CHAPTER 2 ESTATE TAX Intended Learning Outcomes After reading this chapter, you should be able to 1. Understand the fundamental principles and concepts of estate taxation; 2. Identify the composition of taxable gross estate by considering various categories of decedents; 3. Determine the allowed deductions from the gross estate to arrive at the taxable net estate; 4, Compute the estate tax due and explore possible tax credits depending on the different classes of taxpayer; and 5. Gain knowledge about the preparation and filing of estate tax return and payment of the estate tax due, as well as the essential compliance requirements involved in estate taxation. SUCCESSION AND ESTATE TAX Succession Succession is a mode of acquisition by virtue of which the property, rights, and obligations to the extent of the value of the Inheritance, of a person are transmitted through his death to another or others either by his will or by operation of law." ‘The rights to the succession are transmitted from the moment of the death of the decedent? Elements of Succession 1, Decedent 2. Estate 3. Heirs Se ee ee ee * artile 774, Cet Code. 2 Article 777, Civil Code,Chapter 2, Estate Tax Decedent Decedent 1s the general term applied to the permon whose property le transmitted through succession, whether or not he left a will, If he left a will, he is also called the testator. Estate the inheritance, which includes all the ‘This is also referred to as which are not extinguished property, rights, and obligations of a person by his death. This includes not only the property and the transmissible rights and obligations existing at the time of his death but also those which hhave accrued thereto since the opening of the succession.® Heirs ‘An heir is a person called to the succession either by the provision of a will or by operation of law. Devisees and legatees are persons to whom gifts of real and personal property are respectively given by virtue of a will.® Kinds of Succession 1, Testamentary 2. Legal or intestate 3. or Mixed.’ Testamentary succession is that which results from the designation of an heir, made in a will executed in the form prescribed by law. Legal or intestate refers to a situation where a i without having a valid will or last testament in place. ea Mixed succession is that effected partly bj operation of law.? partly by will and partly by 5 Anticle 775, Civil Code. + Article 776, Civ Code. & Artele 781, Ci Code. « Artele 782, Civil Code. 4 Artele 777, Civil Code ¢ Article 79, Geil Code. * Article 780, Chi Code.Chapter 2. Estate Tax Wills ‘A will is an act whereby a person is permitted, with the formalities prescribed by law, to control to a certain degree the disposition of this estate, to take effect after his death. "° Forms of Wills 1, Holographic Will 2, Notarial Will Holographic Will Holographic Will is a will which must be entirely written, dated, and signed by the hand of the testator himself. Notarial Will Notarial Will is a will which must be subscribed at the end thereof by the testator himself or by the testator's name written by some other person in his presence, and by his express direction, and attested and subscribed by three or more credible witnesses in the presence of the testator and of one another. Codicil A codicil is a supplement or addition to a will, made after the execution of a will and annexed to be taken as a part thereof, by which disposition made in the original will is explained, added to, or altered. Estate Tax Estate Tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition. It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death of the owner. ‘The taxpayer in estate taxation is the “estate of the decedent”, who is a juridical person created by law. ‘Article 7&3, Civil Code 65Chapter 2. Estate Tax Purpose of Estate Tax 2. Sustification for the Imposition of 1 To avoid the undue accumulation of wealth or fortune to an individual \t ‘To raise revenue for use of governmen Estate Tax law considered the service the distribution of the estate of accordance with his wishes. Benefit-Received Theory. The rendered by the government in the decedent either by law or in ship Theory. Inheritance is not a right 2. Privilege or State Partne! but a privilege granted by the State and legates have been acquired only with the protection of the State. 3. The State as a passive silent partner in the accumulation of property has the right to collect the share which is properly due it. 4. Ability to Pay Theory. Receipt of inheritance which is in the nature of an unearned wealth or windfall is placing assets into the hands of the heirs and beneficiaries. 5. Redistribution of Wealth Theory. The receipt of inheritance is a contributing factor to the inequalities in wealth and income. Governing Law It is a well-settled rule that estate taxation is governed by the statute in force at the time of death of the decedent. Corollary, the rights to the succession are transmitted from the moment of the death of the decedent.!? Date of Death i aie BOS September 1, 1550 —— Toman eR ea ‘September 15, 1950 ~ December 31, 1972 | R.A. No. 579 : January 1, 1973 — July 27, 1992 P.D. 69 July 28, 1992 — December 31, 1997 R.A. No 7499 January 1, 1998 - December 31, 2017 | RA.No 8424 ‘January 1, 2018 - Present RA. No, 8424, as amended by ‘TRAIN law (Tax Reform for accrual of the tax is distinct from th Acceleration and inclusion). The estate tax accrues as of the death of the decedent and the ¢ obligation to pay the same. Upon oe. 66Chapter 2, Estate Tax the death of i ceca Succession takes place and the right of the Privilege to transmit the estate vests instantly upon Computation of Estate Tax Due By referring to BIR For Cornpubedlsa aligned rm 1801, the estate tax due may be ae Exclusive _| Communal | Total Less: Ordinary Deductions 5 7 ; Net Conjugal Estate x £ Less: Special deductions = Family home 5 Standard deduction S Total = Net Estate Less: Share of the Surviving Spouse 2 NET TAXABLE ESTATE = ‘Multiply by: Estate Tax Rate 6% ESTATE TAX DUE = Tax Rate Effective 01 January 2018, the net estate of every decedent, whether resident or non-resident of the Philippines, as determined in accordance with the NIRC, as amended, shall be subject to an estate tax at the rate of six percent (6%) COMPOSITION OF GROSS ESTATE ‘The following items shalll be included in determining gross estate: Properties, real or personal, tangible or intangible, Decedent’s Interest Proceeds of Life Insurance " Taxable Transfers (ie., Transfer in Contemplation of Death, Revocable Transfer, Property Passing under the General Power of Appointment, Transfers for Insufficient Consideration) 67Chapter 2, Estate Tax Decedent's Properties tate consists of all the decedent's r es ; Fe eer er tangible or intangible, wherever situated, at properties, real or personal, tangibl the time of his/her death. On the other hand, the gross estate of non-resident aliens includes only properties situated in the Philippines except intangible personal property when the reciprocity rule applies. Residents and/or Citizens ‘The gross estate of Residents and/or Citizens shall consist of all properties, real or personal, tangible or intangible, wherever situated. In particular, the gross estate of a resident and/or citizen decedent shall consist of the following: 1. Real properties located within and outside the Philippines; 2. Tangible personal properties located within and outside the Philippines; and 3. Intangible personal properties located within and outside the Philippines. For example, a decedent died leaving the following property: Sees”. Soa Philippines Abroad Total ‘Real property, 4,000,000 2,000,000 P6,000,000 ‘Tangible Personal Property 1,500,000 1,000,000 2,500,000 Intangible Personal Property 2,000,000 ’500,000 2,500,000 How much is the gross estate if the decedent ‘ident Citizen, Non-Resident Citizen, or Resident Alien? cages Considering that the decedent is a resident it a and/or citizen, all his properties, wherever situated, amounting to P1 1,000,000 shall form part of his gross estate. nt The gross estate shall be computed as follows: Sap bweation ippines Abroad Total Real property P4,000,000 Pa, a Tangible Personal Property 1,500,000 r'oog.g0g 76,000,000 Intangible Personal Property __21000,000_"e9n'000 2,500,000 Total Gross Estate F7,500,000 "P3,500,00Pi1,000,000 68Chapter 2. Estate Tax Non-Resident Aliens For Non-Resident Aliens, their gross estate shall consist only of properties situated in the Philippines provided, that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity provided for under Section 104 of the NIRC. In particular, the gross estate of a nonresident alien decedent shall consist, of the following: 1. Real properties located in the Philippines; 2. Tangible personal properties located in the Philippines; and 3. Intangible personal properties located in the Philippines, unless excluded on the basis of reciprocity. For example, assuming that the decedent is a Non-Resident Alien (without Reciprocity), how much would be his gross estate? For Non-Resident Alien Decedent (without reciprocity), the gross estate shall include only properties amounting to P7,500,000, which are situated in the Philippines. His gross estate shall be computed as follows: Location Philippines Abroad Total Real property 4,000,000 = P4,000,000 ‘Tangible Personal Property 1,500,000 = 1,500,000 Intangible Personal Property 2,000,000 = 2,000,000 Total Gross Estate 7,500,000 = _P7,500,000 Rule on Reciprocity There is reciprocity if the foreign country of which the decedent was a citizen and resident at the time of his death: Did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or fer tax in respect of Allowed a similar exemption from trans! intangible personal property owned by citizens of the Philippines not residing in that country. i it ble personal property of a If there is reciprocity, the intangit Nonresident alien shall not be included in his gross ee is no Teciprocity, such intangible personal property will be included. For example, assuming that the decedent is a Non-Resident Alien (with Reciprocity), how much would be his gross estate? 69Chapter 2. Estate Tax 1 Decedent (with reciprocity), the gross For Non-Realdent Alles ‘oss estate shall be compute estate shall amount to P5,500,000. His gr as follows: Location “Philippines__ Abroad. Total ~P4,000,000 = P4,000,600" Real property Tangible Personal Property 1,500,000 = 1,500,000 Intangible Personal Property 2 Total Gross Estate 5,500,000 = P5,500,000 Real property Real property refers to land and anything permanently attached to it, such as buildings, structures, and natural resources like minerals, water, and vegetation. It includes both the physical land and the improvements made on that land. Houses, office buildings, farmland, forests, mineral rights, and water rights are all examples of real property. Under the Civil Code, the following are considered immovable property: 1, Land, buildings, roads, and constructions of all kinds adhered to the soil; 2. Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable; 3. Everything attached to an immovable in a fixed manner, in such ‘a way that it cannot be separated therefrom without breaking the material or deterioration of the object; 4, Statues, reliefs, paintings or other € objects for use oF ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements; 5. Machinery, receptacles, instruments or implements intended bY the owner of the tenement for an industry or works which may be carried on in a building or on a Piece of land, d which tend directly to meet the needs of the said industry or worker 6. Animal houses, pigeon-houses, places of similar nature, in cave then eae fish Ponds or breeding ‘se their owner has placed them oF tention to have them permanently 70Chapter 2. Estate Tax attached to the land, and forming a permanent part of it; the animals in these places are included; 7. Fertilizer actually used on a piece of land; 8. Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or stagnant; 9. Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast; 10. Contracts for public works, and servitudes and other real rights over immovable property. ‘Tangible Personal Property ‘Tangible personal property refers to physical assets that can be touched, moved, or seen and are not permanently affixed to land. These are movable items that can be owned and include a wide range of physical objects. Cars, furniture, electronics, jewelry, clothing, artwork, and machinery are examples of tangible personal property. Intangible Personal Property Intangible personal property encompasses assets that have value but do not have a physical presence. These assets represent legal rights or interests and are typically represented by documents or records. Stocks, bonds, patents, copyrights, trademarks, intellectual property rights, bank accounts, and digital assets like cryptocurrencies are considered intangible personal property. Intangible Properties Situated in the Philippines ‘The following are Intangible Properties which are considered situated in the Philippines.:? 1. Franchise which must be exercised in the Philippine : pbligations or bonds issued by any corporation or Foner oeieaima organized or constituted in the Philippines in accordance with its laws; See 104, MIRC 1Chapter 2. Estate Tax 3. Shares, obligations or corporation 85% of the business of Philippines; and 4. Shares, obligations corporation acquired a business situs in bonds issued by any foreign which is located in the or bonds issued by any foreign if such shares, obligations or bonds have the Philippines; and 5, Shares or rights in any partnership, business or industry established in the Philippines. Summary Rules on Composition of Gross Estate ‘The gross estate of the decedent shall consist of the following: Real and tangible Intangible Decedent | PROPER PerBonal_| personal property Within | Without | Within | Without Resident Citizen * v v v Resident Citizen of v v v Resident Alien v v v v Non-resident alien ‘With reciprocity v s . es Without - = y reciprocity : To illustrate, assume that a decedent died leaving the following properties: House and lot in the Philippines (mort 700,000) (mortgaged for Condominium unit in Japan Car in the Philippines Car in Thailand Franchise exercised in the Philippines Franchise exercised in Japan Domestic shares, the certificate is kept i Doni hare es i kp rth Kore Foreign shares, 30% of business in the Philippi with business situs in the Philippines, Foreign shares, 60% of business in the Philippines 72 P 1,500,000 1,000,000 100,000 160,000 300,000 250,000 80,000 160,000 150,000 50,000Chapter 2. Estate Tax Determine the gross estate if the d ¥ 1 decedent is a on- resident citizen or resident alien or resident citizens, (B) bas raailent alle (without reciprocity), (C) non-resident alien (with ar reciprocity) | House and lot in the 4 2 £ Philippines (mortgaged for P500, 000) P1,500,000 | P1,500,000 | P1,500,000 ‘Condominium unit in Japan 1,000,000 = a Car in the Philippines 100.0 Car in Thailand 160, a ee Franchise exercised in the Philippines 300,000 | _300,000 3 Franchise exercised in Japan 250,000 * 5 Domestic shares, the certificate is kept in South Korea. 80,000 80,000 : Foreign shares, 90% of business in the Philippines 160,000 160,000 = Foreign shares, 30% of business in the Philippines, with business situs in the Philippines. 150,000 | __ 150,000 < Foreign shares, 60% of business in the Philippines 50,000 = = Total 3,750,000 | P2,290,000 | P1,600,000 ‘The gross estate of Residents and/or Citizens shall consist of all properties, real or personal, tangible or intangible, wherever situated. resident aliens includes only properties ‘The gross estate of non- Bite intangible personal property when the situated in the Philippines except reciprocity rule applies. For non-resident aliens (with reciprocity}, considering that there is reciprocity, the following intangible properties located in the Philippines will not be included in his or her gross estate: Franchise exercised in the Philippines — eee 200,000 Domestic shares, the certificate is kept in South Kore g5n.en0 Foreign shares, 90% of business in the Philippines 160,000 Foreign shares, 30% of business in the Philippines, with business situs in the Philippines. Franchise exercised in the Philippines /$ considered situated in the Philippines. 73Chapter 2. Estate Tax Shares of a domestic corporation are always considered as located within the Philippines. Shares of a foreign corporation will be considered located within the Philippines if 85% of its business is located in the Philippines. Moreover, if less than 85% of a foreign corporation’s business is in the Philippines, its foreign shares can still be considered situated within the Philippines if those shares have acquired a business situs in the Philippines (i.e., they are used in the furtherance of its business in the Philippines). Decedent's Interest The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible to the extent of the interest therein of the decedent at the time of his death.1° This includes any interest having value or capable of being valued which is owned by the decedent existing at the time of death, such as dividend declared on or before death, but received by the estate after death, partnership profits that have accrued before his death, but received after death. This also includes those transferred by the decedent at the time of his death. For example, the decedent died leaving a 5-year, 10%, P500,000 promissory note, which the decedent received 3 years ago from a debtor. Both the principal and the interest are due at the maturity of the loan. How much shall be included in the gross estate? Principal 500,000 Accrued interest as of the time of the death (P500,000 x 10% x 3 years) 150,000 Decedent's Interest in Promissory Note P650,000 Proceeds of Life Insurance To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether of not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of 19 See. B5(AS), NIRC 74Chapter 2. Estate Tax insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable.\4 Estate, Executor, or Administrator as Beneficiaries __ Proceeds of life insurance taken out by the decedent on his own life shall be included in the gross estate if the beneficiary of the life insurance is the estate, executor, or administrator regardless of the designation of the beneficiary, For example, the decedent died leaving a P5,000,000 life insurance policy on himself. He designated his executor as the beneficiary, and the designation was irrevocable. How much should be included in the gross estate? The entire proceeds of life insurance amounting to P5,000,000 shall be included in the gross estate since the beneficiary is the executor, Other Parties as Revocable Beneficiaries Furthermore, proceeds of life insurance taken out by the decedent on his own life shall likewise be included in the gross estate if the beneficiary is other than the decedent's estate, executor, or administrator and the designation is revocable or is not expressly made irrevocable. For example, the decedent died leaving a P5,000,000 life insurance policy on himself. The decedent designated his friend as the beneficiary. How much should be included in the gross estate? ‘The entire proceeds of life insurance amounting to P5,000,000 shall be included in the gross estate since the designation of his friend as the beneficiary is silent or is not expressly made irrevocable, Other Parties as Irrevocable Beneficiaries If the beneficiaries are other than the decedent's estate, executor, or administrator and the designation is expressly made irrevocable, the proceeds of life insurance taken out by the decedent on his own life shall be excluded from the gross estate. For example, the decedent died leaving a PS5,000,000 life insurance policy on himself. The decedent designated his friend as the beneficiary. The designation was irrevocable. How much should be included in the gross estate? "SRC, See, 856) 75Chapter 2. Estate Tax surance amounting to P5,000,009 ire f life in The entire Proce gross estate since the designation of hiy shall be excluded from the gross ¢s : friend as the beneficiary is expressly made irrevocable. Summary Rules on Proceeds of Life Insurance In summary, for estate tax purposes, proceeds of life insurance shall be treated as follows: Beneficiary : Designation Gross Estate Estate, Executor, Revocable or irrevocable | /__ Include Administrator : Revocable Include | eetriae! Irrevocable Exclude | To illustrate, assume that the decedent died leaving the following proceeds of life insurance from the following companies. How much should be included in the gross estate? Sun Life of Canada (Philippines), irrevocably designated to estate 1,000,000 Pru Life Insurance Corp. of U.K., revocably designated to the executor 1,000,000 Allianz PNB Life Insurance, Inc., revocably 1,000,000 designated to wife BDO Life Assurance Company, Inc. — 1,000,000 irrevocably designated to daughter ‘The proceeds of life insurance to be included in the gross estate are as follows: Sun Life of Canada (Philippines), irrevocably designated to estate 1,000,000 Pru Life Insurance Corp. of U.K., revocably designated to the executor 1,000,000 Allianz PNB Life Insurance, Inc., revocably 1,000,000 designated to wife ee Total pa‘godio00, P3,000,000 Insurance Proceeds Excluded from Gross Estate The proceeds from insurance are not F 5 circumstances: ‘ot taxable in the following 1, Amount receivable by any beneficiary y ‘iary irrevocably designated in the policy of life insurance taken by the insured The tonefer is 76Chapter 2. Estate Tax absolute, and the insured did not retain any legal interest in th insurance. Irrevocably designated; y legal est in the how done ~ a. By expressly stating the designation of a to be revocable); it in the policy (if not expressly stated, beneficiary in the policy is PRESUMED. b. By not changing the beneficiary during the lifetime of the insured. This was added in Sec. 11, RA 10607 (2013) which provides that, “The insured shall have the right to change the beneficiary he designated in the policy (i.e., it's revocable), unless he has expressly waived this right in said policy. Notwithstanding the foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable.” 2. Accident insurance proceeds as the Tax Code specifically mentions only life insurance policies. 3. Proceeds of a group insurance policy taken out by a company for its employees. 4. Proceeds of insurance policies issued by the GSIS to government officials and employees, which are exempt from all taxes!5 5. Benefits accruing under the SSS law'6 6. Proceeds of life insurance payable to heirs of deceased members of military personnel"? For example, assume that the decedent died leaving the following proceeds from insurance companies: Proceeds of life insurance taken out by the decedent, revocable, payable to wife, as the designated beneficiary 1,000,000 Proceeds of GSIS life insurance policy 2,000,000 Proceeds of a private life insurance policy, where the beneficiary is his sister and is silent as to her designation 3,000,000 Proceeds of life insurance taken out by the decedent, irrevocable, payable to his estate, as designated beneficiary 4,000,000 Proceeds of life insurance taken out by the 1,500,000 ae {Presidential Decree No, 1146. Republic Act No. 1161 Republic Act No. 260 7Chapter 2. Estate Tax decedent, irrevocable, payable to his son, as designated beneficiary. mine how much should be included foregoing list, deter os lof the decedent to and excluded from the gross estate Included in Excluded from Gross Estate Gross estate Proceeds of life insurance taken out by the decedent, revocable, payable to wife, as the designated beneficiary 1,000,000 Proceeds of GSIS life insurance 2,000,000 policy Proceeds of a private life insurance policy, where the beneficiary is his sister and is silent as to her designation 3,000,000 Proceeds of life insurance taken out by the decedent, irrevocable, payable to his’ estate, as designated beneficiary 4,000,000 Proceeds of life insurance taken out by the decedent, irrevocable, payable to his son, as designated beneficiary. 1,500,000 Total 8,000,000 3,500,000 ‘Taxable Transfers ___ Taxable transfers are mortis causa transfers of properties in the guise and form of inter-vivos transfers. They are included in the total gross estate of the decedent. . Transfers in Contemplation of Death Revocable Transfers Transfer with retention or reservation of certain ri ion of certain rights Property Passing under a General Power of Appointment Transfers for Insufficient Consideration seeps ‘Transfers in Contemplation of Death ‘The term “in contemplation of death” : means that the thought of death or the imminence of death (not the general expectation of deat is the controlling motive for the t ‘ the following transfer: ihoetst of the property. ‘Titi ples t 78Chapter 2. Estate Tax 1. by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or 2. by trust or otherwise, under which hi . under wh 1¢ has retained for his life or for any period which does not, in fact, end before his death a. the possession or enjoyment of, or the right to the income from property, or b. 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. For example, Mr. A, who has been critically ill with COVID-19 for almost six months, decided to transfer his commercial building valued at 5,000,000 as he contemplated the possibility of his imminent passing. ‘Transfers in contemplation of death do not include bonafide sale for an adequate and full consideration of money or money's worth. Motives that preclude a transfer from category of one made in contemplation of death: To relieve donor of the burden of management a b. To save income/property taxes ¢. To settle family disputes or unlitigated disputes d. To provide independent income fo dependents e. To see children enjoy the property while donor alive f. To protect family from hazards of business g. To reward services rendered Revocable Transfers ‘This involves transfers made by way of trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power by the decedent alone or by the decedent in conjunction with any other person to alter, amend, revoke, or terminate, or : . where any such power is relinquished in contemplation of the decedent's death. 79Chapter 2. Estate Tax ‘As long as there is a reservation that the transfer is revocable then it is sufficient that it is part of the gross estate to the extent of any interest therein. For example, Mr. A transferred his house and lot with a fair market value of P10,000,000 to Mr. B. The transfer shall be revocable by Mr. A during his lifetime. Mr. A died on 25 December 2023 when the house and lot had a fair market value of P11,500,000. How much should be included in the gross estate of Mr. A? Since the transfer is revocable, the entire fair market value of the house and lot amounting to P11,500,000 at the time of Mr. A’s death Shall be included in his gross estate. Revocability of the Transfer ‘The power to alter, amend, or revoke shall be considered to exist on the date of the decedent's death. The revocability of the transfer is not affected by the following: 1, requirement of prior notice before the power to alter, amend, or revoke is exercised; the alteration, amendment, or revocation takes effect only on the expiration of a stated period after the exercise of the power; and 3. the failure of the decedent to give notice or to exercise power to alter, amend or revoke. If the notice has not been give exercised on or before the date of hi considered to have been given, or the death, "nor the power has not been is death, such notice shall be Power exercised, on the date of Simply put, if the transferor dies without waiving his right of revocation, the law considers him the own. ler of the 1e time of his death. Hence, it shall be included in his grosa cena For example, on 25 September 2023, Mr, with a fair market value of P1,500,000 to Mr. Bh Assignment, the transfer can be revoked by Mr. A until 25 September 2025. However, Mr. A passed away on 25 December 2023 wher the ca ‘was vache st P1A070,000. How nat shoud os Sastene't ae ave om estate of Mr. A? A transferred his cat Based on the Deed of Since Mr. A died without waivi ing his right of rev and/or before the expiration of such right, ight of revocation the entire fair market value of the 80Chapter 2. Estate Tax car amounting to P1,000,000 at the time of Mr. A’s death shall be included in his gross estate, If Mr. A had waived his right to revoke, the property would not be included in his gross estate, as the transfer would no longer be revocable. Note that revocable transfers do not include bonafide sales for adequate and full consideration of money or money's worth. Conditional Donation _The rules on revocable transfers also apply to conditional donations. There is conditional donation when the transfer is contingent upon the done meeting certain conditions or requirements. For example, Mr. A transferred his car to his daughter, C, conditional upon C’s passing the May 2024 LECPA. Mr. A died on 14 February 2024 when the car had a fair market value of P1,000,000 How much should be included in the gross estate of Mr. A? ‘The fair market value of the car amounting to P1,000,000 at the time of the death shall be included in Mr. A’s gross estate since he remains the owner of the car at the time of his death. ‘Transfer with Retention or Reservation of Certain Rights In case the transferor retains the possession or enjoyment of, or right to income from, the property, the same shall be included in the gross estate to the extent of the decedent's interest therein. For example, Mr. A transferred an Apartment House with four units worth P5,000,000 in favor of his son. He, however, reserved for himself the enjoyment of one u nit until his death. Once Mr. A died, how much should be included in his gross estate? value of the unit amounting to P1,250,000 ‘The fair market r. A reserved for him shall be included in his (P5,000,000 / 4), which M gross estate. Property Passing under a General Power of Appointment ‘A General Power of Appointment gives the decedent the power to appoint any person he pleases, including himself, to be the recipient of the property, The property is transferred to the decedent during his Iciine ander a power of appointment couched in general terms, where he can designate any person who shall possess or enjoy the property or the income therefrom. 81Chapter 2. Estate Tax ble transfer where the decedent is the Unlike in ev vessing under a general power of appointmen. transferor, in property passin the decedent is the transferee. if the property arises under oss estate Included in the gross estate IF the decedent general power of appointment exercise 1, By will; or 2. By deed executed in contemplation of or intended to take effect in possession or enjoyment at or after his death; or 3. 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 ~ a. The possession or enjoyment of, or the right to the income from the property; or b. The right cither alone or in conjunction with any person, to designate the persons who shall enjoy or possess the property or the income therefrom. For example, Mr. A died leaving an Apartment House with a fair market value of P5,000,000. In Mr. A’s last will, he transferred the said Apartment to Mr. B, with the right to designate the property to whomever he wants. If Mr. B died, how much should be included in his gross estate? In this case, Mr. B had general power over the Apartment. Hence, the Apartment worth P5,000,000 shall be included in Mr. B's gross estate. Special Power of Appointment If the property is transferred to the decedent under a special power of appointment, the property is excluded from this gross estate. Special Power of Appointment refers to the appointment where the lecedent: 1. can appoint only among a designated class of pers a n sons other than himself, his estate, the creditors of his estate, i 2. if the power of appointment is of the decedent, his estate, estate. expressly not exercisable in favor his creditors, or creditors of his 82Chapter 2. Estate Tax For example, before his death, Mr. A received a house and lot worth P10,000,000 from Mr. B, with the right to designate the property only to himself. In addition, Mr. A received a car worth P1,500,000 from Mr. C, with the right to designate the property only to Mr. D, a stranger. How much should be included in the gross estate of Mr. A? Only the P10,000,000 house and lot shall be included in Mr. A’s gross estate since he has the right to designate it to himself. However, the transfer of the car was made under a special power of appointment, hence, should be excluded from his gross estate. ‘Transfers for Insufficient Consideration ‘The transfer for insufficient consideration will be included in the gross estate if the following are present: 1, The transfer for insufficient consideration must fall under any of the following, otherwise, the donor’s tax will be imposed, a. Transfer in contemplation of death; b. Revocable transfer, or c. Property passing under a GPA. 2. The consideration in money or money's worth is not a bona fide sale for an adequate and full consideration in money or money's worth 3. The excess of the fair market value of the property at the time of the decedent's death over the consideration received shall be included in the gross estate of the decedent. It’s important to note that the determination of whether the transfer is made for insufficient consideration is made at the time of the transfer by comparing the fair market value at that time to the consideration. However, the amount to be included in the estate is determined at the time of the death, that is, the excess of the fair market value at the time of the death over the consideration. 83Chapter 2. Estate Tax For example, before his death, the decedent made the following transfers At the Date of Transfé FMV at Time of FMV Consideration Death Land in Manila P 1,000,000 P 400,000 1,600,005" Land in Bulacan 1,500,000 850,000 1,000,000 Car in Manila 2,000,000 - 1,200,000 Land in Marawi 2,500,000 3,000,000 10,000,009 Car in USA 2,200,000 1,500,000 1,300,000 Compute the total gross estate of the decedent. Review all transfers made by the decedent during his lifetime and identify those that had insufficient consideration at the time of the transfer. These are the transfers that may be subject to inclusion in the gross estate. At the Date of Transfer Insufficient ee FMV Consideration Consideration Land in Manila P 1,000,000 P 400,000 w Land in Bulacan 1,500,000 850,000 (2) Car in Manila 2,000,000 = 3) Land in Marawi 2,500,000 3,000,000 : Car in USA 2,200,000 1,500,000 (4) For each transfer with insufficient consideration, calculate the difference between the fair market value at the time of death and the consideration received. pepe Consideration FMV,at Time of EA 2 Tand in Manila 400,000 P 1,600,000 1,200,000 Land in Bulacan 850,000 1,000,000 150,000 Car in Manila 1,200,000 ‘1,200,000 Car in USA 1,500,000 1,300,000 __= Total PH 55000 The transfer with insufficient considerati sjuded in the gros estate amounts to Pa recent consideration to be ine Prior Interests Transfer in Contemy ransith Proceeds of Life In: Plation of Death, Revocable 7 cs surance shall apply to the transfers, trusts, ©" 84Chapter 2. Estate Tax interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, exiting exercised or relinquished before or after the effectivity of this Other Items ‘The following can be deducted from gross estate only if they have been reported as part of the gross estate: Claims against insolvent person Unpaid mortgages Property previously tax Family home Amounts received under RA 4917 geen VALUATION OF THE GROSS ESTATE ‘The properties comprising the gross estate shall be valued according to their fair market value as of the time of the decedent's death.1® Real Property If the property is a real property, the appraised value thereof as of the time of death shall be, whichever is the higher of — 1. The fair market value as determined by the Commissioner (Zonal Value), or 2. The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors." For example, a resident citizen decedent died leaving the house and lot as part of the estate. House Lor Zonal Value 3,000,000 Fair Market Value as in the schedule of values fixed by the city assessors P1,000,000 2,500,000 Fair Market Value as determined by independent real property appraisers 1,200,000 3,300,000 Mortgage - 500,000 "8 Revenue Regulation (RR) No, 12-2018 "Sec. 8 (8, NIRC. 85Chapter 2. Estate Tax How much is the gross estate? ‘The house and lost shall be included in the gross estate a P1,000,000 and P3,000,000, respectively In compliance with the rules on the valuation of gross estate, the independent appraisal is not considered in the valuation. Furthermore, the mortgage shall not be offset against the value of the property. For purposes of prescribing real property values, the Commissioner is authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers, both from the private and public sectors, determine the fair market value of real properties located in each zone or area. Shares of Stock In the case of shares of stocks, the fair market value shall depend on whether the shares are common or preferred, listed or unlisted in the stock exchanges. Unlisted Common Shares Unlisted common shares are valued based on their book value as shown in the audited financial statements of the issuing corporation nearest to the date of death of the decedent. For example, the decedent died leaving 100,000 common shares of DRL Corporation. Near the date of the death of the decedent, DRL Corporation has the following equity section Common Shares, 1,000,000 shares @ P15 par 15,000,000 Share premium - common shares 2,500,000 Retained earnings 7,000,000 Total shareholder's equity x 24,500,000 How much should be included in the gross estate? Book value per share oat: Shares owned by the decedent 100,000 : ——__100,000 ot 2,450,000