ISU MODULE TEMPLATE

Subject: BUSINESS TAXATION

Title of the Module
Chapter 9: Estate Tax

CONCEPT AND NATURE OF ESTATE TAX

Estate tax, formerly known as inheritance tax, is imposed on the gratuitous transfer of properties on account of
death. The properties are those acquired by heirs through succession or transfer mortis causa.
The right to succeed on the property is normally effected only upon the death of the decedent. However, transfer
in completion of death is effected while the decedent is still alive. It is properly recognized under the estate tax system.
Estate taxation is governed by the statute in force at the time of death of a decedent. The estate tax accrues as of
the death of the decedent and the accrual of the tax is distinct from the obligation to pay it. Upon the death of the
decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly.
Properties subject to estate tax include real properties, tangible personal properties, and intangible personal
properties of the decedent.

BASIC FORMULA TO COMPUTE ESTATE TAX

The computation of estate tax due and payable requires the correct determination of gross estate, allowable
deductions from the gross estate, and net estate subject to tax.

The basic formula to compute the net estate subject to tax appears as follows:
Gross estate xxxxx
Less: Allowable deductions xxxxx
Net estate subject to tax xxxxx

Another factor that has a significant bearing in the computation of estate tax is the classification of the taxpayer.
CLASSIFICATION OF THE DECEDENT

In relation to the computation of estate tax, decedents are classified as:

1. resident (alien or not) or citizen (resident or not) of the Philippines, or
2. non-resident alien.
It is important to properly classify the decedent because of the following:
1. The gross estate of a resident or citizen includes properties located within and outside the Philippines.
2. The gross estate of a non-resident alien includes properties located within the Philippines.
In case the problem is silent as to the classification of the decedent, it is assumed that the decedent is a resident citizen.
GROSS ESTATE

(Sec. 85, NIRC, as amended)

The composition of gross estate of the decedent can be broadly classified as:

1. properties that are physically present and identifiable in the estate, or

2. properties that are not physically present in the estate.

It is emphasized that the correct computation of estate tax due and payable starts from the proper determination of
decedent's gross estate.
PROPERTIES PHYSICALLY PRESENT IN THE ESTATE

The properties to be included in the gross taxable estate of the decedent depend on whether the taxpayer is
classified as resident or citizen of the Philippines or as non-resident alien.
Resident or citizen of the Philippines

The properties of a resident or a citizen of the Philippines included in the gross estate are:

1. Real properties located within and outside the Philippines. Real properties are those properties that are
attached permanently to the land.
Examples are land, building, and machinery.

2. Tangible personal properties located within and outside the Philippines. Examples of tangible
personal properties are clothing, car, or household appliances and utensils.

3. Intangible personal properties located within and outside the Philippines. Examples of intangible
personal properties are shares of stock, bank deposits, and bonds.

Non-resident alien

A non-resident alien decedent's properties within the Philippines are subject to estate tax.
The value of the gross estate of a non-resident decedent who is not a citizen of the Philippines at the time of his
death shall be determined by including the value of all properties, real or personal, tangible or intangible, at the time of
his/her death. Only the entire gross estate located in the Philippines will be counted.
The gross estate of a decedent non-resident alien includes:
1. real properties located within the Philippines,
2. tangible personal properties located within the Philippines, and
3. intangible personal properties in the Philippines subject to the principle of reciprocity.

Reciprocity clause means that:

a. the decedent at the time of his/her death was a citizen and resident of a foreign country which does not impose a
transfer tax of any character with respect to intangible personal properties of citizens of the Philippines not residing in that
foreign country; and
b. the laws of the foreign country of which the decedent was a citizen allow similar exemption from transfer taxes of
every character with respect to intangible personal properties owned by citizens of the Philippines not residing in that
foreign country

Intangible properties located in the Philippines

The following are intangible personal properties located in the Philippines:

a. Any franchise that must be exercised in the Philippines

b. Shares, obligations, or bonds issued by any corporation or sociedad anónima organized or constituted in the
Philippines in accordance with its laws
c. Shares, obligations, or bonds issued by a foreign corporation, wherein
85% of the business operation is located in the Philippines
d. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations, or bonds have
acquired a business situs in the
 Philippines
e. Shares or rights in any partnership, business, or industry established in the Philippines

It should be noted that shares of stock, obligations like mortgages, and bonds are taxable at the place where they are
physically located.
The general rule is that the situs of the property is the domicile or residence of the owner. However, the said basic
rule is not applicable when a property has a situs other than the domicile or residence of the owner, or when the rule is not
consistent with the provisions of the statute.

PROPERTIES NOT PHYSICALLY PRESENT IN THE ESTATE

The following properties, though not physically present in the estate at the time of death, shall be included as part of the
gross estate of the decedent:

1. Transfers in contemplation of death

2. Revocable transfers
3. Transfer under the general power of appointment
4. Proceeds of life insurance with revocable beneficiary
5. Interest accruing to the decedent at the time of death
6. Claims against insolvent persons
7. Transfer for insufficient consideration
8. Retirement and separation pay received under RA 4917

TRANSFER IN CONTEMPLATION OF DEATH

(Sec. 85(B), NIRC, as amended)

The transfer of properties in contemplation of death includes properties that are no longer in the possession of the
decedent at the time of his/her death because he/she transferred them while he/she was still alive in contemplation of
his/her death.
The law considers the following transfers of properties in anticipation of death:
1. The decedent, while still alive, transferred his/her property where the transfer will take effect only upon
his/her death.
2. The decedent donated a property where the donation will take effect only at or after his/her death.
3. The decedent donated a property where he/she will still enjoy the fruits of the donation while still alive or
designated somebody to enjoy its income.

The impelling cause of the transfer must be the thought of death which includes the disposition of property for the purpose
of avoiding estate tax except in case of a bona fide sale for an adequate and full consideration in money or money's worth.
The following reasons for transfer are not in contemplation of death:

1. to relieve the donor from the burden of management

2. to save income or property taxes
3. to settle the family's litigated or unlitigated disputes
4. to provide independent income for dependents
5. to see the children, enjoy the property while the donor is still alive
6. to protect the family from the hazards of business operation
 7. to reward services rendered

REVOCABLE TRANSFER

(Sec. 85/C), NRC, as amended)

Revocable transfer is a kind of transfer where the owner retains the ownership of the property. It is also
characterized by a transfer in which the terms may be altered, amended, revoked, or terminated by the owner.
The following transfers of properties are considered revocable transfer:
1. Transfer by donation but the owner reserves the power to amend or revoke the donation
2. Transfer by donation and the owner has the option to relinquish the power in anticipation of death

What is material in the transfer is the power of the owner to revoke, amend, or alter the terms and conditions even if it is
not actually exercised.
The recoverability of the transfer is not affected by the failure of the decedent to exercise the power to revoke
during his/her lifetime or before his/her death. If the notice has not been given or the power to revoke was not exercised
before the date of death, such notice or power shall be considered to have been given or exercised on the date of death.
TRANSFER UNDER GENERAL POWER OF APPOINTMENT

(Sec. 85(D), NIRC, as amended)

Power of appointment means a right to designate a person who will succeed or receive the properties of a prior
decedent.
A power of appointment may be either:
1. Limited or special power of appointment. This can be exercised only in favor of certain persons
designated by the prior decedent. In other words, the donee or the holder of the power to appoint is authorized
only among a restricted class or designated classes of persons other than him/her.
2. General power of appointment. This can be exercised in favor of anybody even by the decedent, his/her
estate, or creditors of his/her estate.

Under the general power of appointment, the decedent exercises by will or deed the possession or enjoyment of or the
right to the income from the property. The right, either alone or in conjunction with any person, designates the person who
shall possess or enjoy the property or the income therefrom.
The following are the requisites for inclusion of property passing under the general power of appointment:

1. There is an existence of a general power of appointment.

2. The decedent exercised the general power of appointment by will or by deed.
3. There is passing or transfer of property by virtue of such power of appointment.

If the power to consume or appropriate a property and/or income for the benefit of the decedent is limited to an
ascertainable standard of living pertinent to his/her health, education, maintenance, and support, it is not considered
general power of appointment.
However, if the power to use a property for the comfort, welfare, or happiness of the holder of power is not
considered limited to an ascertainable standard, it constitutes a general power of appointment.
PROCEEDS OF LIFE INSURANCE WITH REVOCABLE LIFE INSURANCE POLICY

(Sec. 85(E), NIRC, as amended)

The following simple guidelines may be observed in relation to the proceeds of life insurance:

1. If the wife, child, or other third person is the beneficiary:

a. The proceeds shall be taxable if the policy is revocable.
b. The proceeds are tax-exempt if the policy is irrevocable.
2. If the estate, executor, or administrator is the beneficiary, the proceeds are taxable whether the policy is
revocable or irrevocable.
3. If the insured transfers a life insurance policy in contemplation of death, the amount included in the gross
estate is the face value of the policy and not the cash surrender value.
4. If the insured names a third person as his/her beneficiary in his/her life insurance policy, and the policy is
irrevocable, thus, the premium paid is a gift from the insured to the beneficiary and subject to donor's tax.
5. If the proceeds of life insurance payable to the person's estate where the premiums were paid from the conjugal
partnership of gains, it is a conjugal property and the other half pertains to the surviving spouse.
6. If the premiums were paid partly with paraphernal and conjugal funds, the proceeds are considered
paraphernal in part and conjugal in part.

The policy shall clearly indicate whether the beneficiary is revocable or irrevocable. In the absence of any clear indication
to that effect, the designation of the beneficiary shall be treated as revocable. Also, the query on whether the power of
revocation has been exercised or not by the decedent is immaterial.
Unless expressly stated by the insured and indicated in the policy that the designation is irrevocable, the
designation of beneficiary is revocable under the Insurance Code of the Philippines.
The following insurance proceeds, should not be included as part of the gross estate of the decedent subject to
estate tax:
1. Insurance proceeds from accident insurance policy
2. Proceeds of group insurance policy taken out by a company for its employees
3. Proceeds of irrevocable life insurance policy received by the beneficiary 4. Proceeds from GSIS and SSS
5. Proceeds of life insurance payable to the heirs of the deceased members of the US and Philippine Army

INTEREST ACCRUING TO THE DECEDENT AT THE TIME OF DEATH

Interest accruing to the decedent at the time of death refers to the value of any interest in property or rights accrued in
favor of the decedent on or before his/her death which have been received only after his/her death.
The income earned by the decedent before his/her death, but collected or received only after, shall be included as part of
the gross estate.
Examples of interest accruing to decedent at the time of death include the following:

1. Dividends declared on or before the death of the stockholder and received by the estate after the death of
said stockholder
2. Profit earned from partnership prior to death of the partner and received by the estate after the death of
said partner
3. Accrued rents, interest income, and other incomes on or before death but collected after death of the
decedent
4. Proceeds of life insurance payable to a revocable beneficiary
5. Rights of usufruct if transferable to the heirs
CLAIMS AGAINST INSOLVENT PERSONS

This amount represents credit extended by the decedent to persons later found by the court to be insolvent. The following
guidelines may be observed in handling claims against insolvent persons:
1. The full amount of the receivable should be included as part of the gross estate of the decedent.
2. The claims against insolvent persons shall likewise be recognized as allowable deduction in full amount
from the gross estate
3. The amount of claims may be reported as exclusive or conjugal depending on whether the claim is
coming from an exclusive or conjugal property.

TRANSFER OF INSUFFICIENT CONSIDERATION

(Sec. 85(G), NIAC, as amended)

Basic guidelines in handling transfer of properties
The following guidelines may be observed in handling the transfer of properties from one person to another:
1. Transfer of properties with full consideration, whether regularly or occasionally made, shall not be
included as part of the gross estate. This is a bona fide sale for an adequate and full consideration of monetary
worth.
2. For transfer of properties with inadequate consideration (insufficient payment), the excess of the fair
market value of the property at the time of death over the value of the consideration received shall be included as
part of the gross estate of the decedent.
3. For transfer of properties without consideration (no payment as in donatio mortis causa), the fair market
value of the property transferred at the time of death shall be included as part of the gross estate.
4. Transfer of properties not in contemplation of death or which will not be effective upon or after death is
considered a donation and subject to donor's tax.
5. If an inter vivos transfer is proven to be fictitious, the total value of the property at the time of death shall
be included as part of the gross taxable estate.
6. If the property transferred is a capital asset, it is subject to capital gain tax (CGT) based on the selling
price or fair market value, whichever is higher. The property transferred shall not be included in the gross estate
of the decedent subject to estate tax.

AMOUNT RECEIVED BY HEIRS UNDER RA 4917

(Sec. 86(A)(7), NIRC, as amended)

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 shall be included as part of the gross estate.
It should be noted, however, that the whole amount received will also be treated as an allowable deduction against
the estate,
For the amount received under RA 4917 to be allowed as part of the deductions from the gross estate of the
decedent, the whole amount received shall be included in the gross estate.
The possible benefits that may be received by a decedent employee from his/her employer are the retirement
benefits and Separation pay on account of employee's death, sickness, or physical disability.

EXEMPTED FROM ESTATE TAX

(Sec. 87, NIRC, as amended)

The following transfers and acquisitions should not be included in the determination of the gross taxable estate subject to
estate tax:
1. The merger of the usufruct in the owner of the naked title
 2. The transmission or delivery of inheritance or legacy by the fiduciary heir or legatee to the fideicommissary
3. The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the
desire of the predecessor
4. All bequests, devices, legacies, or transfers to social welfare, cultural, and charitable institutions, no part of the
net income of which insures to the benefit of any individual, provided, however, that not more than 30% of the
said bequests, devices, legacies, or transfers shall be used by such institution for administration purposes

MERGER OF THE USUFRUCT AND THE OWNER OF THE NAKED TITLE

(Sec. 87(A), NIRC, as amended)

The following terms are defined as follows:
Usufruct is a right granted to enjoy the fruits or benefits of something owned by another person.
Usufructuary refers to the person enjoying the benefits or fruits of a thing not belonging to him/her.
Owner of the naked title refers to the person who has the ownership, control, or title of the property under the
terms and conditions of the usufruct agreement.

Under the usufruct agreement, there are two persons involved, namely:
1. the usufructuary, and
2. the owner of the naked title.

If the usufructuary and the owner of the naked title are vested in one person, there is a merger of the usufruct and the
owner of the naked title. Transfer of properties in this case is exempted from estate tax; hence, the properties transferred
are not included in the computation of the gross taxable estate.
TRANSMISSION OF LEGACY BY THE FIDUCIARY NEIR TO THE FIDEICOMMISSARY

(Sec. 87(B), NIRC, as amended)

The following terms are defined as follows:
Legatee is a personal property transferred by way of succession or donation.
Devisee is a real property made as a gift or transferred through testamentary disposition.
Fiduciary heir is the first heir to the property transferred by way of succession or donation.
Fideicommissary is the second heir of the property. The relationship of the second heir to the first heir must only
be one degree of generation.

Each generation is considered one degree. Thus, there is one degree of collateral relation between the parent to the
child or vice versa; two degrees of collateral relation from the child to the grandparent; three degrees of collateral relation
from the child to the uncle or aunt; and so on.
The transfer of properties from the fiduciary heir to the fideicommissary is not subject to estate tax. It should be noted,
however, that only properties of the fiduciary received from the prior decedent and transferred to the fideicommissary are
excluded in the computation of the gross taxable estate. Properties acquired by the fiduciary during his/her lifetime shall
form part of the gross taxable estate
Transmission from the first heir in favor of another beneficiary in accordance with the desire of the predecessor

(Sec. 87(C), NIRC, as amended)

Properties transferred from the first heir to another beneficiary in accordance with the desire of the predecessor
decedent shall not be included as part of the gross estate of the present decedent.
TRANSFERS TO SOCIAL WELFARE, CULTURAL, AND CHARITABLE INSTITUTIONS

(Sec. 871D), NIEC, as amended)

Properties transferred to registered social welfare, cultural, and charitable institutions shall not be included as part of the
gross estate of the decedent, provided that not more than 30% of the total amount transferred is used for administrative
purposes.
VALUATION OF PROPERTIES IN GROSS ESTATE

(Sec. 58, NIRC, as amended)

The following guidelines may be observed in determining the value of the properties of the decedent:
1. General rule. The gross estate shall be valued at its fair market value at the time of death of the decedent.
2. Real properties. The value of the real properties shall be whichever is higher between:
a. the fair market value as determined by the city or provincial assessor; or
b. the zonal value as determined by the Commissioner of Internal Revenue.
3. Usufruct. To identify the value of the right of usufruct, use, or habitation, as well as that of annuity, the
probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table shall be taken into
account. It is to be approved by the Secretary of Finance upon the recommendation of the Insurance
Commissioner.
4. Personal properties. Recently acquired properties are valued at the acquisition cost while previously acquired
properties are valued at the current market price.
5. Shares of stock, bonds, and other securities:
a. Listed in the stock exchange. These are valued at the fair market value which shall be the mean
between the highest and the lowest quotations at the date nearest the date of death, if none is available on
the date itself.
b. Unlisted in the stock exchange
• Common shares are valued based on their book value
• Preferred shares are valued based on their par value.
In determining the book value of common shares, appraisal surplus as well as the value assigned to
preferred shares, if any, shall not be considered.
6. Insolvent shares or under liquidation. There shall be zero valuation for estate tax purposes.

PROPERTY RELATIONSHIP OF SPOUSES

The following points summarize the previous discussion on properties included as part of the gross estate of the
decedent:
1. The gross estate of the decedent includes (a) properties that are physically present; and (b)
properties that are not physically present at the time of death.
2. The gross estate excludes properties enumerated in Section 87 of NIRC, as amended.
3. The decedents should be classified as a resident or citizen, or a nonresident citizen or alien.
4. Non-resident aliens follow the principle of reciprocity on intangible personal properties in the Philippines.
5. There should be appropriate valuation of the properties in the gross estate.

In addition to the above guidelines, another important point to consider in determining the gross estate is the property
relation of the decedent if he/she is married. Property relationship simply refers to the relationship that will govern the
husband and wife in terms of property ownership. In other words, the concept of prope rty relations applies only when the
decedent is married.
The property relationships of married persons include:
 1. conjugal partnership of gains (relative community of property);
2. absolute community of properties; and
3. complete separation of properties.

CONJUGAL PARTNERSHIP OF GAINS

Conjugal partnership of gains (CPOG) is the property relationship of husband and wife in the absence of any
agreement on marriages celebrated before August 3, 1988.
Under this property relationship, the gross estate of the decedent includes:

1. exclusive properties of the decedent; and

2. conjugal properties.

It should be emphasized that the sum of the exclusive properties of the decedent and the conjugal properties will compose
the gross taxable estate.

Exclusive properties of spouses in conjugal partnership of gains

The following are considered exclusive properties of each spouse under this property relationship:
1. Properties brought to marriage as his/her own
2. Properties acquired by gratuitous title (inheritance or gift) during the marriage
3. Properties acquired or paid from exclusive property
4. Properties acquired by right of redemption, by barter, or by exchange with property belonging to any one of
the spouses

Under the conjugal partnership of gains, the spouses retain the ownership, possession, administration, and enjoyment of
their exclusive properties.
Conjugal properties of spouses in conjugal partnership of gains

The following are conjugal properties under this property relationship of spouses:
1. Properties acquired by onerous title during marriage at the expense of the common fund, whether the
acquisition is for the partnership or for only one of the spouses
2. Properties obtained from labor, industry, work, or profession of either or both spouses
3. The fruits-natural, industrial, or civil-due or received during marriage from common property, as well as the
net fruits from the exclusive property of each spouse
4. The share of either spouse in the hidden treasure which the law awards to the finder or owner of the property
where the treasure is found
5. Properties acquired through occupation such as fishing or hunting
6. Livestock existing upon dissolution of the partnership in excess of the number of each kind brought to the
marriage by either spouse
7. Properties acquired by chance, such as winnings from gambling or betting. However, losses therefrom shall be
borne exclusively by the loser spouse.

Therefore, the conjugal properties of spouses under the conjugal partnership of gains are only those properties acquired by
the spouses after marriage.
All properties acquired during marriage, whether the acquisition appears to have been made, contracted, or registered in
the name of one or both spouses, is presumed to be conjugal unless the contrary is proven.
ABSOLUTE COMMUNITY OF PROPERTY

In the absence of any agreement or when the agreement is void, spouses married on or after August 31, 1988 shall
have their property relations under the absolute community of property (ACOP).
In like manner, the gross taxable estate of the decedent consists of:

1. exclusive properties of the decedent; and

2. community properties.

The sum of the exclusive properties and the community properties shall compose the gross taxable estate of the decedent.
Exclusive properties of spouses in the absolute community of property

The following are exclusive properties under this property relationship of spouses:
1. Properties acquired by inheritance or gift during marriage and the fruits as well as the income of such property
unless expressly provided by the donor, testator, or grantor that they shall form part of the community
properties
2. Properties for exclusive and personal use of either spouse except jewelry
3. Properties acquired before the marriage by either spouse who has legitimate descendants by the former
marriage, and the fruits as well as the income, if any, of such properties

The exclusive property does not become a community property just because it is used by both spouses or their family
members like a family home.
Conjugal properties of spouses in the absolute community of property

In the absolute community of property relationship of spouses, the conjugal properties include the following:

1. properties owned before marriage, and

2. properties acquired during marriage.

Either spouse may dispose by will of his/her interest in the community property.
Neither spouse may donate any community property without me consent of the other. However, either spouse may,
without the consent of the other, make moderate donations from the community property on occasions of family rejoicing
or family distress.
In both property relations of spouses, properties acquired during marriage that cannot be clearly identified as exclusive
shall be treated as conjugal or community properties.
COMPLETE SEPARATION OF PROPERTY

Under this property relation of spouses, all properties before marriage, including the fruits from such properties,
and all properties and income acquired during and after marriage from the exercise of profession or business shall be an
exclusive property of such spouse.
The spouses shall clearly agree during the celebration of marriage that their property relation is to be governed by
complete separation of property.