1

ESTATE - mass of properties and assets left behind by the deceased or all property, rights and
obligations of a person which are not extinguished by his death and also those which have accrued
thereto since the opening of the succession.

An estate may be income producing or non-income producing.

An income producing estate may either be a non-taxable or taxable estate.

The income that is subject to income taxation is the income received by estates of deceased persons
during the period of administration or settlement of the estate.

For example: A died leaving as his only property a 25-door apartment located in Baguio City. The
rentals derived from this rental property prior to the partition of the estate would be subject to income
taxes.

Who is liable to pay the income tax of the estate from the death of the decedent until the heirs receive
the property?

Answer: The estate, and it is treated as a person with juridical personality. When the estate is an
income-producing entity and is subject to income tax, the taxable income is computed based on the
concept of an individual taxpayer.

Notes:
1. Non-taxable income-producing estate = when the estate is not under court or judicial
proceedings, its income shall not be subject to income tax. In this case, the heirs are treated as
co-owners of the property and are required to include the income in their individual gross
taxable income.
2. Taxable income-producing estate = if the estate is under court or judicial proceedings, its
income during the period the period of settlement shall be taxable.
- The estate is treated as a juridical person subject to income tax computed based on the
same manner and on the same basis as in the case of an individual taxpayer.
Guidelines:
a. The gross taxable income of the estate shall include all the items composing the gross
income of an individual taxpayer.
b. The deductible items from the income of the estate shall be made up of similar deductions
allowable to an individual taxpayer. The estate may adopt the OSD or ISD.
c. A special deduction is allowed to the estate on the amount of income credited or paid to
the heirs or beneficiaries, which has been subject to 15% creditable withholding tax.
d. When a portion of the gross estate has been paid or transferred to the heir, the amount so
transferred is not allowable deduction from the income of the estate.
e. If the decedent dies during the taxable year, the estate may claim the basic exemption of
P50,000 and additional exemption of P25,000 for each qualified dependent child as if the
decedent died at the close of the year.

f. In succeeding years, the estate shall be allowed to deduct from the income an exemption of
P20,000.
g. The amount of tax dues shall be computed based on the schedular tax rates of the
individual taxpayer / progressive tax rates.

Resident estate DISTINGUISHED FROM non-resident estate

The estate follows the status of the deceased.
A resident estate is allowed to deduct the OSD while a non-resident estate is not allowed to do so.
A resident estate is to be taxed on its income derived from within and without Phil sources while a
non-resident estate is to be taxed only on its income derived from sources within the Phils.

Basic Formula for the computation of income tax of a RESIDENT estate:

Gross income derived from ALL sources

Less: OSD


Taxable Income


Multiply by PROGRESSIVE TAX RATES

Income tax due

Less: Quarterly income tax payments
Withheld taxes on the income

Tax credits

Net Income Tax Payable or


Gross income derived from ALL sources

Less: Regular Itemized Deductions
Amount of income for the period currently distributed to the beneficiaries
(taxable to the beneficiaries)
Amount of income collected which are to be held or distributed as the court may
direct
Amount of income properly credited to the beneficiaries (taxable to the
beneficiaries)

Personal Exemption of P20,000
Taxable Income


Multiply by PROGRESSIVE TAX RATES

Income tax due

Less: Quarterly income tax payments
Withheld taxes on the income

Tax credits

Net Income Tax Payable

Basic Formula for the computation of income tax of a NONRESIDENT estate: (Note: The estate follows
the status of the deceased)
Gross income derived from sources WITHIN the Philippines

Less: Regular Itemized Deductions
Amount of income for the period currently distributed to the beneficiaries
(taxable to the beneficiaries)
Amount of income collected which are to be held or distributed as the court may
direct
Amount of income properly credited to the beneficiaries (taxable to the
beneficiaries)

Personal Exemption of P20,000
Taxable Income


Multiply by PROGRESSIVE TAX RATES

Income tax due

Less: Withheld taxes on the income

Tax credits

Net Income Tax Payable

REMEMBER:
An income producing estate is an income taxpayer if under judicial settlement or administration.
They are taxable on the income of the properties left by the decedents. A taxable estate is treated
as an individual taxpayer and is allowed P20,000 personal exemption.

An estate under extra-judicial settlement is not a taxpayer. The income of the estate is taxable to
the heirs.


TRUST an arrangement whereby one party (grantor or trustor) transfers property to another party
(beneficiary), which will be held under the management of a third party (trustee or fiduciary)

a right or property, real or personal, held by one party for the benefit of another; a confidence given
by a person, the grantor (creator) reposed in one person called fiduciary (trustee) for the benefit of
another who is called the cestui que trust (beneficiary) regarding property given by the
grantor(creator) to the fiduciary (trustee) for the benefit of the cestui que trust (beneficiary).

*When the trust agreement is silent as to revocability of the trust, the trust is presumed to be
revocable.

GRANTOR/CREATOR/TRUSTOR/
SETTLOR/BENEFACTOR










TRUSTEE/FIDUCIARY/ADMINISTRATOR/EXECUTOR - *Legal Title;control,
management, ownership
















TRUST ASSETS/Corpus: personal residence, funds,




Real estate, business, investment account










BENEFICIARY/CESTUI QUE TRUST
- Maybe a natural or juridical person
- *Equitable Title
- The person who will succeed to or receive the
property in trust
- May be legally disadvantaged (minor,
incapacitated, disabled)
- May be an unborn child

A contract of trust is an agreement created by will or otherwise where the property of a grantor is
being transferred to the trustee or administrator for purposes of management or conservation of the
property. The income of and the title to the property will be transferred to the beneficiary as
expressed by the grantor.

Income of trusts for income taxation
1. Income accumulated
a. in trust for the benefit of unborn or unascertained persons or persons with contingent
interests
b. or held for future distribution under the terms of the will or trust
2. Income to be distributed currently by the fiduciary to the beneficiaries, and collected by a
guardian of an infant which is to be held or distributed as the court may direct
3. Income which in the discretion of the fiduciary may either be distributed to the beneficiaries or
accumulated

KINDS OF TRUST RELATIONS Express, and implied trust
EXPRESS TRUSTS those created by the direct and positive acts of the parties, or by some writing or
deed, or will or by word evidencing an intention to create a trust.

IMPLIED TRUSTS those which, without being express, are deducible from the nature of the
transaction as matters of intent, or those which are superinduced on the transaction by operation of
law, irrespective of, and even contrary to, any such intention of the parties.

Classification of trusts for tax purposes:

1. Taxable, and non-taxable trust
a. Taxable trust income is subject to income taxation

b. Tax-exempt trust / Non-taxable trust income is not subject to income taxation
Ex. An employees trust which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees, provided that if contributions are
made to the trust by such employer, or employees, or both for the purpose of distributing to
such employees the earnings and principal of the fund accumulated by the trust in accordance
with such plan and if under the trust instrument it is impossible, at any time prior to the
satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus
or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other
than for the exclusive benefit of his employees.

2. Revocable, and irrevocable trust;
a. Revocable trust a kind of trust where at any time the power to revest (return) to the
grantor title to any part of the corpus (the body) of the truth is vested
a-1 In the grantor alone either
i. Alone or
ii. In conjunction with any person
1. Not having a substantial adverse interest
2. In the disposition of such part of the corpus or in the income
therefrom
a-2 In any person not having a substantial adverse interest in the disposition of such part of
the corpus or in the income therefrom.

b. Irrevocable trust a kind of trust where the corpus (the body) of the trust or any part
thereof does not revest (return) in the grantor through the acts
b-1. of the grantor alone or in conjunction with any person not having a substantial adverse
interest in the disposition of such part of the corpus or in the income therefrom.
b-2 in any person not having a substantial adverse interest in the disposition of such part of
the corpus or in the income therefrom.

Importance of knowing whether a trust is revocable or irrevocable the income of a revocable
trust is included in computing the taxable income of the grantor without any of the deductions
allowed for estates WHILE the income of an irrevocable trust is subject to tax as income of the
trust after deducting the allowable deductions.
Non-taxable income-producing trust
Taxable income-producing trust
The trust is a revocable trust, and the income of The trust is irrevocable, and the income of
the trust is for the benefit of the grantor the trust is partially or fully credited for
income shall be included in the gross taxable the benefit of the beneficiary
income of the grantor

Guidelines:
1. The taxable trust is treated like a person whose gross income shall include all items composing
the gross income of an individual taxpayer.
2. The deductible items from the income of the trust shall be computed in the same manner as in
the case of an individual taxpayer. The trust may adopt the OSD or the ISD.
3. The following special items, if any, shall be deducted from the gross income.
a. Income from the trust which was credited to the grantor
b. Income from the trust which was credited or distributed to the beneficiary
c. Income from the trust which was credited to the guardian of an infant
d. The trust shall be allowed to deduct the personal exemption of P20,000
e. The income tax of the trust shall be computed using the scheduler tax return used by the
individual taxpayer.
3. Trust administered in the Philippines; and trust administered from a foreign country
Trust administered in the Phils
the administrator of the trust (the grantee) is located in the Phils.
- subject to income tax in the same manner as individual citizen and resident alien individual:
- Basic formula for the computation of income tax:


Gross income derived from all sources

Less: OSD

Taxable Income


Multiply by TAX RATE

Income tax due

Less: Withheld taxes on the income

Tax credits

Net Income Tax Payable or


Gross income derived from all sources

Less: Itemized Deductions
Amount of income for the period currently distributed to the beneficiaries
Amount of income collected which are to be held or distributed as the court may
direct

Amount of income properly credited to the beneficiaries

Personal Exemption of P20,000
Taxable Income


Multiply by TAX RATE

Income tax due

Less: Withheld taxes on the income

Tax credits

Net Income Tax Payable

Trust administered in a foreign country
the administrator of the trust (the grantee) is located outside the Phils.
- subject to income tax in the same manner as a non-resident alien individual

- since it is taxed in the same manner, it is not allowed to use OSD as this deduction is available
only to trusts administered in the Phils, not allowed to deduct the special deductions
-basic formula:

Gross income derived from sources within the Phils

Less: Itemized Deductions

Personal Exemption of P20,000
Taxable Income


Multiply by TAX RATE

Income tax due

Less: Withheld taxes on the income

Tax credits

Net Income Tax Payable

ILLUSTRATION TAXABLE TRUST

Mr. RBB designated in irrevocable trust a property in favour of B and appointed J as trustee. The
property earned P500,000 income before expenses of P200,000 and trust fees of P50,000. In
accordance with the trust indenture, J distributed P100,000 to B.
The taxable income of the trust shall be computed as:
Gross income






P500,000
Less:

Regular allowable deductions

P250,000*

Special allowable deduction


Income distribution to beneficiaries P100,000
P350,000
Net Income






P150,000
Less: Personal Exemption




( 20,000 )
Taxable Income






P130,000

**B will report the P100,000 income distribution in his taxable income. J will report the P50,000 trust
fees in his gross income.

CONSOLIDATION OF TWO OR MORE TRUSTS
Multiple irrevocable trusts designated by the same grantor for the benefit of the same beneficiary shall
be consolidated for purposes of income tax.

The consolidation of irrevocable trusts is necessary to eliminate tax savings which the grantor may
derive by deliberately splitting the corpus of the trusts into several trusts.
Illustration 1: Don Angelito designated three trusts all in favour of his daughter Precious:
Trust
Designation
Trustee
Operating
Distribution to
Income
Precious
Trust 1
Irrevocable
BO
P200,000
P 20,000
Trust 2
Irrevocable
BI
300,000
30,000
Trust 3
Revocable
SB
200,000
40,000

*Trust 3 is not taxable as it is revocable. The entire P200,000 income of Trust 3 including the P40,000
income distribution to Precious will be included in the taxable income of Don Angelito.

The trustees of Trust 1 and Trust 2 shall prepare tax return covering the income of the property held
under their control as follows:

Trust 1
Trust 2
Operating Income
P200,000
P300,000
Less: Special itemized deduction


- income distribution to beneficiary
20,000
30,000
Net Income
P180,000
P270,000
Less: Personal exemptions
20,000
20,000
Taxable income
P160,000
P250,000
Income tax due, per tax table
27,500
50,000

For purposes of income taxation, the income of Trust 1 and Trust 2 will be consolidated as follows:

Trust 1
Trust 2
Consolidated
Trust
Net Income
P180,000
P270,000
P450,000
Less: Personal exemption


20,000
Taxable income


P430,000
Income tax due, per tax table


104,000
Less income tax paid
27,500
50,000
77,500
Additional income tax payable


26,500

The additional tax payable resulting from the consolidation of the two irrevocable trusts will be
apportioned to Trust 1 and Trust 2 based on their reported taxable income. Thus:

Trust 1 (P160,000/ [P160k+P250k]) x P26,500

P10,341
Trust 2 (P250,000/ [P160k+P250k]) x P26,500

P16,159

EMPLOYEE TRUST FUNDS

An employees trust which forms part of a pension, stock bonus or profit sharing plan of an employer
for the benefit of some or all of his employees is exempt from income taxes imposed under the NIRC.
The exemption covers final tax, capital gains tax and regular income tax.

However, any amount actually distributed to any employee or distributee shall be taxable to him in the
year in which so distributed to the extent that it exceeds the amount contributed by such employee or
distributee.