Philippine Estate Tax

Nothing is certain in life but death and taxes. - Benjamin Franklin

Estate tax is the tax on the right to transmit property at death and on certain transfers by the decedent during his lifetime which is made by the law equivalent of testamentary disposition.[1]

Estate tax is a privilege tax. The tax is not imposed on the property but rather on the privilege of shifting of economic benefits and enjoyment of property from the deceased to his heirs.

The following are theories which justify the imposition of Estate Tax:

1. Benefits Received Theory

The state can collect taxes because of the services and other benefits that accrue to the estate of the decedent.

2. State Partnership Theory

The state is a passive and silent partner in the accumulation of the properties by the decedent’s estate.

3. Ability to Pay Theory

The receipt of an inheritance, which in the nature of unearned wealth, gives the heirs an ability to pay the taxes.

4. Redistribution of Wealth

The receipt of inheritance is a contributing factor to the inequalities in wealth and income. The taxes imposed on rich people are used to program disbursement for the benefits of the poor to bring a more equitable economic environment.

5. Back Tax

Estate tax is imposed on the taxes that were not imposed upon the accumulation of properties by the decedent’s estate.

6. Privilege Tax

Transfer of property from the decedent to the heirs is not a right but a privilege granted by the state. Thus, the legislature can impose taxes on succession.

Estate tax accrues at the time of death of the decedent. Under Article 777 of the New Civil Code of the Philippines, the rights to succession are transmitted at the moment of the death of the decedent. Even if the right to succeed passes from the time of death of the decedent, payment of estate tax is required. Section 94 of the Tax Code, as amended, provides that no judge shall authorize the executor or judicial administrator to deliver a distributive share to any party interested in the estate unless a certification from the Commissioner that the estate tax has been paid is shown.

Estate taxation is governed by the statute in force at the time of the death of the decedent [2]

Gross estate shall be determined by including the value, at the time of the decedent’s death, of all property, real or personal, tangible or intangible, wherever situated. Provided, however, that in the case of a non-resident decedent, who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.[3]

There are two (2) kinds of decedent:

1. Resident Decedent

It refers to a resident or citizen of the Philippines at the time of his death. Resident decedent’s gross estate comprises of the value of his real property wherever situated and his personal property, whether tangible or intangible, wherever it is situated.

2. Non – Resident Decedent

It refers to a decedent who is not a resident or citizen of the Philippines. Non-resident decedent shall be taxed only for real and personal properties located in the Philippines.

The following are included as part of the gross estate[4]:

1) Property owned by the decedent;

(2) Decedent’s interest;

(3) Properties not physically in the estate, such as:

(a) Transfers in contemplation of death;

(b) Transfers with retention or reservation of certain rights;

(c) Revocable transfers;

(d) Property passing under a general power of appointment;

(e) Transfers for insufficient consideration; and

(f) Proceeds of life insurance.

Property owned by the decedent

It includes properties actually and physically present in decedent’s estate at the time of his death.

Decedent’s Interest

It refers to interest not yet possessed at the time of death of the decedent but he acquires right over such property at the time of death. An example is partnership profits which have accrued before the death of the decedent.

Transfer in contemplation of death

In transfer in contemplation of death, the thought of death is the controlling motive. The thought of death induces the decedent to transfer his property during his lifetime to avoid the payment of estate tax.

Transfer with retention or reservation of certain rights

It includes a transfer of property but with retention of an interest that results in the prohibition of the transferee to freely enjoy and dispose of the property until the transferor’s death.

Revocable Transfer

It is a transfer made by the decedent during his lifetime where the decedent expressly reserved the right to alter, amend, revoke or terminate.

Property passing under a general power of appointment

It gives the decedent the power to designate or appoint any person, including himself, who shall enjoy and possess certain property from the estate of a prior decedent.

Transfers for insufficient consideration

It is a transfer with consideration on money or money’s worth but it is not a bona fide sale for adequate and full consideration. The amount to be included in the gross estate is the excess of the fair market value of the property at the time of the decedent’s death over the consideration received.

Proceeds of life insurance

The life insurance must be taken out by the decedent upon his own life and the beneficiary is his estate, his executor or administrator. The proceeds of life insurance shall also form part of the decedent’s gross estate if the designation of the beneficiary is generally revocable.

The following are excluded from the gross estate:

1. Separate property of the surviving spouse.

2. The merger of usufruct and the owner of the naked title.

3. Transmission or delivery of inheritance or legacy by fiduciary heir or legatee to the fideicommissary.

4. Transmission from the first heir, legatee, or done in favor of another beneficiary, in accordance with the desire of their predecessor.

5. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions.

6. GSIS proceeds/ benefits.

7. Accruals from SSS.

8. Proceeds of life insurance under group insurance taken by the employer.

9. War damage payments and benefits received from the US Veterans Administration.

10. Transfer by way of bona fide sales.

11. Transfer of property to the National Government or any of its political subdivisions.

At present, based on the Tax Reform for Acceleration and Inclusion (TRAIN) Act, the net estate of every decedent, whether resident or non-resident, shall be subject to an estate tax at the rate of six percent (6%). The standard deduction was increased from One Million Pesos (Php 1,000,000.00) to Five Million Pesos (Php 5, 000,000.00) for a resident decedent, and Five Hundred Thousand Pesos (Php 500, 000. 00) for a non-resident decedent. Such standard deduction is deductible without need of substantiation. However, judicial, funeral and medical expenses are no longer deductible.

Nonetheless, the decedent’s estate may claim for ordinary deductions for claims against the estate, unpaid mortgages, taxes and casualty losses, transfer for public use, property previously taxed falling under vanishing deduction, and the amount received by heirs under Republic Act No. 4917.

The following are the requisites for deductibility of claims against the estate[5]:

1. The liability represents a personal obligation of the deceased existing at the time of his death;

2. The liability was contracted in good faith and for adequate and full consideration in money or money’s worth;

3. The claim must be a debt or claim which is valid in law and enforceable in court; and

4. The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed.

Further, all unpaid obligations and liabilities of the decedent at the time of his death must comply with the substantiation requirements.

For unpaid mortgages or any indebtedness, it must be founded upon a promise or agreement. It is limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth.

The unpaid taxes are deductible provided the taxes are unpaid at the time of death and the taxes accrued before the death of the decedent.

Casualty losses or those arising from fires, storms, shipwreck, or other casualties, or robbery, theft or embezzlement, are deductible when such losses are not compensated for by insurance, and if at the time of the filing of the return such losses have not been claimed as a deduction for income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax.

The property transferred for public use must be transferred to the Government of the Republic of the Philippines or any political subdivision, and the property transferred must be used exclusively for public purposes.

For property previously taxed falling under vanishing deduction, it is deductible provided there must be two (2) deceased persons and the first one is the donor. The second decedent dies within five (5) years after the death of a prior decedent, or in case of a gift, the decedent-donee dies within the same period after the date of the gift. The percentage of deductions shall be as follows:[6]

1. One hundred percent (100%) of the value if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift, within the same period prior to his death;

2. Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

3. Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

4. Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and

5. Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death.

Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917 (An Act Providing Retirement Benefits of Employees of Private Firms) is deductible. It includes retirement benefits from the private firms with private benefit plan. The retiring employee must be at least 50 years old and he availed such benefit plan once. Likewise, benefits granted in case of separation beyond the control of the employee are an allowable deduction.

The family home, as a special deduction, was increased from One Million Pesos (Php 1, 000, 000.00) to Ten Million Pesos (Php 10, 000,000.00). The excess of Php 10,000,000.00 shall be subject to estate tax. The family home must be the actual residential home of the decedent and his family at the time of his death. It must be certified by the Barangay Captain of the locality where the family home is situated. The total value of the family home must be included as part of the gross estate of the decedent.

The filing of a notice of death was repealed. An estate tax return must be filed within one (1) year from the decedent’s death. Estate tax returns showing a gross value exceeding Five Million Pesos (Php 5, 000,000.00) must be supported with a statement duly certified to by a Certified Public Accountant.

Extension of time to pay estate tax is allowed. If the payment of the estate tax or any part thereof would impose an undue hardship upon the estate or any of the heirs, the Commissioner of Internal Revenue may extend the time for payment of such tax or any part thereof not exceeding five (5) years in case the estate is settled through the courts, or two (2) years in case the estate is settled extrajudicially. Also, payment of the estate tax by installment and partial disposition of estate may be allowed in case of insufficiency of cash.

Further, withdrawal from decedent’s bank is allowed subject to a final withholding tax of six percent (6%) of the amount to be withdrawn, provided that the withdrawal shall only be made within one year from the date of the decedent.

Should you have any questions, kindly contact us.

__________________________________________________________________________________

[1] Ingles, I. M. D. (N.D.). Tax Made Less Taxing: A Reviewer With Codals And Cases. Manila: Rex Book Store. [2] Revenue Regulation No. 12-2018 [3] Tax Code, As Amended, § 85 [4] Tax Code, As Amended, § 85 (A)(B)(C)(D)(E)(F)(G). [5] Revenue Regulation No. 12-2018 [6] Ibid. #EstateTax #TRAINLaw #NIRC