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TAX 5.

3 – ESTATES AND TRUSTS

 Estates
- An estate refers to the mass of all property, rights and obligations of a person which are not
extinguished by his death
- An estate of a deceased person is a taxpayer if it will receive income during the period of
settlement or administration
- The tax imposed upon individuals shall also apply to the income of estates including:
 Income accumulated or held for future distribution under the terms of the will
 Income received by estates of deceased persons during the period of administration or
settlement of the estate
- When an estate is a taxpayer, a distribution of the year’s income to a heir or beneficiary is:
 A special item of deduction for the estate
 A special item of income to the heir

 Trusts
- Trust is a right on property, real or personal, held by one party for the benefit of another
- Fiduciary means a guardian, trustee, executor, administrator, receiver, conservator, or any
person acting in any fiduciary capacity for any person
- Trust as a taxpayer
 A trust is a taxpayer if under the terms of the trust the fiduciary must accumulate the
income
 A trust is a taxpayer if under the terms of the trust the fiduciary may accumulate or
distribute the income, in his discretion
- The tax imposed upon individuals shall also apply to the income of any kind of property held
in trust including:
 Income accumulated in trust for the benefit of unborn or unascertained person/persons
with contingent interests, and income accumulated or held for future distribution under
the terms of the will or trust
 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
 Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated
- The tax imposed on the income of any kind of property held in trust shall not apply to
employee’s 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
 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
 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 used for or diverted to, purposes other than for the exclusive benefit of his
employees. Provided, that any amount actually distributed to any employee shall be
taxable to him in the year in which so distributed to the extent that it exceeds the
amount contributed by such employee.
- When a trust is a taxpayer, a distribution of the year’s income to beneficiary is:
 A special item of deduction for the trust
 A special item of income to the beneficiary

 Computation and payment of taxable income of the estate or trust


The tax shall be computed upon the taxable income of the estate or trust and shall be paid by
the fiduciary, except as those relating to revocable trusts and to income for the benefit of the
grantor.
- 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
 In any person not having a substantial adverse interest in the disposition of such part of
the corpus or the income therefrom, the income of such part of the trust shall be
included in computing the taxable income of the grantor
- Where any part of the income of a trust
 Is, or in the discretion of the grantor or of any person not having a substantial adverse
interest in the disposition of such part of the income may be held or accumulated for
future distribution to the grantor, or
 May, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income, be distributed to the
grantor, or
 Is, or in the discretion of the grantor or of any person not having a substantial adverse
interest in the disposition of such part of the income may be applied to the payment of
premiums upon policies of insurance on the life of the grantor, such part of the income
of the trust shall be included in computing the taxable income of the grantor.
The term in the discretion of the grantor means in the discretion of the grantor, either
alone or in conjunction with any person not having a substantial adverse interest in the
disposition of the part of the income in question.
- The taxable income of the estate or trust shall be computed in the same manner and on the
same basis as in the case of an individual, except that:
a. There shall be allowed as a deduction in computing the taxable income of the estate or
trust
o The amount of the income of the estate or trust for the taxable year which is to
be distributed currently by the fiduciary to the beneficiaries, and
o The amount of the income collected by a guardian of an infant which is to be
held or distributed as the court may direct, but the amount so allowed as a
deduction shall be included in computing the taxable income of the
beneficiaries, whether distributed to them or not.
Any amount allowed as a deduction under this Subsection shall not be allowed
as a deduction in the next paragraph (b.) in the same or any succeeding taxable
year.
b. In the case of income received by estate of deceased persons during the period of
administration or settlement of the estate, and in the case of income which, in the
discretion of the fiduciary, may be either distributed to the beneficiary or accumulated,
there shall be allowed as an additional deduction in computing the taxable income of
the estate or trust the amount of the income of the estate or trust for its taxable year,
which is properly paid or credited during such year to any legatee, heir or beneficiary
but the amount so allowed as a deduction shall be included in computing the taxable
income of the legatee, heir or beneficiary.
c. In the case of a trust administered in a foreign country, the deduction mentioned in
paragraph (a.) and (b.) shall not be allowed: That the amount of any income included in
the return of said trust shall not be included in computing the income of the
beneficiaries.
- Estates and trusts are allowed a personal exemption of 20,000 pesos from their gross
incomes.
- Format of computation of taxable income
Gross income XX
Less: Deductions
Business expenses XX
Distribution of year’s income to the heir or beneficiary XX XX
Net Income before exemption XX
Less: Personal exemption (Not allowed under TRAIN law) XX
Taxable net income XX
Tax due XX
- Several trusts with a common grantor and a common beneficiary
 Filing of separate returns – a separate return will have to be filed for each trust by the
respective trustee or fiduciary
 Consolidation of the separate returns – the separate returns filed by different fiduciaries
shall be consolidated in the BIR allowing against the consolidated taxable income one
exemption only of P20,000
 Consolidated income tax – income tax shall be computed on the consolidated income
 Apportionment of the consolidated income tax to the different trusts – the tax
computed on the consolidated income shall be apportioned to the different trust, such
that each trust shall have a share in the income tax on consolidated income
o The format of computation follows:
Taxable Income of the Trust x Consolidated Income Tax
Taxable Income of all Trusts
- Filing of returns and payment of tax
 The following persons acting in any fiduciary capacity shall file the income tax return for
the estate or trust:
a. Guardians
b. Trustees
c. Executors
d. Administrators
e. Receivers
f. Conservators
g. All other persons or corporations acting as fiduciarys

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