CHAPTER II ESTATE AND DONOR’S TAXES1 A. ESTATE TAX 1. Taxpayer and Tax Base The estate tax is imposed on the transfer of the decedent’s estate to his lawful

heirs and beneficiaries based on the fair market value of the net estate at the time of the decedent’s death. It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death of the owner. The Estate Tax is based on the laws in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.

2. Computation of Net Estate a. Gross estate The value of the gross estate of the decedent includes the value at the time of

his death of all property, real or personal, tangible or intangible, wherever situated.2

In the case of a nonresident decedent who at the time of his death was not a

citizen of the Philippines, only that part of the entire gross estate situated in the Philippines is included in the taxable estate.3

Gross estate4 includes property falling under any of the following categories: Decedent’s interest, to the extent of his interest therein at the time of his

death; Transfers in contemplation of death; Revocable transfers;

1 Title III of the National Internal Revenue Code (NIRC) of 1997, as amended.

2 Sec. 85, NIRC of 1997.

3 No estate tax shall be collected in respect of intangible personal property if (a) the decedent at the time of death was a citizen and resident of a foreign country which did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or (b) if the laws of the foreign country of which the decedent was a citizen or resident allows a similar exemption from transfer or death taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.

(Sec. 104, Ibid)

4 Sec. 85(a) to (g), supra.

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Property passing under general power of appointment; Proceeds of life insurance; Prior interests; and Transfer for insufficient consideration. The following are excluded from the gross estate:5 GSIS proceeds/ benefits Accruals from SSS Proceeds of life insurance where the beneficiary is irrevocably appointed Proceeds of life insurance under a group insurance taken by employer (not

taken out upon his life) War damage payments Transfer by way of bona fide sales Transfer of property to the National Government or to any of its political

subdivisions Separate property of the surviving spouse Merger of usufruct in the owner of the naked title Properties held in trust by the decedent Acquisition and/or transfer expressly declared as not taxable Personal Equity and Retirement Account (PERA) assets of the decedent-

contributor.6 b. Net estate7 The net estate is determined by deducting from the value8 of gross estate the

total amount of allowable deductions. c. Deductions In the case of citizens or residents of the Philippines9 Expenses, losses, indebtedness, and taxes consisting of; Actual funeral expenses or five percent 5% of the gross estate, whichever

is lower, but not exceeding Two Hundred Thousand Pesos (P200,000.00);

Judicial expenses of the testamentary or intestate proceedings; Claims against the estate;

5 Source: <http://www.bir.gov.ph/taxinfo/tax_estate.htm> (August 16, 2010).

6 Section 14, Republic Act No. 9505 or the “Personal Equity and Retirement Account (PERA) Act of 2008.”

7 Sec. 86, supra.

8 With the adoption of the zonal valuation scheme under PD 1994, the computation for estate tax purposes of real properties shall be based on the zonal values at the time of death. Where no zonal values are yet approved, the computation shall be based on the schedule of fair market values prepared by the Provincial or City Assessors, or where both values exist, on whichever is higher. See Sec. 88(b), Ibid.

9 Sec. 86(A), supra.

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Claims of the deceased against insolvent persons where the value of such claim is included in the value of the gross estate;

Unpaid mortgages in favor of the estate, under certain conditions. (vi) Unpaid taxes; and (vii) Casualty losses.

Value of property previously taxed (estate or donor’s tax), under certain conditions.

Transfers to or for the use of the Philippine Government or any political subdivision thereof, exclusively for public purposes.

Current fair market value of the decedent’s family home. If the said current fair market value exceeds One Million Pesos (P1,000,000), the excess shall be subject to estate tax. Also, said family home must have been the decedent’s family home as certified by the barangay captain of the locality.

Standard deduction equivalent to One Million Pesos (P1,000,000).

Medical expenses not exceeding Five Hundred Thousand Pesos (P500,000.00), incurred by the decedent within one year prior to his death, duly substantiated with receipts.

Amount received by heirs under RA 4917 10 (retirement benefits of employees of private firms) provided such amount is included in the gross estate of the deceased.

The net share of the surviving spouse in the conjugal partnership property. In the case of a nonresident not a citizen of the Philippines11 That portion of the funeral expenses, losses and indebtedness, and taxes

which the value of the decedent’s gross estate situated in the Philippines bears to his entire gross estate wherever situated;

Value of property previously taxed, under certain conditions, if part of decedent’s gross estate is situated in the Philippines;

Transfers to or for the use of the Philippine Government or any political subdivision thereof, exclusively for public purposes; and

The net share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property.

d. Exemptions12 The following shall not be taxed: The merger of usufruct in the owner of the naked title; The transmission or delivery of the inheritance or legacy by the fiduciary heir

or legatee to the fideicommissary; The transmission from the first heir, legatee, or donee in favor of another

beneficiary, in accordance with the desire of the predecessor; and All bequests, devises, legacies or transfers to social welfare cultural or

charitable institutions, no part of the net income of which inures to the benefit of any individual, provided that not more than 30% of said

10 An Act Providing that Retirement Benefits of Employees of Private Firms Shall Not Be Subject to Attachment, Levy, Execution, or Any Tax Whatsoever.

11 Section 86(B), ibid.

12 Section 87, ibid.

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bequests, devises, legacies or transfers shall be used for administration purposes.

3. Rates of Estate Tax 13

If The Net Estate Is The Tax Shall Be

P Of Excess Over

Over But Not Over

- P 200,000

Exempt

- -

P 200,000

500,000 0 5 P 200,000

500,000 2,000,000

15,000

8 500,000

2,000,000

5,000,000

135,000

1 2,000,000

5,000,000

10,000,000

465,000

1 5,000,000

10,000,000

And Over

1,215,000

2 10,000,000

4. Filing Requirements and Payment of Tax a. Persons required to file notice

of death A written notice of death to the Commissioner of

Internal Revenue shall be filed by the executor, administrator or any of the legal heirs, as the case may be, within two (2) months after the decedent’s death, or within a like period after qualifying as such

13 Section 84, ibid.

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executor or administrator, in all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds Twenty Thousand Pesos (P20,000). 14

b. Persons required to file estate tax returns 15 The estate tax return shall be filed by the executor or administrator, or any of

the legal heirs, in cases of transfers subject to estate tax, or where though exempt from estate tax, the gross value of the estate exceeds Two Hundred Thousand Pesos (P200,000.00) or regardless of the gross value of the estate, where the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the BIR is required as a condition precedent for the transfer of ownership thereof in the name of the transferee.

In case the estate tax return shows a gross value exceeding Two Million Pesos (P2,000,000) it must be supported with a statement certified to by a Certified Public Accountant.

c. Time of filing 16 The estate tax return shall be filed within six (6) months from the decedent’s

death. The Commissioner shall have the authority to grant, in meritorious cases a reasonable extension not exceeding thirty (30) days for filing the return.

d. Place of filing 17 The return shall be filed with an authorized agent bank, or Revenue District

Officer, Collection Officer or duly authorized Treasurer of the City or municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the office of the Commissioner.

e. Payment of tax 18 The estate tax shall be paid at the time the return is filed by the executor,

administrator or the heirs. The Commissioner may grant extension of time not exceeding five (5) or two (2) years depending on whether the estate was settled judicially or extrajudicially.

In case the available cash of the estate is not sufficient to pay its total estate tax liability, the estate may be allowed to pay the tax by installment and a clearance shall be released only with respect to the property the corresponding/computed tax on which has been paid. There shall, therefore, be as many clearances (Certificate Authorizing Registration) as there are as many properties released because they have been paid for by the installment payments of the estate tax. The computation of the estate tax, however, shall always be on the cumulative amount of the net

14 Section 89, ibid.

15 Section 90(A), ibid.

16 Section 90(B), ibid. 17 Section 90(D), ibid.

18 Sec. 91, ibid.

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taxable estate. Any amount paid after the statutory due date of the tax shall be imposed the corresponding applicable penalty thereto. However, if the payment of the tax after the due date is approved by the Commissioner or his duly authorized representative, the imposable penalty thereon shall only be the interest.19

f. Penalties Violations of the estate tax provisions are subject to the applicable common

penalties prescribed under Title X (Statutory Offenses and Penalties) of the NIRC, as amended.

B. DONOR’S TAX 1. Taxpayer and Tax Base The donor’s tax is imposed on the transfer by any

person, resident or nonresident, of property by gift. 20 The taxable base is the fair market value of the total net gifts made by a donor

during the calendar year. a. Coverage of the Tax “Gifts” include real and personal property, whether tangible or intangible,

or mixed wherever situated. In case of a nonresident alien, his real and personal property so transferred but which are situated outside the Philippines are not included as part of the gross gift. 21

The following are considered situated in the Philippines and includible as gifts:

Franchise which must be exercised in the Philippines; Shares, obligations or bonds issued by any corporation or sociedad anonima

organized or constituted in the Philippines; Shares, obligations or bonds by any foreign corporation 85% of the

business of which is located in the Philippines; Shares, obligations, or bonds issued by any foreign corporation if such

shares, obligations, or bonds have acquired a business situs in the Philippines; and

Shares or rights in any partnership, business or industry established in the Philippines, which are to be considered as situated in the Philippines.

The following are the requisites of a donation for purposes of the donor’s tax: Capacity of the donor; Donative intent, or an intent of the donor to make a gift; Delivery, whether actual or constructive, of the subject matter of the gift; and Acceptance of the gift by the donee. b. Exemptions The following gifts or donations are exempt from the donor’s

tax, under certain conditions: 22

19 Sec. 9 (F), Revenue Regulations No. 2-2003.

20 Sec. 98, op.cit. The donations subject to donor’s tax are donations inter vivos or those made between living persons to take effect during the lifetime of the donor. Donations mortis causa or those which are to take effect upon the death of the donor and therefore partake of the nature of testamentary dispositions are subject to estate tax. [ Articles 728, 729, and 734, New Civil Code as cited in Hector S. De Leon, et. al., The National Internal Revenue Code Annotated, Vol. I, 8th Ed., (Manila: Rex Bookstore, 2003) p.619].

21 Section 104, ibid.

22 Section 101, ibid.

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In case of gifts made by a resident of the Philippines: Dowries or gifts made on account of marriage and before its celebration or

within one year thereafter by the parents to each legitimate, recognized, natural, or adopted children to the extent of the first P10,000.00;

Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any of its political subdivisions; and

Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization or research institution or organization provided that not more than 30% of said gifts shall be used by such donee for administrative purposes.

In case of gifts made by a nonresident alien of the Philippines: Gifts made to or for the use of the National Government or any entity created

by any of its agencies which is not conducted for profit, or to any of its political subdivisions; and

Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization, provided that not more than 30% of said gifts shall be used by the recipient for administrative purposes.

3. Donor’s Tax Rate 23 The tax for each calendar year shall be computed on the basis of the total net

gifts made during the calendar year, in accordance with the following schedule:

If The Net Gift Is: The P Of Excess Over

Over But Not Over

- P 100,000

EXE

P 100,000

200,000

0 2 P 100,000

23 Section 99(A), NIRC of 1997.

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200,000

500,000

P 4 200,000

500,000

1,000,000

14,0 6 500,000

1,000,000

3,000,000

44,0 8 1,000,000

3,000,000

5,000,000

204, 1 3,000,000

5,000,000

10,000,000

404, 1 5,000,000

10,000,000

1,00 1 10,000,000

When the donee or beneficiary is a stranger, the tax payable by the donor shall

be 30% of the net gifts.

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Any contribution in cash or in kind to any candidate or political party or coalition of parties for campaign purposes, duly reported to the Commission, shall not be subject to the payment of donor’s tax. 24

4. Filing Requirements 24 a. Filing and contents of returns A return is required in all cases of transfers by gift except those which are

exempt under the NIRC, and shall set forth: each gift made during the calendar year which is to be included in computing net gifts; the deductions claimed and allowable; any previous net gifts made during the same calendar year; name of donee; relationship of the donor to the donee; and such other information as may be required.

b. Time and place of filing and payment The return shall be filed within thirty (30) days after the date the gift is made

and the tax due thereon shall be paid at the time of filing with an authorized agent bank, Revenue District Officer, Revenue Collection Officer or duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of the transfer or if there is no legal residence in the Philippines, with the Office of the Commissioner. In case of gifts made by a non-resident, the return may be filed with the Philippine embassy or Consulate in the country where the donor is domiciled at the time of the transfer, or directly with the office of the Commissioner.

What is Transfer Tax?A transfer tax is imposed on tax on the sale, donation, barter, or any other

mode of transferring ownership or title of real property at the maximum rate of 50% of 1% (75% of 1% in the case of cities and municipalities within Metro Manila) of the total consideration involved in the acquisition of the property or of the fair market value in case the monetary consideration involved in the transfer is not substantial, whichever is higher. This is pursuant to Section 135 of the Local Government Code of 1991 (LGC).

The charge levied by the government on the sale of shares of stock. A charge imposed by thefederal and state governments upon the passing of title to real property or a valuable interest insuch property, or on the transfer of a decedent's estate by inheritance, devise, or bequest.

The states also impose transfer tax on deeds used to convey real property.

You need to pay the transfer tax because the evidence of its payment is required by the Register of Deeds of the province concerned before registering any deed. This is also required by the provincial assessor before cancelling an old tax declaration and issuing a new one in its place. Please do not confuse the transfer tax which is paid to the local

24 Section 3, Commission on Elections’ (COMELEC) Resolution No. 8944 - Rules and Regulations Governing Electoral Contributions and Expenditures in Connection With the May 10, 2010

National and Local Elections (promulgated May 25, 2010). Source: <http://www.comelec.gov.ph/2010%20National_Local/resolutions/res_8944.html> (August 16, 2010)

24 Section 103, ibid.

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government with the transfer taxes due to the BIR (which may either be donor’s or estate taxes).

Disclaimer: While great effort has been taken to ensure the accuracy of the discussion here as of its writing, this is not intended to replace seeking professional services. Always consult with your tax attorneys and read up on the relevant laws and regulations also.

Who should payThe payment of the transfer tax is the responsibility of the seller, donor,

transferor, executor or and administrator.When to payThe deadline for payment is sixty (60) days from the date of the execution of

the deed or from the date of the decedent’s death. Please note too that notaries public are required to furnish the provincial treasurers with a copy of any deed transferring ownership or title to any real property within thirty (30) days from the date of notarization.

Surcharges and penalties for late payments (as per section 168 of RA 7160)Surcharge – No more than twenty-five percent (25%) of the amount of taxes,

fees or charges not paid on timePenalty – No more than two percent (2%) per month of the unpaid taxes, fees

or charges including surcharges, until such amount is fully paid, but in not to exceed thirty-six (36) months or seventy-two percent (72%).

Where to payThe transfer tax is to be paid at the Treasurer’s Office of the city or

municipality where the property is located.RequirementsIn general, the requirements for the payment of transfer tax are the following:Certificate Authorizing Registration from the Bureau of Internal Revenue;Realty tax clearance from the Treasurer’s Office; andOfficial receipt of the Bureau of Internal Revenue (for documentary stamp

tax).

PURPOSES OF TRANSFER TAX:In this broader sense, estate tax, gift tax, capital gains tax, sales tax on

goods (not services), and certain use taxes are all transfer taxes because they involve a tax on the transfer of title.

PURPOSES OF ESTATE TAX:A tax levied on an heir's inherited portion of an estate if the value of the

estate exceeds an exclusion limit set by law. The estate tax is mostly imposed on assets left to heirs, but it does not apply to the transfer of assets to a surviving spouse.

PURPOSE OF DONOR’S TAX:Donor’s Tax is a tax on a donation or gift, and is imposed on the gratuitous

transfer of property between two or more persons who are living at the

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time of the transfer. It shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible.

SUCCESSION:The action of one party, person or product being replaced by another that has

become obsolete, incapacitated, retired or deceased. Ideally, a successor will fill the role of its predecessor, being fully compatible with all other entities in place and perfectly functional without any interruption in service.

SUCCESSION TAX:

Succession tax is the tax upon an interest in real property, whether passing by will or under the law of descent.

A succession tax is a duty or bonus exacted in certain instances by the state upon the right and privilege of taking legacies, inheritances, gifts and successions passing by will, by intestate laws, or by any deed or instrument, made inter vivos, intended to take effect at or after the death of the grantor. The burden or the tax is not imposed upon the property itself, but upon the privilege of acquiring property by inheritance. [In re ESTATE OF MACKY, 46 Colo. 79, 91-92 (Colo. 1909)].

CHARACTERISTICS OF SUCCESSION:

Mode of acquisitionThe property, rights & obligations to the extent of the value of the inheritance

transmittedThe transmission takes place only by virtue of deathThe transmission takes place either by will or by operation of lawThe transmission to another 

REQUISITES FOR TRANSMISSION OF RIGHT TO SUCCESSION (or more correctly stated, time of vesting of the successional right):

Death of the decedentExpress will of the testator calling succession and/or provision of law

prescribing successorsRights or properties are transmissibleTransferee is still alive (didn’t predecease)Transferee is capacitated to inheritAcceptance of the inheritance by the successor 

SUCCESSOR:

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one that follows; especially :  one who succeeds to a throne, title, estate, or office.

KINDS OF SUCCESSION:

1.    Testamentary – succession by will

2.    Intestate – succession in default of a will

3.    Mixed 

Testamentary Capacity

1.    All persons not expressly prohibited by law

2.    18 years old and above

3.    Sound mind

2 Kinds of Wills:

Notarial will – Articles 804-806, & 807-808 in special casesHolographic – Articles 804 & 810 

Common requirements that apply to the 2 kinds of wills       1. In writing2. In a language or dialect known to the testator

REQUISITES FOR VALID NOTARIAL WILL:

In writingExecuted in a language or dialect known to the testatorSubscribed by the testator himself or by the testator’s name written by some

other person in his presence & under his express direction at the end thereof, at the presence of witnesses

Attested & subscribed by at least 3 credible witnesses in the presence of the testator and of one another

Each & every page must be signed by the testator or by the person requested by him to write is name, & by instrumental witnesses in the presence of each other, on the left margin

Each & every page of the will must be numbered correlatively in letters placed on the upper part of each page

Must contain an attestation clause, stating the following:The number of pages of the will

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Fact that the testator signed the will & every page in the presence of witnesses, or caused some other person to write his name under his express direction

All witnesses signed the will & every page thereof in the presence of the testator & of one another

Must be acknowledged before a notary public 

Additional requisite if deaf or mute:

Must either:

      1. Read will personally, if able to do so;            

      2.  Otherwise, he shall designate 2 persons to read it & communicate to him the contents

 

Additional requisite if blind:

Will shall be read to him twice:  

      1.  Once by one of the subscribing witnesses

      2.  Once by the notary public before whom it is acknowledged

REQUISITES OF HOLOGRAPHIC WILL:

In writingExecuted in a language or dialect known to the testatorEntirely written, dated & signed by the hand of the testator himself  AMENDING A WILL:

Notarial will can only be amended through a codicilHolographic will can be amended in 3 ways:Dispositions may be added below the signature, PROVIDED that said

dispositions are also dated & signed  & everything is written by the hand of the testator himself

Certain dispositions or additional matter may be suppressed or inserted PROVIDED that sad cancellation is signed by the testator & is written by the testator himself (no need to be detailed)

Executing a codicil which may either be notarial or holographic 

Effect of cancellation, addition insertion), or erasure on the validity of the will

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If made by the hand of the testator & authenticated by him: alters the will without affecting its validity

If made by the hand of the testator but was not authenticated by him: deemed as if not written at all

If made by testator but not handwritten: entire will is nullifiedBy a stranger & the testator has authenticated the same: entire will is nullifiedMade by a stranger but not authenticated by the testator: deemed as if not

written at all 

What is a codicil?  It is a supplementary or addition to a will, made after the execution of the will & annexed to be taken as part by which any disposition in the original will may be explained, added to or altered.

Qualifications of a witness and a testator:

Witness

At least 18 years oldPhysically fit (not deaf, dumb, blind)Literate, able to read and writeNo prior conviction for perjury/false testimony/falsificationNot the notary public before whom the will is acknowledgedSound mindDomiciled in the PhilippinesSameMay be blind, deaf or deaf-muteNo literacy requirementNo such requirement 

Testator

No such requirement 

REVOCATION OF A WILL:

By implication of lawBy the execution of a documentation with all the requisites of a willBy the physical act of destruction coupled with the intent to revoke 

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PROBATE – It is a the special proceeding by which the validity of a will maybe established  

Matters to be proved in a probate:

Whether the instrument which is offered for probate is the last will and testament of the decedent

Whether the will has been executed in accordance with the formalities prescribed by law

Whether the testator had testamentary capacity at the time of the execution of the will

 

GROUNDS FOR DISALLOWANCE OF A WILL:

The testator did not possess testamentary capacity at the time of executionThe testator failed to comply with prescribed formalitiesThe execution of the will is attended by a vice of consent 

INSTITUTION OF HEIR – an act by virtue of which a testator designates in his will the person or persons who are to succeed him in his property and transmissible rights and obligations

Requisites for a valid institution of heir:

Designation in will of person/s to succeedWill specifically assigns to such person an inchoate share in the estateThe person so named has capacity to succeedThe will is formally validNo vice of consent is presentNo preterition results from the effect of such will 

3 principles in the institution of heirs:

Equality: heirs who are instructed without a designation of shares inherit in equal parts

Individuality: heirs collectively instituted are deemed individually named unless contrary intent is proven

Simultaneity: when several heirs are instituted, they are instituted simultaneously & not successively

 

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PRETERITION:

1.    There must be an omission of one, some or all of the heir/s in the will 

The omission must be that of a COMPULSORY HEIRCompulsory heir omitted must be of the DIRECT LINEThe omitted compulsory heir must be LIVING at the time of testator’s death

or must at least have been CONCEIVED before the testator’s death 

Effects of preterition:

The institution of heirs is annulledDevises & legacies shall remain valid as long as they aren’t officious 

DISINHERITANCE – It is the act by which the testator, for just cause, deprives a compulsory heir of his right to the legitime.  

Preterition vs. Disinheritance Disinheritance Preterition

Express deprivation of legitime

Tacit deprivation of legitime

Always voluntary

May also be voluntary but is presumed to be involuntary (as it’s an omission to mention as an heir or though mentioned, isn’t instituted as an heir) 

Legal cause is present

Presumed by law to be a mere oversight

Even a compulsory heir may be totally excluded

Compulsory heir is merely restored to his legitime

Requisites for a valid disinheritance

Heir disinherited must be designated by name or in such a manner as to leave no room for doubt as to who it is intended

Disinheritance must be for a cause designated by law

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It must be made in valid willIt must be made expressly, stating the cause in the will itselfCause must be certain & true, & must be proved by interested heirs if the

person disinherited should deny itIt must unconditionalMust be total

The compulsory heirs may be classified into (1) primary, (2) secondary, and (3) concurring. The primary compulsory heirs are those who have precedence over and exclude other compulsory heirs; legitimate children and descendants are primary compulsory heirs. The secondary compulsory heirs are those who succeed only in the absence of the primary heirs; the legitimate parents and ascendants are secondary compulsory heirs. The concurring compulsory heirs are those who succeed together with the primary or the secondary compulsory heirs; the illegitimate children, and the surviving spouse are concurring compulsory heirs.

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