Chapter 2 Gross Estate The first estate tax law in the Philippines is embodied in Act 2601 which took effect on July 1, 1916. It imposes graduated estate tax rates computed on net inventoried property left by a decedent. It was subsequently amended by the Revised Administrative Code of the Philippines imposing upon “every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance, devise or bequest.” Since then, several laws were introduced to amending Act 2601. RA 8424 also known as “Tax Reform Act” or the National Internal Revenue Code (NIRC) Effective Jan.1, 1998 further restructured the tax base and rates of both estate and donor's taxes in addition to allowing the deduction of medical expenses from the gross estate. Bulk of the estate’ tax law aside from determining the tax base and rates which are found in NIRC are embodied in the Civil Code and Family Code of the Philippines. The recent amendment to Estate Tax law was introduced by RA 10963, or the “Tax Reform for Acceleration and Inclusion (TRAIN) Act” which took effect on January 1, 2018. It substantially” amended the estate tax law by getting rid of the use of graduated tax rate and changed it to a single rate of 6% of the net taxable estate as well as revising the thresholds for Standard Deduction, Family Home and other amendments such as repealing funeral expenses, judicial expenses and medical expenses. 33Gress Estate Estate Tax - Definition and Nature Philippines, Estate Tax is in ine on in controlling f0 a C2 n is givel propery to take effect upon death. As ivilege that tax imposed on the privilege tha stain oxont, the disposition of his discussed in Chapter 1, itis an cise tax imposed on the act of passing the Sinete ha properly a i time ‘of death and not on the value of the Peete ae ne sorte , a dire est a he Paces thereon. Since estate tax accrues as though the tax is baset es' ; of fe nme eat, the right of the State to tax the privilege to ech the eaate vests instantly upon death. The accrual of the tax is distinct from the obligation to pay the same. Justification for the Imposition of Estate Tax 1. Benefit-Received Theory - The law considers the service rendered by the government in the distribution of the estate of the decedent, either by law or in accordance with his wishes. For the performance of these services and other benefits that accrue to the estate and the heirs, the State collects the tax. Privilege or State Partnership Theory Under this theory, inheritance is not a right but a privilege granted by the State and legatees have been acquired only with the protection of the State. Consequently, the State as a passive silent partner in the accumulation of property has the right to collect the share which is properly due to it. nN 3. Ability to Pay Theory Receipt of inheritance which is in the nature of an unearned wealth or windfall, are place assets into the hands of the heirs and beneficiaries. This creates an ability to Pay the tax and thus contributes to government income. 4. Redistribution of Wealth Theory " geet of inheritance is @ Contributing factor to the inequalities aaa ores The imposition of estate tax reduces the r y the aes helping to promote equitable niapeH e le tax base is th Pohea * i ne earessve scheme of taxation is qe Hse las ‘© mitigate the evils of inheritance in the Mhaieos lc,Gress Csliite Classification of Decedents and Composition of Gross Estate For estate taxation purposes, decedents are classified into three (3); citizens, resident aliens and nonresident aliens. Section 85 of the Tax Code provides that the value of the gross estate of the decedent should be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated; Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. The composition of the estate may be summarized as follows: PULSER ee ee eed | DECEDENT GROSS ESTATE | se : |= Citizen 4) Property (Real or Personal) wherever situated = — Resident alien 2) Intangible personal property wherever situated «Nonresident alien 1) Real property situated in the Philippines | 2) Tangible personal property situated in the Philippines | 3) _ Intangible personal property with situs in the Philippines, | unless excluded on the basis of reciprocity. RECIPROCITY CLAUSE (Section 104 of the Tax Code, as amended) The Tax Code excludes “intangible” personal property with situs in the Philippines from the gross estate of a non-resident alien decedent if there is reciprocity. There is reciprocity if: = The decedent at the time of his death was a resident citizen of a foreign country which at the time of his death did not impose an _ estate tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or = The laws of the foreign country of which the decedent was a resident citizen at the time of his death allow a similar exemption from estate taxes of every character, in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. 35Gross Estate Intangible Asset was not defined in the Tax Code, tangible asset as an nonetheless, Accounting Standards defines in 7 ; "identifiable nonmonotary asset without physical substance : ‘They deve their value from intellectual or legal rights, and from the value they add to the other assets. The term ‘intangible asset” As a tule, the situs of intangible personal property is the domicile of the owner, also known as "mobilia sequntur personam sheet such rule is not applicable if the intangible property has situs elsewhere or where the intangible property has acquired a business situs in another jurisdiction because the principle of “mobilia sequntur personam’ is only used for convenience. It must yield to the actual situs of such property. The situs of Franchise, for instance, should not be based ‘on the domicile of the owner but the place where such franchise is exercised. - INTANGIBLE ASSETS WITH SITUS “WITHIN” THE PHILIPPINES Section 104 of the Tax Code enumerates the following intangible personal property with situs in the Philippines, for estate tax purposes: 1. Franchise which must be exercised in the Philippines. 2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws. 3. Shares, obligations or bonds issued by any foreign corporation, 85% of the business of which is located in the Philippines. 4, Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines. 5. Shares or rights in any partnership, business or industry established in the Philippines. TABLE 2:2; SITUS OF TANGIBLE AND INTANGIBLE PROPERTY. PROPERTY SITUS = Real Property and Location of the proper Tangible personal property ae * — Shares, franchise, Where the intangible is exercised jardless of copyright, and the like, where the corresponding certificates stored * Receivables Residence of the debtor = Bank deposit Location of the depository bank 36Gross Estate [LLUSTRATION Anonresident alien decedent left the following estate: House and Lot ~ Hongkong, inherited before mariage * 15,000,000 Car, acquired during marriage in Cebu 5 1,500,000 Shares of stocks issued by a foreign corporation, 20% of its operation is in the Philippines 250,000 Bank deposit with PNB branch in New York, New York : representing income earned during marriage 500,000 ‘Shares of stocks issued by PLDT group of companies, a 500,000 corporation organized under Philippine laws 5-year, 12% promissory note, received 2 years ago, during martiage. The debtors a resident of QC. ‘ 500,000 Case A: Assume there is no reciprocity, what is the correct value of the gross estate? “+ Answer: P2,620,000 Solution: Car, acquired during marriage in Cebu 1,500,000 Shares of stocks - PLDT 500,000 5-year, 10% Promissory Note 500,000 Interest income (P500,000 x 12% x 2) 120,000 Gross Estate P2,620,000 * The shares of stock issued by a foreign corporation (20% of its operations is in the Philippines) is considered situated outside of the Philippines. Under the tax code, a nonresident alien decedent is taxable only for properties situated in the Philippines. Same rule applies to the House and Lot as well as the bank deposit in New York, USA. = Interest income eared before or at the time of death shall likewise form part of the decedent's gross estate. Case B: Assume there is reciprocity, what is the correct value of the gross estate? “+ Answer: P1,500,000 ° Only the car in Cebu acquired during marriage shall be included in the decedent's gross estate. Intangible properties with situs within the Philippines are excluded in the determination of gross estate if there is reciprocity. 37determine the following: led in the decedent's gross estate. Composition of Gross Estate ILLUSTRATION From the list of properties shown below, 1) Situs of the Property : 2) Whether or not the property is includ PARTICULARS Resident Parcel of Land — Makati Parcel of Land ~ Bi House and Lot (Family Home) ~ Taguig Rest House - Batangas Rest House -Palawan Rest House — Malaysia 4 Cars-Philippines Cars Abroad BPI Deposit-Philippine branch BPI Deposit-U.S. branch "ABN Amro Bank (Foreign bank) = Philippine Branch 72. | ABN Amro Bank (Foreign bank) - London Branch 73_| Receivables-debtor from Philippines 14_| Receivables-debtor from Canada 45 | Shares of stocks of domestic corporations. The certificates are stored in the Philippines 16 | Shares of stocks of domestic corporations. The certificates are stored abroad co} 00 ~Jolen| aleslns| =\5) 77_| Shares of stocks of foreign corporations. The certificates are stored in the Philippines 48 | Shares of stocks of foreign corporations. The certificates are stored abroad 49 | Shares of stocks of foreign corporations, 90% of its operations is in the Philippines 20 | Shares of stocks of foreign corporations, 80% of its operations is in the Philippines 21 | Shares of stocks of foreign corporations which acquired business situs in the Philippines 22_| Patents and copyrights exercised in the Philippines : Patents and copyrights exercised abroad 38“Citizen | GROSS ESTATE _ or Resident Parcel of Land ~ Makat! 2 Parcel of Land ~ Ball, Indonosia we Inco. |._ Ineude. Include Exclude House and Lol (Family Home) ~Tagulg | Within | Include fe Rest House ~Batangas | within | include ~§_| Rest House -Palawan Within’ | Include 6 | Rest House — Malaysia (Wo | incixde 7_| Cars-Philippines | Within | “Include 8 _| Cars ~Abroad | Wio | Inolud 9 _, BPI Deposit-Philippine branch — “Include [include _| “10 __| BPI Deposi-ULS. branch Wo |" include |" Exclude [Exclude] eae [ Amro Bank (Foreign bank) | Within | Include | Exclude | Include | |_| Philippine Branch 12 vst be Bank (Foreign bank)-London | Wio |” Include Exclude Exclude jrancl | 13 | Receivables-debiors from Philippines Within | Include Exclude Include 14_| Receivables-debtors from Canada Wo | Include |~ Exclude Exclude | | 15 | Shares of stock of domestic corporations. | Within | Include | Exclude Include | The certificates are stored in the Q | Philippines ie | | 16 | Shares of stock of domestic corporations. | Within | Include | Exclude Include | | The certificates are stored abroad | 17 | Shares of stock of foreign corporations. Wo | Include | Exclude Exclude | The certificates are stored in the Philippines _ 18 | Shares of stock of foreign corporations. Wio Include Exclude Exclude The certificates are stored abroad | ie 19. | Shares of stock of foreign corporations, Within | Include Exclude Include 90% of its operations is in the Philippines 7 20. | Shares of stock of foreign corporations, Wo Include Exclude Exclude 80% of its operations is in the Philippines 21. | Shares of stocks of foreign corporations Within | Include Exclude Include which acquired business situs in the | Philippines a a Patents and copyrights exercised inthe | Within | Include |” Exclude Include | | Philippines | Patents and copyrights exercised abroad Wio_| Include | Exclude ExcludeValuation of Gross Estate (as amended by RA10963; The estate of the decedent shall be appraise at the time of his death, Since si corresponding estate tax takes offect upon di appraise the estate at its fair ma Specifically, the following rules s estate: 1. In General 2. Real Property RR 12-2018) d at its fair market value ‘and the accrual of the uuccossion Tt ghall only be fair to of the decedent's death, time ut ket value at tho uate ort: hall apply in determining the : Fair Market Value at the time of death The higher value between: issioner; and FMV determined by the Commissioner; an FMV as shown in the schedule of values fixed by the provincial and city assessors (also known as assessed value or FMV for real estate tax purposes). For purposes of prescribing real property values, the CIR is authorized to divide the Phippine if diferent zones or arees and shal, upon consulton with competent appraisers, both from the private and public sectors, determine the fair market value of real properties located in each zone or area. If there is an improvement, the value of improvement is the construction cost per building Perit or the fair market value per latest tax declaration 3. Personal Property 4. Shares of stock 5. Units of participation in any association, recreation or amusement club (ie.,golf, polo, similar clubs) 6. Right to usufruct, use or habitation, and annuity Fair market value at the time of death Unlisted common share: Book value per share of the issuing corporation (Appraisal surplus shall not be considered, as well as the assigned amount to preference shares, if any). “ Unlisted Preference share: Par value per share 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 (RR 2-2003/ RR 12-2018). The bid price nearest the date of death published in any newspaper or publication for general circulation. 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 [Section 88(A)-NIRC]. 40 iesGross Cstdtle [ILLUSTRATION 3: Determine the correct amount i i . ; following independent cases: ‘obe included in the gross estate of the decedent in the Case A: . ee ve ew car with a cash price of P3,000,000, He bought the, car on 41 P700,000 for a following terms: down payment of P500,000 and annual installment ‘iat wor ur years. On his way home, he run over an approaching truck and Answer: 3,000,000 Case B: The degen ated F2.000000 oan os best end to ers ef det due after three years, lum evidenced by a note. Both the principal and interest are “> Answer: 2,400,000. Principal amount plus interest of 10% for 2 years Case C: The decedent devised to his son a 1,000 ‘square meter lot in Global City, Taguig with the following valuation: Fair value as determined by city assessors P20,000/sq.m. Zonal value as determined by the CIR 17,000,000 FV determined by independent assessors - 18,500,000 “Answer: P20,000,000 (1,000 sq.m x P20,000) The higher between the fair value as determined by city assessors and the zonal value as determined by the Commissioner of Intemal Revenue (CIR) Case D: | Decedent owns 100,000 ordinary shares of Alpha Company at the time of his death. At that time, Alpha's outstanding shares were 1,000,000 with P10 par value and Retained Earnings amounting to P5,000,000. The shares are not traded in the stock exchange. > Answer: P1,500,000 Book value per share of Alpha Company multiplied by the number of shares held by the decedent at the time of death P10M + 5M 1,000,000 shares X 100,000 shares Case E: A decedent left 10,000 Pinoy Telecom shares. The shares were traded in the local stock. exchange, At the time of death, the following were available: Highest quotation P800 per share Lowest quotation P200 per share Book value P350 per share Answer: P5,000,000 _[10,000sh. x ((800+200)/2)} 4Gross Estate EXEMPTIONS AND EXCLUSIONS FROM THE GROSS ESTATE The following shall be excluded from the gross estate of a decedent: A. Exclusions under Sections 85 and 104 of the Tax Code 1. Exclusive property of the surviving spouse (Sec. 85(H)]- The gross estate in case of married decedents, is composed of, * Exclusive properties of the decedent; and F * Common properties of the decedent and the surviving spouse Exclusive properties of the surviving spouse should be excluded in the gross estate because these properties are not owned by the decedent upon his death. For estate tax purposes, exclusive properties of the husband are known as ‘capital while exclusive properties of the wife are known as ‘paraphernal” properties (Article 135 of the Civil Code). Whether such property is exclusive or common will depend on the type of property relations or marriage settlement of the husband and wife. Marriage settlements are discussed in Chapter 4 of this book. 2. Property outside the Philippines of a non-resident alien decedent (Sec. 85 and 104). The Tax Code provides that for nonresident alien decedents, only his properties situated or with situs within the Philippines shall be included in his gross estate. Consequently, properties outside of the Philippines are excluded in determining the gross estate of a nonresident alien decedent. 3. Intangible personal property in the Philippines of a non-resident alien under the Reciprocity Law. Section 104 of the Tax Code expressly provides that “intangible” personal property in the Philippines of a nonresident alien decedent shall be excluded from the gross estate if there is reciprocity. 42Gross Estate , Te ne sider Section 87 of the Tax Code ” The tranarrieet uct 'n the owner of the naked title, fiduciary heir (ales celery Of the inheritance or legacy by the fideicommisary (also icone as the 1" heir) or legatee to the i wn as the 2" heir), 3. aeemsion ‘rom the first hair, lagatee or donee in favor of predecessor faleay in “accordance with the desire of the Appointment’). © known as “Transfer under Special Power of 4, All oe eee 'egacies or transfers to social welfare, cultural ae hari Ae institutions, no part of the net income of which cn enefit of any individual: Provided, however, that not re than thirty percent (30%) of the said bequest, devises, legacies or transfers shall b instit re e use stitutions for administration purposes, oe vag The government agency which is empowered to determine the exemption is the BIR. To enable it to exercise such power, the value of ‘transfer to social welfare, cultural and charitable institutions should be included in the gross estate. An equal amount, however, may be taken up as a deduction. THE MERGER OF USUFRUCT IN THE OWNER OF THE NAKED TITLE The decedent in this particular case (known as donee-decedent or current decedent) only received from the prior decedent (donor-decedent or prior decedent) usufruct over the latter's property. Usufruct pertains “only to the right or privilege to enjoy the use and advantages of another's Property. Thus, the current decedent is not considered the owner of the property. Consequently upon his death, the usufruct will be merged to the owner of the naked title, the intended beneficiary of the property. ILLUSTRATION 4: |n the last will and testament of Mr. Yumao, he assigned the usufruct of one of his Parcels of land to his son (Juan) while his grandson (Pedro) was named the owner of the naked title. Upon the death of Mr. Yumao, the parcel of land should be included in his gross estate. However, upon the death of Juan (the current decedent), the Parcel of land should be “excluded” in his gross estate because he is not the intended owner/beneficiary of the land but his son, Pedro. Upon Juan's death, there will be merger of usufruct in the owner of the naked title (Pedro). Meaning, Pedro will be entitled to both the usufruct and ownership of-the naked title upon Juan's death.Gross Estate Es ee “the wr of the naked title Merger of usufruct in the ownel + the intended owner ofthe and (naked tle) + The usufruct wil be merged to his naked ttle upon Juan's death + +inGeupon death | QRNMYMNE? | + +n Ge Subject to * Subject to Estate Tax J+ Not subject to Estate Tax Estate Tax TRANSMISSION FROM THE FIRST HEIR, LEGATEE OR DONEE IN FAVOR OF ANOTHER BENEFICIARY (Also known as 2nd Heir), IN ACCORDANCE WITH THE DESIRE OF THE PREDECESSOR (Also known as Transfer under Special Power of Appointment) + Usufructuary but not the Intended ‘owner of the land ILLUSTRATION 5: In the last will and testament of Mr. Yumao, he devised a parcel of land to Juan but with a condition that such property should be given to Pedro upon Juan's death. Thus, the parcel of land is intended to be inherited by Pedro, not Juan. Juan is acting only as a trustee or fiduciary until such time that the property is transferred to Pedro. Upon Juan’s death, the parcel of land should be “excluded” in his gross estate simply because he is not the owner of the property. In the illustration provided, Juan only received the parcel of land under a Special Power of Appointment (SPA) from Mr. Yumao, the prior decedent/predecessor or also known as the donor of the power or donor-decedent. Thus, Juan is known as the donee-of the power or donee-decedent or current decedent. Special Power of Appointment exists when the donee-decedent (Juan) can appoint only from a restricted or designated class of persons other than himself. In the problem above, Juan is restricted to transfer such Property only to Pedro, in accordance with the desire of the Predecessor (Prior Decedent or Donor-Decedent). Property panetorred under a special power of appointment should be excluded from the gross estate of the donee of the power because the donee- decedent only holds the Property in trust. 44Gress Estate — Special Power of Appointment _ a | DRED * Theparcel ofiand * The intended ae Isnotintended for beneficiary of Mr. tlow: Juan Yumao, * Acting only as trustee/fiduclary of Pedro ne Subjectto Estate Tax * Not Subject to" +in GE upon death Estate Tax * Subj. to Estate Tax TRANSMISSION OR DELIVERY OF THE INHERITANCE OR LEGACY BY THE FIDUCIARY HEIR/LEGATEE (Also known as the 1st heir) TO THE FIDEICOMMISARY (Also known as the 2nd heir). ILLUSTRATION 6: Using the same information in the immediately preceding illustration (llustration No. 5) and assuming further that Juan is the father of Pedro. Since Juan is the father of Pedro and both were alive at the time of the testator’s death (Mr. Yumao), the substitution or transfer from Juan to Pedro is known as fideicommissary substitution. Upon the death of Mr. Yumao, the parcel of land should be included in his gross estate... However, upon the death of Juan, the parcel of land should be “excluded” in his gross estate because Juan is acting only as the trustee of Pedro. Fideicommisary transfer of property is in substance, the same with transfer of property received under Special Power of Appointment (SPA), except that the relationship of the 1st heir and the 2nd heir should not be more than one (1) degree apart (Refer to Illustration #7 of Chapter 1 for the determination of degree of relationship). Elements of a fideicommissary substitution: = The substitution must not go beyond one degree from the heir originally instituted (i. father to son). = The fiduciary(first heir) and the fideicommissary(second heir) must be both living [Link] time of the testator's death. 45Gross Estate ws Exclusions under Special La benefits recel Proceeds of life insurance and the GSIS (RA728). 2. Accruals and benefits received by mom reason of death (RA1792). 3, Amounts received from _ Philippines Governments for war damages (RA227)- a received from United States Veterans Administration. ius government to the legal heirs d deceased civilian for ‘and Philippine Army ived by members of so ers from the SSS by and United States 4, Amounts 5. Payments from the Philippines of of deceased of World War I! Veterans an supplies/services furnished to the US (RA136). 6. Retirement benefits of officials/employees of a private firm (RA4917). 7. Personal Equity decedent-contributor (Se Retirement Account Act of 2008). and Retirement Account (PERA) assets Of the c, 14, RA 9505 — Personal Equity and 8. Compensation paid to private and public health workers who have contracted COVID-19 in case of death, the said amount shall not be included as part of the gross estate of the decedent subject to estate tax as provided under Republic Act No. 11494 or the “Bayanihan to Recover as One Act". COMPOSITION OF THE GROSS ESTATE Generally, gross estate consists of all the property owned by a decedent or which the decedent had an interest at the time of death, such as: = Real property = Personal tangible property = Intangible personal property (shares of stor Shares of stock K as y Bank deposit Dividends declared before his death but received after de ith. Y Parner rot wich have acoued belo his death. Y — Usufructuary & rights beetie daa, 46Gross Eslite Section 85 acy Of the Tax Code enumerates the composition of the Gross Property owned by the dece present in his estate at the tim shares of stock, vel dont that ate actually and physically Ne of his death such as land, buildings, hicles, bank deposit, and the like, Decedent's Interest [Sec. 85(A)] The Tax Code provides that Decedent's Interest to the extent of the interest therein of the decedent at the time of death shall be included in the gross estate, Decedent Interest refers to the extent of equity or ownership participation of the decedent on any property physically existing and present in the gross estate, whether or not in his possession, control or dominion. It also refer to the value of any interest in property owned or possessed by the decedent at the time of his death (interest having value or capable of being valued or transferred). Property NOT PHYSICALLY IN THE ESTATE but are still subject to payment of estate tax. These properties have already been transferred during the lifetime of the decedent, however, such properties shall still form part of his gross estate because the transfers were either intended to take effect only upon his death or does not actually convey full ownership over the property transferred. a. Transfers in Contemplation of Death [Sec. 85(B)] The Tax Code, as amended, provides: To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (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; except in case of a bonafide sale for an adequate and full consideration in money or ‘money's worth.ntamplation of death ie fi ee af 01 5 operly prompted by thought of death. st Sonlien at prope! induces th c ing motive which tne dlenoalton sf SO dee within this concept IS causa. A transfor In c the value of property The gross estate shall Ince THe in anticipation during hi i fansferred by the decedent duri He ons ‘death (transfer in contemplation of nee oH ae 1) "Transfer of property in favor of another pefwory Ot ihe transfer was. intended 0 take. effet 1's death. - oF afte Transfer by gift intended to take effect a Cae focetes death, or under which the donor reserves A ae the right to designate the persons who s| income. ; _ Transfer with retention or reservation of certain Reet decedent had transferred his property during his tfetime, but retained for himself beneficial enjoyment of the thing or the right to receive income from the same. 2 3) Section 85 provides that there is no transfer in contemplation of death when the transfer of property is a bonafide sale for an adequate and full consideration in money or money's worth. b. Revocable Transfers [Sec. 85(C)] It is a transfer where the terms of enjoyment of the property may be altered, amended, revoked or terminated by the decedent. It is sufficient that the decedent had the power to revoke though he did not exercise the power. Section 85(C) of the Tax Code, as amended, provides: (1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bonafide sale for an adequate and full consideration in money or money's worth) by trust or ofhenwise, where the enjoyment thereof was Subject at the date of his death to any change through the exercise of @ power (in whatever fapacly exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from What source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such is relinquished i 1 , power is relinquished in Contemplation of the decedent's death, _ 48Gross Estate (2) For tho purpose of this Subsection, tho power fo ater, amend or Took shal te consid fo axl onto at oto decode death even though the exarais of tho power is subject fo a precedent giving of ‘notice or even though the altaration, amendment or. ‘evocation takes effct only on tho expiration ofa stated period after {he exercise of the power, whethor or not on or befor the date of the decedent's death notico has boon given or the power has been exercised. In such casas, propor adjustment shall be made ‘presenting the interests which would have been excluded from the Power ifthe decedent had lived, and fr such purpose ithe notice has Not been given or the power has ol been exercised on or before the date of his death, such notice shal be considered fo have been given, or the power exercised, on the date of his death ILLUSTRATION 7: Case A. Abiigh ranking official realized that due to the nature of his illness, age and the pressure brought about by the various legal cases filed against him, death might not be that far. Hence, he gratuitously transferred most of his properties to his children while stil alive. Should the properties transferred be included in the gross estate of the decedent- transferor upon his death? = Answer: Yes The properties transferred should be included in the estate of the decedent because the transfers were intended to take effect upon his death (donation mortis causa), regardless of the date of the actual transfer to the beneficiaries or hers. Case B. Renato, a natural philanthropist, gratuitously transferred a property to CJ worth 50,000,000 during his lifetime. What amount should be included in the gross estate of Renato upon his death? “Answer: PO. The transfer was not intended to take effect upon his death but during his lifetime, thus, it should be treated as a “donation inter-vivos” rather than inheritance (donation mortis- causa). The transfer is subject to donor's tax instead of estate tax. Case C. Due to an unstable medical condition, Pedro thought that it is only proper for him to gratuitously transfer his properties to his love ones now instead of waiting for his death. He then transferred various condominium units to his children worth P200,000,000 while he was undergoing major medical operation. At the time of Pedro's death, the fair market value of the properties transferred increased to P250,000,000. What amount ‘should be included in the computation of Pedro's gross estate? 49Gross Estate ‘Answer, P250,000,00 it Tho rege peau mort causa (ntondod [0 we bis a ae ra fe decodonts doath, 11s tho thought of death, a8 7 oo aropenty atthe dat ofthe disposition of the proporty. Tho fair ‘market value of th PY actual transfor should be Ignored. fo Juan, in trust for Boy, oer 000,000 t Oro an terminate the transfer anytime, Pedro transferred all his real properties wor Juan's legitimate minor son. Pedro reserved his right to termi Question 1 9 What amount should be included in Pedro's gross estate uPOn his death? | “Answer: P10,000,000. Question 2: | Assume Juan subsequently died a year after Pedro's death, what amount should be included in Juan's gross estate? dro). A revocable transfer does ‘Answer: PO The transfer is revocable on the part of the testator (Pec 7 not actually convey ownership over the property transferred because it may be revoked roy pe testator (egalessof whether the righ fo revoke Was exercise of Appointment (Sec. 85(0)] c. Transfers under a General Power Power of appointment refers to the right to designate the person or persons who will succeed to the property of the prior may be “general” or decedent. | The power of appointment ‘special’. It is considered “general” when the power of appointment ‘authorizes the donee of the power to appoint any person he pleases. The power may be exercised in favor of anybody including the donee-decedent. The donee of a general power of appointment holds the appointed property with all the attributes of ownership thus, the appointed property shall form part of the gross estate of the donee (beneficiary) of the power upon his death. Special Power of Appointment (SPA) exists when the donee can appoint only from a restricted or designated class of persons other than himself. Property transferred under a special power of appointment should be excluded from the gross estate of the donee of the power because the donee-decedent only holds the property in trust. Refer also to Exclusions under Section 87 0 the Tax Code as discussed in illustration #5, #8 Case B and Page 45. 50Gross Estate The power of appointment may be exercised by ‘the donor- decedent through the following modes: a) By will b) By deed to take effect In possession or enjoyment at or after his death ©) By deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death, The possession or enjoyment of, or the right to the income from the property. 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. ILLUSTRATION 8 - GENERAL POWER OF APPOINTMENT (SPA): . In the last will and testament of Mr. Yumao, he devised a parcel of land located in Batangas to Juan, with the power to appoint any person he pleases. Juan decided to transfer the property to Pedro through his last will and testament. q) e) 'n this illustration, Juan received the property under "General Power of Appointment (GPA)’. GPA exists when the power of appointment authorizes the donee of the power to appoint any person he pleases. The power may be exercised in favor of anybody including the donee-decedent. The donee of a general power of appointment holds the appointed property with all the atrbutes of ownership thus, the appointed property shall form part of the gross estate of the donee (beneficiary) of the power upon his death, Mr. Yumao_ = Donor of the power = Predecessor / Donor-decedent Juan = Donee of the power or 1st heir = Current decedent / Donee-decedent Parcel ofland * Appointed property General Power of Appointment "+n GEupondeath —* +InGE + +InGE * Subject to Estate Tax = Subjectto Subject to Estate Estate Tax Tax 51Gross Estate’ Bier ee S| Sareea ee ILLUSTRATION 9: Case A: General Powor of Appointment final Manny tonaled property to Non through his eee an a 7 a provision that Nonito can transfor the properly: vol Nont's death. property to Boomboom intended to take cffoct atthe tt i 2 Question 1; What type of power of apponimet tte above ‘Answer: General Power of aPPO! sp roanons, Toke that Nonito may transfer the propery anyone Thr, The ‘will provides t is if anybody in the power may be exercised in ee e var when the power of appointment NNonito). The power of appoint @ Cotes the donee ofthe power to appoint any Peso” he pleases. oe ne determination of Manny's gross estale? Should the property be included in t +» Answer: Yes Question 3: ‘Should the property be inc! “Answer: Yes Juded in Nonito’s gross estate? The donce of a general power of appointment holds the appointed property with ithe atinbutes of ownership. Thus, the appointed property shall form part ofthe ‘gress estate of the donee-decedent (Nonito) upon his death. Case B. Special Power of ‘Appointment Manny donated property to Nonto through his ast will and testament. It includes a provision that Nonito can transfer the property only fo his son, Boomboom. Question 1: What type of power of. appointment is illustrated above? “> Answer: Special Power of Appointment Special power of appointment exists when the donee can appoint only from @ restricted or designated class of persons other than himself. In the case provided, no other person should inherit the property left by Manny, but Boomboom. Question 2; Should the property be included in Manny's gross estate? + Answer: Yes Question 3: Should the property be included in Nonito's gross estate? “Answer: No : The donee of the power (Nonito) only holds the i intentic n property in trust. The intention of ‘Manny is to transfer the property to Boomboom not to Nonito. Consequently, the property transferred by Manny should be excluded in Nonito’s gross estate. _/ 52d. Gross Estate Transfers for Insufficient Consideration [Sec, 85(G)] When a sale or transfer (other than a bonafide or valid sale) was made for a price less than ils fair market value at the time of Sale or transfer, the excess of the fait market value of the transferred property at the time of death over the value of the consideration feceived should be included in the gross estate. For. this purpose, the following fair market values shall be used: Fair Market Values (FMV): * FMV of the Property at the time of sale or transfer. This is use to determine whether or not the Consideration was full and adequate. If the consideration received is substantially the same with the fair market value at the time of transfer, such sale or transfer is considered a bona fide sale, hence, not Subject to estate tax. FMV of the property at the time of death. This is used to determine the amount to be included in the gross estate. If the consideration received is substantially lower or for less. than full and adequate consideration compared to the fair market value at the time of sale or transfer, such sale or transfer was made for insufficient consideration. In such cases, the excess of the fair market value at the time of death over the consideration received at the time of sale or transfer should be included in the gross estate of the decedent. If there was no consideration received at the date of transfer and such transfer was made “in contemplation of death” (donation mortis causa), the fair market value of the Property at the date of death, not at the’ date of transfer, should be included in the gross estate of the decedent. If there was no consideration received at the date of transfer and such transfer was. not made “in contemplation of deat! E such transfer shall be considered donation inter-vivos subject to donor’s tax based on the fair market value of the Property at the date the donation was made. Donor's tax is discussed in Chapter 6. The above rules on insufficient consideration are summarized in Table 2-3 below: 53Gros Estate Ex Insufficient Pru aa excluded from the me Bonatide, sale Conair FMV at the docodent's gross estate. ime of transfor. jent consideration. Consideration < FMV at the = aime tho. gross estate. the time of transfer. tress of FMV @ the time of death over the consideration received. dless of the i Bonafide sale regar Saas me i ose —> er donation mortis causa a state tax) or donation No consideration received (subject fo e inter-vivos (SU! bject to donor's tax). TI CASE A t with carrying value of On January 2021, Juan sold for P5,000,000 an apartment c 3,500,000 to Pedro. At the time of sale, the property has @ prevailing market price of P7,000,000. Juan died on June 2021. At the time of death, the prevailing fair market value ofthe property was P8,000,000. Question 1: What amount should be included in the gross estate of the decedent? + Answer: P3,000,000. The excess of the fair value of the property at the time of death over the consideration received (P8,000,000 vs. 5,000,000). The carrying value of .d for purposes of determining whether the property transferred is disregarde ornot the transfer was made for an adequate and full consideration. ° Question 2: What amount should be included in the gross estate of the decedent assuming the fair market value ofthe property atthe time of death was P4,000,000? > Answer: PO. The fair market value at the time of death was lower than the amount of consideration received. Hence, the P5,000,000 is considered adequate and full consideration. Gielen 3 Assume that the property sold is classified as an ordinary asset and the sale or transfer was made in the ordinary course of trade or business. What amount should be included as part of the gross estate of the decedent? ‘Answer: PO. The sale or transfer is a result of a bona fide sale 54mt. Goss Estate apt fro Juan sold for 5,000,000 an apartment with carrying value of Of P5,000,000. Jura cn time of sao, tho property has a prevailing market price het value of (nn, God on Juno 2021. AL the time of death, the prevailing fair ra tvalue ti the property was P8,000,000, Wuestion 1: What an Pal ist SS ANSWOEE PO Soul be included inthe gross estate of the decedent? Hd conskiraion received is substantially the same with the falr market value at subject toe eae sale or transfer is considered a bonafide sale, hence, not Question 2. Assume Juan transferred the property without consideration, what amount should be included in his gross estate at the time of his death? “Answer: P8,000,000 The transfer is considered transfer in contemplation of death. Thus the transfer ‘should take effect ypon Juan's death. The fair market value of the property at the time Juan’s death should be included in his gross estate Question 3: Assume Juan transferred the property during his lifetime and- the corresponding donor's tax was paid, what amount should be included in his gross estate at the time of his death? “+ Answer: PO. The transfer is subject to donor's tax, not estate tax MISCELLANEOUS ITEMS. a. Claims against insolvent persons (Sec. 85) For estate tax purposes, an insolvent is a person whose properties are not sufficient to satisfy, whether fully or partially, his debt(s). A judicial declaration of insolvency is not required but the incapacity of the debtor to pay his obligation should be proven. As a rule regardless of the amount the debtor is unable to pay, the full amount of the claim against the insolvent person should be included in the gross estate of the decedent. The portion of the claim which is not collectible should be allowed as a deduction from the gross estate. ILLUSTRATION 11: CASEA Juan died with an existing collectible of P5,000,000 against Pedro. Since Pedro is financially stable, Juan exerted all possible efforts to collect the amount during his lifetime, however, Pedro failed settle the same before Juan’s death, Question 1; How much should be included in the gross estate of Juan? Answer: the entire amount of the claim, P5,000,000. Question 2: How much is the deduction from the gross estate of Juan? ‘Answer: PO. 55Gross Estate racily of the debtor to pay his The debtor is not an insolvent person ender ‘this category is allowed, obligation should be proven before @ de ct the amount due from Pedro, he gladly welcomed by Pedro, Question 3 Assume that after Juan falled to colle state of Juan? : ; I decided to just condone the claim, ‘The condonation wa a A year later, Juan died, How much should be included in the gros 7 esate onthe by him prior tos death, Therefor, the condonation should be classified as donation infer-vivos subject fo : CASE B Juan died with an existing collectible of P5,000,000 against Pedro whose properties are not sufficient to satisfy his debts. Pedro's properties are valued at P6,000,000 while his liabilities amounted to P10,000,000. A ‘ Question 1: How much should be included in the gross estate of Juan? “Answer: The entire amount of the claim, P5,000,000 Question 2: How much is the deduction from the gross estate of Juan? “Answer: P2,000,000. Only the uncollectible portion, — Collectible portion = Debtor's assets/Debtor's Liabilities x Claims Collectible = P6M/P10M x P5M = P3,000,000 Uncollectible = P5M - 3M = P2,000,000 Question 3: Assume that P2M of Pedro's liabilities are unpaid taxes from the government, how much should be included as a deduction from the gross estate of Juan? “Answer: P2,500,000. Only the uncollectible portion, Pedro's assets after unpaid taxes = P6M-2M = PAM Pedro's liabilities excluding unpaid taxes = P&M Collectible portion = Debtor's assets/Debtor's Liabilities x Claims Collectible = PAW/PAM x P5M = P2,500,000 Uncollectible= P5M — 2.5M = P2,500,000 b. Proceeds of life insurance [Sec. 85(E)] Proceeds of life insurance taken out by the by the decedent on his own life should be included in the gross estate if the following requisites are present: 1. It must be an insurance on the life of the decedent; and 2. The beneficiary must be either of the following; ‘ o His estate or executor/administrator (revocable or not) ° Ay a foi ; person (other than estate or administrator/executor) ic ignation is ecmbieral ) provided that the designation is not BRGross Estate If the policy does 5 / Not expressly say that the designation of the Hoey is irrevocable, then it is presumed to be revocable. oe a " eds of life insurance under a group Insurance taken by MPloyer are not subject to estate tax. of a nntilippine insurance Code presumes that the designation Te Ror OICY IS Fevocablo in case the designation of the beneficiary states that mane Section 11 of the Insurance Code (RA 10607) benefici © insured should have the right to change the eneficiary he designated in the policy, unless he has expressly aves this right in said policy. Notwitistanding the foregoing, in the event the insured does not change beneficiary during his lifetime, the designation shall be deemed irrevocable." AES aes Omura UT Ne EC hua) Beneficiary Designation =” Gross Estate Estate Revocable or revocable Included Executor Revocable or Irrevocable Included Administrator Revocable or revocable Included 39 Party (i. wife) Revocable Included L38Party (ie. wife) Irrevocable Excluded a Exclude proceeds from SSS and GSIS as provided by law. ILLUSTRATION 12: Case A: A life insurance worth P10,000,000 was taken out by Pedro upon his life. He designated his friend, Juan, as beneficiary. Should the proceeds be included in the gross estate of Pedro upon his death? > Answer:. Yes The beneficiary was his friend (other than the decedent's estate, executor or administrator). Since the designation is silent, it should be assumed that Juan's designation as beneficiary is revocable, As @ rule, when the beneficiary is a third person and the designation is revocable, the amount of proceeds should form part of the decedent's gross estate. Irrevocable designation of a beneficiary is not presumed. To be excluded from the gross estate, Juan's designation should be clearly stated as irevocable beneficiary. Case B: Assume the same data in case A, except that Juan's designation as beneficiary is irrevocable, Should the proceeds be included in the gross estate of Pedro upon his death? * Answer: No 57Gress Estate : —— xdro's executor, noficiary Was Pet 2) jaa parould the proceeds be included Case ‘Assume the same data in case A, excep! The designation ofthe beneficiary was itevoca in the gross estato of Pedro upon his doall? F Answer: YOs nan aie The designation of the benoficiar eect reine ese, exocor or aairaQr, 1 {fe insurance should always bo included in the gt ____regardiess ofthe benefcian’s designation. ficory should bo ignored i the Hela a cas, the proceeds of yvocable banal i we estate of the decedent ESTATE TAX RATE dent, whether resident The transfer of the net estate of every dece i ‘dance with the or non-residi ‘lippines, as determined in accor ith t Serer subject to the estate tax. Beginning Tax Code, as amended, should be January 1, 2018 or upon the effectivity of RA 10963; otherwise known a the “Tax Reform for Acceleration and Inclusion Act’ (TRAIN t sete i estate of every decedent, whether resident or non-resident of the Philippines, shail be subject to an estate tax rate of six percent (6%). The law that Governs the imposition of Estate Tax [Link] of Estate Tax ‘As discussed in Chapter 1, it is a well settled rule that estate taxation is governed by the statute in force at the time of death of the te of death of the decedent decedent. The estate tax accrues as the dal * and the accrual of the tax is distinct from the obligation to pay the same (RR 2-2003). Refer to Chapter 1 for additional discussions and illustrations. Filing of Estate Tax Return and Payment of Estate Tax Due The Tax Code, as amended, provides that the estate tax shall be paid by the executor/administrator or any of the legal heirs at the time the return is filed (Pay as you file system). FILING and PAYMENT: * Primary responsibility to file and pay — Executor or administrator; « Secondary responsibility to file and pay — any of the heirs An estate fax return shall be filed under oath in any of the following situation (RR 12-2018): 1. In cases of transfer subject to Estate Tax; and 58Gross Estate 2. Where regara registered or roshstigb vehicle, share of stoc Certificate Authorizing Revenue (BIR) is. raqi transfer of ownership {I executor or the admir may be. an gross value, the estate consists of le property such as real property, motor ks or othor similar property for which a Registration from the Bureau of Internal ulred as a condition precedent for the ; hereof in the name of the transferee, the nistrator, or any of the legal heirs, as the case Estate tax ; pose (oa, GonmS, Showing gross value exceeding five milion 000,000) shall be supported with a statement duly certified to a 7 following: by a Certified Public Accountant containing the ol . gees, assole of the decedent with their corresponding ae at the time of his death, or in the case of pens lent, not a citizen of the Philippines, of that part of b__ jis gross estate situated in the Philippines: . ized _ deductions allowed from the gross estate under Section 86 of the Tax Code, as amended; c. The amount of tax due, whether paid or still due and outstanding. TIME for FILING the Estate Tax Return Section 90(B) of the Tax Code, as amended, provides that the estate tax return is required to be filed within one (1) year from: the decedent's death. The court approving the project of partition shall furnish the Commissioner with certified copy thereof and its order within thirty days (30) after promulgation of such order: The period allowed to file the estate tax return ‘shall be distinguished from the “accrual” date of the estate tax due. The accrual of the estate tax is distinct from the obligation to pay the same [(RR 2-2003); (Lorenzo vs. Posadas, 64 Phil. 353)]. As discussed in page 1, the estate tax due “accrues” immediately at the time of death. The one-year time of filing is the allowable period of filing the return without incurring surcharge/penalty and interest. EXTENSION of Time to File the Estate Tax Return Under Sec. 90(C) of the Tax Code, “the Commissioner or any Revenue Officer authorized by him pursuant to the NIRC shall have the authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return”. The application for theGross Estate extension of time to file the ostate tax roturn must be filed with the Revenuo District Office (RDO) where the estate is required to secure its Taxpayor Identification Numbor (TIN) and filo tho tax returns of the estate, which RDO, likewise, has jurisdiction ovor the ostate tax rotury required to bo filed by any party as a rosult of tho distribution of the assots and Hlabilities of the decedent, TIME for PAYMENT of the Estate Tax As @ general rule, tho estate tax Imposed under the Tax Code Shall be paid at the timo the return is filed (Pay as File system) by the executor, administrator, or the heir(s). Consequontly, the estate tay due may be paid within the one-year period allowed to file the estate tax return. EXTENSION OF TIME TO PAY ESTATE TAX When the Commissioner finds that the payment of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5) years in case the estate is settled through the courts (Judicial Settlement), or two (2) years in case the estate is settled extrajudicially (extrajudicial settlement). In such case, the amount in respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the running of the statute of limitations for deficiency assessment shall be suspended for the period of any such extension. The application for extension of time to file the return and extension of time to pay estate tax shall be filed with the Revenue District Officer (RDO) where the estate is required to secure its TIN and file the estate tax return. This application shall be approved by the , Commissioner or his duly authorized representative. Where the request for extension is by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner. If an extension is granted, the Commissioner or his duly authorized representative may require the executor, or administrator, or beneficiary, as the case may be, fo furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension. 60Payment of Estate Ta; estate (RR 12-2018 a: estate tax due, the est; through the following options, in conditions: : 4. Gross Estate « by installment and ? partial disposition of 'S amended by RR 8-2019) i In case of insufficiency of ca sh for the i ' ale may be allen mediate payment of the total 2 allowed to pay the estate tax due cluding corresponding terms and Cash Installment a) The cash installm date of the filing (BIR Form 0605) ents shall be made within two (2) years from the © Of the estate tax return, using the payment form for succeeding oc yPavment form dedicated for this transaction “eeding installment payments after filing the first (1°) Payment through the estate tax retumn, The estate tax return shall thi ie date of he denen noe filed within one (1) year from th The frequency (i.e., monthly, quarterly, semi-annually, annually) deadline and the amount of each installment shall be indicated in the estate tax retum, subject to the approval by the BIR; In case of lapse of two (2) years without the payment of entire tax due, the remaining balance thereof shall be due and demandable subject to applicable penalties and interest reckoned from the eae deadline for filing the return and payment of estate tax; ani No civil penalties or interest may be imposed on the estates ~ permitted to pay the estate tax due by installment. Nothing in this subsection, however, prevents the Commissioner from executing enforcement action against the estate tax due of the estate tax provided that all the applicable laws and required procedures are followed/observed. = 2 ae © . Partial disposition of estate and application of its proceeds to the estate tax due a) The disposition, for purposes of this option, shall refer to the conveyance of property, whether real, personal or intangible property, with the equivalent cash consideration; b) The estate tax return shall be filed within one (1) year from the date of the decedent's death; : c) The written request for the partial disposition of estate shall be approve by the BIR. The written request shall be filed, together with a notarized undertaking that the proceeds thereof shall be exclusively used for the payment of the total estate tax due; 61Gress Estate d) The computed estate tax due shall be allocated in proportion to the value of each property. The estate shall pay to the oe the p ro the property intended to be disposed 0” f) An clectrontc Certificate Authorizing Registration eee anaes issued upon presentation of the proof of Ps vonded to be proportionate estate tax due of the Prope ee any as ther disposed. Accordingly, eCARs shall be issued as Wee ts are properties to be disposed to cover the total esta’ a fates of the proportionate estate tax(es) previously pal Ns option; and in case of failure to pay the total estate tax due out ae the proceeds of the said disposition, the estate tax due, I : be immediately due and demandable subject to the applicable penalties and interest reckoned from the prescribed deadline for without prejudice of filing the return and payment of the estate tax, WITO™ : withholding the issuance of eCARs on the remaining properties until the payment of the remaining balance of the estate tax due, including the penalties and interest. REQUEST FOR EXTENSION OF TIME, INSTALLMENT PAYMENT AND PARTIAL DISPOSITION OF ESTATE & proportionate estate tax due of 9, .xtension to file the return, extension to pay the estate. installment shall be filed with the Revenue District Officer (RDO) where the estate is required to secure its TIN and file the estate tax return. This request shall be approved by the Commissioner or his duly authorized representative. Request for e tax and payment by PLACE OF FILING THE RETURN In case of a resident decedent, the administrator or executor shall register the estate of the decedent and secure anew TIN therefor from the Revenue District Office where the decedent was domiciled at the time of his death and shall file the estate tax return and pay the corresponding estate tax with the Accredited Agent Bank (AAB), Revenue District Officer or Revenue Collection Officer having jurisdiction on the place where the decedent was domiciled at the time of his death, whichever is applicable following prevailing collection rules and regulations. PLACE OF FILING THE RETURN In case of a non-resident decedent, whether non-resident citizen oF non-resident alien, with executor or administrator in the Philippines, the 62Gross Estate estate ae return shall be filed with and the TIN for the estate shall be Seen en. ne, ROVATUG Dlatrict Office where such executor or administrator is eee Provided, however, that in case the executor oF feuistered, the estate tax return shall be filed with and the TIN of the estate shall be sociredtonts Revenue District Office having jurisdiction Over the executor or administrator's legal residence. Nonetheless, il Case the non-resident decedent does not have an executor or administrator in the Philippines, the estate tax return shall be filed with and the TIN for the estate shall be secured from the Office of the Commissioner though RDO No 39-South Quezon City. The foregoing Provision, Internal Revenue may venue/place in the fili ; Not withstanding, the Commissioner of 'Yy continue to exercise his power to allow a different Ng of tax returns. LIABILITY FOR THE Pa’ YMENT OF ESTATE TAX The executor/administrator of an the estate tax but the heir or beneficiar Where there is no executor or adminis acting within the Philippines, then any p. possession of any Property of the Estate Tax imposed under the Ta; administrator before the deliver to any heir or beneficiary. strator appointed, qualified and erson in actual or constructive decedent must file the return. The x Code shall be paid by the executor or ry Of the distributive share in the inheritance Where there are two or more executors or administrators, all of them are severally liable for the payment of the tax. The estate tax clearance issued by the Commissioner or the Revenue District Officer (RDO) having jurisdiction over the estate, will serve as the authority to distribute the remaining/distributable properties/share in the inheritance to the heir or beneficiary. PAYMENT BY INSTALLMENT In case the available cash of the estate is insuffi estate tax due, payment by installment shall be allowec Years from the statutory date for its payment without civil Penalty and interest, using the payment form (BIR Form 0605) or a Payment form dedicated for this transaction for succeeding instaliment Payments after filing the first (1*") payment through the estate tax return. icient to pay the ‘d within two (2) 63Fate Civil penalties and interest late of the tax, but within subject to interest but not he etc sg Penalty of 25% if there 1s no false or fraudulent cn or intent pa ‘he Penalty of 50% if thore is false, malice of frau nT Oe oF tax trom taxpayer, Interest shall be computed on the UNPZE th aw: 12% upon the date computed until fully paid (20% prior to effectivity of the TRAIN Law). Payment of Tax Antecedent fo the Transfer of Shai Rights (Sec. 97, as amended) Any amount paid after the. statutory due di the extension period, shall be res, Bonds or There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, Dae organized or established in the Philippines any share, obligation, bond or right by way of gift inter-vivos or mortis causa, legacy OF inheritance, unless a-certification from the Commissioner that the applicable tax have been p: If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall allow any withdrawal from the said deposit account, subject to a final withholding tax of six percent (6%). For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. Under RA No. 10963 (TRAIN Law) In case the available cash of the estate is insufficient to pay the total estate tax due, payment by installment shall be allowed within two (2) years from the statutory date for its payment without civil penalty and interest. 64PROBLEMS P2.1. A decedent taxpayer died leaving the following: Family home (land and residential house) in the & P8,000,000 ~ Philippines r Parcel of land with vacation Farm land in the Phili the Philippine Nation: Shares of stock of a house in Malaysia 5,000,000 ppines, with a mortgage in favor of = 3,000,000 ‘al Bank for P600,000 domestic corporation 2,000,000 Shares of stock of a foreign corporation, the entire 500,000 business of which is in the Philippines , Receivable from a friend who has no property 300,000 whatsoever Receivables under the following insurance policies: * _ Life insurance policy, taken by the decedent on 200,000 his own life, with his estate as revocable beneficiary Life insurance policy, taken by the decedent on 300,000 his own life, with his daughter as revocable beneficiary Life insurance policy, taken by the decedent on 600,000 his own life, with his son as irrevocable beneficiary Life insurance (group) taken by the employer of 150,000 the decedent, with the estate as revocable beneficiary REQUIRED: Determine the correct Gross Estate assuming the decedent was: 1. Aresident citizen 2. Resident alien 3. Non-resident alien with reciprocity 4. Non-resident alien without reciprocity 65Chip ber Exuercises ~ Estate Cag n separate parcels of land with P2.2, a The decedent devised to his four (4) childre a the following data: meter fot in Sampaloc Manila with the TO JUAN, 1,000 square following valuation: b = Assessed value determined by P25,000/sq.m. 18,000,000 = Zonal value as determined by the ea 20,000,000 lot in Q.C. with the following the City of Manila, * FMV as determined by independent a TO PEDRO, 1,000 square mete! valuation: = Assessed value determined by Q.C., Ps toe O00 Zonal value as determined by the CIR, 5, po0 feoton = _FMVas determined by independent assessors, ,000, TO MARIA, 1,000 square meter lot in Makati with the following valuation: 7 : = Assessed value~ determined by the City of Manila, P15,000/sq.m. Popone oon FMV as determined by independent assessors, REQUIRED: Determine the gross estate of the decedent P2.3, Pedro owns various shares of stock from different companies during his lifetime. At the time of his death, the following details were provided to you by his administrator: 100,000 shares of Frozen Company's ordinary shares, not traded = Outstanding shares - 800,000 shares; P10 par * Retained Earnings - P3,000,000 100,000 shares of Divergent Company's ordinary shares, listed shares = Outstanding shares - 1,000,000 shares; P10 par = Retained earnings - P5,000,000 * Mean value of the shares in the stock exchange - P15 100,000 shares of Lenovo Company's ordinary shares, listed shares * Qutstanding shares - 1,000,000 shares; P10 par * Retained earnings - P5,000,000 * Mean value of the shares in the stock exchange - P12 REQUIRED: Determine the gross estate of Pedro 66Chepter Exercises ~ Estate Te P24. For each of the fol the property inthe gross ene Mtependnt cases, determine the value of 1. A parcel of land inher; décadents fanee treated from the father was acquired by the the fair market "a cost of P250,000. Upon inheritance, values from the year 200,000 as shown in the schedule of rs 7 the office of the BIR Cominco 230,000 as determined by : é. contac erauured for P1,000,000, was transferred in | *, 0 market value aie Sd for a consideration of P100,000. Fair * s0ate of death, P1,200,000'"° Of transfer, P1,500,000, while at the time 5 . conten acquired at a cost of P1,000,000, was transferred in market Sige for a consideration of P1,200,000. Fair im ; : of death, P1.200,909'"° % transfer, P1,500,000, while at the time 4. ire ee Was about to present to his girlfriend a brand-new , P6000 000. 2002000 cash. Installment price is valued at :000,000. on his way to meet his girlfriend, he met a car accident and died. 5. On January 1, 2020, Pedro granted a loan worth P1,000,000 to Juan, due on January 1, 2022. The latter executed a promissory oe with an annual interest of 10%. Pedro died on June 30, (MODIFIED) IDENTIFICATION: Exercise A (Inclusions and Exclusions) Determine whether the following is included or excluded from the gross estate. Included Excluded 1. Transfer with reservation of certain rights 2. Transfer for insufficient consideration 3. Transfer for an adequate and full consideration in money's worth 4. Transfer in contemplation of death 5, Insurance proceeds from SSS and GsIs ae 6. Proceeds of group insurance taken c out bya company for its employees. 67Ohypte 7. Transfer from the first heir to the second heir designated by the predecessor. 8. Donation to the national government 9, Merger of usufruct in the owner of, the naked title 10. Legacy to a charitable institution whose administrative expenses did not exceed 30% of the legacy Exercise B (Insufficient Consideration) Determine the amount to be included in Decedent from the following independent cases: Ee ws — Estate Tae ereks Ee 4 ah Ll — the Gross Estate of the Transferor- Inclusion in the Particulars: 1. FMV at the time of Transfer 5,000,000 1 FMV at the time of Death 6,000,000 ve Consideration received 5,000,000 gM Answer: 2. FMVat the time of Transfer 5,000,000 FMV at the time of Death 6,000,000 Consideration received 6,000,000 3. FMV at the time of Transfer P5,000,000 FMV at the time of Death 6,000,000 Consideration received 7,000,000 4, FMV at the time of Transfer 5,000,000 FMV at the time of Death 6,000,000 Consideration received 2,000,000 5, FMV at the time of Transfer 5,000,000 t FMV at the time of Death 6,000,000 Consideration received nil \ 68Chapter Exercises — Estate Toe Exercise C (Proceeds of Life Insurance Premi vercise remium Determine the amount that should be included in the gross estate: : Inclusion in ‘the 2 Tacha ook ares : Nt took an insu i pioone0 surance on his life for loa nb 2. The decedent took an insurance on his ti ety al, He his life for P20,000,000 and designated his estate as the : revocable beneficiary. esd 3. The decedent took an insurance forhislifefor ~~ ~——~SOS~S P5,000,000 and irrevocably designated the t administrator of his estate as the beneficiary. ane EE Rattan 4, The decedent took an insurance on his life for P10,000,000 and designated his son as ' beneficiary. 2" 5. The decedent took am insurance on his lifefor ~~ —~—~—SOS~S~S~S P10,000,000 and designated his son as r from the decedent's death. in-one.(1) 4a 0. The payment of estate tax could only be extended maxi : up to imum of thirty (30) days from the date of filing. cae aa 70Chapter Eercives ~ Estate Tee MULTIPLE CHOICE Principles 1. An excise tax on transfers inter-vivos. a. Donor's tax b. Estate tax ava 2. An excise on transfers mortis causa a. VAT c. Income tax b. Estate tax d. Donor's tax 3. Which among the following statements is not correct? |. Estate taxation is governed by the statute in force at the time of death of the decedent. |. Estate tax accrues as of the death of the decedent. MM. Succession takes place and the right of the State to tax the Privilege to transmit the estate vests instantly upon death. a. lonly c. Ill only b. Ilonly d. None of the above 4. Estate tax is a tax on the right of the deceased person to transmit his estate to his lawful heirs and beneficiaries. Hence, it is |. Atax on property. I. Anexcise tax a. lonly c. Both | and Il b. Il only d. Neither I nor II 5. Estate tax is imposed upon the: a. Decedent b. Property of rights transferred c. Right to transfer property upon death d. Privilege to receive inheritance 2 . When will the transfer through succession be effective? a. Upon the signing of a written will. b. Upon payment of estate tax. c. Upon death of the testator d. Upon registration in the register of deeds. 1— Estate Tag Ezcercises ctoristic of donation mortis Chapt a 7. Which of the following is not a char causa? a ‘a. The transfer to the donee Is iravoc ble b. There is no conveyance of title before tho death of the donor c. The transferor retains the full oF : whilo alive. [Link] tha d. The wonctor ‘should be void If the donor shoul donee, rile donor is alive. o worship to the doneee ked ownership and contro} be imminent, 8. Mr. Wais thought that due to old age, death mae disposed his Knowing that the value of estate tax is ha death (transfer in properties to his rightful heirs prior to jidance of tax, inter. contemplation of death). To prevent undue avol i is ct to: vivos disposition in contemplation of death is subje fe a. Donor's tax c. Income b. Estate tax d. Excise tax Classification of Taxpayers following hall be comprised of the i 9. The gross estate of a decedent shal Pai properties and interest therein at the time of his death, : revocable transfers and transfers for insufficient consideration, etc.: |. Residents and citizens: All properties, real or personal or intangible, wherever situated. . Il. Nonresident aliens: Only properties situated in the Philippines, that, with respect to intangible personal property, its inclusion in the gross estate is not subject to the rule of reciprocity a. lonly c. Both | and Il b. Honly d. Neither | nor II 10. The personal property of a non-resident, not citizen of the Philippines, would not be included in the gross estate if; a. The intangible personal property is in the Philippines. b. The intangible property is in the Philippines and the reciprocity clause of the estate tax law applies. ¢. The tangible property is in the Philippines. d. The personal property is shares of stocks of a domestic corporation 90% of whose business is in the Philippines. 11. Which of the following is subject to the rule of reciprocity? a. Carin the Philippines owned by a non-resident alien decedent. b. Investment in stock in a US Corporation owned by a non- resident alien decedent. 72Od ler Lui c. Investment in bonds j in a U.S.-Corporation that has acquired aeiieas situs in the Philippines, and is owned by a resident d. Shares owned by y a non-resid in a_partnershi established in the Philippines, eel : r “ — Estate Tae 12. The rule of reciprocity applies to: Non-resident alien decedent a Yes b. No ic Yes d. No 13. Intangible Personal Property of Non-Resident Alien Decedent with Situs in the Philippines shall be Exempt from Taxation if: |. The decedent, at the time of his death was a resident citizen of a foreign country which at the time of his death did not impose an estate tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country. Il The laws of the foreign country of which the decedent was a resident citizen at the time of his death allow a similar exemption from estate taxes of every character, in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. a. lonly c. Either! or Il b. Ilonly d. Neither | nor Il 14. One of the following is not an intangible personal property situated in the Philippines: |. Shares, obligations or. bonds issued by any corporation or sociedad anonima organized and constituted in the Philippines in accordance with its laws: ll. Shares, obligations or bonds issued by any foreign corporation where 85% of its business is located in the Philippines. lll. Shares, obligations or bonds issued by a foreign corporation if such shares, obligations or bonds have acquired business in the Philippines. ‘ ! i IV. Shares or rights in any partnership, business or industry established outside the Phiippines, a. c. Ill only b. iy d. Vonly 73Olypter Exuercises — Estate Tage Situs of Estate i 4 45. Which of the following rules on sgitus” of property of a decedent roporty is thé place or correct? ' Foe vas a goneral rule, the situs foal PI country where it is situated. UF As a general rule, the situs of tangible personal | 7 place of country whore such Is actually located al the decedent's death. UL. The rule that situs ‘of intangible. p' domicile or residence of the owner does No! property has a situs elsewhere. ; : iv. Phetest of situs of property of a non-resident alien decedent is not important at all because only the transmissions of property Irecated in the Philippines are subject to estate tax. a. lonly c. |, Hand Ill only b. Land I! only d. 1, Il, Ill, and IV property is the it the time of ersonal property is the t apply when the 16. Which is not a test of situs? ‘a. Residence of the debtor in case of accounts receivable. b._ Place of storage in case of certificates of stocks. © Location of depository bank in case of bank deposit. d._ Place of exercise in case. of copyright. 47. One of the following is not an intangible personal property situated in the Philippines: bonds issued by any corporation or a. Shares, obligations or Sociedad anonima organized or constituted in the Philippines in accordance with its law; b. Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines; Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired business situs in the Philippines; d. Shares, obligations or bonds issued by a non-resident foreign corporation. 18. Which of the following statements is correct? a. The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. b. Estate taxation is governed by the statute in force at the time the return is filed. c. Both “a” and “b” d. Neither “a” nor “b” 74Chepter Exercises ~ Estate Tae 419. Which of the follo 2 ad wing te ‘ outside the Philippines? 9 item is considered situated outsi a. Franchise in the name of the decedent which is exercised in the Philippines b. Share of stock holdings of decedent in a foreign corporation whose business i is 90% done in the Philipp c. Bond certificate issued | ilippines i 7 i by a domestic corporation owned by a non da. Foreign Currency deposited in bank outside the Philippines Pedro died on April 13, 2021, leaving the following properties: Common stocks of Sunchamp Corporation (2,000 shares) - listed in the Philippine Stock Exchange (highest - P40; lowest - P39). Common stocks of AgriNurture Corporation (1,500 shares) - not listed oe stock exchange. Cost - P50 per share; book value - P45 per share. Preferred stocks of Greenergy Inc. (3,000 shares) — not listed in the stock exchange. Cost - P70 Per share; book value - P60 per share; par value — P50 per share Car (cost - P600,000; book value - P350,000; market value - P400,000) Real properties (zonal value - P 120,000; assessed value - P72,000) The gross estate of Pedro is — a. P817,500 c. P824,000 b. P816,500 d. P846,500 Use the following data for the next two (2) questions 21. Following are properties in the gross estate with their fair market values: . House and lot, family home in Quezon City 1,500,000 Bank deposit in the foreign branch of a domestic 500,000 bank Bank deposit in Makati branch of a foreign bank 300,000 Shares of stock issued by a domestic corporation 1,000,000 (certificate kept in Canada) Franchise exercised in Manila 800,000 Receivable, debtor from Mindanao 200,000 75~ Coste bie } ses Chyler Eee there If the decedent was non-resident alr Cd excluded from gross estate 18 valued S444 o99 Is reciprocity, property a, P2,800,000 dd. P2,000,000 b, 2,600,000 " , — no reciprocity, the 22. If the decedent was non-resident allon and thero Is ross astato Is valued al 3,600,000 any PA,300,000 oF 3/200,000 b, P3,800,000 cre ‘came, left th i is lifetime, left the 23. A Filipino decedent residing in Hawail during his following properties: 00 House and lot, USA Foe oud Mansion, Philippines 2/000,000 : Cars, Philippines _ 5/000,000 Shares of stock, Singapore 300,000 Accounts receivable, USA dent is The gross estate of the dece Bees nag tn . P70,000,000 D P67,000,000 d, P62,000,000 Use the following data for the next two (2) questio1 The gross estate of a decedent included the followin: Cost Fair value Land and building, Philippines P1,600,000 P2,000,000 House and lot, UK 1,800,000 1,500,000 Personal properties, UK 1,000,000 600,000 House and lot, Philippines 4,000,000 3,500,000 Shares of stocks, UK corp. 200,000 Shares of stocks, domestic corp. 250,000 (certificate kept in UK) Shares of stocks, domestic corp. 100,000 (certificate kept in Phils.) Franchise exercised in the Phils. 200,000 Franchise exercised in UK 150,000 Receivables, debtor is from UK 50,000 Receivables, debtor is from Phils. i a 50,000 24. If the decedent was a nonresident alien and his | the dece IS country exempts a Filipino citizen from estate tax, how much of hi subject to reciprocity? pte Coscia weld a. P1,000,000 c. P600,0 b. P800,000 a. P350,000 76 4C apt cists — Estate Tae \ 25, I'the decedent was a nonresidont alien and assuming there is no reciprocity, how much is tho gross ostate? a. P10,700,000 ©. P6,100,000 b. 6,600,000 4. P5,860,000 Valuation of Estate 26, When the Property is donated in contemplation of death, the basis of the tax shall be a. Fair market value b. Fair market valu the donation, c. Fair market valu . Ce at the time of donation in the hands of the donor before the time of le at the time of death of the donor ‘ost when the property was acquired ' 27. AS a tule, the basis of valuation Of property in the gross estate is the fair market value prevailing at the time of decedent's death. In the case of domestic shares of stock not traded thru the stock exchange, the fair market value is a. The value appearing in the schedule of fixed values from the assessor's office b. Net realizable value ©. Acquisition cost d. Issuer's book value. 28. Which of the following value is not used when valuing gross estate? a. Fair market value at the time of death; b. Fair market value at the time the estate return is filed; c. Zonal value when higher than the assessed value in case of real property; d, Book value in case of shares not traded in the stock exchange. 29. The following statements pertain to rules on valuing the estate left by adecedent. Select the incorrect statement. |. Values in the gross estate are based on values at the time of the decedent's. death because it is at this time that the heir legally succeeds to the inheritance. | Receivable are appraised on the basis of the amount of the principal and interests due and unpaid at the time of death. [Link] ‘ c. Both | and Il b. Hlonly d. Neither I nor Iled Copapter Eeeereeses Estate Cie avaltable in loco of jand, The following data wore 30, A decedent loft a ph 500,000 connection th oport 2,500; seaeasad valet, “ne (4) month hofore doath 9,000,000 Zonal valuo, tine of death turn 3,000,000 FMV at tho tine of fling astale Lr PAT iand in the gro8® estate? What would bo the value of he pee. 000, 000 oe 3 Pot bo aotrmined b, 2,500,000 Use the following data [Link] noxt f “hares. The shares were A decedent loft 1,000 XYZ Corpora made available: not traded in the stock exchange. The following data wer10,000,000 Capital stock, XYZ Corporation 2'000,000 Retained earnings 100,000 Outstanding shares codent's gross estate? 31, What was the value included the det a. P100,000 c, P150,000 b, P120,000 d, PO re classified as preference shares, what 32. Assume that the shares wel {'s gross estate? was the value included the decedent a. P100,000 c. P150,000 b. P120,000 d. PO re traded in the stock exchange. Assume 33, Assume that the shares wel further that the average value at the time ‘of death was P100 per share. What was the value included the decedent's gross estate? a. P100,000 c. P120,000 b. P110,000 d. P150,000 34. Assume that the shares were traded in the stock exchange. However, the quoted price at the time of death was not determinable. Nonetheless, the highest and lowest quotations of the shares in the market were P140 and P80, respectively, what was the value included the decedent's gross estate? a. P100,000 c. P120,000 b. P110,000 d, P150,000 35, Decedent died in 2018 leaving a will which directed all real estate owned by him not to be disposed or sold for a period of 2 years after his death, and ordered that the property be given to Juan Dela Cruz after 2 years. In 2018, the estate left by the decedent had a fair 78Chapter Ecvercises — Estate Tae market value of P: estate increased Ree In 2020, the fair market value of the said thereon estate tay 4800.00 and the BIR Commissioner assessed What would be the ran On assessed value of P4,000,000 in 2018. @. P5,000,000 amount of the gross estate? b. P4,000,000 d,500,000" INCLUSIONS IN THE GRO: Decedent's Interest > ESTATE 36. Decedent's Interest L aaa to the extent of equity or ownership participation of the lent on any property physically existing and present in the gross estate, i i » Whether in his ssion, control or dominion. Less Il. Refers to the value of any interest, having value or capable of being valued or transferred, in , in property owned or possessed by the decedent at the time of his death. a. lonly c. Both | and Il b. Honly d. Neither | nor I! 37. Which of the following is not to be included in the gross estate of citizen decedent? a. Dividend income declared, but not yet actually received at date of death b. Share in partnership's profit earned immediately after date of death c. Rent income accrued before death but collected after death d. None of the above Transfer in Contemplation of Death 38. Transfer in contemplation of death |. Refers to property formerly owned by the decedent but were no longer owned by him at the time of his death. |. Contemplates a ‘situation where the transferor during his lifetime, transfers property in contemplation of or intended to take effect in possession or enjoyment at or after his death. III, © Includes situations where the transferor retains for life the possession or enjoyment, or the right to the income from the property, or the right to designate the person who shall possess or enjoy the property or the income therefrom. 79