COLLEGE OF BUSINESS AND ACCOUNTANCY

TOPIC: GROSS ESTATE

LEARNING OBJECTIVES:

At the end of this module, the student should be able to:

✓ Understand the nature of estate tax

✓ Identify the different classification of taxpayers under estate tax
✓ Know how to compute for the valuation of gross estate.

INTRODUCTION

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.

BODY

Estate Tax - Definition and Nature

In the Philippines, Estate Tax is a tax imposed on the privilege that a person is given in controlling to a certain extent,
the disposition of his property to take effect upon death. It is an excise tax imposed on the act of passing the ownership of
property at the time of death and not on the value of the property or right. On this basis, estate tax should not be construed as
a direct tax on the property decedent although the tax is based thereon. Since estate tax accrues as of the time of death, the
right of the State to tax the privilege to transmit the estate vests instantly upon death. The accrual of the tax is distinct from the
obligation to pay the same.

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:

DECEDENT GROSS ESTATE

▪ Citizen 1) Property (Real or Personal) wherever situated
▪ Resident alien 2) Intangible personal property wherever situated

▪ Non resident 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.

TABLE 1: Composition of Gross Estate based on citizenship and residency

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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.

PROPERTY SITUS
▪ Real Property and Tangible personal ▪ Location of the property
property

▪ Shares, franchise, copyright, and ▪ Where the intangible is exercised regardless of

the like. where the corresponding certificate is stored

▪ Receivables ▪ Residence of the debtor

▪ Bank deposit ▪ Location of the depository bank

TABLE 2: Situs of Tangible and Intangible Property

ILLUSTRATION NO. 1

A decedent died leaving the following property:

LOCATION TOTAL
Philippines Abroad
REAL PROPERTY P 2,000,000 P 3,000,000 P 5,000,000
TANGIBLE PERSONAL PROPERTY 1,000,000 500,000 1,500,000
INTANGIBLE PERSONAL PROPERTY 800,000 1,200,000 2,000,000
TOTAL P 3,800,000 P 4,700,000 P 8,500,000
Requirement: How much is the gross estate if the decedent is a:

1. Resident Citizen _______________________________________

2. Nonresident Citizen _______________________________________
3. Resident Alien _______________________________________
4. Nonresident alien without reciprocity _______________________________________
5. Nonresident alien with reciprocity _______________________________________

ILLUSTRATION NO. 2

From the list of properties shown below, determine the following:

1. Situs of the property
2. Whether or not the property is included in the decedent’s gross estate.

No. Particulars Situs Composition of Gross Estate

Citizen or Nonresident Alien
Resident With Without
reciprocity Reciprocity
1 Parcel of land - Makati
2 Parcel of land - Singapore
3 House & Lot (Family Home) - Taguig
4 Rest House - Batangas
5 Rest House - Palawan
6 Rest House - Hongkong
7 Cars-Philippines
8 Cars-Abroad
9 BPI Deposit- Philippine Branch

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10 BPI Deposit- USA Branch
11 ABN Amro Bank (Foreign)- Philippine Branch
12 ABN Amro Bank (Foreign)- London Branch
13 Receivables-debtor from the Philippines
14 Receivables-debtor from Canada
15 Shares of stock of domestic corporations. The
certificates are stored in the Philippines
16 Patents and copyrights exercised in the Philippines
17 Patents and copyrights exercised abroad

VALUATION OF GROSS ESTATE (AS AMENDED BY RA10963; RR 12-2018)

The estate of the decedent shall be appraised at its fair market value at the time of his death. Since succession and the
accrual of the corresponding estate tax takes effect upon death, it shall only be fair to appraise the estate as its fair market
value at the time of the decedent’s death. Specifically, the following rules shall apply in determining the valuation of the estate:

1. In General: Fair Market Value at the time of death

2. Real Property The higher FMV FMV determined as value shown between:
▪ FMV determined by the Commissioner; and
▪ FMV as shown in the schedule of values and fixed by the provincial and city
assessors (also known as assessed value or FMV for real estate tax purposes).

For the purposes of prescribing real property values, the CIR 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. If there is an
improvement, the value of improvement is the construction cost per building
permit or the fair market value per latest tax declaration.

3. Personal Property Fair market value at the time of death

4. Shares of stock
1. 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).
2. Unlisted Preference share: Par value per share
3. 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).

5. Units of any association, The bid price nearest the date of death published participation in amusement club
in any newspaper or publication for general circulation. recreation or
(i.e.., golf, polo, similar clubs)

6. Right to usufruct, In accordance with the latest Basic Standard Mortality Table taking into account
use of habitation, the probable life of the beneficiary, to be approved by the Secretary of Finance
and annuity upon recommendation of the Insurance Commissioner [Section 88(A)-NRIC]

ILLUSTRATION NO. 3

Juan Dela Cruz passed away on April 1, 2025. The following assets were part of his estate:

Asset Valuation Details

Residential lot Assessed value: ₱2,500,000; Zonal value: ₱3,000,000
Personal car Estimated FMV at death: ₱700,000
Unlisted common shares (10,000 shares) Book value per share: ₱120
Listed shares (PLDT – 500 shares) Highest price on date of death: ₱1,480; Lowest: ₱1,420

Compute the total value of Juan’s gross estate based on the information above. ___________________________

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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

▪ 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.

B. Exclusions under Section 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 fideicommissary (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 known as "Transfer under Special Power of Appointment").
4. All bequest devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net
income of which inures to the benefit of any individual: Provided, however, that not more than thirty percent (30%) of
the said bequest, devises, legacies or transfers shall be used by such institutions for administration purposes.
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.

C.
1.
Exclusions under insurance Special and Laws Non taxable
Proceeds of life insurance and benefits received by members of the GSIS (RA728).
2. Accruals and benefits received by members from the SSS by reason of death (RA1792).
3. Amounts received from Philippines and United States governments for war damages (RA227).
4. Amounts received from United States Veterans Administration.
5. Payments from the Philippines to 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 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”.

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ILLUSTRATION NO. 4

Mr. Santos, a Filipino citizen, passed away in 2025. The following assets are identified:

Asset Value (₱)

Exclusive property of his wife 3,000,000 X
Conjugal house and lot 8,000,000
Life insurance proceeds (GSIS) 2,000,000
SSS death benefit 500,000
Donation to a charitable institution (used 25% for admin) 4,000,000
US bank account (depositor: non-resident alien brother) 2,500,000

8m
Compute the gross estate of Mr. Santos. ________________________________

COMPOSITION OF THE GROSS ESTATE

Generally, or which gross the estate decedent consists of had an of interest all the at the property time of owned death,
by such as

▪ Real property
▪ Personal tangible property
▪ Intangible Shares of personal stock property (shares of stocks,
✓ Shares of stock
✓ Bank deposit
✓ Dividends declared before his death but received after death.
✓ Partnership profit which have accrued before his death.
✓ Usufructuary & rights

Section 85 of the Tax Code enumerates the composition of the Gross Estate.

I. Property owned by the decedent that are actually and physically present in his estate at the time of his death such as
land, buildings, shares of stock, vehicles, 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).

II. 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 property any person, to designate the person who shall possess or enjoy the property or the

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income therefrom; except in case of bonafide sale for an adequate and full consideration in money or
money's worth.

A transfer in contemplation of death is a disposition of property prompted by thought of death. It is the thought
of death, as a controlling motive which induces the disposition of the property. Included within this concept is donation
mortis causa.

The gross estate shall include the value of property transferred by the decedent during his lifetime in anticipation
of his death (transfer in contemplation of death) such as:

1) Transfer of property in favor of another person, but the transfer was intended to take effect only upon the
transferor's death.
2) Transfer by gift intended to take effect at death, or after death, or under which the donor reserved the income
or the right to designate the persons who should enjoy the income.
3) Transfer with retention or reservation of certain rights. The decedent had transferred his property during his
lifetime but retained for himself beneficial enjoyment of the thing or the right to receive income from the same.

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 otherwise, where the enjoyment thereof was subject at the date of his death to any change
through the exercise of a power (in whatever capacity 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 power
is relinquished in contemplation of the decedent's death.
(2) For the purpose of this Subsection, the shall be considered to exist on the even though the
exercise of the power is of notice or even though the takes effect only on the expiration exercise
of the power, whether or not on or death notice has been given or In such cases, proper the
interests which would have if the decedent had lived, and for such been given or the power has
not been of his death, such notice shall be the power exercised, on the date of his

c. Transfers under a General Power of Appointment [Sec. 85 (D)]

Power of appointment refers to the right to designate the person or persons who will succeed to the property
of the prior decedent. The power of appointment may be “general” or “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 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.

d. 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 its fair market value
at the time of sale or transfer, the excess of the fair market value of the transferred property at the time of death over
the value of the consideration received 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.

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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 death", 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:

III. MISCELLANEOUS ITEM

a. Claim 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 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.

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)
o Any third person (other than estate or administrator/executor) provided that the designation is not
irrevocable

If the policy does not expressly say that the designation of the beneficiary is irrevocable, then it is presumed to be
revocable. Also, proceeds of life insurance under a group insurance taken by the employer are not subject to estate tax.

The Philippine Insurance Code presumes that the designation of a policy is revocable in case the designation of the
beneficiary is not clear or silent. Section 11 of the Insurance Code (RA 10607) states that "the insured should have the right to
change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy. Notwithstanding the
foregoing, in the event the insured does not change beneficiary during his lifetime, the designation shall be deemed
irrevocable."

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ILLUSTRATION NO. 5

Read each scenario carefully and determine whether the property/transaction should be included in the gross estate or not.
Choose:
- INCLUDE – if the item forms part of the gross estate
- EXCLUDE – if it should not be part of the gross estate
Then, briefly explain your answer using the relevant section of the law or concept.

Include /
Scenario Explanation
Exclude
Mr. Santos died owning a house and lot in Quezon City titled under his name.
Before his death, Mr. Santos donated land to his daughter but still received rent
from it.
Mr. Santos sold his car for ₱100,000 when FMV was ₱300,000. He died a month
later.
Mr. Santos sold a condo unit for ₱2M, matching FMV at sale time.
Mr. Santos owned shares of stock in a domestic corporation at the time of death.
A life insurance policy on Mr. Santos named his wife as beneficiary; designation
is revocable.
Mr. Santos held a property under a special power of appointment for relatives.
Mr. Santos transferred property into a trust but retained the right to revoke.
Unpaid claim of ₱500,000 against an insolvent debtor.
Mr. Santos gifted land to niece 3 years before death, with no contemplation of
death.

SUMMARY:

Summary of rules on gross estate

Residents or Citizens NRA without reciprocity NRA with reciprocity
Property Location Within Abroad Within Abroad Within Abroad
Real Properties ✓ ✓ ✓ x ✓ x
Personal Properties
• Tangible ✓ ✓ ✓ x ✓ x
• Intangible ✓ ✓ ✓ x x x

REFERENCES:

Business Taxation and Transfer - Train Law updated, 2020 ed., Rex Banggawan

Transfer and Business Taxation – 2022 ed., Tabag & Garcia

Quicknotes Taxation, Latest ed., Jack De Vera

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