tax 2 reviewer

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“Everything not saved will be lost.” -Nintendo "Quit Screen" message Page

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ESTATE TAXATION

ESTATE TAX – Estate tax is an excise tax imposed on the privilege of transmitting properties at the time of death. It is also a tax on inter-vivos transfers or transfers made by the decedent during his lifetime that partake and is considered by the tax authorities as taking the form of a testamentary disposition of property. It is not imposed on the property nor on the person who receives the estate nor on the decedent. It is an excise tax.

RATE OF ESTATE TAX: Exempt to 20% PURPOSES OF ESTATE TAX

1. To raise revenues in order to defray the expenses of the government. (Supplements income tax) 2. Facilitates the distribution of wealth so that those who have more gets to be taxed more. 3. To prevent undue accumulation of wealth.

THEORIES WHICH SUPPORTS THE ESTATE TAX

Benefits-Received Theory – The State expects to be paid for the services that it has rendered which you benefited in a system of distribution or property.

Ability to Pay Theory – Those who have more properties to transfer to their heirs upon death shall pay more estate taxes.

Redistribution of Wealth Theory – This is founded upon the principle of reduction of social inequality. The taxes paid by rich people are programmed for disbursement by Congress more for the benefit of the poor in terms of social services, education, health, etc.

State Partnership Theory or Privilege Theory – Succession to the property of a deceased person is not a fundamental right and consequently, the legislature can constitutionally burden such succession with a tax. The government is your partner in increasing you wealth. You get to have that privilege because you have a partner.

CLASSIFICATIONS OF A TAXPAYER FOR PURPOSES OF ESTATE TAX 1. Resident Citizen – Taxable for estate within and without the Philippines 2. Non-Resident Citizen – Taxable for estate within and without the Philippines 3. Resident Alien – Taxable for estate within and without the Philippines 4. Non-Resident Alien – Taxable for estate within the Philippines

RESIDENCE - refers to the permanent home or domicile, the place to which whenever absent, for business or pleasure, one intends to return. WHEN DO YOU DETERMINE THAT AN INDIVIDUAL IS A RESIDENT CITIZEN

1) You have to qualify as a Filipino citizen under the Constitution:

1. Those who are citizens of the Philippines at the time of the adoption of thisConstitution; 2. Those whose fathers or mothers are citizens of the Philippines;

3. Those born before January 17, 1973, of Filipino mothers, who elect Philippinecitizenship upon reaching the age of majority; and 4. Those who are naturalized in accordance with law.

2) You have to establish domicile or permanent residence here in the Philippines. HOW DO YOU BECOME A NON-RESIDENT CITIZEN

1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.

2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.

3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

 most of the time: it means that that particular citizen stays abroad for 183 days or more during a calendar year.

4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.

RESIDENT ALIEN - A person not a citizen of Philippines who establishes permanent residency in the Philippines.

NON-RESIDENT ALIEN - A person not a citizen of Philippines who fails to establish permanent residency in the Philippines. RECIPROCITY RULE AS TO INTANGIBLE PERSONAL PROPERTY OF NON-RESIDENT ALIEN

A decedent’s (NRA) intangible personal property may be subject to transfer taxes both in his place of domicile or residence and in the place where such property has a situs or is located. In order to prevent multiplicity of taxation, the Tax Code provides that the tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country, subject to limitation (Sec. 86[E], NIRC). If reciprocity applies, these intangible personal properties will not be included in the computation of the net estate of the NRA. In all other cases – RA, RC, NRC – their intangible personal property will always form part of the gross estate.

RECIPROCITY RULE: No tax shall be imposed in respect to intangible personal property of the NRA:

a) When the foreign country does not impose transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or

b) When the foreign country imposes transfer taxes but grants similar exemption from transfer taxes in respect of intangible personal property owned by the citizens of the Philippines not residing in that foreign country.

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1. Franchises, patents, copyrights and royalties exercised in the Philippines.

 It may not be registered here in the Philippines as long as it is being used in the Philippines.

2. Shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws;

3. Shares, obligations, or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines; 4. Shares, obligations, or bonds issued by any foreign corporation is such shares, obligations or bonds have acquired business situs

 they are used in furtherance of its business in the Philippines by the foreign corporation in the Philippines

 Example: A US Corporation issued a bond to augment the funds of the corporation in order to expand its operations in the Philippines. That bond is considered as having situs here in the Philippines because it is used in furtherance of its business in the Philippines.

5. Sharesor rights in partnership, business or industry established in the Philippines (Sec 104, NIRC). 6. Bank deposits of banks located in the Philippines.

7. Accounts receivable from debtors residing in the Philippines. PROPERTIES COVERED BY GROSS ESTATE, IN GENERAL

Allpropertiesand interests of the decedent at the time of his death shall be included in his gross estate including transfers akin to a testamentary disposition. The properties includible in the gross estate of the decedent would depend on whether or not the decedent is a citizen or alien and whether or not the alien decedent is a resident of the Philippines at the time of his death.

 Requires ownership but not possession. COMPOSITION OF THE GROSS ESTATE

The decedent’s gross estate includes the following (Except for No 8, all these are considered transfers akin to a testamentary disposition): 1. Decedent’s interest;

2. Transfers in contemplation of death; 3. Revocable transfers;

4. Property passing under general power of appointment; 5. Proceeds of life insurance;

6. Prior interests;

7. Transfers for insufficient consideration; 8. Capital of the surviving spouse (Sec. 85, NIRC) 1. DECEDENT’S INTEREST

The general rule is that all property owned by the decedent has to be included in the gross estate, to the extent of the value of his interest in such property at the time of his death. Thus, if the decedent fully owns a piece of property, the value of such property shall be included in the gross estate. However, if he owns only a proportionate share in the property, or is entitled only to its use, it is only the value of such share or such use that has to be included.

 Requires ownership but not possession.

 The decedent may only own the legal title but not the beneficial ownership or vice-versa.

o Example: Usufruct - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner.

2. TRANSFERS IN CONTEMPLATION OF DEATH

Transfers in contemplation of death cover those which are transfers made during the lifetime but are considered as part of the gross estate. If the motive behind the transfer is due to an impending death that he has been called or he perceives, then the transfers may be in contemplation of death and at the time of his death it will be considered as transfer in contemplation of death and it will be considered as part of his gross estate subject to estate tax.

 Controlling motive is the thought of death which made him dispose of his property regardless of time from the transfer until the time of death.

 Example: Mr. A thinks that he will die 10 years from now. He made a transfer to take effect at the time of his death. Is it a transfer in contemplation of death? Yes as long as it is the thought of death which made him dispose of his property regardless of time from the transfer until the time of death.

 Before, if the transfer was made 3 years before the death of the decedent, it is already considered as in contemplation of death. Now, it is simply the thought of death which makes it a transfer in contemplation of death.

CIRCUMSTANCES TAKEN INTO ACCOUNT INCLUDE:

1) Age and state of health of the decedent at the time of gift, especially where he was aware of a serious illness;

2) Length of time between the gift and the date of death. A short interval suggests the conclusion that the thought of death was in the decedent’s mind, and a long interval suggests the opposite.

3) Concurrent making of a will or making a will within a short time after the transfer. 3. REVOCABLE TRANSFER

A revocable transfer is made when there is a transfer of property with the transferor or decedent retaining the rights to alter, amend, terminate or revoke the transfer during his lifetimewhether or not such rights to revoke, terminate, amend or alter has been exercised. So long as that right remains until the day of his death, it is still under the control of the decedent, it is part of his properties because he actually will enjoy the income, the rights and the enjoyment of the property.

 TAKE NOTE: So long as the transferor will retain those rights until the day of his death, it is as if he has full dominion of his property and it willform part of his gross estate.

 Example:Mrs. J transferred her car to Ms. L with the condition that she reserves the right to revoke the transfer during Ms. J’s lifetime. When Ms. J died, the car will form part of the gross estate of Ms. J.

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 The right to alter, revoke, amend or terminate the enjoyment of the property by the transferee does not need to be actually exercised by

the transferor as long as the right has been reserved, even if it is in conjunction with another person.

o Example: Mrs. J, transferor, along with her husband, may reserve the right to alter, amend, terminate or revoke the transfer during their lifetime.

TRANSFERS WITH RETENTION

Not totally the same as revocable transfers but somewhat takes the form of a revocable transfer because there is a right (to alter,amend, terminate or revoke) that has been retained or reserved by the transferor during the time that the property has been transferred during his lifetime. So long as the transferor has retained those rights until the day of his death, he can still say that he, the transferor, may have at anytime have taken back the property. So it’s equivalent to full dominion over the property, still part of his gross estate as if there was no transfer made.

This may fall under Revocable Transfer or Transfers In Contemplation of Death, provided that the retention of the right relating to an intention of controlling the property.

Example: You retain the right to income while you transfer the property during your lifetime and the enjoyment of the income is retained until your death. It may be considered a transfer in contemplation of death rather than a bona fide transfer.

4. PROPERTY PASSING UNDER GENERAL POWER OF APPOINTMENT

A “power of appointment” refers to a right to designate the person or persons who shall enjoy or possess certain property from the estate of a prior decedent.

GENERAL

It is “general” when it gives to the donee (decedent) the power to appoint any person he pleases, including himself, his spouse, his estate, executor or administrator, and his creditor, thus having as full dominion over the property as though he owned it.

 Example: Mr. A, during his lifetime gave a painting to Mrs. B along witha general power of appointment. Mrs. B appointed Mrs. C to enjoy or possess the painting. When Mrs. B dies, this painting will be considered part of her gross estate.

SPECIAL

It is “special” when the donee (decedent) can appoint only among a restricted or designated class of persons other than himself. The power to dispose of property at death by the exercise of a general power of appointment is equivalent of ownership.

5. PROCEEDS OF LIFE INSURANCE

The life insurance policy must be taken out by the decedent himself. If it is not taken by the decedent himself, it shall not be part of the estate.  Taxation of the proceeds of life insurance will depend on the designated beneficiary and the manner of designation of such beneficiary,

such that if the beneficiary is the estate itself, the executor or the administrator, IT FORMS PART OF THE GROSS ESTATE regardless of the manner of designation.

 If the beneficiary is other than the estate, executor, or administrator and the designation is revocable (which is the default in the insurance code), THE INSURANCE PROCEEDS FORM PART OF THE GROSS ESTATE.

 If the beneficiary is other than the estate, executor, or administrator and the designation is irrevocable, THE INSURANCE PROCEEDS WILL NOT FORM PART OF THE GROSS ESTATE. The transfer is absolute and the insured did not retain any legal interest in the insurance.  Example: Mr. A secured a life insurance in favor of his estate for P1M. Later on, Mr. A died and the proceeds of the insurance policy is

now collected. Is it subject to income tax? No, it is exempted from income tax. Is it subject to estate tax? Yes, regardless of the manner of designation.

o What if the beneficiary is the girlfriend of Mr. A?Is it subject to income tax? No. Is it subject to estate tax? It depends on the revocability of the designation.

o What if the company of Mr. A secures a life insurance for the benefit of the girlfriend of Mr. A. The designation is irrevocable. Is it subject to income tax? Yes. How about estate tax? No, because it is the company was the one who secures the insurance. The revocability of the designation is irrelevant.

6. PRIOR INTERESTS - No longer relevant now considering that the law has been in effect for more than 17 years now. 7. TRANSFERS FOR INSUFFICIENT CONSIDERATION

If during the lifetime of the decedent, he has entered into transactions for inadequate or insufficient consideration, the property that was sold for insufficient consideration will still form part of his gross estate at the time of his death provided that no prior donor’s tax has been paid on the said transaction. The law does not provide for a time frame wherein transfers may be classified as one with insufficient consideration. For as long as it transpired during the decedent’s lifetime, it should be included in the gross estate. In transactions TANTAMOUNT TO A FICTITIOUS SALE OR SIMULATED SALE, where no consideration was in fact given, the FMV at the time of death less the consideration paid, will form part of the gross estate of the decedent.

 TAKE NOTE: Do not include Capital Assets subject to Capital Gains Tax for purposes of Transfers for Insufficient Consideration.

 Classification of the property matters because if the sales involves a capital asset which is subject to Capital Gains Tax, the tax on that transfer has already been accounted for, based on an assumed gain. Thus, it can no longer be considered as transfers for insufficient consideration for purposes of Estate Tax. The property can no longer ba taxed again.

o Example: Mr. M owns a land with a Fair Market Value of P1M. He sold the land to Mr. X for P200K (selling price). When Mr. M dies, such transfer would no longer be considered as transfer for insufficient consideration and the land will not form part of his gross estate because the asset has already been subjected to CGT.

 For properties which falls under Transfers for Insufficient Consideration, you have to consider the FMV of the property at the time of the death of the decedent.

o Example: Mr. M, during his lifetime, sold a property with a FMV of P1M for a gross selling price of P200,000. At the time of his death, the FMV of the property is P1.5M. The amount that will formed part of his gross estate would be P1.3M (P1.5M – P200K) o Had the FMV of the property gone down to P400K at the time of Mr. M’s death, the amount that will formed part of his gross

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TAKE NOTE: In all the transfers akin to testamentary disposition, the exception is when the transfer is made bona fide for an adequate and full consideration in money or money’s worth.

The last two will form part of the gross estate of the decedent but will later be deducted as part of the Deductions: 8. CAPITAL OF THE SURVIVING SPOUSE

9.REPUBLIC ACT No. 4917 - An act providing that retirement benefits of employees of private firms shall not be subject to attachment, levy, execution, or any tax whatsoever. The retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action. Provided:

1. That the retiring official or employee has been in the service of the same employer for at least ten (10) years and 2. Is not less than fifty years (50) of age at the time of his retirement

3. Availed of by an official or employee only once:

4. That in case of separation of an official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, any amount received by him or by his heirs from the employer as a consequence of such separation shall likewise be exempt as hereinabove provided.

 The term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his officials and employees, wherein contributions are made by such employer or officials and employees, or both.

ACQUISITIONS AND TRANSMISSIONS NOT SUBJECT TO ESTATE TAX

These involve transfers or transmittals which do not give rise to estate tax even though it is in some way connected to someone’s prior death. 1. MERGER OR USUFRUCT IN THE OWNER OF THE NAKED TITLE

This involves a situation where upon the death of a decedent, property is transferred to one person (usufructuary) giving the latter the right to enjoy the property, and to a second person (naked or beneficial owner), the naked title to the property.

When the usufructuary dies and that the enjoyment of the property is transferred to the naked owner (merger), this transfer is not subject to estate tax because the same property has already been subjected to tax upon the decedent’s death. The transfer between the decedent and the usufructuary has already been subjected to estate tax. The subsequent transfer from the usufructuary to the naked owner should be therefore no longer taxed.

Example: Upon the death of Mr. D, the naked title of his property is transferred Mr. N, and the usufructuary of the same property to Mr. U. Upon the transfer of the property from Mr. D to Mr. U, such property will be subjected to estate tax. When Mr. U dies and the enjoyment of the property will be merge with the naked title of Mr. N, the property will no longer be subjected to estate tax.

2. TRANSMISSION BY THE FIDUCIARY HEIR OR LEGATEES TO THE FIDEICOMISSARY

This involves fideicomissary substitution wherein the decedent provides in his will that upon the death of the fiduciary heir, the property shall be transferred to the fideicomissary heir.

The subsequent transfer (from fiduciary heir to fideicomissary) shall be free from estate taxation because the same property has already been taxed upon the first transfer.

Example: Mr. A died, in his will, he named Mr. B as the fiduciary heir and Mr. C as the fideicommissary. Upon the transfer of the property from Mr. A to Mr. B, the fiduciary heir, it will be subjected to estate tax. Upon the death of Mr. B and the transfer of the property from Mr. B to Mr. C, the fideicommissary heir, the property will no longer be subjected to estate tax.

Review: Requisites of Fideicommissary Substitution:

1) There must be a first heir (fiduciary) called primarily or preferentially to the enjoyment of the property. 2) There must also be a second heir (fideicommissary).

3) There must be an OBLIGATION CLEARLY IMPOSED upon the first heir to PRESERVE AND TRANSMIT to the second heir the whole or part of the inheritance

4) The first and the second heirs must be only one degree apart.

5) Both heirs must be alive, or at least conceived, at the time of the testator’s death.

3. TRANSMISSION FROM THE FIRST HEIR, LEGATEE OR DONEE IN FAVOR OF ANOTHER BENEFICIARY (in accordance with the desire of the predecessor)

This contemplates a situation where the decedent’s will provides that his property shall be transmitted to two heirs proportionately. The subsequent transfer from the 1st heir to the 2nd heir will not be subject to estate tax if such transfer was made in accordance with the will of the decedent. This is so because the estate tax has already been imposed on the 1st transfer.

Example: If in the will of decedent A there will be two beneficiaries, B and C, each given ½ of the property, if B transfers his half to C thereby making the property whole, this 2nd transfer is NOT SUBJECT TO ESTATE TAX.

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4. BEQUESTS, DEVISES, LEGACIES OR TRANSFERS TO SOCIAL WELFARE, CULTURAL AND CHARITABLE INSTITUTIONS

This transfer also includes transmissions made to NON-STOCK, NON-PROFIT EDUCATION INSTITUTIONS. Although not included in the enumeration provided for under the NIRC, such exemption is provided for in Art. XIV, Sec. 4(4) of the 1987 Constitution which provides that bequests to be actually, directly and exclusively used for educational purposes shall be exempt from tax.

Requisites for this transmission to be considered non-taxable: 1. Transfer to a social welfare, cultural and charitable institutions; 2. No part of the income inures to the benefit of any individual; and 3. Not more than 30% of the said bequests, devises, legacies or transfers 5. OTHERS

The other transmissions of property or receipts/proceeds of the estate of the decedent that are not subject to estate tax are the following: a. Benefits received from SSS or GSIS;

b. Benefits received from U.S. Veterans Administration;

c. War benefits given by the Philippine government and U.S. government due to damages suffered during the war; d. Grants and donations to the Intramuros Administration;

e. If the decedent holds a property in trust for someone else, usually a beneficiary, the general rule is that it does not form part of the estate of the decedent because ultimately, it will be in favor of the beneficiary, unless it falls under the general power of appointment over which the decedent has been holding on to it with the free reign to designate himself as the ultimate beneficiary;

f. Transfers by way of bona fide sales of adequate and full consideration;

g. Life insurance proceeds from GSIS and from private insurance companies so long as the beneficiary designated irrevocably is a third person other than the estate, administrator, executor. It will never form part of the gross estate of the decedent; anf

h. Capital of the surviving spouse. Even if initially we consider the assets of both spouses during lifetime, we eventually exclude the exclusive properties of the surviving spouse.

FORMULA ESTATE TAX Gross estate

Less: Deductions

Less: ½ share of surviving spouse Net estate

X Estate Tax Rates Estate tax due Less: Tax Credits Estate tax payable Nov. 18, 2014

TAKE NOTE: Transfers with retention may fall either: (1) Revocable Transfers; or (2) Transfers in contemplation of death, provided that the retention of the right could be relating to an intention of controlling the property.

Example: you retain the right to receive income while you transfer the property during your lifetime and the enjoyment of the income is retained until your death, then it may be considered as transfer in contemplation of death. Except if the transfer involves a consideration which is substantial and adequate paid by the transferee.

But for it to be considered as revocable transfer, what has to be retained is THE RIGHT TO ALTER, AMEND, REVOKE, or TERMINATE THE TRANSFER. DEDUCTIONS ALLOWED TO THE ESTATE OF CITIZEN OR A RESIDENT:

A. EXPENSES, LOSSES, INDEBTEDNESS AND TAXES (ELIT) (1) Expenses, Losses, Indebtedness, and taxes. –Such amounts: 

(a) For actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed Two hundred thousand pesos (P200,000);

(b) For judicial expenses of the testamentary or intestate proceedings;

I For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan;

(d) For claims of the deceased against insolvent persons where the value of decedent’s interest therein is included in the value of the gross estate; and

(e) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, but not including any income tax upon income received after the death of

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the decedent, or property taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth. There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91.

1) FUNERAL EXPENSES

For expenses to be considered under this category, such expenses must be incurred from the moment of death until interment/burial.

Example: if you write a thank you letter to those who attended the burial, a year after the burial. --- no longer deductible because the expenses should be incurred FROM the moment of death UNTIL interment.

If the thank you letter was given out on the day of the funeral --- it can be deducted. Provided that it has to be simultaneous. The following are considered funeral expenses:

- Mourning apparel of the surviving spouse and unmarried minor children of the deceased, bought and used on the occasion of the burial - Expenses for the deceased’s wake, including food and drinks

- Publication charges for death notices (obituaries)

- Telecommunications expenses incurred in informing relatives of the deceased

- Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In case the deceased owns a family estate or several burial lots, only the value corresponding to the plot where he is buried is deductible.

- Interment and/or cremation fees and charges

- All other expenses incurred for the performance of the rites and ceremonies incident to interment Funeral expenses will not be deducted outright. The amount allowable as deductions is:

- The amount actually paid or incurred; OR 5% of the gross estate, WHICHEVER IS LOWER - But in no case to exceed P 200,000

2) JUDICIAL EXPENSES

These are incurred with respect to settlement of the estate, testamentary or intestate. CIR vs CA, CTA and Pajonar

- Judicial expenses are expenses for administration

- Deduction is limited to such administration expenses as are:

(1) actually and necessarily incurred in the collection of the assets of the estate, (2) payment of the debts, and

(3) distribution of the remainder among those entitled thereto - Such expenses may include:

o executor’s or administrator’s fees, o attorney’s fees,

o court fees and charges, o appraiser’s fees, o clerk hire,

o costs of preserving and distributing the estate and storing or maintaining it, o brokerage fees or commissions for selling or disposing of the estate, and the like.

- the notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement effected a distribution of Pedro Pajonar’s estate to his lawful heirs.

- Similarly, the attorney’s fees paid to PNB for acting as the guardian of Pedro Pajonar’s property during his lifetime should also be considered as a deductible administration expense. PNB provided a detailed accounting of decedent’s property and gave advice as to the proper settlement of the latter’s estate, acts which contributed towards the collection of decedent’s assets and the subsequent settlement of the estate.

Take note of the 3 general classifications of judicial expenses as mentioned in the Pajonar case.

But under the law, there is a reckoning point for which these judicial expenses will be allowed as deduction:

- Within 6 months from the death of the decedent which coincides with the date of filing of the estate tax return - Or within the 30 days extension granted by the Commissioner under meritorious cases.

TAKE NOTE:

- For FILING of Estate Tax Return:

o Within 6 months from the death of the decedent; or

o Within the 30 days extension (this is on top of the 6 months period) granted by the Commissioner under meritorious cases - For PAYMENT of Estate Tax Return:

o GR: paid at the time the ETR is filed

o EXCEPT: if it will impose UNDUE HARDSHIP on the estate, extension of time of payment is allowed—  Within 5 years for judicial settlement

 With 2 years for extrajudicial settlement 3) LOSSES

These losses are:

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2) Losses from robbery

3) Losses from theft

4) Losses from embezzlement

These are the same type of losses that can be deducted in your income tax for estate.

Similar as that of the losses under income tax of estate, if the loss or portion thereof is covered or indemnified by insurance, that loss or that portion of the loss is NOT DEDUCTIBLE.

Does the executor or administrator of the estate have the option to deduct these losses from the income tax of the estate or from the gross estate of the decedent? After all they refer to the one and the same type of losses?

- The law states: “and if at the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax return”. Take note of that. That tells us that the executor and the administrator has the option to either deduct it from the income or from the gross estate.

- The rule is that it is mutually exclusive. Once you already opted to deduct it from the income tax. You cannot deduct it anymore from your gross estate.

When should the losses be incurred?

- From the death of decedent until the DATE OF PAYMENT. It also mean that because the law says “provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91” only, it precludes losses that incurred during the 2 year or 5 year extension of payment as mentioned in subsection (B) of Section 91. So again you refer to what the law says.

- IOW, do not include losses incurred during the extension of payment. 4) CLAIMS AGAINST THE ESTATE

Dizon vs CA

- the term “claims” required to be presented against a decedent’s estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions.

Basis of this type of claim: date-of-death valuation or the value at the time of death of the decedent Reason why the SC use the date-of-death valuation principle in the Dizon case:

- First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation.

- Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term “claims” required to be presented against a decedent’s estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions.

ATTY A.: In other words, whatever is the value during the lifetime of the decedent should also be the value of the claims when you compute for the estate tax.

The requirements for the deductibility of claims against the estate are:

a. Must be a personal obligation of the deceased existing at the time of his death (except unpaid funeral expenses and unpaid medical expenses);

b. Liability must have been contracted in good faith and for adequate and full consideration in money or money’s worth;

- Example of debt contracted in bad faith: When the decedent obtained a loan at the time when he knew that he will only be living for 2 months. So such contracted debt will not form part of claims against the estate.

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

d. Indebtedness not condoned by the creditorduring the lifetime of decedent or the action to collect from the decedent must not have prescribed

e. General rule: Must be duly substantiated.

- Just like funeral expenses, you cannot claim funeral expenses w/o presenting receipts, invoices for the costs. If the claim against the estate arose from a contract of loan or a promissory note, the following additional requirements are needed:

a. The debt instrument must be duly notarized at the time the indebtedness was incurred

- Except: Loans granted by financial institutionswhere notarization is not part of the business practice/policy of the financial institution-lender

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c. Proof of financial capacity of the creditor to lend the amount at the time the loan was granted, as well as its latest audited balance

sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor

d. A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within 3 years prior to the death of the decedent.

If the claims against the estate arose from a simple purchase of goods or services, it need not be substantiated by a contract or a promissory note. They are usually substantiated by invoices and receipts for the purchase of the goods or services – a certification from the creditor still that the amount is collectible, including interest.

If the debt is condoned, the general rule is that it should not be deductible.

Except: If the debt is condoned after the death,the same is deductible. Condonation should be taken at the point of death. (This exception goes against the lifeblood doctrine. Furthermore, whether or not the condonation is before or after the decedent’s death, such will not reduce his estate. The most plausible view must be to favour the lifeblood doctrine and that any condonation of debt must be non deductible. Nonetheless, the exception is upheld because of jurisprudence.)

5) CLAIMS AGAINST THE INSOLVENT

It is the decedent who is the creditor who has extended a loan but can no longer collect the loan because the debtor is already insolvent. A person is insolvent when his liabilities exceeds his assets.

For claims against insolvent persons to be deductible from the gross estate (Sec. 86(d), it is important to show that: a. The amount of said claims has been initially included as part of his gross estate; and

b. The incapacity of the debtors to pay their obligations is proven, not merely alleged. CLAIMS AGAINST THE CLAIMS AGAINST THE

ESTATE INSOLVENT

Decedent is DEBTOR Decedent is the CREDITOR Claim is a PAYABLE Claim is a RECEIVABLE Need not be included first in

the gross estate

The value needs to be included first gross estate before it could be deducted 6) UNPAID MORTGAGES OR INDEBTEDNESS

Requisites in order for unpaid mortgages to be deductible against the gross estate:

a. The FULL VALUE of the decedent’s interest in the property encumbered by such mortgage or indebtedness is included in the value of the gross estate;

- The value pertains to the property’s FMV at the time of the death of the decedent on the mortgaged property.

- Where the indebtedness was secured by mortgage of a real property situated outside the Philippines, the value may not be deducted because the same is not includible in the gross estate for the reason that the decedent at the time of his death was a non-resident alien.

- In an accommodation mortgage, the value may be deductible as long as the executor records the same as a receivable. Otherwise, it is non-deductible.

b. Such deduction shall be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth, if such unpaid mortgages or indebtedness were founded upon a promise or an agreement;

- Where the decedent owned only ½ of the property mortgaged, only half of its value should be included in the estate and thereafter deductible. This is true even if the executor paid the entire mortgage debt, inasmuch as the executor would be subrogated to the rights of the mortgagee as against the co-owner and co-mortgagor.

c. The mortgage must be contracted during the lifetime of the decedent.

It must be a mortgage personally contracted by the decedent. Otherwise, if the heirs were the ones who mortgaged the property, the value is not deductible.

7) UNPAID TAXES

Requisites for unpaid taxes to be deductible against the gross estate:

a. The taxes must have accrued as of the death of the decedent or prior to the death of the decedent.

- The reckoning point is the point of death. So all taxes which accrue during the lifetime of the decedent up to the point of death is considered deductible against the gross estate. Note that the gathering of the gross estate is always reckoned upon the date of death. Any taxes accruing after death will be considered as a separate taxable entity.

- Property taxes accrued prior to the decedent’s death, unpaid taxes on income received by decedent during his lifetime, donor’s taxes which are unpaid upon death are properly deductible against the estate.

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- The same rules apply to real property taxes. However, the difference lies in the due date when the real property taxes shall be paid. In income tax, the taxes shall be due on or before the 15th of April following the close of the taxable year. Real property taxes are due once every January 1.

b. They were unpaid as of the time of death

c. This deduction shall not include income tax upon income received after the death, or property taxes not accrued before his death, or the estate tax due from the transmission of his estate.

ATTY. A:

- So if unpaid taxes, the reckoning point is the date of death of the decedent. Even if it is already incurred, so long as it is not yet paid, you can deduct it from the estate tax up to the point of death. So thereafter, it is no longer deductible.

- But fore real property tax, it’s due for payment on every January 31. It accrues on January 1, and should be paid on January 31. But it follows a “pay first, incur later” principle. Example, my property tax for this year 2014, I already paid it way back January 2014. And then I died in October 2014, i cannot anymore deduct my real property tax because I already paid it on January. (??? Wa ku kasabot ani nga part)

B. TRANSFERS FOR PUBLIC USE

(3) Transfers for Public Use.- The amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes. 

 Requirements to be deductible:

- The whole amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the RP, or any political subdivision thereof, for exclusively public purposes shall be deductible from gross estate, provided such amount or value had been included in the gross estate.

- The transfers to the government or political subdivisions include only provinces, cities, municipalities and barangays. IT DOES NOT INCLUDE GOCCs.

- It must be in writing. It must be a testamentary disposition.

 For bequests to charitable institutions, social welfare, etc., they are not deductible since in the first place, they are exempt transmission of property. In other words, they are not includible in the gross estate. Unlike a deduction which must first be included as part of the gross estate and subsequently deducted.

 If the TFPU has been previously made during the lifetime and prior to the death of the decedent, it will not form part of the gross estate of the decedent.

 Not all transmissions to the government are deductible. What is contemplated under the law are transfers for public use, if the purpose is private, it is not deductible.

 TFPU are allowable deduction in order to encourage decedents to put into writing or in the will or to make transfers to the government, to give them incentives such as deductions and exemptions from tax.

C. VANISHING DEDUCTIONS

(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming a part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received:

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

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

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

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

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

These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in

Jan. 1

Oct. 1 (death)

Dec. 31 Income earned BEFORE

death - DEDUCTIBLE

Income earned AFTER death – NOT DEDUCTIBLE

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the decedent's gross estate, and only if in determining the value of the estate of the prior decedent, no deduction was allowable under paragraph (2) in respect of the property or properties given in exchange therefor.

Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said Subsection shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under said paragraph (2) bears to the value of the decedent's estate. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction. This refers to properties previously taxed. There must have been a previous tax paid on the property.

Requirements to be deductible:

1) Prior Transfer. There is a prior decedent or donorwho gave a property;

- Prior transfer could either be a prior donation or a prior death because the tax imposed in the prior transfer here could be an estate tax or a donor’s tax.

2) Death. The present decedent died within 5 yearsafter receiving the inheritance from the prior decedent or gift from the prior donor; 3) Identity of the Property. The property with respect towhich deduction is sought can be identified as the one received from the prior

decedent or the donor, or as the property acquired in exchange for the original property so received;

- IOW, it should be the same property as what was previously taxed or it could be that the property is no longer in the hands of the decedent so long as you can identify the property for which it was exchanged for.

4) Inclusion of the Property. The property must formpart of the gross estate of the present decedent.

5) Previous Taxation of the Property. The estate tax onthe prior succession, or the donor’s tax on the gift, must have been finally determined and paid by the prior decedent or by the donor as the case may be.

6) No Previous Vanishing Deduction on the Property.No such deduction on the property, or the property given in exchange therefore, was allowed in determining the value of the net estate of the prior decedent.

- It is incorrect to say that vanishing deduction is only allowed once every 5 years because it could happen that within 5 years from the first transfer, vanishing deductions could happen twice. JUST REMEMBER THAT there could be NO SUCCESSIVE DEDUCTIONS FOR VANISHING DEDUCTION BUT THERE COULD BE MULTIPLE VANISHING DEDUCTIONS for the same type of property.

7) The property should be located in the Philippines.

FORMULA:

FMV (prior or present, whichever is lower) Less: Mortgage payments

INITIAL BASIS

Less: Allowable Deductions = [(ELIT+TPU)x(IB/GE) DEDUCTION BASIS

x Vanishing rate

VANISHING DEDUCTION ALLOWED

*ELIT = Expenses, Losses, Indebtedness and Taxes *TPU = Transfer for Public Use

*IB = Initial Basis *GE = Gross Estate

Illustration: (please read discussion on the illustration below)

FMV 1M

Less: mortgage payments 40K

INITIAL BASIS 960K

Less: Allowable Deductions 30K DEDUCTION BASIS 930K

x Vanishing rate 40K

VANISHING DEDUCTION 372K

First, determine the initial basis. And under the law, the initial basis, it is the value of the property when it was previously taxed. IOW, it has to be value of the property at the time of the first transfer, or the value of the second transfer, WHICHEVER IS LOWER.

So that if there was a property transferred in Jan. 1, 2010 and the FMV of the property then was 1M. And in Jan. 1, 2014, which is also the date of death of the decedent, the value was already 2M. How much do you include in the gross estate of this current decedent?

- 2M because we are talking here about the gross estate.

But what will you consider as the INITIAL BASIS for purposes of computing the vanishing deduction allowed? - 1M because it is the lower value.

But what if there is a mortgage involved on the property? What are you suppose to deduct?

- So in this case, you should deduct in the initial basis the amount of mortgage already paid. Not the unpaid mortgage. *Tricky ni sa problem because ang ihatag nga value is the unpaid mortgage*

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So now let’s assume that at the time it was transferred, there was a mortgage to be assume by this decedent at 100K. Now, at the time of his death, there remains an unpaid mortgage of 60K. How much do you deduct from your gross estate for purposes of unpaid mortgage?

- 60K.

But how much do you deduct for purposes of computing initial basis for property previously taxed? - 40K, which is the paid portion of the mortgage.

So next, we determine the allowable deductions. And under the law, the allowable deductions are ELIT plus Transfer for Public Use. But take note that it is only the pro-rata value that can be deducted. And the formula for the proportion is Initial Basis divided by Gross Estate (IB/GE).

So now let’s assume that the gross estate is 9.6M. ELIT is 200K. and TPU is 100K. So how much do we include as allowable deductions? ELIT+TPU = 200K+100K = 300K. Next, IB ÷ GE = 960K ÷ 9.6M = 10%. So 300K x 10% = 30K, this is the allowable deductions.

So next, we determine deduction basis. 960K, as initial basis, less allowable deduction of 30K. So our deduction basis is 930K.

Then, the vanishing rate. In our example, we will use the 40% because 2010 to 2014 is 4 years, which falls on the “more than three (3) years but not more than four (4) years” as what the law says.

Therefore, 930K multiply by the vanishing rate of 40% = 372,000. VANSHING DEDUCTION

Formula:

Initial basis Value @ 1

st

transfer Whichever is

lower Value @ 2nd transfer

- Allowable deduction (pro rata deduction) Initial basis x (ELIT + TPU) Gross estate

Deduction base x Vanishing rate

Vanishing deduction

TN: Vanishing deductions is otherwise known as property previously taxed, therefore there must be a previous tax paid in the form of donor’s or estate tax.

Mr. X, a Filipino, died in the US. He has a motorcycle which is located in the US at the time of his death. He wrote in his will that the motorcycle will be given to his son Mr. Y who is in the Philippines. Two years after, Mr. Y died alsobut the motorcycle is already inhis possession when he died. Question: will the motorcycle be included in the gross estate of mr. Y? YES

Will it be subject to vanishing deduction? YES

“The property should be located in the Philippines” –required during the second transfer. Thus, the motorcycle is subject to vanishing deduction because the property is already in the possession of Mr. Y when he died.

Suppose Mr. X is a NRA, will the motorcycle be included in the gross estate of mr. Y? YES

Will it be subject to vanishing deduction? NO. Because the property was located outside the Phil during the first transfer, and being a NRA, the property was not previously taxed.

MEDICAL EXPENSES

 Requisites for deductibility of medical expenses:

a. The expenses (cost of medicines, hospital bills, doctors’ fees, etc.) were incurred within one (1) year prior to the death of the decedent; - Example: If decedent died on Dec. 8, 2011, expenses must be incurred on Dec. 9 up to Dec. 8, 2011.

- Leap years are irrelevant, that is to say that even if decedent died on a leap year, the same computation for the 1 year period applies.

b. The expenses are duly substantiated with official receipts for services rendered by the decedent’s attending physicians, invoices, statements of account duly certified by the hospital, and such other documents in support thereof;

c. Provided, that the total amount thereof, whether paid or unpaid, does not exceed Five hundred thousand pesos (P 500,000) - So all medical expenses, whether paid or unpaid, for as long as they have been incurred are considered.

 Any amount of medical expenses exceeding P 500K, even if unpaid, shall not be allowed as deduction under the medical expenses. Neither can this excess amount beallowed to be deducted from the gross estate as claim against the estate (same rule in funeral expenses).

 The medical expenses need not pertain to the cause of death of the decedent for it to be a deductible medical expense. It can be for any type of illness and the cause of death maybe any other illness, or accident, etc. for as long as the requisites are present.

 it may not be paid as long as it is incurred.

Question: if there is an unpaid medical expense, can it be treated as claims against the estatelater on if it already exceeded the P500k limit? NO, there is a separate category for medical expenses like the judicial expenses and funeral expenses. So anything in excess even if it’s unpaid cannot be treated as claims against the estate for the reason that they are given special categories under the law. So the intention must be to remain as it is, as classified under the law.

FAMILY HOME

Family home means the dwelling house, including the land on which it is situated, where the husband and wife, or a head of the family, and members of their family reside, as certified to by the Barangay Captain of the locality. The family home is deemed constituted on the house and lot

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from the time it is actually occupied as a family residence and is considered as such for as long as any of its beneficiaries actually resides therein (Arts. 152 and 153, Family Code).

- The family home consists of the house and the lot on which the house is situated. - Only one family home can one person own.

- Married individuals and heads of the family – whether single, widowed or divorced – can claim family home as a deductible item against the gross estate.

- For income tax purposes, the head of the family no longer has a useful definition since all individuals regardless of the status is entitled to the personal exemption of P 50K. The difference lies in whether a taxpayer has dependents which entitles him/her to an additional exemption of P 25K for every dependent.

Question: can a single individual claim as deduction family home?yes, as long as he is considered as the head of the family.(please verify) - But for estate tax purposes, the definition of the head of the family is still significant. A head of the family is:



An individual who is single, legally separated or widowed, etc. who is chiefly supporting a child, whether legitimate, illegitimate, legally adopted or naturally acknowledged, not more than 21 years of age (TN: under the law, its 21 or below), where such child is not gainfully employed, unmarried and he can be more than 21 if he is mentally incapacitated or physically disabled.



An individual who is chiefly supporting a parent living with him. (TN: parents must not be gainfully employed too.)



An individual who is chiefly supporting a brother or sister living with the former, provided that the latter shall be no more than 21 years of age, unmarried and not gainfully employed.



An individual who is supporting a senior citizen whether or not related to each other, provided that the latter be 60 years of age or above and not earning more than P 5K a month (or P 60k a year-poverty line according to NEDA).

- For income tax purposes, among the 4 types of dependents, only a child can entitle a taxpayer to avail of the P 25K additional exemption. But for estate taxes, if you’re classified as a married individual or single but head of the family, then your family home can be considered as a deductible item.

 An amount equivalent to the current or fair market value of the decedent’s family home, whichever is higher:

Provided, however, That if the said current or fair market value or zonal value exceeds one million pesos (P 1,000,000), the excess shall be subject to estate tax. As a sine qua non condition for the exemption or deduction, said family home must have been the decedent’s family home as certified by the barangay captain of the locality (Sec. 2, No.4, RA 7499)

ATTY. A:

RULE: fair market value of the property or P 1,000,000, whichever is lower.

Question: If the property (family home) is owned by a married couple as part of their conjugal property, how do you determine the P1M? Is there a need for you to divide the value of the property for purposes of this deduction?

TN: the family home has to form part of your gross estate, part of the deduction of the gross estate would be the share of the surviving spouse (SSS). So this family home is considered part of the special deductions. It is not accounted for prior to the deduction for SSS. That being the case, the gross estate, you claim there the full amount but you will deduct a portion of that, half of that, under SSS. So in effect, what was considered as gross estate or taxable estate for the decedent only pertains to half of the family home. So it’s only appropriate that when you make a deduction later on for the family home, you can claim half of that also.

But the limit of P1M, does it change? NO, it will not change just because it is a conjugal property. Illustration:

1.

Gross estate (family home) 2,000,000

SSS 1,000,000

1,000,000 Family home 1,000,000

Net taxable estate -0-

2.

Gross estate (family home) 3,000,000

SSS 1,500,000

1,500,000 Family home 1,000,000

Net taxable estate 500,000

TN: the structure itself maybe considered the family home because it may happen that the lot is owned by another person. In this case, only the value of the structure is considered family home excluding the value of the lot.

 Conditions for the allowance of family home as deduction from the gross estate:

a. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the family home is situated;

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the Barangay Captain.

b. The total value of the family home must be included as part of the gross estate of the decedent; and

c. Allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate, or the extent of the decedent’s interest

(whether conjugal or community, or exclusive property), whichever is lower, but not exceeding P 1,000,000. - Any excess of the P 1,000,000 is subjected to estate tax.

 Examples:

Decedent: Mr. A, single but head of the family, owns a house worth P 750K and lot P 500K - Only 1M can be deductible being the maximum amount allowed.

Decedent: Mr. A, single but head of the family, owns a house worth P 250K and lot worth P 500K.

- Only P 750K can be claimed as deduction because the deductible amount is the actual value of the family home or P 1M, whichever is lower.

Decedent: Mr. A, married, owns a house worth P 300K and lot worth P 500K. - Determine first whether the property is conjugal or exclusive property.

- If the house and lot are exclusive properties of the decedent, the entire P 800K is deductible.

- If both the house and lot are conjugal properties, only P 400K [(300K/2) + (500K/2)] is deductible because the division between the spouses is always ½ or 50% in the absence of a property relation before marriage.

- If the house is exclusive and the lot is conjugal, P 550K is deductible [300K + (500K/2)]

- If the house is 1.3M conjugal and the lot is 500K exclusive, the result obtained is 1.15M [(1.3M/2) + 500K] but since P 1M is the maximum deductible amount, only P 1M can be claimed as deduction.

STANDARD DEDUCTION

 An amount equivalent to 1M shall be deducted from the gross estate without need of substantiation  Not available to NRAs.

 Standard deduction is an arbitrary amount of 1 million without any official receipt that you need to present.  Under regulation, deductions are classified into:

1. Ordinary

2. Special – it will not be accounted for in the share of the SS. It is deducted after deducting the SSS. a. Standard deduction

b. Medical expenses c. Family home

Thus, Standard deduction in itself pertains only to the deceased. The surviving spouse does not share with this deduction. To properly account for the taxable estate, you have to determine the type of property regime that governs the married individual.

1. Absolute community of properties – default regime if marriage occurred on or after August 3, 1988.

GR: everything brought into the marriage and acquired thereafter is considered communal property. EXC:

i. anything received gratuitously after/during the marriage is exclusive property. Any fruits of these properties are also exclusive.

ii. Personal properties except jewelries

iii. If there is a previous marriage, anything acquired during the first marriage, if there hasn’t been any liquidation. (FAMILY CODE)

Art. 91. Unless otherwise provided in this Chapter or in the marriage settlements, the community property shall consist of all the property owned by the spouses at the time of the celebration of the marriage or acquired thereafter.

Art. 92. The following shall be excluded from the community property:

(1) Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property;

(2) Property for personal and exclusive use of either spouse. However, jewelry shall form part of the community property;

(3) Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property.

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2. Conjugal partnership of gains – default regime if marriage occurred before August 3, 1988.

GR: anything bought during the marriage is conjugal property but anything owned before the marriage remains exclusive properties of the spouse.

EXC: properties acquired by gratuitous title during the marriage are exclusive properties but the fruits of these properties are conjugal.

(FAMILY CODE)

Art. 106. Under the regime of conjugal partnership of gains, the husband and wife place in a common fund the proceeds, products, fruits and income from their separate properties and those acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage or of the partnership, the net gains or benefits obtained by either or both spouses shall be divided equally between them, unless otherwise agreed in the marriage settlements.

Art. 109. The following shall be the exclusive property of each spouse: (1) That which is brought to the marriage as his or her own; (2) That which each acquires during the marriage by gratuitous title;

(3) That which is acquired by right of redemption, by barter or by exchange with property belonging to only one of the spouses; and (4) That which is purchased with exclusive money of the wife or of the husband.

3. Complete separation of property Deductions allowed for NRA:

1. Expenses, losses, indebtedness, taxes

2. Property previously taxed (vanishing deduction) 3. Transfer for public use

4. Share of surviving spouse, if married

These deductions are considered to the extent of the amount attributable to properties located here in the Philippines. So: Allowable deductions= (ELIT + TPU + Vanishing deductions +SSS) x FMV of properties in the Philippines

FMV of world wide properties Same computation for NRA on estate tax payable.

Illustration: (problem)

Mr. Ventura died on June 11, 2013 Gross Estate:

1. Property acquired by Mr. Ventura and his wife through combined effort P3,000,000 2. Property received as gift by Mr. Ventura from his uncle on May 7, 2009. His uncle died on Feb. 11, 2013.

625,000

3. Property inherited from his father who died on March 5, 2011. Mr. Ventura, the son, paid the estate tax on these property:

Property FMV at the time of death

Prior decedent (father) Present decedent (son)

1 150,000 125,000

2 250,000 312,500

3 375,000 437,500

Total 775,000 875,000

Property no. 3 above was subject to a mortgage of P312,500 at the time it was inherited by Mr. Ventura. The mortgage was deducted from the gross estate in determining the net taxable estate and in computing the estate tax due from the estate of his father. Mr. Ventura paid P125,000 of this mortgage indebtedness before the death of his father.

Deductions claimed:

Funeral expenses P 100,000

Judicial expenses 162,500

Claims against the estate incurred during the marriage

125,000 Transfer to the government for

exclusive public purpose

25,000

Total P 412,500

Determine the following:

1. Amount allowable as vanishing deduction on the property inherited. 2. Net share of the surviving spouse

3. Amount deductible as vanishing deduction on the property received as gift 4. Net taxable estate

5. Estate tax.

Gross estate Exclusive Conjugal Total

625,000 3,000,000