GROSS ESTATE THE GROSS ESTATE

The starting point in computing Philippine estate tax liability is the determination and valuation of gross estate. The gross estate consists of all property owned by a decedent at the time of his death, including his stocks, bonds, real estate, mortgages and any other property that technically belonged to him. However, it shall not include the exclusive properties of the surviving spouse. The property is called a gross estate because it is to be reduced by decedents debts (including taxes), funeral expenses, share of the surviving spouse and other permissible deductions to arrive at a net taxable estate. Composition of the Gross Estate

In general, real and personal properties (tangible or intangible), wherever located, in the case of decedent citizens and resident aliens, shall be included as part of the gross estate. In case of nonresident aliens , only properties located in the Philippines that are to be transferred upon death are subject to estate tax. Real property includes land, building or any structure or even equipment permanently attached to the land. Tangible personal property is a property with physical form that could be seen or touched, such as car, jewelry and clothing. Intangible personal property is a property that has no physical form, such as receivables, bonds and other securities. Illustration

Supposing the following properties are listed as part of the estate of Dina Gising: Farm land in the Philippines, jewelry pawned in a pawnshop in the Philippines, Bonds issued by a Philippine Corporation, bank deposit in a Philippine bank, shares of stock of a Philippine corporation, investment in partnership established in the Philippines, copyright and franchise exercised in the Philippines, and car in USA. Below is the summary of properties to be included in the gross estate for estate tax in the Philippines: Notes:

1. As a general rule, the situs of a property is the domicile or residence of the owner.

2. Shares of stocks acquired by a nonresident alien from a domestic corporation are taxable in the Philippines. 3. Bonds, mortgages and certificates of stock are taxable at the place where they are physically located. 4. Various statutory provisions which exempt bonds, notes, bills and the certificates of indebtedness of the government from taxation, are not applicable to the estate tax since this tax is an excise tax on transfer and not on the property transferred. 5. Intangible personal property located within the Philippines of a nonresident alien is subject to the rule of reciprocity, it is not subject to estate tax in the Philippines. VALUATION OF THE GROSS ESTATE For the purpose of computing the estate tax, it is necessary that the gross estate of the decedent be appraised or valued at the time of death. The date of valuation is the time of death because the transfer of properties from the dead to the living takes effect at the moment of death. Rules in Valuing the Gross Estate

The following rules shall be observed in the valuation of the gross estate: 1. In general, the gross estate shall be valued at its fair market value at the time of the decedents death. The property is to be valued as of the decedents death upon which date the tax accrues regardless of any subsequent contingency affecting the estate. Illustration

The estate of a decedent, Mr. Dido, has a fair value of P5,000,000 at the time of his death. He inherited this property from his father 10 years ago when its fair value was P2,000,000. The amount to be included in the gross estate of Mr. Dido would be valued at P5,000,000. 2. Real properties should be valued at the current fair market value as shown in the schedule of values fixed by the Provincial/City Assessors, or the fair market value as determined by the BIR Commissioner, whichever is higher. Illustration

Mr. Todas died leaving the following real properties in Baguio City: Fair market values by Baguio City BIR

Assessors House and lot Subdivision lots Totals P10,000,000 20,000,000

Commissioner P12,000,000 19,000,000 P31,000,000

P30,000,000

The value of the real properties of Mr. Todas to be included in his gross estate would be P32,000,000, determined as follows: Fair market values by Baguio City Assessors BIR Commissioner Higher values Reportable Gross Estate P12,000,000 20,000,000 P32,000,000

House and lot Subdivision lots Totals

P10,000,000 20,000,000 P30,000,000

P12,000,000 19,000,000 P31,000,000

3. Personal properties should be reported at the acquisition cost for the recently acquired properties, or the current market price for the previously acquired properties.

Illustration Mr. Pahiga died leaving a car which he purchased for P1,000,000 five years ago. At the time of his death, the car has a book value of P500,000 but can be sold for P400,000. The car should be included as part of the gross estate at a current market value of P400,000. 4. Stocks, bonds and other securities

a. If listed in the local stock exchange the value is the mean between the highest and the lowest quoted selling prices at the date nearest the date of death, if none is available on the date of death. b. if not listed in the local stock exchange: (1) Unlisted common shares should be valued at book value at the date of death. (2) Unlisted preferred shares are valued at par value. In determining the book value of the unlisted common shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares, if there is any. Illustration

Mr. Tulog died leaving 10,000 common shares investment acquired at P110,000 from San Pedro Corporation. At the time of death, the stockholders equity of San Pedro Corporation shows the following information: Capital stock: Common, 100,000 shares, par P100 Preferred, 60,000 shares at P200 Reserves: Revaluation surplus Addition paid-in-capital common shares Addition paid-in-capital preferred shares Retained earnings Total stockholders equity 400,000 600,000 1,000,000 6,000,000 P30,000,000 P10,000,000 12,000,000

The liquidating value of preferred shares is P220 per share.

Required: Determine the reportable value of investment in common stock as part of the gross estate if the securities are: 1. Listed in the local stock exchange assuming that each common share has an initial sales price of P140 and closing sales price of P160 at the time of death. 2. Not listed in the local stock exchange. Answers:

1. If listed in the local stock exchange, the value of investment in common stock to be reported as part of the gross estate would be: Average selling price per share (P140+P160)/2 Multiplied by number common shares invested Value of securities as part of gross estate Revocable Transfer P 150 10,000 P1,500,000

refers to a transfer of property with retention or reservation of rights over the property by the donor (decedent) while he still lives. The following instances describe revocable transfers:

1. By gift where the donor has reserved the power to alter, amend, and revoke donation. 2. The donor retains the option to relinquish such power in contemplation of death. As a general rule, if the enjoyment of property transferred by decedent is subject at the date of his death to any change through the exercise of a power to revoke, alter or amend or terminate the transfer, the transferred property is included in the decedents estate. Transfers in Contemplation of Death

These properties are not physically available in the estate at the time of death because the decedent transferred them during his lifetime in anticipation of his death. Death must be contemplated, and the thought of death, as distinguished from purposes associated with life, must be the impelling cause of transfer. The purpose in including transfers in contemplation of death as part of the gross taxable estate is to prevent evasion from estate tax liability by the use of other forms of conveyances rather than by succession or transfer mortis causa. Based on section 85b of the NIRC there is a transfer in contemplation of death when the following instances are present:

1. While still living, the decedent transferred his property in favor of another person, but the transfer was intended to take effect only upon the formers death. 2. 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. Property Passing under General Power of Appointment

For purposes of estate tax, a power of appointment is the right to designate by will or deed the person or persons who are to receive certain properties from the estate of a prior decedent. As a rule, if the decedent possessed, exercised or released a general power of appointment, the property subject to the power shall be included in the gross estate because in substance, he owns the property. However, if the power released by the decedent is a special power of appointment, the property subject to such power shall be excluded from the gross estate. Proceeds of Life Insurance with Revocable Beneficiary

Life insurance covers all description of insurance related to life, including death benefits and accidents insurance. The following rules shall be observed with regard to the proceeds of life insurance policy:

1. Exclude from the gross estate if the beneficiary is irrevocable. 2. Include in the gross estate if the beneficiary is: a. revocable, or b. the decedents estate, his administrator or his executor. Transfers for Insufficient Consideration

A property is transferred for insufficient consideration if disposed for less than its adequate and full consideration. The value to be included in the gross estate shall be determined under the following rules: 1. If the transfer was in the nature of a bona fide sale for an adequate and full consideration in money or moneys worth, no value shall be included in the gross estate. Claims Against Insolvent Persons These refers to receivables left by the decedent but the court consequently found the related debtor insolvent. A claim against an insolvent person must be reported as part of the gross estate in the full amount of the receivable. This should be reported as exclusive or conjugal property depending on whether the claim is derived from an exclusive or conjugal property. EXEMPTIONS FROM ESTATE TAX

The term exemptions from estate tax is synonymous with the term exclusion from estate tax. It refers to properties, rights or transfers that are specifically declared by the law as free from the burden of estate tax. As a rule , properties or transfers, which are exempt by law from estate tax, are not considered in the determination of the amount of the gross estate. 1. Section 87 of the NIRC provides that the following acquisitions and transmission shall not be subjected to estate tax: a. The merger of usufruct in the owner of naked title; b. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary; c. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor;

d. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which goes to the benefit of any individual; provided however, that not more than 30% of the said bequests, devices, legacies or transfers shall be used by such institutions for administration purposes; and e. Bequests to be used actually, directly and exclusively for educational purposes. 2. Exemptions under reciprocity clause of estate tax law; 3. Exemptions under special laws such as: a. Benefits received from SSS ; b. Benefits received from U.S. Veterans Administration ; c. War benefits given by the Philippine government and U.S government due to damages suffered during the war; and d. Grants and donation to the Intramuros Administration. 4. A net estate with a value of P200,000 or less; and 5. Capital of the surviving spouse. Merger of Usufruct in the Owner of Naked Title

Usufruct is the legal right to use and enjoy the benefits and profits of something belonging to another. Two persons involved in the usufruct: (1) The usufructuary, and (2) The owner of the naked title. Reciprocity Clause

No estate tax shall be imposed with respect to the intangible personal property situated in the Philippines and owned by a nonresident alien of the laws of his foreign country allows similar exemption on transfer taxes on intangible personal property situated in that foreign country and owned by a Filipino citizen not residing in the said foreign country.