CHAPTER 02: Gross Estate

Introduction 4. Redistribution of Wealth Theory

Act 2601: 1st Estate Tax in the Philippines - the imposition of estate tax reduces the property
received by the successor, thus helping to promote
- imposes graduated estate tax rates computed on
equitable distribution of wealth in society
net inventoried property left by a decedent.
 tax base – the value of the property
RA 8424: Tax Reform Act
Classification of Decedents and Composition of
- restructured the tax base and rates of both estate
Gross Estate
and donor's taxes in addition to allowing the
deduction of medical expenses from gross estate
RA 10963: “Tax Reform for Acceleration and
Inclusion (TRAIN) Act”
- 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 Reciprocity Clause (Section 104 of the Tax
Code, as amended)
Estate Tax
The Tax Code excludes "intangible" personal
- a tax imposed on the privilege that person is given
property with situs in the Philippines from the gross
in controlling to a certain extent, the disposition of
estate of a non-resident alien decedent if there is
his property to take effect upon death
reciprocity. There is reciprocity if:
- excise tax imposed on the act of passing the
 The decedent, a resident of a foreign
ownership of property at the time of death and not country, did not impose any estate tax on
on the value of the property or right. intangible personal property of Philippine
Justification for the Imposition of Estate Tax citizens not residing in that country at the
time of decedent’s death; OR
1. Benefit Received Theory  The decedent's foreign country laws permit
exemption from estate taxes on intangible
- the service rendered by the government in the personal property owned by Philippine
distribution of the estate of the decedent, the State citizens not residing in that foreign country
collects the tax at the time of death.
2. Privilege or State Partnership Theory Intangible Asset – identifiable nonmonetary asset
- inheritance is not a right but a privilege granted by without physical substance
the State and legatees have been acquired only  The situs of intangible personal property
with the protection of the State GEN RULE: the domicile of the owner, also
known as “mobile sequntur personam”
- the State as a passive silent partner in the EXPN: actual situs of the intangible property
accumulation of property has the right to collect the if it has situs elsewhere or where the
share which is properly due to it intangible property has acquired a business
situs in another jurisdiction
3. Ability to Pay Theory
Intangible Assets with Situs "Within" The
- the receipt of inheritance which is in the nature of Philippines
an unearned wealth or windfall, are place assets 1. Franchise which must be exercised in the
into the hands of the heirs and beneficiaries. Philippines.
2. Shares, obligations or bonds issued by
any corporation or “sociedad anonima”

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 organized or constituted in the Philippines in  FMV as shown in the
accordance with its laws. schedule of values fixed by
3. Shares, obligations or bonds issued by the provincial and city
any foreign corporation, 85% of the assessors / assessed
business of which is located in the value
Philippines. NOTE: If there is an improvement,
4. Shares, obligations, or bonds issued by the value of improvement is the
any foreign corporation if such shares, construction cost per building
obligations or bonds have acquired a permit or the fair market value per
business situs in the Philippines. latest tax declaration.
5. Shares or rights in any partnership, 3. Personal FMV at the time of death
business or industry established in the property
Philippines. 4. Shares of  Unlisted common share:
stock Book value per share of
the issuing corporation
 Unlisted Preference share:
Par value per share
 Listed shares: FMV shall
be the arithmetic mean
between the highest and
lowest quotation at a date
PRACTICE nearest the date of death if
none is available on the
date of death itself (RR 2-
2003/ RR 12-2018).
5. Units of The bid price nearest the date of
participation death published in any newspaper
in any or publication for general
association, circulation.
recreation,
or
amusement
club
6. Rights to In accordance with the latest
usufruct, Basic Standard Mortality Table
use or or taking into account the probable
habitation, life of the beneficiary, to be
and annuity approved by the Secretary of
Finance upon recommendation of
the Insurance Commissioner
[Section 88(A)-NIRC].

Exemptions and Exclusions from the Gross

Estate
A. Exclusions under Sections 85 and 104 of the
Valuation of Gross Estate (as amended by
Tax Code
RA10963; RR 12-2018)
1. Exclusive property of the surviving spouse
1. In FMV at the time of death
general [Sec. 85(H)].
2. Real The higher between: The gross estate in case of married decedents, is
property  FMV determined by the composed of:
Commissioner
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 bequest, devises, legacies or transfers shall be
used by such institutions for administration
 Exclusive properties of the decedent; AND purposes.
 Common properties of the decedent and the
surviving spouse The government agency which is empowered to
determine the exemption is the BIR. To enable it to
Exclusive properties of the surviving spouse should exercise such power, the value of transfer to social
be excluded in the gross estate because these welfare, cultural and charitable institutions should
properties are not owned by the decedent upon his be included in the gross estate. An equal amount,
death. For estate tax purposes, however, may be taken up as a deduction.
 Capital properties - exclusive properties of THE MERGER OF USUFRUCT IN THE OWNER
the husband OF THE NAKED TITLE
 Paraphernal properties - exclusive
properties of the wife The decedent in this particular case (known as
donee-decedent or current decedent) only received
2. Property outside the Philippines of a non- from the prior decedent (donor-decedent or prior
resident alien decedent (Sec. 85 and 104). decedent) usufruct over the latter's property.
- only his properties situated or with situs within the  Usufruct - the right or privilege to enjoy the
Philippines shall be INCLUDED in his gross estate use and advantages of another's property.
- properties outside of the Philippines are  Naked title - the legal ownership of real
EXCLUDED in determining the gross estate of a property without the right to use, occupy or
nonresident alien decedent. possess it. This type of ownership interest is
often used in trusts, where the trustee
3. Intangible personal property in the holds the legal title to the property, while the
Philippines of a non-resident alien under the beneficiary holds the equitable title.
Reciprocity Law.
Thus, the current decedent is not considered the
Section 104 of the Tax Code expressly provides owner of the property. Consequently upon his
that "intangible" personal property in the Philippines death, the usufruct will be merged to the owner of
of a nonresident alien decedent shall be excluded the naked title, the intended beneficiary of the
from the gross estate if there is reciprocity. property.
B. Exclusions under Sections 87 of the Tax
Code
1. The merger of usufruct in the owner of the naked
title.
2. The transmission or delivery of the inheritance or
legacy by the fiduciary heir (also known as the 1st
heir) or legatee to the fideicommisary (also known
as the 2nd heir).
3. The transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the desire of the predecessor (also TRANSMISSION FROM THE FIRST HEIR,
known as "Transfer under Special Power of LEGATEE OR DONEE IN FAVOR OF ANOTHER
Appointment"). BENEFICIARY (Also known as 2nd Heir), IN
ACCORDANCE WITH THE DESIRE OF THE
4. All bequest devises, legacies or transfers to
PREDECESSOR (Also known as Transfer under
social welfare, cultural and charitable institutions,
Special Power of Appointment)
no part of the net income of which inures to the
benefit of any individual: Provided, however, that
not more than thirty percent (30%) of the said
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ILLUSTRATION: Yumao), the substitution or transfer from Juan to
Pedro is known as fideicommissary substitution.
In the last will and testament of Mr. Yumao, he
Upon the death of Mr. Yumao, the parcel of land
devised a parcel of land to Juan but with a
should be included in his gross estate. However,
condition that such property should be given to
upon the death of Juan, the parcel of land should
Pedro upon Juan's death. Thus, the parcel of land
be "excluded" in his gross estate because Juan is
is intended to be inherited by Pedro, not Juan. Juan
acting only as the trustee of Pedro.
is acting only as a trustee or fiduciary until such
time that the property is transferred to Pedro. Upon Elements of a fideicommissary substitution:
Juan's death, the parcel of land should be
"excluded" in his gross estate simply because he is  The substitution must not go beyond one
not the owner of the property. degree from the heir originally instituted (i.e.
father to son).
 Mr. Yumao - the prior  The fiduciary (first heir) and the
decedent/predecessor or the donor of the fideicommissary (second heir) must be both
power or donor-decedent living at the time of the testator's death.
 Juan - the donee-of the power or donee-
decedent or current decedent C. Exclusions under Special Laws
 Special Power of Appointment - exists 1. Proceeds of life insurance and benefits received
when the donee-decedent can appoint only by members of the GSIS (RA728).
from a restricted or designated class of 2. Accruals and benefits received by members from
persons other than himself the SSS by reason of death (RA1792).
Property transferred under a special power of 3. Amounts received from Philippines and United
appointment should be excluded from the gross States governments for war damages (RA227).
estate of the donee of the power because the 4. Amounts received from United States Veterans
donee- decedent only holds the property in trust. Administration.
5. Payments from the Philippines of US
government to the legal heirs of deceased of World
War II Veterans and deceased civilian for
supplies/services furnished to the US and
Philippine Army (RA136).
6. Retirement benefits of officials/employees of a
private firm (RA4917).
7. Personal Equity and Retirement Account (PERA)
assets of the decedent-contributor (Sec. 14, RA
9505 - Personal Equity and Retirement Account Act
of 2008).
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
TRANSMISSION ‘OR DELIVERY OF THE
of the gross estate of the decedent subject to
INHERITANCE OR LEGACY BY THE FIDUCIARY
estate tax as provided under Republic Act No.
HEIR/LEGATEE (Also known as the 1st heir) TO
11494 or the "Bayanihan to Recover as One Act".
THE FIDEICOMMISARY (Also known as the 2nd
heir). Composition of the Gross Estate (Section 85)
ILLUSTRATION: I. Property owned by the decedent that are
actually and physically present in his estate at
Using the same information in the immediately
the time of his death such as land, buildings,
preceding illustration (Illustration No. 5) and
shares of stock, vehicles, bank deposit, and the
assuming further that Juan is the father of Pedro.
like.
Since Juan is the father of Pedro and both were
alive at the time of the testator's death (Mr.

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  Decedent Interest c. Transfers under a General Power of
- the extent of equity or ownership Appointment [Sec. 85(D)]
participation of the decedent on any
 Power of appointment – the right to
property physically existing and present in
designate the person or persons who will
the gross estate, whether or not in his
succeed to the property of the prior
possession, control or dominion
decedent.
- the value of any interest in property owned
 General - when the power of
or possessed by the decedent at the time of
appointment authorizes the donee of
his death (interest having value or capable
of being valued or transferred). the power to appoint any person he
pleases; the appointed property
II. Property NOT PHYSICALLY IN THE ESTATE SHALL FORM PART OF THE
but are still subject to payment of estate tax. GROSS ESTATE of the donee
(beneficiary) of the power upon his
- either intended to take effect only upon his death
death.
or does not actually convey full ownership over the
 Special - when the donee can
property transferred
appoint only from a restricted or
a. Transfers in Contemplation of Death [Sec. designated class of persons other
85(B)] than himself; EXCLUDED FROM
THE GROSS ESTATE of the donee
 transfer in contemplation of death of the power because the donee-
- a disposition of property prompted by decedent only holds the property in
thought of death. It is the thought of death, trust
as a controlling motive which induces the
disposition of the property The power of appointment may be exercised by
the donor- decedent through the following
NOTE: There is no transfer in contemplation of modes:
death when the transfer of property is a bonafide
sale for an adequate and full consideration in a) By will
money or money's worth. b) By deed to take effect in possession or
b. Revocable Transfers [Sec. 85(C)] enjoyment at or after his death.

It is a transfer where the terms of enjoyment of the c) By deed under which he has retained for his life
property may be altered, amended, revoked or or any period not ascertainable without reference to
terminated by the decedent. It is sufficient that the his death or for any period which does not in fact
decedent had the power to revoke though he did end before his death.
not exercise the power. d) The possession or enjoyment of, or the right to
1. The decedent's interest in a trust or other trust the income from the property.
can be transferred if it was subject to change at the e) The right, either alone, or in conjunction with any
date of death due to the decedent's power to alter, person to designate the persons who shall possess
amend, revoke, or terminate, or if it is relinquished or enjoy the property or the income therefrom.
in anticipation of the decedent's death.
2. This Subsection states that the power to alter,
amend, or revoke a decedent's property is
considered to exist on the date of their death, even
if the power is subject to a precedent or expires
after a specified period. In such cases, proper
adjustments must be made to represent the
excluded interests.

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d. Transfers for Insufficient Consideration RULE: If the policy does not expressly say that the
designation of the beneficiary is irrevocable, then it
is presumed to be revocable.
ESTATE TAX RATE
- an estate tax rate of six percent (6%)
The Law that Governs the Imposition of Estate
Tax and Accrual of Estate Tax
The estate tax accrues as the date of death of the
decedent and the accrual of the tax is distinct from
the obligation to pay the same (RR 2-2003
Filing of Estate Tax Return and Payment of
III. MISCELLANEOUS ITEMS Estate Tax Due
RULE: Pay as you file system.
a. Claims against insolvent persons (Sec. 85)
FILING and PAYMENT:
 Insolvent person - whose properties are
not sufficient to satisfy, whether fully or  Primary responsibility to file and pay -
partially, his debt(s). Executor or administrator;
RULE: The full amount of the claim against the  Secondary responsibility to file and pay -
insolvent person should be included in the any of the heirs
gross estate of the decedent. The portion of the
claim which is not collectible should be allowed Estate tax returns showing gross value exceeding
as a deduction from the gross estate. five million pesos (P5,000,000) shall be supported
with a statement duly certified to by a Certified
b. Proceeds of life insurance [Sec. 85(E)] Public Accountant.
Proceeds of life insurance taken out by the by the TIME for FILING the Estate Tax Return
decedent on his own life should be INCLUDED in
the gross estate if the following requisites are The estate tax return is required to be filed within
present: one (1) year from the decedent's death.

1. It must be an insurance on the life of the The court approving the project of partition shall
decedent; and furnish the Commissioner with certified copy
thereof and its order within thirty days (30) after
2. The beneficiary must be either of the following; promulgation of such order.
a. His estate or executor/administrator EXTENSION of Time to File the Estate Tax
(revocable or not) Return
b. Any third person (other than
administrator/executor) provided that the A reasonable extension not exceeding thirty (30)
designation is not irrevocable days for filing the return.
The application for the extension of time to file the
estate tax return must be filed with the Revenue
District Office (RDO) where the estate is required to
secure TIN and 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

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  Judicial Settlement: 5 years 2. Partial disposition of estate and application
- In a judicial settlement, the court will of its proceeds to the estate tax due
appoint an administrator who, as the term
a) The disposition, for purposes of this option, shall
indicates, will administer the estate
refer to the conveyance of property, whether real,
 Extrajudicial Settlement: 2 years
personal or intangible property, with the equivalent
- The requirements before resorting to
cash consideration;
extrajudicial settlement are:
a. the decedent left no will; b) The estate tax return shall be filed within one (1)
b. the decedent did not leave any debts or year from the date of the decedent's death;
already paid them; and
c. there are several heirs who are all of age. c) The written request for the partial disposition of
If there are minors, they have their duly estate shall be approved by the BIR. The written
authorized legal or judicial representatives request shall be filed, together with a notarized
representing them. undertaking that the proceeds thereof shall be
exclusively used for the payment of the total estate
Payment of Estate Tax by installment and tax due;
partial disposition of estate (RR 12-2018 as
amended by RR 8-2019) d) The computed estate tax due shall be allocated
in proportion to the value of each property.
1. Cash Installment
e) The estate shall pay to the BIR the proportionate
a) The cash installments shall be made within two estate tax due of the property intended to be
(2) years from the date of the filing of the estate tax disposed of;
return, using the payment form (BIR Form 0605) or
a payment form dedicated for this transaction for f) An electronic Certificate Authorizing Registration
succeeding installment payments after filing the first (eCAR) shall be issued upon presentation of the
(1st) payment through the estate tax return. proof of payment of the proportionate estate tax
due of the property intended to be disposed.
b) The estate tax return shall be filed within one (1) Accordingly, eCARS shall be issued as many as
year from the date of the decedent's death; there are properties to be disposed to cover the
total estate tax due, net of the proportionate estate
c) The frequency (i.e., monthly, quarterly, semi-
tax(es) previously paid under this option; and
annually, annually) deadline and the amount of
each installment shall be indicated in the estate tax g) In case of failure to pay the total estate tax due
return, subject to the approval by the BIR; out from the proceeds of the said disposition, the
estate tax due shall be immediately due and
d) In case of lapse of two (2) years without the
demandable subject to the applicable penalties and
payment of entire tax due, the remaining balance
interest reckoned from the prescribed deadline for
thereof shall be due and demandable subject to
filing the return and payment of the estate tax,
applicable penalties and interest reckoned from the
without prejudice of withholding the issuance of
prescribed deadline for filing the return and
eCARS on the remaining properties until the
payment of estate tax; and
payment of the remaining balance of the estate tax
e) No civil penalties or interest may be imposed on due, including the penalties and interest.
the estates permitted to pay the estate tax due by
PLACE of FILING the Return
installment. Nothing in this subsection, however,
prevents the Commissioner from executing The estate tax return shall be filed with and the TIN
enforcement action against the estate tax due of for the estate shall be secured from the Revenue
the estate tax provided that all the applicable laws District Office where such executor or administrator
and required procedures are followed/observed. is registered.

 resident decedent: decedent was

domiciled at the time of his death and shall
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 file the estate tax return and pay the any share, obligation, bond or right by way of gift
corresponding estate tax with the inter-vivos or mortis causa, legacy or inheritance,
Accredited Agent Bank (AAB), Revenue unless a certification from the Commissioner
District Officer or Revenue Collection that the applicable tax have been paid.
 non-resident decedent
If a bank has knowledge of the death of a person,
LIABILITY for the PAYMENT of Estate Tax
who maintained a bank deposit account alone, or
 Primary liable: executor/administrator
jointly with another, it shall allow any withdrawal
 2 or more executors/administrators:
from the said deposit account, subject to a final
severally liable for the payment of
withholding tax of six percent (6%).
the tax
 Secondary liable: heir or beneficiary
The extent of his liability, however, shall in no case
exceed the value of his share in the inheritance.
The Estate Tax imposed under the Tax Code shall
be paid by the executor or administrator before the
delivery of the distributive share in the inheritance
to any heir or beneficiary.
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
- within two (2) years from the statutory date for its
payment without civil penalty and interest, using the
payment form (BIR Form 0605)
Civil penalties and interest
Any amount paid after the statutory due date of the
tax, but within the extension period, shall be subject
to interest but not to surcharge.

 Penalty of 25% if there is no false or

fraudulent intent on the taxpayer.
 Penalty of 50% if there is false, malice or
fraudulent intent on the taxpayer.
 Interest shall be computed on the unpaid
amount of tax from the date computed until
fully paid (20% prior to TRAIN Law; 12%
upon effectivity of the TRAIN Law).
Payment of Tax Antecedent to the Transfer of
Shares, Bonds or Rights (Sec. 97, as amended)
There shall not be transferred to any new owner in
the books of any corporation, sociedad anonima
(public limited company), partnership, business, or
industry organized or established in the Philippines

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