the will shows that such was intention of the
testator. (Festorazza vs. First National Bank of Mobile, 288 Ala. 645 So. 2d. 496, 505)

A “legatee” is the person to whom a legacy in a will is given. A “fiduciary heir” is the first heir of
the property while a “fideicommissary” is the second heir whose relationship to the fiduciary
heir must be one degree of generation such that of a parent and a child (vice versa), (Brown vs.
Brown, 83 Hun. 160, 31 N.Y.S. 650)

Fedeicommissary refers to a person designated who has the real or beneficial interest in a
estate or fund, the title or administration of which is temporarily confided to another. (Black’s
Law Dictionary)

Illustration

Mr. Bankai died with last will and testament. He appointed his only daughter, Kalansai, as the
first heir of his property. His will, however provides that upon his death, the property shall be
preserved and transmitted to Semeterio , his grandson, from Kalansai, upon reaching the age
of maturity or upon the death of his daughter. Which transfer is subject to estate tax ?

In this case , the transfer of the estate of Mr. Bankai ta Kalansai is subject to estate tax because
this is just an ordinary transfer. The Tax Code provides that only the transfer from the first heir
to the second heir with the same property shall be exempted from estate tax, ( Sec.. 87 (B),
NIRC). Consequently, the transfer of the same property from Kalansai to Semeterio is exempted
from estate tax to avoid double taxation.
It is to be noted that if the second heir (fideicommissary) predeceased the first heir (fidudiary),
the property goes automatically to the latter. Such transfer is still exempted form estate tax
because the property transferred remains the same.
Second Transfer as Desired by the Predecessor

It refers to the transmission of property from the first heir, legatee, or donee in favour of
another beneficiary, in accordance with the desire of the predecessor. (Sec, 87 (c), NIRC)

This transfer, like the two cases above, is exempt from estate tax because in substance, there is
only one transfer of the property from the testator. The second transfer of property shall not
be subjected to estate tax because it has been previously subjected to the same tax.

Illustration

Don Dacer died leaving his estate to his sons Jose and Ping. Ping renounced his inheritance on
favour of Jose. Ping died a year later.

The transfer of property from Don Dacer to his sons is subject to estate tax, but the transfer of
the same property from Ping to Jose shall be exempted from estate tax.

Transfer to Social Welfare, Cultural and Charitable Institutions

Section 87D of the Tax Code provides that “all bequests”, devises legacies, or transfers to social
welfare, cultural and charitable institutions of which no part of the net income inures to the
benefits of any individual; provided , however, that not more than 30% of the said bequests,
devises, legacies, or transfers shall be used by such institutions for administration purposes.”

Illustration

Don Vicente died testate. His will provides that the following transfers of some of his properties
shall be made upon his death to the following persons:

Mr. Antay Bigay, his cousin P6, 000,000

Blind Foundation, a charitable institution
(20% used for administration) 3,000,000
Ina Moy, his secretary 2,000,000

How much is the amount to be excluded from the taxable estate?

The amount to be reported as exclusion of the taxable estate is only P3, 000,000 which is the
donation to the Blind Foundation.
Reciprocity Clause

No estate tax shall be imposed with respect to the intangible personal property situated in the
Philippines and owned by anon-resident alien if the laws of his foreign country allow similar
exemption on transfer taxes on intangible personal property situated in that foreign country
and owned by a Filipino citizen not residing in the said foreign country. (Sec. 85 and Sec. 104 of
the NIRC)

Illustration

Mr. Moran Tee, a Vietnamese and resident of Laos, died leaving the following
Properties:

Business interest in Laos P 5, 000,000

House and lot in Vietnam 3, 000,000
Vacation house in the Philippines 2, 000,000
Franchise exercised in the Philippines 4, 000,000

How much is the amount of taxable estate of Mr. Tee in the Philippines if it has been found that
Vietnam exempts Filipinos from estate tax on all intangible properties.

The amount of taxable estate of Mr. Tee in the Philippines would be p 2,000,000 pertaining to
the vacation house-located in the Philippines.

Although the franchise is exercised in the Philippines, such intangible property is exempted
from estate tax because of the application of the reciprocity principle. The rule of reciprocity is
not applicable for real and/or tangible personal property.

Capital of Surviving Spouse

The Capital of the surviving spouse of a decedent shall not be deemed part of the gross estate
(Sec. 85h, NIRC). This is not subject to estate tax because of the properties that are objects of
tax must be the capital of the decedent.

The term “capital of surviving spouse” refers to the separate property of the surviving spouse.
An exclusive property is a property specifically identified and belonging exclusively to either of
the spouse, while a conjugal property that belongs to both of the spouses.

Under the Family Code, the property owned by the husband is called husband’s capital while
the property owned by the wife is called wife’s paraphernal. (Art. 109, Family Code)

Property Relations between Spouses

The system of property relationship is applicable only to married person.

The property relations between husband and wife shall be governed in the following order:

1. B marriage settlement executed before the marriage;

2. The regime of absolute community (for marriage August 3, 1998 and onwards);
3. Conjugal partnership of gains (for marriage prior to August 3,1998) and;
4. By the local customs. (Art. 74, Family Code)

In the absence of any contract or marriage settlement executed before celebration of a

marriage, either the (1) conjugal partnership of gains or (2) absolute community of properties
shall govern the property ownership of the husband and wife.

Conjugal Partnership of Gains

This system of property relationship governing spouses is applicable if they are married before
August 3, 1998. (Art. 106, Family Code)

All properties acquired during the marriage whether the acquisition appears to have been
made, constructed or registered in the name of one or both spouses are presumed to be
conjugal unless proven otherwise. (Art. 116, Family Code)

Under this property relationship, the following are considered as the exclusive properties of
each spouse:
1. That which is brought to the marriage as his/her own (Art. 109.L)
2. That which each acquires during marriage through gratuitous transfer (Art.
109.2);
3. That which is acquired by right of redemption or by exchange with other
property belonging to only one of the spouses (Art. 109.3);and
4. That which is purchased with the exclusive money of the wife or the husband.
All the rest are considered conjugal properties of husband and wife. (Art. 109.4, Family Code)
Illustration
Mr. H, married in 1986, died leaving the following properties:
Acquisition FMV at the
Properties Cost Time of Death
a) Residential lot he inherited from his parent P 300,000 P 1,000,000
(Before marriage)
b) Residential house built during marriage 500,000 1, 200,000
c) Personal properties acquired during marriage
out of his savings accumulated before marriage 100,000` 400,000

How much would be the gross estate of Mr. H?

The property ownership under this case is governed by the conjugal regime of partnership
because the couple was married before 3, 1988, and as such, the gross estate is as follows:

Conjugal property:
Residential house P 1, 200,000
Add: Exclusive properties:
Residential inheritance P 1,000,000
Personal properties acquired out
Exclusive property 400,000 1, 400, 000
Gross estate of Mr. H P 1,400,000

Note: Property acquired through exclusive through exclusive property of the husband or wife
is an exclusive property even acquired marriage.

This system or property relationship governing the spouses is applicable if they are married in
August 3, 1998 or thereafter. (Art. 88, Family Code)

Under the Family Code of the Philippines, the community property shall consists of all
properties owned by the spouse at the time of the celebration of the marriage or acquired
thereafter except the following:
1. Property acquired during marriage through gratuitous title by either spouse, or fruits as
well as in come thereof, if there are any, unless it is expressly provided by the donor,
testator, or grantor that they shall from part of the community property. (Art. 92.1
Family Code)
 2. Property for personal and exclusive use of either spouse; however, jewelry shall from
part of the community property. (Art. 92.2, Family Code)
3. Property acquired before the marriage by either spouse who has legitimate descendants
by former marriage, and the fruits as well as the income, if there are any, such property.
(Art. 92.3, Family Code)
4. In general, properties acquired by purchase with exclusive money, or by exchange with
exclusive property, shall be considered exclusive.
Property acquired during marriage is presumed to belong to the community, unless proven
otherwise.

Illustration

1997: Through his labor, Mr. H acquired personal properties valued at P 200, 000. Ms. W
acquired real properties valued at P 500,000, and inherited a commercial building worth P
1,000,000 from her grandparents.

1998: Mr. H and Ms. W got married

1999 to 2013: Through their joint they were able to acquire their residential house and lot with
a value of P 1,700,000. Mr. H received a house and lot in Tarlac valued at P 500,000 as
inheritance from his father. H and W used the house and lot as their family home. Ms. W
earned rent income of P100, 000 from the commercial building she inherited from her
grandparents in the commercial building she inherited from her grandparents. In November,
2013 Mr. H died of heart attack.

Which of the above properties should be included in the gross estate of Mr. H?

The property ownership of H & W is governed by absolute community under the Family Code
because the couple was married after the Family Code because the couple was married after
August 3, 1998, and such as such, the properties to be included in the gross estate of Mr. H are

Community Property:
H’s personal properties acquired in 1197 P 200, 000
Properties of W acquired before marriage 1,500, 000
Residential house and lot 1,700, 000
Rent income 100, 000
Add: Exclusive property of H, inheritance 500, 000
Total gross estate of Mr. H P4,000, 000
Similarities between Conjugal Partnership of Gains and Absolute Community
of Properties

CONJUGAL ABSOLUTE
PROPERTY PARTNERSHIP COMMUNITY
[Link] inherited or
received as donation during Exclusive Property Exclusive Property
marriage
[Link] acquired during
marriage (other than Conjugal Property Community Property
inheritance or donation)
3. Property acquired from
labor, industry work or Conjugal Property Community Property
profession of the spouses
[Link] or income due or
derived during the marriage Conjugal Property Community Property
coming from common
property

Differences between Conjugal Partnership of Gains and Absolute Community

of Properties

Figure 3.3

PROPERTY CONJUGAL ABSOLUTE

PARTNERSHIP COMMUNITY
[Link] before the
marriage or brought to the Exclusive Property Community Property
marriage
2. Fruits or income due or
received during the marriage Conjugal Property Exclusive Property
Regime of Complete Separation of Property

If the spouses agreed in the marriage settlements that their property relations during the
marriage shall be governed by the regime of the separation of property, the rule on the
complete separation of property shall be applied. (Art. 143, Family Code)

The rule on complete separation of property during marriage provides that each spouse shall
own all of his/her earnings from industrial or civil, due or received during the marriage from his
or her separate property. (Art. 145, Family Code)

Illustration

In 2005, Richard married Luci. They executed a contract of complete separation of property
during their marriage. Richard died on November 1, 2013. As of that date, the properties of the
couple are as follows:

ACA franchise acquired By Richard during the marriage P 10, 000,000

Condominium brought into marriage by Richard 5, 000,000
Savings from condominium earnings 500,000
Sugarcane plantation inherited by Luci 20, 000,000
Savings from sugarcane earnings 2,
000,000
House and lot acquired by the couple during marriage 15, 000,000

How much is the reportable gross estate of Richard? The gross estate of Richard to be reported
would be:

ACA franchise acquired By Richard during the marriage P 10, 000,000

Condominium brought into marriage by Richard 5, 000,000
Savings from condominium earnings 500,000
Share from condominium earnings 7,500,000
Share from the house and lot (P15, 000,000/2)
Gross estate of Richard P23, 000,000
Outside Marriage Property Relationship

When a man and woman who are capacitated to marry each other live exclusively with each
other as husband and wife without the benefit of marriage or under a void marriage, properties
acquired by them, during their living together as husband and wife, shall be owned by them in
equal shares. (Art. 147 of the Family Code

Illustration

Since 1998, Jose and Maria lived together as husband and wife without marriage. They bought
and acquired some properties before and during the cohabitation as follows:

House and lot acquired during the live-in period P 3,000,000

Car brought into the live-in relation by Maria 400,000
Subdivision inherited by Jose 1,500,000
Other properties – acquisition cannot be determined 2,000,000

If Jose died on December 31, 2013, how much is his gross estate?
The gross estate of Jose would be:

House and lot acquired during the live-in period (3,000,000/ 2) P 1,500,000
Subdivision inherited by Jose 1,500,000
Other properties (2,000,000/ 2) 1,000,000
Gross estate P 4,000,000