CHAPTER 2 – GROSS ESTATE

Estate Tax- is a tax imposed on the privilege that a person is given in controlling to a certain extent, the
disposition of his property to take effect upon death.

Justification for the Imposition of Estate Tax

1. Benefit - Received Theory

2. Privilege or State Partnership Theory
3. Ability to Pay Theory
4. Redistribution of Wealth Theory

Classification of Decedents

1. Citizens
2. Resident aliens
3. Nonresident aliens

There is reciprocity if:

 The decedent at the time of his death was a resident citizen of a foreign country which at that
time of his death did not impose an estate tax of any character in respect of intangible personal
property of citizens of the Philippines not residing in that foreign country; or
 The laws of the foreign country of which the decedent was a resident citizen at the time of his
death allow a similar exemption from estate taxes of every character, in respect of intangible
personal property owned by citizens of the Philippines not residing in that foreign country.

Intangible asset - identifiable nonmonetary asset without physical substance

Section 104 of the Tax Code enumerates the following intangible personal property with situs in the
Philippines, for estate tax purposes:

1. Franchise which must be exercised 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 if such shares, obligations or
bonds have acquired a business situs in the Philippines.
5. Shares or rights in any partnership, business or industry established in the Philippines.
Exclusions under Section 85 and 104 of the Tax Code

1. Exclusive property of the surviving spouse.

The gross estate in case of married decedents, is composed of:

 Exclusive properties of the decedent; and

 Common properties of the decedent and the surviving spouse
2. Property outside the Philippines of a non-resident alien decedent.
3. Intangible personal property in the Philippines of a non-resident alien under the Reciprocity Law.

Exclusions under Section 87 of the Tax Code

1. The merger of usufruct in the owner of the naked title.

2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommisary
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 bequest devises, legacies or transfers to social welfare, cultural and charitable institutions, no
part of the net income of which inures to the benefit of any individual: Provided, however that not
more than 30% of the said bequest, devises, legacies or transfers shall be used by such
institutions for administration purposes.

Elements of a fideicommissary substitution:

 The substitution must not go beyond one degree from the heir originally instituted.
 The fiduciary and the fideicommissary must be both living at the time of the testator's death.

Exclusions under Special Laws

1. Proceeds of life insurance and benefits received by members of the GSIS

2. Accruals and benefits received by members from the SSS by reason of death
3. Amounts received from Philippines and United States governments for war damages
4. Amounts received from United States Veterans Administration
5. Payments from the Philippines of US government to the legal heirs of deceased of World War II
Veterans and deceased civilian for supplies/services furnished to the US and Philippine Army
6. Retirement benefits of officials/employees of a private firm
7. Personal Equity and Retirement Account (PERA) assets of the decedent-contributor
8. Compensation paid to private and public health workers who have contracted COVID-19 in case
of death, the said amount shall not be included as part of the gross estate of the decedent subject
to estate tax as provided under Republic Act No. 11494 or the "Bayanihan to Recover as One
Act."
Composition of the Gross Estate

 Real property
 Personal tangible property
 Intangible personal property
o Shares of stock
o Bank deposit
o Dividends declared before his death but received after death
o Partnership profit which have accrued before his death
o Usufructuary and rights

Section 85 of the Tax Code enumerates the composition of the Gross Estate

 Property owned by the decedent that are actually and physically present in his estate at the time
of his death such as land, buildings, shares of stock, vehicles, bank deposit, and the like.
 Property NOT PHYSICALLY IN THE ESTATE but are still subject to payment of estate tax.
a. Transfers in Contemplation of Death
b. Revocable Transfers
c. Transfers under a General Power of Appointment
d. Transfers for Insufficient Consideration
 Miscellaneous items
a. Claims against insolvent persons
b. Proceeds of life insurance

The gross estate shall include the value of property transferred by the decedent during his lifetime in
anticipation of his death (transfer in contemplation of death) such as:

1. Transfer of property in favor of another person, but the transfer was intended to take effect only
upon the transferor's death.
2. Transfer by gift intended to take effect at death, or after death, or under which the donor reserved
the income or the right to designate the persons who should enjoy the income.
3. Transfer with retention or reservation of certain rights.

The power of appointment may be exercised by the donor-decedent through the following modes:

a. By will
b. By deed to take effect in possession or enjoyment at or after his death.
c. By deed under which he has retained for his life or any period not ascertainable without reference
to his death or for any period which does not in fact end before his death.
d. The possession or enjoyment of, or the right to the income from the property.
e. The right, either alone, or in conjunction with any person to designate the persons who shall
possess or enjoy the property or the income therefrom.
Proceeds of life insurance taken out by the decedent on his own life should be included in the gross
estate if the following requisites are present:

1. It must be an insurance on the life of the decedent; and

2. The beneficiary must be either of the following;
 His estate or executor/administrator (revocable or not)
 Any third person (other than estate or administrator/executor) provided that the designation is
not irrevocable

FILING and PAYMENT:

 Primary responsibility to file and pay- Executor or administrator

 Secondary responsibility to file and pay- any of the heirs

An estate tax return shall be filed under oath in any of the following situation:

1. In cases of transfer subject to Estate Tax; and

2. Where regardless of the gross value, the estate consists of registered or registrable property such
as real property, motor vehicle, share of stocks or other similar property for which a Certificate
Authorizing Registration from the Bureau of Internal Revenue (BIR) is required as a condition
precedent for the transfer of ownership thereof in the name of the transferee, the executor or the
administrator, or any of the legal heirs, as the case may be.

Estate tax returns showing gross value exceeding five million pesos shall be supported with a statement
duly certified to by a Certified Public Accountant containing the following:

a. Itemized assets of the decedent with their corresponding gross value at the time of his death, or
in the case of nonresident, not a citizen of the Philippines, of that part of his gross estate situated
in the Philippines;
b. Itemized deductions allowed from the gross estate under Section 86 of the Tax Code, as
amended;
c. The amount of tax due, whether paid or still due and outstanding.

In case of insufficiency of cash for the immediate payment of the total estate tax due, the estate may be
allowed to pay the estate tax due through the following options including corresponding terms and
conditions:

1. Cash installment
2. Partial disposition of estate and application of its proceeds to the estate tax due