ESTATE PLANNING PART 2

Atty. Nicasio C. Cabaneiro, CPA

ESTATE PLANNING is the most powerful tool to control your
heirs' financial future

You will be remembered by the plan you make or fail to make

Your choices will enable or disable your children and grand-

children

Their opportunities and values will be directly tied to your

PLAN
Importance of an Estate Plan
• Without a plan, estate will be distributed according to laws that
may cause your heirs to incur additional legal fees and wasted
time which could have been avoided

• In the absence of estate plan, litigation usually occurs when a

deceased person's property is transferred to heirs especially if
there is conflict among them
Experts Needed in Estate Planning

ESTATE PLANNING is a multi-discipline activity that needs a

team of planners including Lawyer, Accountant, Real Estate
Broker, Trust Officer and Financial Advisor who understand
the legal and managerial intricacies.

However, the most important person to initiate estate planning

is YOU.
Estate Planning Process
5 STEPS IN THE ESTATE PLANNING PROCESS

Formulate
Analyze and
Practical Develop an
Establish Evaluate Implement and
Strategies by Estate Plan
Client's Goals Client's Current Update the
Selecting approved by
and Obj ectives Financial Estate Plan
Suitable Estate the Client
Situation
Planning Tools
STEP 1: ESTABLISH CLIENT'S GOALS & OBJECTIVES

• Financial Planner talks with client to establish

his goals and objectives

• Financial Planner must practice tactfulness in

the discussion since subject matter is private
and related to client's assets and his death

• At this stage, client may be unsure of what he

wants to do with his estate
STEP 1 : ESTABLISH CLIENT'S GOALS & OBJECTIVES - cont.

Examples of Estate Planning Objectives:

• Provide adequate income to dependents
• Provide cash for funeral expenses
• Provide sufficient funds for children's
education

• Create a trust for heirs

• Arrange for Business Succession Program
• Bestow gifts for non-heirs
• Preserve family legacy to the next generation
• Donate to charitable institutions
• Provide gifts for employees
Sample Asset Inventory Worksheet
Template - cont.

A.Background Information - cont.

Provisions you're considering for beneficiaries, check all that apply:
D Gifting Program during my lifetime
D Additional life insurance
D Charitable contribution during my lifetime
D Charitable contribution after my death
Provisions for a business you own
D I have a written Business Continuation Plan

D I wish to have my business liquidated after my death

Sample Asset Inventory Worksheet
Template - cont.
A.Background Information - cont.
Additional Information, check all that apply:
D Significant inheritance is for me, my spouse or my beneficiaries

D I've named a person to act as legal representative in the event of my incapacity or

incapacity of any of my beneficiaries (Durable Power of Attorney)
Name:
---------
D I've named a person to manage the estate after my death (Estate Executor)
Name:
---------
B. Family and Other Beneficiary Information
Full Name Contact No. Date of Birth Relationship Notes
Sample Asset Inventory Worksheet
Template - cont.

C. Asset ln·v entory

C.1 Bank Accounts
Name of Bank Account Name Account No. and Type Amount Beneficiary

Total

C.2 Securities in Certificate Form

Name of Stock/ Bond Stock/ Bond No. No. of Shares Fair Market Value

Total
Sample Asset Inventory Worksheet
Template - cont.
C. Asset Inventory - cont.
C.3 Insurance
Insurance Co. Contact No. Policy No. and Type Beneficiary Face Amount (Net of Loans)

Total

C.4 Real Estate

Type of Property and Location FMV Mortgage Amount Value (Net of Mortgage)

Total
Classification of Assets
ASSETS CAN BE CLASSIFIED INTO 5 BROAD CLASSES:
1. Liquid Assets - include cash, bank savings account, fixed income
deposits, shares of stock, unit trusts, life insurance policies, etc.

2. Immovable Assets- comprise of real estate and offshore

properties, etc.

3. Movable Assets - include motor vehicle, jewelry, art collection,

furniture and fixtures

4. Business Assets - include sole proprietorship or partnership

interest, shares in corporation or private limited companies

5. IntellectualProperties - include intangible asset such as

trademark, copyright, patent, software design, etc.
STEP 2: ANALYZE AND EVALUATE CLIENT'S CURRENT
FINANCIAL SITUATION - cont.
• It is important for Financial Planner to know client's ownership
rights on his assets to determine how these can be transferred
upon his death

• For transfers upon death, properties are classified as Trust

Property or Non-Trust Property
• Trust Property can automatically be passed on to beneficiaries without
being subiect to Probate Laws
Eg. Life insurance policy with a nominated beneficiary is a trust
property
STEP 2: ANALYZE AND EVALUATE THE CLIENT'S
CURRENT FINANCIAL SITUATION -cont.
• Non-Trust Property can only be transferred under a Grant of Probate
which often takes years to complete

• Estate Owner can avoid burdening his beneficiaries with long

delays in settlement, legal hassles or creditors' claims through
having trust properties
STEP 3 : FORMULATE PRACTICAL STRATEGIES BY
SELECTING SUITABLE ESTATE PLANNING TOOLS

• Financial Planner needs to be familiar

with estate planning tools so he can
provide proper advice to client

• Financial Planner must always bear in

mind the importance of preserving
the client's assets
STEP 4 : DEVELOP AN ESTATE PLAN APPROVED BY CLIENT

• After selecting the suitable estate planning tool/s for the client,
the next step is to develop the actual Estate Plan

• Financial Planner must ensure that recommendations comply

with local laws and regulations

• Financial Planner must consult with other professionals such as

lawyers, accountants and trust officers (if necessary)

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STEP 4 : DEVELOP AN ESTATE PLAN APPROVED BY CLIENT
-cont.
Estate Planning Brief can be presented containing the ff. items:
• Summary of the client's financial details for easy reference
• Established goals of the client
• Proposed action plan to meet the client's goals
The following items must also be determined:
• Explain the reasons for choosing selected estate planning tools
• Client's authorization to proceed with the plan
Estate Plan Prereguisites
Development of a sound plan requires full disclosure of the
ff.:
1. List of assets and liabilities of estate owner

2. List of family members

3. Estate Owner's own needs and objectives as well as needs of

his family

4. His existing plan, if there's any

5. Communication between estate owner and estate planner

concerning the existing plan's merits and disadvantages,
available options for improvement and their consequences
Sam~le Format of Estate Plan
a. One's Current Situation
a.1 List of Beneficiaries {Family Members)
a.2 List of Assets and Liabilities

b. Structure the Distribution of Assets

b.1 Detailed recommendations in accordance with one's wishes and
current laws
b.2 Illustration on Proposed Distribution of Assets
ESTATE •
b.3 Tax Implications PLAN
Sam~le Format of Estate Plan (cont.)
c. Will Planning Considerations
c.1 Appointment of Executors and Trustees
c.2 Indicate Powers of Executors and Trustees
c.3 Appointment of Guardians for Minors
c.4 Incapacity Planning

d. Action Plan
d.1 Summary of Recommendations
d.2 Periodic Review
STEP 5 : IMPLEMENT AND UPDATE THE ESTATE PLAN

• Implementation of an estate plan depends on the complexity of

tasks

• It may take as short as 1 month to as long as 2 years for its

completion and implementation

• This may involve the creation of numerous legal documents

• After the implementation state, financial planner also needs to

constantly monitor and update the estate plan (if necessary)
Steps Necessary in Updating Estate Plan

• Financial Planner should keep proper records of the client's

confidential information and existing estate plan

• Financial Planner should remain in contact with the client at least

once every 3 mos. to be updated

• Financial Planner should update the client on any changes in the

economy, law or other factors that may affect client's overall estate
plan

• Financial Planner should encourage the client to inform his

executors and family members about the estate plan
U1>dating }'Our Estate Rian

1. Review existing plan in place

• Check if it still reflects your current wishes given what is

happening in your surroundings

• Will is a crucial part of estate plan. Without it, law decides who
gets your assets and in what shares after your death

• Use of life insurance and trust is a powerful tool so that you can
distribute your assets according to your plan
URdating xour Estate Rian - cont.

2. Look out on your assets

• Make sure that your tangible assets are in good condition (E.g.
Real property, Personal property like jewelry)

• Check documents of your assets (E.g. Real Property Titles,

Bank books, Life insurance policies) and see if it is intact or
stored in proper place

• Determine if you need to purchase more assets for your

family's needs
Updating xour Estate 1>lan - cont.

3. Know the worth of your assets

• Check net value of your assets and see how much has it been
affected by unforeseen events

• Review your investments and see if there is a need to change

where these are invested (E.g. Money invested in equities
shifted to short-term fund due to liquidity needs)

• Review your will and see if gifts for loved ones need adjustment
(E.g. Shares may have lesser value now so one should check if
there is fairness in assets that you give to your beneficiaries)
U1>dating xour Estate Rian - cont.

4. Remember to be charitable

• With the pandemic happening, now more than ever is the time
to help those in need

• You can make a donation to our frontliners or those severely hit

by COVID-19

• You cannot bring your wealth when you die but doing good
works will surely affect your next life
What You Need for an Effective Estate Plan

• Successful estate plan must include provisions to ensure family

members can access or control assets should client b,ecomes
disabled or die

• The ff. are some items every estate plan should include:
1. Will and Trust
2. Durable Power of Attorney
3. Beneficiary Designation
4. Guardianship Designation
5. Letter of Intent .
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6. Healthcare Power of Attorney :: D •.....•..
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What You Need for an Effective Estate Plan (cont.)

1. Will and Trust - important even if client doesn't have huge assets.
Wills and Trusts ensure that assets are passed on to beneficiaries
according to client's wishes

2. Durable Power of Attorney - document that allows an agent or a

person appointed to act on client's behalf and manage his assets in
the event of disability or death

3. Beneficiary Designation - client should designate beneficiaries for

all assets otherwise the court will be left to decide on the fate of
his assets
Check List
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What You Need for an Effective Estate Plan (cont.)

4. Guardianship Designation - allows client to choose the one whom

he thinks will genuinely take care of his child. Without this
designation, court may appoint a family member whom the client
may not approve

5. Letter of Intent - document left to client's executor or beneficiary

indicating what he wants to be done with his asset after
incapacitation or death

6. Healthcare Power of Attorney - document similar to a Living Will

that designates another person to make important healthcare
decisions on client's behalf in the event of incapacity • Chfoc~w
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10 .··_ .
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•
Estate Equalization
• Create a plan that satisfies one's desire to pass along specific assets to
certain individuals but ensuring that each beneficiary is treated fairly
and equitably

• Some assets cannot easily be divided, have fluctuating values and lack
liquidity

• Plan to be developed must consider all assets with respect to its

monetary and emotional value

• Dividing the assets requires careful planning and open discussion with
family members and experts

• Insurance is a good tool to equalize distribution of estate

Tools for Estate Planning

1. Wills ( earlier discussed)

2. And/ Or Bank Accounts

3. Sale of Property

4. Donation of Property

5. Incorporation of Family Assets

• I

6. Trust

7. Life Insurance
2. And/ Or Bank Account
"And/Or" account is a joint account opened by two or more persons
in a bank

Advantages of this tool:

• Surviving bank owners or heirs of the deceased are now allowed to
make withdrawals on the account even if estate tax has not yet been
settled as long as withholding tax is paid

• Joint accounts can be an easy way to plan for incapacity since joint
owner can pay bills and manage investments if the other owner falls ill
or suffer from dementia

.,,,,.
BANK
Sec. 97 Tax Code on Bank Accounts
(Prior to passage of TRAIN law)
"If a bank has knowledge of the death of a person, who
maintained a bank deposit account alone or jointly with another,
it shall not allow any withdrawal from said deposit account
unless the Commissioner has certified that taxes imposed under
Title Ill of the code had been paid."
3. Sale of Property to Heirs

Sale is a contract whereby a seller obliges himself to transfer

ownership of property to a buyer in consideration for the latter's
commitment to pay the equivalent price

Advantages of this tool:

• Once property is sold, it is no longer included in the computation
of the gross estate of the owner
3. Sale of Property to Heirs - cont.

Disadvantages of this tool:

• Buyer must prove financial capacity to pay

• Original Owner no longer has a right on the property

This tool is recommended to owners who have real properties and

would like to transfer these to heirs who have the capability to
purchase these assets.
Use of Sale - Leaseback Deals

• Sale- Leaseback is when the owner of a real property sells it but

continues to live on it as a tenant

• This may involve an entire building or a floor of a building

• This is a good succession tool since the real property is removed

from inventory of the owner's properties
Installment Sale as a Tool for Succession

• Under the tax code, casual sale of a property in an installment sale

arrangement where the initial payment is more than 25% of selling
price is considered a cash sale

• There is already a transfer of title from the seller to buyer so the

property ceases to be in the name of the owner
Tax Conseguence on Sale of Propert}'

• Capital Gains Tax

(applies to Non-business Assets)

• Regular Income Tax

(applies to Business Assets)
Premature Transfer (Lifetime Transfer)

• Premature transfer of property to heirs while owner is still

alive is essentially giving them a gift that is subiect to
Donor's Tax especially if children have no financial capacity
to pay

• Transfer can be done through sale by owner to heirs if the

latter have financial capacity to pay

• Donation and sale of capital assets are both subject to 6%

tax rate after passage of TRAIN law
Transfer b}' Sale vs. Donation

• ONEROUS - Disposition of property for a valuable

consideration (Eg. Sale)

• GRATUITOUS - Disposition of property without valuable

consideration and given out of love and generosity
(Eg. Donation and Inheritance)

For
Sale
~'x v ~lt • •
 Transfer of Properties of an Individual
Properties:
1. Real Property
2. Personal Properties (tangible or intangible)

Transferring of Property Through

I Gratuitous Transfer I I Onerous Transfer j

l
Inheritance
l
Donation
l
Normal Course of Business
(Sale or Exchange)
4. Donation of Property to Heirs

Donation is an act of liberality whereby a donor relinquishes

ownership of property in favor of a Donee who accepts the same,
without any consideration (payment)

Advantages of this tool:

• Donor's tax now has a flat rate of 6% for net gifts made regardless
of the relationship between the Donor and Donee

• Donations not more than Php250,000 per year are exempted

from donor's tax
4. Donation of Property to Heirs - cont.

Disadvantages of this tool:

• Donation partakes the nature of advance inheritance that will be

collated back to the estate when donor dies to ensure that legitime
of heirs is not adversely affected

• Original Owner no longer has a right on the property unless there is

a protective clause on the transfer allowing the former to retain his
right over the property (Usufruct)
4. Donation of Property to Heirs - cont.
This tool is recommended to avoid conflict among heirs if properties
are already distributed before death as agreed upon by all parties.

There will also be lesser estate tax to settle if there are no more big
properties to transfer upon death of owner.
Inter Vivos Transfer

• Inter Vivas Transfer may be accomplished through sale or donation

of properties to beneficiaries

• As per Tax Code, where property is transferred for less than

adequate payment required, the deficiency in payment is deemed as
a gift that is subiect to Donor's Tax

• Vendee-Beneficiary must be financially capable to buy the property

otherwise the transaction will also be construed as a donation
subject to Donor's Tax
5. Incorporation of Family Assets - cont.

Disadvantages of this tool:

• Shares that are transferred to children while parents are still alive are
subject to donor's tax

• Since a corporation is a form of co-ownership, there is vulnerability

for conflict especially in the 2 nd , 3rd and future generations
5. Incorporation of Famil}' Assets - cont.

This tool is recommended if owner has a big estate and would like to
save on tax.

It is also suggested if the intention is to continue family business as a

going concern and that the duty of each heir is clearly defined.

However, owner must be sure that heirs have a harmonious relationship

since this device is prone to disagreements.
Creation of Corporation as Tax Relief

• One way of maximizing tax relief is to organize a corporation and

transfer a portion of real property in exchange for shares of stocks of
the organized corporation

• Tax Code provides tax schemes like under Sec. 40(C)(2) stating tax-
free transfer of properties

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Basic Technique to Incorporate a
Family Business

Sec. 40 (C)(2) of the Tax Code states:

"No gains or loss will be recognized if a person transfers property to a

corporation in exchange for stock and as a result of such exchange,
the person alone or together with others not exceeding 4 persons
gain control of the corporation."
Piercing Corporate Veil not Applicable
to Family-owned Corporation

• The fact that a corporation is owned by one family will not result to loss
of its corporate personality and piercing of its corporate veil

• Doctrine of Piercing the Veil applies only to fraudulent, illegal or

criminal acts
Exchange of Real Pro1>ert}' to
Shares of Stocks

Real Property
....
Individual ..
or Corporation
Parents
Shares of Stock

TAX-free Covenant
Exchange of Real Property to
Shares of Stocks

Shares of Stock
Children Corporation
Let us compare the tax bite on a net taxable real estate asset
worth Php10 million under various alternatives presented.
Sale Sale Estate Tax Donor's Tax Creating a
Corporation
thru tax-free
exchange
-
As Capital Asset As Ordinary Asset 6% on net 6% of net 15% for stocks
(6% gross tax) -graduated rates taxable estate taxable gifts not traded in
of 0%-35% (ind.); the stock
30% (corp.) on exchange
net gain
P600,000 P3.SM max for PG00,000 PG00,000 Pl,500,000
ind./ P3M for
corp.
Assume: No cost Assume: No cost Assume: No Assume: No Assume: No cost
basis basis deduction deduction basis or other
expenses of tax
free exchange
6. Trust
Trust is a fiduciary arrangement that allows a Trustee to hold assets on
behalf of Beneficiary or Truster

It can either be Testamentary (arise upon death) or Inter vivas

(applied while alive)

Advantages of this tool:

• May avoid probate since ownership is transferred from Truster to
Trustee (For Irrevocable Trust)

• Assets held in trust are treated confidentially unlike if one use a will
6. Trust - cont.
Disadvantages of this tool:
• In case of Irrevocable Trust, designation of beneficiary is for good

• Placing assets in trust is subject to Trust Fees

6. Trust - cont.

This tool is recommended to those who have a big estate and would
like the,ir assets to be managed privately, avoid prolonged probate and
obtain Trustee's expertise to administer and protect assets from
dissipation of heirs.

One should just consider if the additional cost {Trust Fee) is worth the
benefits of using this tool.
Trust Arrangement

• Legal agreement that often involves 3 parties: Trustor, Trustee

and Beneficiary
o Trustor - person who creates trust arrangement. Also referred to
as Granter or Settler E.g. Parents

o Trustee - person/ entity responsible for managing the property that

Truster decides to title in the name of trust E.g. Trustee Bank

o Beneficiary - person who is to receive the benefits of property that

is titled in the name of trust E.g. Son/ Daughter

• Sometimes, there are only 2 parties in this arrangement. Trustor

can also be beneficiary of trust
Who can be an Institutional Trustee/
Investment Manager
• Trust Entity can be any Bank, Investment House or Corporation duly
licensed by the Monetary Board of the BSP to perform trust and
fiduciary business

• In the case of Authorized Banks or Investment Houses, Trust or

Fiduciary Business is normally carried out through their Trust
Group/ Division/ Unit.
Living Trust vs. Will
• Trust can avoid cost and delays of probate process and minimize
estate taxes

• Living Trust allows wealth to be transferred during one's lifetime in

a private manner with less complexity than a Will

• Will does not take effect until death and payment of debts
Advantages of Living Trust vs. Will

• Court-controlled Living • No Court Control

Will
• Needs a Lawyer Trust • No Lawyer
• Probate Fees • No Probate

•
Probate
• Delayed
Distribution of
Assets
• No Delays
• Confidential

• Public Disclosure • No Guardians/

Conservators
of Assets

•
Heirs
• Court-appointed
Guardians/
Conservators
Heirs
• No Contest
Clause

• Easily Contested
Trust is a useful and flexible device since it allows ownership
transfer of an asset to an intended heir.

Trust permits you to accomplish a number of succession

planning goals. It may be used for funding a child's education,
providing for handicapped children, or obtaining professional
property management.

To achieve tax savings, one should relinquish ownership of

assets held by trust.
Premature Death

• Premature death especially a breadwinner has

"devastating" impact to heirs (eg. Surviving spouse and
children) who will be left behind
• Primary purpose of life insurance is to provide financial
benefit to dependents upon premature death of an insured
person
• lns,urance policy pays a specified amount called "death
benefit" to named beneficiary when insured dies
• This is very common now that we are experiencing a health
• •
CrlSIS
7. Life Insurance

Life insurance is a protection against financial loss that would result

from the premature death of an insured

Advantages of this tool:

• If beneficiary designated in the policy is irrevocable, insurance
proceeds are exempted from estate tax

• Insurance proceeds are generally income-tax free

Disadvantage of this tool:

• If beneficiary designated in the policy is revocable, insurance
proceeds are still subject to estate tax
Importance of Insurance in Business Entities

Buy-Sell Agreement on Corporations

• Life insurance is usually used by companies to fund buy-sell
transactions triggered by a shareholder's agreement upon death
• In most cases, surviving shareholders are not interested in having
the deceased partner's families involved in business and those
families may not be interested as well
• Insurance proceeds can be used to buy out the business shares
owned by the deceased owner and also provide cash to deceased's
beneficiaries
Business Succession and Insurance

Life insurance creates instant liquidity to enable the deceased's family

to continue business without having to sell an asset at a loss.

A company can own a life insurance policy based on the owner's life.
The company can pay the premiums at the same time be the beneficiary
of the policy.

In case of the owner's death, proceeds are paid tax-free to the

corporation.
 Insurance as an Estate Planning Tool

• Business owners may invest part of the retained earnings in a life

insurance policy owned by the corporation

• Investment income earned from life insurance policy is sheltered

from tax until it is withdrawn

• If investments are retained in the policy until death of the insured

then potentially all investments or death benefit can be paid to
surviving shareholders (Eg. Spouse or children) on a tax-free basis

• This strategy can be used to strip assets from a corporation free of

tax
Uses of Life Insurance in Estate Planning

1. Estate Creation - Life Insurance instantly creates an estate in

the form of insurance policy. Proceeds can be used in build ing an
estate.

+
Php SOOK
Php 10M
Estate 0 Income from
VUL Policy

2. Estate Conservation - Proceeds of Life Insurance may be

used for prompt settlement of outstand1
ing bills such as funeral
expenses and Estate Tax.

Php10M
Estate
0 Php 6OOK
Estate Tax
Uses of Life Insurance in Estate Planning

3. Family Protection - Provide definite sum of money to replace

lost income for the family's benefit. It gives protection in case
of disability, accident, critical illness and death of insured.

4. One can create an inheritance for his child by buying life

insurance policy and naming the child as beneficiary.

5. Insurance provides a form of savings program by reason of

ever-increasing cash value. This is a form of compulsory
savings that many are unable to manage on a voluntary basis.
Uses of Life Insurance in Estate Planning

6. Insurance proceeds are not subject to probate so delays and

expenses of that process can be avoided.

7. Insurance payments are private. Insurance settlements are

known only to insurance companies and payees.

8. Insurance can provide for liquidation of decedent's major

indebtedness.

9. Beneficiaries of insurance policy are not subject to attachment

by policy owner's creditors.
Uses of Life Insurance in Estate Planning

10. Receipt of life insurance proceeds is free from income tax.

11. Business Continuation - owners or partners can use

proceeds of life insurance (company paid) to purchase shares of
deceased stakeholders.

12. Retirement Income - guaranteed source of income for long

years of retirement and maintaining one's lifestyle.
Life Insurance during COVID-19
• Life insurance is an essential element of an estate plan since
it brings financial insecurity in the face of uncertainty such as
the pandemic
• More people are now becoming aware and giving importance
to having insurance given that there is a health risk

• However, job instability and poor personal finances prevent

some people to buy life insurance even if they see a need for
it

• Insurers said that the small number of COVID-19 claims

reflect low penetration of insurance in the Philippines.
Importance of Life Insurance during COVID-19 -
cont.
• Assist in treatment cost - some policies provide
hospitalization income to help in treating diseases like
COVID-19

• Provides financial security - living benefits can be used for

medical expenses and other financial stress such as job loss

• Protect you and your family - having insurance shields you

especially if you have dependents and it is also important to
family members who are senior citizens and those with low
immunity more prone to the illness
Tax Event

Refers to a transaction which would cause a change of

property ownership or right

Examples of a Tax Event

O Sale of Property

0 Donation of Property

0 Inheritance of Property
Conseguence of a Tax Event

Regulatory authorities like the BIR and local government shall

collect taxes upon occurrence of the event
Tax Avoidance
The Supreme Court in the case of ''Delpher Trades
Corporation'' ruled that it is perfectly the legitimate right of
a taxpayer to reduce or avoid his tax liability as long as he
adopt lawful means allowed for Tax Avoidance
Tax Planning
Machinery or vehicle with which to reach the economical
objective of saving on taxes due to the government

Objective of Tax Planning

To make the ESTATE of a person while alive AS SMALL AS
POSSIBLE so that the basis for the computation of Estate Tax will
be small

One must remember that tax is a burden and THE BIGGER THE
ESTATE, THE BIGGER WILL BE THE TAX EXPOSURE
Estate Planning and Estate Tax
• One of its basic precepts is that family security must never be
sacrificed for tax advantages

• But estate planning is an effective means of passing from this world

to the next without passing through the BIR
Estate Taxation
ESTATE TAX is a tax on the right of deceased person to
transfer estate to his lawful heirs. It is not a tax on property.

ESTATE TAX is an Excise Tax imposed on privilege of

transmitting property upon death of owner.

ESTATE TAX is generated by laws in force at time of death.

Rationale for Estate Tax Imposition

• Justified based on the Estate - Government Partnership

Theory

• Estate Tax represents the share of State as a passive and

silent partner in the accumulation of property of the
decedent
State (Government} - Special Heir
• State is regarded as an extraordinary compulsory heir of
decedent, practically taking precedence over all legitimate
heirs in the distribution of decedent's assets

• In effect, Estate Tax allows entry of first stranger to the

family's exclusive property

• If after payment of Estate Tax new obligations of decedent

shall appear, heirs are obligated to restitute a proportional
part of the tax deficiency due to government
Estate Tax Table (Prior to Passage of TRAIN law)

Tax Rates

Effective January 1, 1998 up to Present

If the Net Estat e is :

Over But not Over

:============= :============:
The Tax
Shall be
IB Plus
Of the Excess
Over
:=============::::
:============:::::: :===P=2=0=0,=O=O=.o=o==: :====E=x=e=m=p=t===: D :=============::::
P200,000.00 500,000.00 0
0 P 200,000.00
:::::============ :===========:::::::: ::::==========::::::
500,000.00 2,000,000.00 p 15,000.00 0 ::::============:::::
500,000.00
:::::============:::::
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Formula for Computing Net Estate and
Estate Tax Due
Gross Estate
Less: Allowable Deductions
Estate After Deductions
Less: ½ Net share of Surviving Spouse in Conjugal (or Community)
property, if applicable
Net Taxable Estate
Multiplied by: Estate Tax Rate of 6%*
Amount of Estate Tax Due

*With passage of TRAIN law, estate tax is now 6% of net taxable

estate effective Jan. 01, 2018
Composition of Gross Estate

a. Real and Personal Property (whether tangible or intangible)

b. Taxable Transfers (Transfers in Contemplation of Death,

Transfers for Insufficient Consideration, Revocable Transfers)

c. Proceeds of Life Insurance (beneficiaries are revocably-

designated)
Allowable Deduction for Estate Tax PurQoses

o Standard Deduction - Php 5M (no substantiation required)

In lieu of actual funeral expenses (Php200K), medical expenses
(Php500K), and judicial expenses. TRAIN law increases standard
deduction from Php 1M to 5M

o Family Home - Php 10M (after the passage of TRAIN law)

o Claims against estate

o Unpaid Mortgages, Unpaid Taxes and Casual Losses

Allowable Deduction for Estate Tax Purposes -
cont.

o Claims against insolvent persons

o Property previously taxed

o Transfers for public use

o Amount received by heirs under Rep. Act 4917

Illustration:
ASSETS/ PROPERTIES AMOUNT
Real Properties Php 30,000,000
Personal Properties (Eg. Cash, Stocks) 8,000,000
Family Home 10,000,000
Taxable Transfers 2,000,000
GROSS ESTATE 50,000,000
Less: ALLOWABLE DEDUCTIONS:
Standard Deduction (5,000,000)
Family Home (10,000,000)
Claims against the Estate (1,000,000}
Unpaid Mortgages (3,000,000}
Amount received by heirs
under R.A. 4917 _(1_.0_00_,_oo_o_)_ _ (20,000,000)
ESTATE AFTER DEDUCTIONS 30,000,000
Less: Share of Surviving Spouse {1/2) (15,000,000)
NET TAXABLE ESTATE Php 15,000,000
Multiplied by Estate tax rate of 6% .06
Estate Tax Due Php 900,000
Payment of Estate Tax (after passage of TRAIN law)

a. Filing of Notice of Death - no longer required

b. Filing of Estate Tax Return - must be filed within 1 year after
death of decedent. This used to be 6 months before the passage of
TRAIN law

c. Extension to file return - CIR or Rev. Officer may grant in

meritorious cases a reasonable extension not exceeding 30 days in
addition to 1 year period for filing

d. Payment can now be made through installment, 2 years after the

death of decedent with no incremental penalties

e. CPA certification is now required only if gross estate is above

Php5M, it is up from the previous Php2M estate value
Who are Reguired to File Estate Tax Return
a. Executor, Administrator or any of the legal heirs of
Testator
In all cases of transfer subject to Estate Tax, regardless of gross
value of estate; where said estate consists of registered or
registrable property such as real property, shares of stock or other
similar property for which clearance from BIR is required as a
condition to transfer ownership.
-Amended Sec. 90 of Tax Code

b. When there is no qualified executor or administrator, any

person in actual or constructive possession of property
of the decedent
Stel;;!S to Settle Estate Taxes
Step 1 - Fill out BIR Form 1904 (Application for Registration);
Estate of the Deceased must have a new TIN

Step 2 - Prepare the mandatory documentary requirements for

attachment to the Estate Tax Return

Step 3 - Prepare BIR Form 1801 (Estate Tax Return)

Step 4 - Pay the estate tax as computed

Step 5 - File the return with the RDO having jurisdiction over the
place of residence of the decedent

Step 6 - Wait for the release of the CAR

/
 Sam~le Estate Tax Return (BIR Form 1801 }
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