PART X Estates and Trusts

1. Estate, defined mass of all the property, rights and obligations of a person that
are not extinguished upon his death including those that have accrued thereto since
the opening of the succession.
2. Kinds of Estate for Tax Purposes

Estate under judicial settlement

Estate NOT under judicial settlement

3. Burden of Income Taxation on Estates

If the estate is under judicial administration, the income of the estate shall be
taxable to the fiduciary (executor or administrator) and the trustee shall file the
return for the estate and he is responsible to pay the income tax thereon;
Where the estate income is distributed to the heirs during the taxable year
such income is deductible from the taxable income of the estate and the
heirs shall be taxed individually based on their distributive share.
Where no part of the estate income earned during the year is distributed to
the heirs, and such income is subject to. income tax payment by the estate,
the subsequent distribution thereof to the heirs is no longer taxable on the
part of the beneficiaries.
If the estate is NOT under judicial administration, the income of the estate shall
be taxable to the heirs and beneficiaries of the estate; each heir and beneficiary
shall include in his return his distributive share of the net income of the estate.
4. Rules on Taxability of Estates
5. Composition of the Gross Income of the Estates all income received by the
estate of a deceased person during the period of the administration or settlement of
the estate.
6. Additional Special Deductions Available to Estates and Trust
a. The amount of the income of the trust and estates for the taxable year which
is to be distributed currently by the fiduciary to the beneficiaries;
b. The amount of income collected by a guardian of an infant which is to be held
or distributed as the court may direct;
c. The amount of the income received by estates during the period of
administration or settlement, properly paid or credited during the taxable
year to any legatee or heir; and
d. The amount of the income of the trusts, which in the discretion of the
fiduciary may either be distributed to the beneficiary or accumulated,
properly paid or credited during the taxable year to the beneficiary.

7. Formula for Computation of Taxable Income of Estates

Gross Income

Php XXXXXXXXXXX

Less: Deductible expenses

XXXXXXX

Income distributed to beneficiaries

Net Income
Less: Exemption
Taxable Income

XXXXXXX

Php XXXXXXXXXX
50,000
Php XXXXXXXXXX

8. Trust, defined an arrangement created by will or an agreement under which title

to property, rights of property, real or personal, is passed to another for
conservation or investment with the income therefrom and ultimately the corpus
(principal) to be distributed in accordance with the direction of the grantor as
expressed in the governing will or agreement.
a. Fiduciary, defined Generally it refers to a team, which applies to all persons
or corporations that occupy positions of peculiar confidence towards others,
such as trustees, executors or administrators. For income tax purposes, it
refers to any person or corporation that holds in trust an estate of another
person(s). In order that a fiduciary relationship may exist, it is necessary that
a legal trust be created.
b. Cestui que trust The person for whose benefit a trust is created or who is to
enjoy the income or the avails of it.
9. Essential Elements of a Trust

Designated beneficiary and trustee

Fund sufficiently identified to enable title to pas to trustee
Actual delivery of fund to trustee with intention of passing title thereto

10. Trust, how created

a. Expressly by the intention of the trustor or of the parties
b. Impliedly by operation of law. (Art. 1441, NCC)
11. Parties to a Trust
a. Trustor or Grantor the person who establishes a trust.
b. Trustee or Grantee the person in whom confidence is reposed as regards the
property for the benefit of another.
c. Beneficiary the person for whose benefit the trust has been created.
12. Kinds of Trust

i.

ii.

iii.
iv.

Ordinary trust the income and corpus of the trust do not revert to the
grantor. The trust income is accumulated and held for distribution to the
beneficiaries.
Revocable trust a kind of trust in which the power to revest in the grantor
title to any part of the corpus of the trust is vested in the grantor himself or
in any person not having any substantial adverse interest in the trust corpus
or in its income.
Irrevocable trust irrevocable both as to corpus and as to income. Taxed
exactly like an estate under judicial settlement.
Employees trust

a. Examples of Ordinary Trust

i.
ii.
iii.

A trust where the income is accumulated or held for future distribution under
the terms of a will or trust;
A trust where the income is to be distributed currently by the fiduciary to the
beneficiaries;
A trust where the income collected by a guardian of an infant is held or
distributed as the court may direct.

b. When is a Trust Revocable?

i.

ii.

Where, at any time, the power to revest in the grantor title to any part of the
corpus of the trust is vested in the grantor either alone or in conjunction with
any person not having a substantial adverse interest in the disposition of
such part of the corpus or the income therefrom; or
In any person not having a substantial adverse interest in the disposition of
such part of the corpus or the income therefrom.

13. Composition of the Gross Income of Trusts

The items of gross income of estates and trusts are the same items of gross
income of individuals as provided under the Tax Code. (Sec.32), which shall include

a. Income accumulated in trust for the benefit of unborn or unascertained

person(s) with contingent interests, and income accumulated or held for
future distribution under the terms of the will or trust agreement. (Taxable to
the estate or trust)
b. Income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which is to be
held or distributed as the court may direct (Taxable to the beneficiary,
whether distributed or not, and is usually deductible by the fiduciary)
c. Income received by estates of deceased persons during the period of
administration or settlement of the estate. (Taxable to the fiduciary or
beneficiary, depending upon the amounts which are properly paid or credited
to the beneficiary)
d. Income that, in the discretion of the fiduciary, may be either distributed to
the beneficiaries or accumulated. (Taxable to the fiduciary or beneficiary,

depending upon the amounts which are properly paid or credited to the
beneficiary)
e. The distribution of income during the taxable year to the beneficiaries of the
trust is deductible from the taxable income of trust.
14. Rules on Taxability of Trust
15. Taxable Trust
a. When Income of the Trust is Taxable to the Grantor
i.
ii.
iii.

iv.

If the trust is revocable, the income of such trust which may be revested to
the granted is taxable to the grantor.
If the income of the trust, in whole or in part, that is held or distributed for
the benefit of the grantor is taxable to the grantor.
A trust, under which the grantor remains in control of the estate and/or
income, is a scheme intended to avoid payment of income tax. Thus, the
income that may be revested in the grantor, or held or distributed for the
benefit of the grantor shall be included in computing the taxable income of
the grantor.
If the income of the trust is applied to the payment of premiums upon such
policies of insurance on the life of the grantor, the said income is taxable to
the grantor.

b. When is Income of the Trust Taxable to the Trustee?

i.

ii.

iii.

iv.

If the income is to be accumulated or held for future distribution, whether

consisting of ordinary income or gain from sale of assets included in the
corpus of the trust, must be returned by and will be taxed to the trustee;
If the income of the trust whether created by will or dead, for accumulation
of income, whether for an unascertained person(s) with contingent
interests or otherwise, shall be taxed to the trustee;
If the income of a trust, where under the terms of a will or dead, the
trustee may in his discretion, distributes the income or accumulates it, the
income taxed to the trustee, irrespective of the exercise of his discretion.
If the income of a trust administered in a foreign country, undiminished by
any amounts distributed, paid or credited to beneficiaries, will be taxed to
the trustee

c. When is Income of the Trust Taxable to the Beneficiary?

All income of a trust for the taxable year which is to be distributed to the
beneficiaries must be returned by and will be taxed to the respective beneficiaries.
Thus, each beneficiary must include in his return his distributive share of the net
income of the trust.
16. One-layered Taxation Regime in Taxable Trust and Estate, defined Income held
by the trustee or the estate should be taxed only once. Hence, any distribution of
income will not trigger the imposition of another income tax otherwise there will be
a violation of the one-layered taxation.

17. Formula for Computation of Taxable Income of Trust

18. Formula for Computation of the Consolidated Income of Several Trusts
Total tax on consolidated Net income x Net income before exemption of trust
administered by trustee/consolidated net income before exemption of several trusts
= tax to be paid by each trust
19. Exception of a Taxable Trust
Employees trust. An employees trust which forms part of an employers
pension, stock or profit-sharing plan that complies with the requirements of law is
tax-exempt from income tax. It is usually created for the benefit of the employees
for the purpose of acquiring share capital in the employer company so that the
employees can share in the ownership of the business.
a. Requisites of Exemption of Employees Trust from Income Tax
i.
ii.
iii.

iv.

The employees trust must form part of a pension, stock bonus or profitsharing plan of an employer for the benefit of some or all of his employees;
Contributions are made to the trust by such employer, or employees, or
both;
The contributions are made for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the trust
in accordance with such plan;
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 used for, or diverted to, purposes
other than for the exclusive benefit of the employees.