Estate Tax Basics

TAX
2
Estate Tax
I.  THE GROSS ESTATE
A"y. Terence Conrad H. Bello 2
A.  Introduc:on A.  Introduc:on
1.  When does the estate tax accrue? 3.  At what point is the value of the gross estate
§  Upon the death of the decedent. Inheritance measured for purposes of imposing the
taxa:on is also governed by the statute in force estate tax?
at the :me of the death of the decedent §  Because succession takes place and the right of
2.  What is the nature of the estate tax? the state to impose estate tax accrues upon the
§  It is in the nature of an excise tax imposed upon death of the decedent, the tax should be
the right or privilege to succeed to, receive, or measured by the value of the estate as it stood
take property by or under a will or the intestacy at the :me of the decedent’s death, regardless
law, or deed, grant, or giK, to become opera:ve of any subsequent con:ngency affec:ng value or
at or aKer death any subsequent increase or decrease in value.
Lorenzo v. Posadas; NIRC § 85
A"y. Terence Conrad H. Bello Slide No. 3 A"y. Terence Conrad H. Bello Slide No. 4
A.  Introduc:on B.  General Defini:on of Gross Estate
4.  Does the postponement of possession postpone the 1.  What is generally included in the gross estate of a
payment of the estate tax as well? resident ci:zen decedent?
§  No. A transmission by inheritance is taxable at the :me §  All property, real or personal, tangible or
of the predecessor’s death, notwithstanding the intangible, wherever situated (i.e., taxed on a
postponement of the actual possession or enjoyment of worldwide basis) (NIRC § 85)
the estate by the beneficiary, and the tax is measured by
the value of the property transmi"ed at that :me
2.  Nonresident ci:zen? Worldwide basis
regardless of its apprecia:on or deprecia:on. 3.  Resident alien? Worldwide basis
§  Thus, the estate tax is payable even where a testator 4.  Nonresident alien?
provided in his will that his real proper:es be held for a §  Only that part of his en:re gross estate which is
period of 10 years aKer his death then, thereaKer, the situated in the Philippines (see, however, special
real proper:es shall go to his nephew. Lorenzo v. rules in § 104 for certain intangible property)
Posadas
§  CIR v. Campos Rueda
C.  Cons:tu:on of Gross Estate C.  Cons:tu:on of Gross Estate: Property in which Decedent had an Interest
1.  What shall be included in gross estate? 1.  What is covered by “property in which decedent had
Proper&es physically in the estate an interest”?
a.  Property in which decedent had an interest §  Covers property beneficially owned by the decedent
b.  Proceeds of life insurance (unless designa:on of (includes property wherein legal :tle is not in the
beneficiary is irrevocable) name of the decedent but is beneficially owned by the
Proper&es no longer physically in the estate decedent)
a.  Transfers in contempla:on of death –  E.g., land registered in the name of a trustor or a
dummy
b.  Transfers taking effect at death
c.  Transfers with retained interest –  Stock cer:ficates in the name of the decedent’s
stock broker or held by a bank in trust for the
d.  Revocable transfers
decedent
e.  Property passing under general power of appointment
–  Cash deposits in a numbered account in the
f.  Transfers for insufficient considera:on Cayman Islands
C.  Cons:tu:on of Gross Estate: Property in which Decedent had an Interest C.  Cons:tu:on of Gross Estate: Transfers in Contempla:on of Death
1.  What is covered by “property in which decedent had 1.  An example of property no longer physically in the
an interest”? patrimony of the decedent at the :me of death (because
§  Conversely, if the decedent merely holds :tle to a there was an inter vivos transfer) but by fic:on of law is
property only as a guardian or trustee or in some other brought back into the patrimony of the decedent (i.e.,
fiduciary capacity (i.e., mere naked :tle), he would not deemed inclusion)
be considered as having an interest in such property 2.  The law only targets gratuitous transfers. Hence, transfers
for a full and adequate considera:on in money or money’s
worth is not covered by the inclusion (theory of
conversion)
§  Reason: the transfer amounts only to a subs:tu:on or
exchange of assets and therefore the gross estate is
not reduced, and no estate tax is avoided
C.  Cons:tu:on of Gross Estate: Transfers in Contempla:on of Death C.  Cons:tu:on of Gross Estate: Transfers in Contempla:on of Death
3.  What is meant by a transfer in contempla:on of death? 4.  How do you know whether the transfer was made in
§  The transfer was mo:vated by the thought of death contempla:on of death?
–  e.g., decedent suffers a stroke but survives; a day §  Determined using a “facts and circumstances” test
aKer he is discharged from the hospital, he donates (therefore, subjec:ve). Some factors considered:
his proper:es to his children (or “sells” the –  Age (advanced age at the :me of transfer?)
proper:es for an insufficient considera:on) –  Health (terminally ill at the :me of transfer or in
–  the donated property, while no longer physically in the pink of health?)
the estate of the decedent at the :me of his death, –  Length of :me between the transfer and death
would s:ll result in inclusion because the transfer –  Concurrent making of a will
was mo:vated by the thought of death
–  And other similar circumstances
C.  Cons:tu:on of Gross Estate: Transfers in Contempla:on of Death C.  Cons:tu:on of Gross Estate: Transfers Taking Effect at Death
5.  Since the law covers only transfers mo:vated by the 1.  What is the ra:onale for inclusion?
thought of death, if the mo:ve for the transfer is
something else other than the thought of death, the §  These transfers are essen:ally equivalent to
transfer will not result in inclusion. Some non-‐death testamentary disposi:ons. The effect is the
factors: same as when transfers are provided for in a last
§  Reduce annual income tax liability of the transferor will and testament of the decedent
§  Relieve the transferor from the burden of
management
§  To protect the family from the hazards of business
opera:ons
§  Or other valid business reasons
C.  Cons:tu:on of Gross Estate: Transfers Taking Effect at Death C.  Cons:tu:on of Gross Estate: Transfers Taking Effect at Death
2.  What is the test to determine whether a transfer 3.  Thus a joint survivorship agreement (e.g.,
takes effect at death? “and/or” account) is considered a transfer
§  The possession or enjoyment is condi:onal upon taking effect at death
surviving the decedent. Thus, if the transferee of §  The survivorship agreement is in effect a
a property interest can get possession or dona:on mor@s causa made by the deceased co-‐
enjoyment while the decedent transferor is depositor during his life:me but effec:ve upon
living, the property shall not be included in the death because the acquisi:on by the survivor of
decedent’s gross estate the remaining balance is a considered a bequest.
BIR Rul. 10-‐03 dated Sept. 8, 2003
§  Can possession or enjoyment of the property be
obtained without surviving the decedent? If yes,
property is excluded from the gross estate. If no,
property is included in the gross estate
C.  Cons:tu:on of Gross Estate: Transfers Taking Effect at Death C.  Cons:tu:on of Gross Estate: Transfers with Retained Interest
4.  Illustra:on: 1.  The decedent must have retained an interest in the property
for a specified period
§  Sr. “donates” house and lot to Jr. in a Deed of 2.  Two-‐fold test to determine whether decedent made a
Dona:on purportedly transferring ownership transfer with retained interest:
over the house and lot to Jr. a.  Has the decedent retained an interest (i) for his life; or (ii)
§  In a side agreement, however, it was agreed that for a period not ascertainable without reference to his
:tle to the house and lot and possession would death; or (iii) for a period that does not in fact end before
be transferred only to Jr. upon the death of Sr. his death?
b.  Did the decedent retain (i) possession or enjoyment of
§  In the mean:me, Sr. would con:nue to live in the property; or (ii) the right to the income from the
the house and lot and retain possession un:l his property; or (ii) the right to designate (either alone or in
death conjunc:on with any other person) the person who shall
possess or enjoy the property; or (iv) the right to
designate (either alone or in conjunc:on with any other
person) the person who shall receive the income?
C.  Cons:tu:on of Gross Estate: Transfers with Retained Interest C.  Cons:tu:on of Gross Estate: Transfers with Retained Interest
3.  Illustra:ons: period 4.  Illustra:ons: interest retained

a.  For life: decedent transfers property to a trust with the a.  Possession or enjoyment of the property:
income therefore payable to himself “for as long as I live” and,
upon his death, the corpus shall be distributed to his children §  Decedent donated a Juan Luna pain:ng to the
b.  For a period not ascertainable without reference to the Na:onal Museum but reserved the right to keep
decedent’s death: decedent transfers property to a trust, with it for life
income therefrom payable to himself quarterly for life but, §  Decedent sold his house and lot to his son (for a
under the trust agreement, the decedent is to receive none of
the trust income for the calendar quarter in which he dies song), but reserved the right to live in it for life
c.  For a period which does not in fact end before decedent’s §  Ra&onale: with the transferor retaining for
death: decedent, aged 40, transfers property to a trust with himself essen:ally full life:me benefits from the
the trust agreement providing that decedent shall receive the transferred property, the ul:mate shiKing of
trust income for 10 years, at the end of which period, the trust enjoyment upon the death of the decedent is
terminates and the corpus shall be distributed to the
decedent’s children. The decedent dies, however, within the
akin to a testamentary disposi:on of property,
10-‐year period hence, jus:fying the imposi:on of estate tax at
that :me
4.  Illustra:ons: interest retained 4.  Illustra:ons: interest retained

b.  Right to the income from the property: decedent c.  Right to designate person (either alone or in
transfers property to a trust, with the income conjunc:on with any other person) who shall
payable to him for life, or to a dependent of the possess or enjoy property or income therefrom:
decedent whom the la"er would otherwise have
to support (note: the decedent need not directly §  Exercisable alone: the decedent transfers
receive the income. The income may also be property to a trust, retaining for his life the
paid to a third party in discharge of the right to say who may enjoy the transferred
decedent’s obliga:on to the la"er) property or the income therefrom
4.  Illustra:ons: interest retained 4.  Illustra:ons: interest retained

c.  Right to designate person (either alone or in c.  Right to designate person (either alone or in
conjunc:on with any other person) who shall conjunc:on with any other person) who shall
possess or enjoy property or income therefrom: possess or enjoy property or income therefrom:
§  Exercisable in conjunc:on . . .: the decedent §  Exercisable in conjunc:on . . .: If decedent names
creates a trust wherein B had the right to the a 3rd party as trustee and gives the trustee the
income but the decedent retains for life the right right to designate who shall enjoy the property or
to designate, with B’s consent, another person as the income, the decedent has not retained the
an income beneficiary prescribed control. BUT, if the decedent has the
–  Tax policy: Congress wary of family right to discharge the trustee and name himself
transac:ons, which are always suspected of trustee with the same right, he has indirectly
tax avoidance mo:ves retained the prescribed control
C.  Cons:tu:on of Gross Estate: Revocable Transfers C.  Cons:tu:on of Gross Estate: Revocable Transfers
1.  Elements of § 85(C) 2.  The kind of power which brings about inclusion,
a.  Transfer of property was made (by trust or otherwise); includes any power affec:ng the :me or manner of
b.  but, the enjoyment thereof was subject to change (at the enjoyment of the property or its income, even though
date of decedent’s death); the decedent could not benefit from its exercise and
c.  through the exercise of a power (in whatever capacity even though the iden:ty of the beneficiary is unaffected
exercisable and without regard to when or from what §  Example: A creates a trust to pay income to B for life,
source the decedent acquired the power); with remainder to C, but reserves the right to invade
§  by the decedent (alone or in conjunc:on with any corpus and accelerate enjoyment in C’s favor
other person); §  Here C does not have full enjoyment and it is the
d.  power exercised is the power to alter, amend, revoke or retained power to accelerate the enjoyment which
terminate the transfer; results in inclusion
e.  or where any such power is relinquished in v  85(C) may overlap with 85(B) (transfers with retained
contempla:on of death interest)
3.  What is meant by “subject to change in enjoyment”? 4.  Example of power to revoke:
§  If the decedent could take back un:l death property
§  A creates a trust to pay income to B for life, with
transferred, interests given are subject to change
remainder to C, but reserves the right to take
§  If the decedent could name another income beneficiary,
even if subject to consent of originally named beneficiaries back the property altogether
§  The enjoyment of the property transferred is subject to 5.  Examples of power to alter/amend:
change if the decedent could accelerate the beneficiary’s §  Name new beneficiaries
enjoyment of the property
§  Change propor:onate interests among
–  Example: under the trust, A shall receive income for 10
years, and at the end of the period, the corpus shall go
beneficiaries
to A. The trust, however, provides that the trustor may §  Remove the trustee and appoint himself
terminate the trust earlier and have the corpus
delivered to A or his estate
6.  Example of power to terminate: 7.  Where power to alter, amend, etc. is relinquished in
contempla:on of death:
§  D creates a trust, with income payable to B for
§  The relinquishment of the power results in the inclusion
life, remainder to C or C’s estate, but reserves of the same interest in property in the decedent’s gross
the right to terminate the trust, effec:ng an estate
immediate distribu:on of corpus to C §  Except: if relinquishment was an adequate and full
–  Here B’s enjoyment of the income is subject considera:on in money or money’s worth
to change because the trust may be §  Example: decedent relinquishes power to alter, amend,
terminated etc. upon realiza:on that he is terminally ill
–  C’s right to possess the property and enjoy §  Reason: since the law treats the power to alter, amend,
etc. as equivalent to a property interest, the
the income thereof is subject to change relinquishment of said power in contempla:on of death
because his en:tlement to the property may is no different from a transfer of property in
be accelerated contempla:on of death, hence, includable
C.  Cons:tu:on of Gross Estate: General Power of Appointment C.  Cons:tu:on of Gross Estate: General Power of Appointment
1.  A power of appointment is the right to designate the 3.  Illustra:on:

person or persons who will succeed to, or will become §  A transfers property to a trust, with B as income
beneficial owners of, the property of a prior decedent. beneficiary, and granted C the right to direct the trustee, by
A power of appointment may be a general power of will, to transfer the property to anybody whom C
nominates. The “anybody” could be C (i) himself, (ii) his
appointment or a limited power of appointment
creditors, (iii) his estate, (iv) the creditors of his estate, or
2.  Personali:es involved: (v) anybody else in the world
§  Prior decedent/donor – the grantor of the power of –  A: prior decedent (grantor of power of appointment)
appointment –  C: decedent (grantee of power of appointment)
§  Decedent – the grantee of the power of –  Anybody: successors who will succeed to the property
appointment §  Thus, if C (the decedent) exercised or released the general
§  Successor/s – the person/s who will succeed to the power of appointment by will or by deed in certain
instances, the property subject to the power will be
property
included in C’s gross estate
C.  Cons:tu:on of Gross Estate: General Power of Appointment C.  Cons:tu:on of Gross Estate: General Power of Appointment
4.  Ra:onale for inclusion: 4.  Requisites for inclusion of property passing under GPA:
§  The right to determine who may become the beneficial
owner of a property is such an important a"ribute of a.  Existence of a general power of appointment;
outright ownership that a ques:on may be raised b.  An exercise of such power by the decedent by will or
whether for estate tax purposes, it should be considered
the equivalent of an ownership interest includable in the by deed in certain cases (i.e., life:me transfer (i) in
decedent’s gross estate contempla:on of death, or (ii) taking effect at death,
§  As a general rule, mere possession of a power of or (iii) with retained interest); and
appointment over property is not considered an interest
in property. Therefore if the holder of the power dies c.  The passing of the property by virtue of such
possessed of such power, there is no “property in which exercise
the decedent had an interest in” that would result in its
inclusion in gross estate 5.  For exercise or release of GPA to result in inclusion, it
§  By the same token, if the holder/grantee exercised the must be by will or by a life:me transfer which if it were
power of appointment during his life:me, the holder/ a transfer of actual property would result in its inclusion
grantee has made no transfer of an “interest” in
property which may be taxed under § 85(A) in gross estate as in contempla:on of death, or under
the other life:me transfer rules
C.  Cons:tu:on of Gross Estate: General Power of Appointment C.  Cons:tu:on of Gross Estate: Proceeds of Life Insurance
6.  Property over which the decedent held a power of 1.  Proceeds of insurance under policies taken out by
appointment is not includible in his gross estate unless such
power was “general” the decedent upon his life shall be includable if the
§  A power is general when it authorizes the grantee/ beneficiary is:
decedent (of the power of appointment) to appoint
anyone, possibly including himself, his estate, his creditors a.  The estate of the decedent, his executor or his
or creditors of his estate.
administrator; or
§  A power is special where the grantee/decedent can appoint
only a restricted or designated class of persons other than b.  A third person, unless the designa:on of the
himself. Property which passes under a special power of
appointment is not includible in the gross estate beneficiary is irrevocable
§  Example: A leaves his property in trust for his son, B, for life 2.  When are proceeds of life insurance excludable?
and then in trust for such children of B as B shall by will
appoint §  When the beneficiary is a third person (e.g., wife
–  The power of appointment is a special power of or kids of the insured) and the designa:on is
appointment, thus the value of the property is
excludible from the gross estate of B irrevocable
A.  Valua:on of Taxable Transfers
1.  In a (1) transfer in contempla:on of death, (2) transfer

taking effect at death, (3) transfer with retained
interest, (4) revocable transfer, and (5) property passing
under a general power of appointment, the value to
include in gross estate shall be determined under the
following rules:
a.  If the transfer was in the nature of bona fide sale for
an adequate and full considera:on in money or
money’s worth, no value shall be included in the
gross estate
b.  If the considera:on received on the transfer was
II.  VALUATION OF ESTATE AND insufficient, the value to include in the gross estate
shall be the excess of the FMV of the property at the
AMOUNT TO BE INCLUDED IN CASES :me of the decedent’s death over the considera:on
COVERED BY 85(B), (C) AND (D) received
A"y. Terence Conrad H. Bello 37 A"y. Terence Conrad H. Bello Slide No. 38
A.  Valua:on of Taxable Transfers
2.  If there was no considera:on received on the

transfer (as in dona:on mor@s causa), the value
includible shall be the FMV of the property at the
:me of death
3.  Illustra:on:

FMV at the :me of transfer 100,000 100,000 100,000
Considera:on received 100,000 60,000 None
FMV at :me of death 180,000 180,000 180,000 III.  EXEMPT TRANSFERS
Amt. includable None 120,000 180,000
A"y. Terence Conrad H. Bello Slide No. 39 A"y. Terence Conrad H. Bello 40
A.  Exempt Transfers A.  Exempt Transfers
1.  What are the types of exempt transfers? 2.  Examples:
a.  The merger of usufruct in the owner of the naked :tle; §  P died leaving a piece of land to Q in usufruct
b.  The transmission or delivery of the inheritance or legacy (right to enjoy the fruits), and to R in naked
of the fiduciary heir or legatee to the fideicomissary
ownership (without the right to the fruits). The
c.  The transmission from the first heir, legatee or donee in
land is subject to estate tax in the estate of P.
favor of another beneficiary, in accordance with the will
of the predecessor Upon the death of Q, the usufruct shall be
d.  All bequests, devices, legacies or transfers to social merged into the naked ownership of R, who shall
welfare, cultural and charitable ins:tu:ons no part of the then become the absolute owner of the
net income of which inures to the benefit of any property. The transmission of the usufruct from
individual: provided not more than 30% of the said Q to R shall be exempt from estate tax
bequests, legacies or transfers shall be used by such
ins:tu:ons for administra:on purposes
A.  Exempt Transfers
2.  Examples:
§  S died leaving a piece of land to T, a grandson, to be
owned by him for 4 years, with the obliga:on to preserve
it, aKer which, one-‐half shall be given to U, a great
grandson, and the other half to be retained by T. This is
fideicomissary subs:tu:on. The fiduciary heir, T, is
entrusted with the obliga:on to preserve the property
and transit it to the fideicomissary heir, U, with the
subs:tu:on not going beyond one degree from the heir
originally ins:tuted, and both heirs being alive at the
:me of the testator’s death. The transmission from S to IV.  DEDUCTIONS FROM GROSS
T is subject to estate tax. The transmission from T to U
shall be exempt from estate tax
ESTATE
A"y. Terence Conrad H. Bello Slide No. 43 A"y. Terence Conrad H. Bello 44
Deduc:ons from Gross Estate Deduc:ons from Gross Estate
1.  What are the deduc:ons from the gross estate of a 2.  What are the deduc:ons from the gross estate of a
ci:zen and resident decedent? nonresident alien decedent?
a.  ELITE (expenses, losses, indebtedness, taxes, etc.) a.  Pro-‐rated ELITE: [Phil. gross estate/worldwide
b.  Vanishing Deduc:on gross estate] x [ELITE]
c.  Transfers for Public Use b.  Vanishing Deduc:on
d.  Family Home c.  Transfers for Public Use
e.  Standard Deduc:on
f.  Medical Expenses
g.  Benefits Received from Employer by Reason of
Death
h.  Share in the Conjugal Property
A.  ELITE A.  ELITE
1.  Funeral expense What are examples of funeral expense?

§  Mourning apparel of surviving spouse and minor children
a.  Actual funeral expense
§  Expenses during the wake (e.g., food and drinks)
b.  5% of gross estate §  Cost of obituary
c.  P200,000 §  Telecommunica:on expenses incurred for informing rela:ves
Whichever is the lowest among a, b, or c of the decedent (e.g., overseas calls)
§  Cost of burial plot, tombstone, monument or mausoleum (but
§  Rule of thumb: cut off point is the interment or not their upkeep)
burial; expenses incurred aKer the burial or §  Interment or crema:on fees
interment will not be deduc:ble §  All other expenses incurred for the performance of the rites
and ceremonies incident to the interment (expenses aKer the
interment, such as prayers, masses, 9th day, 40th day, etc., are
not deduc:ble)
2.  Expenses for testamentary or intestate proceedings §  Examples:

§  Expenses incurred during the se"lement of the a.  Fees of executor or administrator
estate (e.g., inventory taking, payment of debts b.  A"orney’s fees
of the estate, distribu:on of estate to heirs) c.  Court or filing fees
§  Cut-‐off point is the last day prescribed by law, or d.  Accountant’s fees
the extension thereof, for the filing of the estate e.  Appraiser’s fees
tax return
f.  Clerk hire
§  Expenses incurred aKer the cut-‐off point are not
g.  Cost of preserving and distribu:ng the estate
deduc:ble
h.  Costs of storing or maintaining the property
i.  Broker’s fees/commissions for selling the property
3.  Claims Against the Estate 4.  Claims Against Insolvent Persons – provided the
§  To be deduc:ble, claim must have been enforceable value of the decedent’s interest in the claim is
against the decedent if he were living
§  If claim is a simple loan, there must be a debt instrument included in the gross estate
which was notarized 5.  Unpaid Debts/Mortgages Upon Property – provided
§  If the loan was contracted within 3 years from the
decedent’s death, the executor or administrator is the decedent’s interest in the property,
required to submit a statement showing the disposi:on undiminished by the debt/mortgage, is included in
of the proceeds of the loan
§  Deduc:ble amount of claim is valued as of the death of
the gross estate
decedent irrespec:ve of post-‐death developments 6.  Taxes – which have accrued as of the death but not
–  Thus where the claims are reduced or condoned through
compromise agreements entered into by the estate with its yet paid; does not include income tax upon income
creditors resul:ng in the reduc:on of the amount actually paid received aKer the death, property taxes not accrued
post-‐death, the deduc:ble claim would s:ll be valued as of the
date of death. Dizon v. Court of Tax Appeals, G.R. 140944, May
6, 2008
before death, or the estate tax
A.  ELITE B.  Vanishing Deduc:on
7.  Casualty Losses 8.  Vanishing deduc:on

§  Arising from fire, storm, shipwreck, or other §  Property may change hands several :mes
c a s u a l : e s , o r f r o m r o b b e r y , t h e K o r within a very short period of :me by reason
embezzlement
of death of the owner shortly aKer receiving
§  Must not be compensated for by insurance or the property by giK or inheritance
otherwise
§  Must not have been deducted for income tax
§  This subjects the property to double taxa:on,
purposes because the tax is imposed on each transfer
§  Losses were incurred not later than the :me §  The vanishing deduc:on is meant to mi:gate
required to pay the estate tax (6 mos.) the effects of double taxa:on
B.  Vanishing Deduc:on B.  Vanishing Deduc:on
§  Condi:ons for deduc:bility: §  Amount deduc:ble:

a.  The present decedent died within 5 years from receipt of
the property from a prior decedent or donor; •  100% of value: if prior decedent died within one
b.  The property on which vanishing deduc:on is being year;
claimed must be located in the Philippines;
c.  The property must have formed part of the taxable •  80%: > one year < two years
estate of the prior decedent, or of the taxable giK of the •  60%: > two years < three years
donor;
d.  The estate tax on the prior succession or the donor’s tax •  40%: > three years < four years
on the giK must have been finally determined and paid; •  20%: > four years < five years
e.  The property on which vanishing deduc:on is being
taken must be iden:fied as the one received from the
prior decedent, or from the donor, or something
acquired in exchange therefore; and
f.  No vanishing deduc:on on the property was allowable to
the estate of the prior decedent
C.  Transfers for Public Use D.  Family Home
•  The amount of all bequests, legacies, devises or 1.  Dwelling house where a person and his family
transfers to or for the use of the Government of the resides, and the land on which it is situated (follows
Republic of the Philippines, or any poli:cal defini:on in the Family Code)
subdivision thereof, for exclusively public purposes •  Cons:tuted jointly by husband and wife or by an
unmarried head of family
2.  To be deduc:ble, must be cer:fied to as such by
Barangay Chairman where family home is located
3.  Total value is included in gross estate
4.  Amount deduc:ble is the FMV or P1 million,
whichever is lower
E.  Standard Deduc:on F.  Medical Expenses
1.  Available as a deduc:on in addi:on to the other 1.  Incurred within one year from death (whether paid
deduc:ble items or unpaid); cap is P500,000.00; must be
2.  Amount deduc:ble is P1 million substan:ated
G.  Death Benefits from Employer H.  Capital of Surviving Spouse
1.  Any amount received by an official or employee’s §  Capital of the surviving spouse of a decedent (e.g.,
heirs from the employer as a consequence of the conjugal share) shall not form part of the gross
death of the said official or employee under NIRC § estate of the decedent
32(B)(6)(b)
Foreign Tax Credits
1.  Purpose: the net taxable estate of a decedent who

was a resident or ci:zen of the Philippines includes
his net taxable estate within and without the
Philippines. It is possible that the decedent’s net
estate without the Philippines was subjected to
transfer taxes as well by the country where the
property is located. There is therefore a possibility
of double taxa:on of the same property.
V.  FOREIGN TAX CREDITS 2.  The purpose of the estate tax credit is to avoid or
mi:gate the effects of double taxa:on.
Administra:ve Provisions
1.  No:ce of Death – within 2 months

2.  Estate Tax Return – within 6 months; extendible for
up to 30 days
3.  Payment of Estate Tax – pay as you file; extendible
for up to 2 year (extrajudicial se"lement) or 5 years
(judicial se"lement), if payment would impose
“undue hardship” upon estate or any of the heirs
4.  Consequences of Non-‐Payment – surcharge,
VI.  ADMINISTRATIVE PROVISIONS interest, compromise penalty
A.  Meaning of GiK
1.  When conveyance of property is mo:vated by a

sense of gra:tude, or out of pure liberality, and not
addi:onal compensa:on for past services rendered,
the transfer is a giK subject to donor’s tax
TAX 2 §  Thus, the renuncia:on by a company of the
proceeds of a life insurance policy in favor of the
heirs of a deceased officer “out of gra:tude” for his
Donor’s Tax past services is a “giK” subject to donor’s tax.
Pirovano v. CIR
A"y. Terence Conrad H. Bello Slide No. 68

A.  Meaning of GiK A.  Meaning of GiK
CIR v. Duberstein CIR v. Duberstein

§  Illustra:on of a non-‐taxable giK vs. taxable §  When is a payment a non-‐taxable giK and when
is a payment taxable compensa:on for services
compensa:on for services rendered rendered?
§  Court found that the Cadillac was “a recompense •  Mere absence of a legal or moral obliga:on to make
for Duberstein’s past services, or an inducement for such a payment does not mean it is a giK
him to be of further service in the future” •  If the payment proceeds primarily from “the
constraining force of any moral or legal duty,” or
from “the incen:ve of an:cipated benefit” of an
economic nature, it is not a giK
•  A giK in the statutory sense, on the other hand,
proceeds from a “detached and disinterested
generosity, “out of affec:on, respect, admira:on,
charity or like impulses”
B.  Composi:on of Gross GiKs B.  Composi:on of Gross GiKs
1.  In case of a resident or ci:zen donor, the gross giKs 3.  Reciprocity rule on intangible personal property -‐-‐
would consist of: a.  General rule: intangible personal property located in the
Philippines belonging to a non-‐resident alien donor is included
a.  Real property, regardless of loca:on in gross giKs
b.  Tangible personal property, regardless of loca:on b.  Excep:on: not includible under the “reciprocity clause”
c.  Intangible personal property, regardless of loca:on i.  if the donor at the :me of the dona:on was a resident of
2.  In case of a non-‐resident alien, the gross giK would a foreign country which at the :me of the dona:on did
not impose a transfer tax of any character in respect of
consist of: intangible personal property of ci:zens of the Philippines
a.  Real property located in the Philippines not residing in that foreign country; or
b.  Tangible personal property located in the Philippines ii.  if the laws of the foreign country of which the donor was a
resident at the :me of dona:on allows a similar
c.  Intangible personal property located in the exemp:on from transfer taxes of every character in
Philippines respect of intangible personal property owned by ci:zens
of the Philippines not residing in that foreign country
B.  Composi:on of Gross GiKs B.  Composi:on of Gross GiKs
4.  Examples of intangible personal property located in the 5.  Transfers for insufficient considera:on (if transfer
Philippines: was effec:ve during donor’s life:me) – excess of
a.  Franchises which must be exercised in the Philippines; FMV over considera:on received considered a
b.  Shares, obliga:ons or bonds issued by a domes:c dona:on
corpora:on;
c.  Shares, obliga:ons or bonds issued by a foreign
corpora:on 85% of the business of which is located in
the Philippines;
d.  Shares, obliga:ons or bonds issued by a foreign
corpora:on, if such shares, obliga:ons or bonds have
acquired a business situs in the Philippines; and
e.  Shares or rights in any partnership, business or
industry established in the Philippines
C.  Valua:on of Gross GiKs D.  Deduc:ons from Gross GiKs
1.  If a dona:on is made in property, FMV of such property 1.  Deduc:ons allowed for resident or ci:zen donor,
at the :me of dona:on shall be the value of the gross and non-‐resident alien donors:
giK
a.  GiKs made to or for the use of the Na:onal
a.  In case of real property, value shall be: Government or any en:ty created by any of its
i.  Current FMV, as shown in schedule of values agencies which is not conducted for profit;
fixed by the local assessor; or
b.  GiKs in favor of an educa:onal and/or charitable
ii.  FMV as determined by CIR and/or religious corpora:on, ins:tu:on,
b.  In case of personal property recently acquired by the founda:on, trust or philanthropic organiza:on or
donor, the purchase price may indicate the FMV research ins:tu:on or organiza:on: provided,
c.  In the case of personal property not recently however, that not more than 30% of said giKs
acquired by the donor, there should be some shall be used by such donees for administra:on
evidence of FMV purposes
D.  Deduc:ons from Gross GiKs E.  Net GiKs and Imposi:on of Donor’s Tax
2.  Deduc:ons allowed for resident or ci:zen donors only: 1.  The donor’s tax for each calendar year is computed
a.  Dowries or giKs made on account of marriage and on the basis of the total net giKs made during the
before its celebra:on, or within one year thereaKer, by
calendar year (NIRC §§ 99(A) and 103(A))
parents to each of their legi:mate, recognized natural
or adopted children, to the extent of the first P10,000 2.  Donor’s tax return is filed within 30 days from the
§  Ques@on: Mr. and Mrs. H are making a joint giK of giK; pay-‐as-‐you-‐file (NIRC § 103(B))
P40,000 out of community funds to Mr. I, a legi:mate
child, on account of marriage and before its 3.  Formula for compu:ng the donor’s tax on the first
celebra:on. How much is the deduc:on? donaIon for the calendar year
§  Answer: there are 2 dona:ons, one by Mr. H, in the Gross giKs made
amount of P20,000 as gross giK, from which he is
en:tled to a P10,000 deduc:on, and another by Mrs. Less: deduc:ons_
H, in the amount of P20,000 of gross giK, from which Net giKs made
she is en:tled to her own deduc:on of P10,000
E.  Net GiKs and Imposi:on of Donor’s Tax F.  Donor’s Tax Rates
4.  Formula for compu:ng the donor’s tax on the 1.  Donee is not a stranger – schedular rates
subsequent donaIon for the same calendar year:
2.  Donee is a stranger – flat rate of 30%
Gross giKs made on this date
Less: deduc:ons__________ §  A “stranger” is a person who is not a:
Net giKs made on this date –  Brother, sister (whether by whole or half
Add: all prior net giKs within the year
blood), spouse, ancestor, lineal descendant
Aggregate net giKs –  Rela:ve by consanguinity in the collateral line
within the 4th degree of rela:onship

Donor’s tax on aggregate net giKs
Less: donor’s tax on all prior net giKs within the year
Donor’s tax on the net giKs on this date

Estate Tax Basics

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TAX

A"y. Terence Conrad H. Bello 2

A. Introduc:on A. Introduc:on

3. Illustra:ons: period 4. Illustra:ons: interest retained

4. Illustra:ons: interest retained 4. Illustra:ons: interest retained

4. Illustra:ons: interest retained 4. Illustra:ons: interest retained

1. A power of appointment is the right to designate the 3. Illustra:on:

1. In a (1) transfer in contempla:on of death, (2) transfer

A. Valua:on of Taxable Transfers

2. If there was no considera:on received on the

A. Exempt Transfers

A. ELITE A. ELITE

1. Funeral expense What are examples of funeral expense?

2. Expenses for testamentary or intestate proceedings § Examples:

A. ELITE A. ELITE

7. Casualty Losses 8. Vanishing deduc:on

B. Vanishing Deduc:on B. Vanishing Deduc:on

§ Condi:ons for deduc:bility: § Amount deduc:ble:

E. Standard Deduc:on F. Medical Expenses

Foreign Tax Credits

1. Purpose: the net taxable estate of a decedent who

1. No:ce of Death – within 2 months

A. Meaning of GiK

1. When conveyance of property is mo:vated by a

A"y. Terence Conrad H. Bello Slide No. 68

CIR v. Duberstein CIR v. Duberstein

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A.  Introduc:on A.  Introduc:on

3.  Illustra:ons: period 4.  Illustra:ons: interest retained

4.  Illustra:ons: interest retained 4.  Illustra:ons: interest retained

4.  Illustra:ons: interest retained 4.  Illustra:ons: interest retained

1.  A power of appointment is the right to designate the 3.  Illustra:on:

1.  In a (1) transfer in contempla:on of death, (2) transfer

A.  Valua:on of Taxable Transfers

2.  If there was no considera:on received on the

A.  Exempt Transfers

A.  ELITE A.  ELITE

1.  Funeral expense What are examples of funeral expense?

2.  Expenses for testamentary or intestate proceedings §  Examples:

A.  ELITE A.  ELITE

7.  Casualty Losses 8.  Vanishing deduc:on

B.  Vanishing Deduc:on B.  Vanishing Deduc:on

§  Condi:ons for deduc:bility: §  Amount deduc:ble:

E.  Standard Deduc:on F.  Medical Expenses

1.  Purpose: the net taxable estate of a decedent who

1.  No:ce of Death – within 2 months

A.  Meaning of GiK

1.  When conveyance of property is mo:vated by a