DEATH, SUCCESSION AND ESTATE TAX

By: Dan Michael M. Dela Serna

INTRODUCTION:

This article aims to explore and connect the topics of succession and

estate taxes with the amendments made by Republic Act No. 10963 or the Tax

reform for Acceleration and Inclusion, otherwise known as the TRAIN law. The

law made several amendments to the National Internal Revenue Code of 1997

or the Tax Code, specifically on personal-income taxation, passive income,

estate tax, donor’s tax, value-added tax, excise tax and documentary stamp

tax. The law took effect on January 1, following its complete publication in the

official gazette. This article will focus on the significant changes on the

substantive and administrative procedures with respect to the computation of

estate taxes plus all the other laws related to it particularly the law in

succession of the New Civil Code of the Philippines.

Before we go deeper into estate taxes, we have to remember that the

requirement of paying the estate tax begins upon the death of a person. The

topic of death is usually avoided, except when we remember our dearly

departed on the recently concluded All Saints’ and All Souls’ Day. But with

death, estate taxes must be settled, and this will be the main focus of my

article. On ordinary days, we usually try to avoid talking about death because

of many reasons. It maybe because of fear of an impending reality or because

of personal experience brought by it. It only becomes acceptable to talk about it

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when we are jolted by the death of a close friend or relative. However, we must

accept that we will all die and it is just a matter of time. And no matter how

cliché it may seem, even during times of death, we still need to pay taxes.

A famous saying was uttered by a great inventor and one of the founding

fathers of the United States of America named Benjamin Franklin. He said, “in

this world, nothing is certain except death and taxes." Such a line will stand

the test of time and it is practically true in our present situation in the

Philippines with the recently concluded TRAIN law and the vitally important

requirement of the payment of estate taxes. When someone passes away, loved

ones left behind are usually overwhelmed with emotions and are unable to do

anything. But, there are certain things that need to be done, like making

arrangements for the embalming, the wake, the casket, the interment or

cremation, the burial plot and the gravestone, among others. And of course,

someone has to take care of the estate tax.

The requirement of paying estate taxes stems from the inheritance of the

heirs of the deceased person or the decedent. The flow of my article is divided

into two. I will first discuss salient portions of the law on succession that will

be my spring board for the next part of my article which is the estate tax per se

and how it is computed and paid giving due consideration to the amendments

made by the TRAIN law.

Succession is important to discuss because it is the way wherein the

properties, rights and obligations of the deceased are transmitted to the heirs.

Succession therefore paves the way for the payment of the estate tax.

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SUCCESSION:

When we encounter the word succession, we usually think of death of a

person and the inheritance he or she will pass down to his or her heirs. In a

way, this is correct. The law on succession is governed by the Civil Code of the

Philippines. Article 774 of which states “Succession is a mode of acquisition by

virtue of which the property, rights and obligations to the extent of the value of

the inheritance, of a person are transmitted through his death to another or

others either by his will or by operation of law”. This actually gives us the legal

definition of succession.

We have the three kinds of succession as defined by the following articles

of the Civil Code.

A. Art 779. Testamentary succession is that which results from the

designation of an heir, made in a will executed in the form prescribed by law.

B. Art. 960. Legal or intestate succession takes place:

(1) If a person dies without a will, or with a void will, or one which has

subsequently lost its validity;

(2) When the will does not institute an heir to, or dispose of all the property

belonging to the testator. In such case, legal succession shall take place only

with respect to the property of which the testator has not disposed;

(3) If the suspensive condition attached to the institution of heir does not

happen or is not fulfilled, or if the heir dies before the testator, or repudiates

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the inheritance, there being no substitution, and no right of accretion takes

place;

(4) When the heir instituted is incapable of succeeding, except in cases

provided in this Code.

C. Art. 780. Mixed succession is that effected partly by will and partly by

operation of law.

From the foregoing, the law gives us the important kinds of succession.

“Testate or testamentary succession” refers to situations where the person dies

leaving a last will. The person who executes a last will is called the “testator.”

The share in the inheritance is called “legitime.”

Art. 782 states “An heir is a person called to the succession either by the

provision of a will or by operation of law.

Devisees and legatees are persons to whom gifts of real and personal

property are respectively given by virtue of a will.”

From the foregoing article, we are given with two types of heirs namely:

the forced or compulsory heirs and the voluntary heirs.

The New Civil Code provides for compulsory heirs” or certain people to

whom the testator is obligated to give their legitimes. In computing the

legitimes, the remaining portion of the estate is called the “free portion”. The

testator can give this portion to anyone.

On the other hand, voluntary heir, is when the testator is not obliged to

give. However, a compulsory heir may also be a voluntary heir in the s sense, if

a compulsory heir is given something over and above his legitime.

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 As the law says by virtue of a will, there can only be legatees and

devisees in testamentary succession and not in legal succession. A legatee is

someone who receives personal property from an estate. It refers to a person

who inherits under a will but who may not be related to the decedent. On the

other hand, “devisee" is someone who receives real property from an estate.

Like the legatee, a devisee may or may not be related to the decedent. As to

legatees and devisees, they cannot represent the juridical personality because

they only succeed the properties and rights. So, only properties and rights are

involved and no obligations.

The law also clearly defines what is an inheritance. Art. 776 states “The

inheritance includes all the property, rights and obligations of a person which

are not extinguished by his death”. Now let us go to the inheritance. We have

the properties, rights and obligation of a person which are not extinguished by

his death. So we mentioned properties, rights and obligations. These can be

transmitted by succession. So if a person dies, his properties, rights and

obligations can also be transmitted to his heirs.

Now if there is no will there is legal succession. We have the legitimate

children and descendants, legitimate parents and ascendants, surviving

spouse and illegitimate children. In legal succession, they are called legal heirs.

All compulsory heirs are legal heirs. However, it does not follow that all legal

heirs are compulsory heirs because the term legal heirs is much broader than

compulsory heirs. Aside from the legitimate children and descendants,

legitimate parents and ascendants, surviving spouse and illegitimate children,

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we have brothers and sisters, nephews and nieces, uncles and aunts. As the

law says by virtue of a will, there can only be legatees and devisees in

testamentary succession no such term in legal succession. The share in the

inheritance is called “intestate share.”

A sole heir claiming the whole estate can file an “Affidavit of Adjudication

by sole heir” with the Register of Deeds (ROD) if real property is involved or

with the Bureau of Internal Revenue (BIR).

Under the New Civil Code, compulsory heirs include the surviving spouse

and the children whether legitimate or illegitimate. In intestate succession, the

estate of the deceased may be partitioned or subdivided either by:

1) Extrajudicial Settlement of Estate- Under this scheme the decedent do

not have unpaid creditors and minor children and that all the heirs are in

harmony as to the manner in which the property is to be subdivided or

partitioned. And without going to the court, the heirs agreed amongst them to

adjudicate the estate by means of instruments known “Extrajudicial Settlement

of Estate” duly signed and notarized and have it published in the newspaper of

general circulation for at least three (3) consecutive weeks. And of course to

pay the required estate tax and compliance of procedure and administrative

matters with the concerned government agencies.

2) Judicial Settlement of Estate- If the deceased left no will but there are

creditors or claimants or an heir is minor or suffering from incapacity to act

and/or the heirs cannot agree amongst themselves in the manner or partition

or distribution of the estate, the settlement of estate shall be by means of

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Judicial Settlement. This means that the heirs or creditor(s) concerned have to

file a petition in the Court of Law for the settlement of estate.

Unless there is a third party claimant, this scheme should be avoided as

much as possible. Aside from being adversarial, this is also costly as parties

will have to engage the services of lawyers. The process could take years to be

resolved. The sharing of the heirs is the same as what is mentioned above, less

the provisions for the payments of creditors, if any.

As to the common law wife of the deceased brother , for as long as they

are legally married and that marriage was not annulled , she is still considered

as compulsory heirs of the deceased and as such entitled to inherit from her

husband .

As to the adopted son, if the adoption is legal in the sense that the

adoption was authorized by the court, then the adopted son is considered as a

compulsory heir. However, if the birth certificate of the “adopted son” would

show that the father is your deceased brother, and during the lifetime of your

deceased brother, the status of this “adopted son” was never questioned him or

any third party, and then he could be considered as a compulsory heir.

As to the live-in partner of the deceased, she is not entitled to inherit

from the estate as she is not considered as a spouse under the law.

After knowing the inheritance of all those person we have just discussed,

it is important to mention that the properties can already be given to the

compulsory heirs, legatees or the devisees and the transmission is by following

the rules on succession as I have already discussed above. However, with

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respect to real properties, it cannot be transferred in their names without first

paying the estate tax. Thus, we now move on the discussion on estate tax.

ESTATE TAX:

The term estate tax is specifically stated in Section 84 of the National

Internal Revenue Code (NIRC) as amended by the TRAIN law. Estate Tax is a

tax on the right of the deceased person to transmit his or her estate to his or

her lawful heirs and beneficiaries at the time of death and on certain transfers,

which are made by law as equivalent to testamentary disposition. It is not a tax

on property.

It is a tax imposed on the privilege of transmitting property upon the

death of the owner. The Estate Tax is based on the laws in force at the time of

death notwithstanding the postponement of the actual possession or enjoyment

of the estate by the beneficiary. The estate tax accrues as of the time of the

death of the decedent. The accrual is distinct from the obligation to pay the tax

which is 6 months after the death of the decedent. And so, how do we compute

for this estate tax?

We can follow these steps in the computation of the estate tax:

1. First is we have to determine the gross estate;

2. We then deduct the allowable deductions from the gross estate in order to

arrive to the net estate; and

3. The Net Estate will then be multiplied to 6% flat rate in order to get the

estate tax.

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 Actually, this was not the case prior to the TRAIN law. For me, the TRAIN

law made the computation of the estate tax easier than before. Section 22 of

the TRAIN law amends Section 84 of the Tax Code, which provides for the

estate-tax rate. It provides:

"Sec. 84. Rate of Estate Tax. - There shall be levied, assessed, collected and

paid upon the transfer of the net estate as determined in accordance with

Sections 85 and 86 of every decedent, whether resident or nonresident of the

Philippines, a tax at the rate of six percent (6%) based on the value of such net

estate."

Previously, a tax based on the value of the net estate of the decedent,

whether resident or nonresident of the Philippines, was computed based on a

tax schedule where an estate worth P200,000 and over was taxed from 5

percent to 20 percent. Under the TRAIN law, it will now be subject to a flat rate

of 6 percent.

We now go to the first step in the computation of the estate tax which is

the determination of the gross estate. Under Section 85 of the NIRC, gross

estate is the value of all the property, real or personal, tangible or intangible, of

the decedent. The composition of the gross estate depends on the following:

1. If the decedent is a resident or citizen, gross estate shall be composed of

all properties, real or personal, tangible or intangible, wherever situated.

2. If the decedent s a non-resident alien, only properties situated in the

Philippines shall constitute the gross estate. However, with respect to

intangible personal property, its inclusion is subject to the rule of

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 reciprocity provided for under Section 104 of the NIRC (R.R. No. 02-2003,

Sec. 4).

Thus, for non-resident decedent/non-citizens, the gross estate shall be

composed of the following:

a. Real or immovable property located in the Philippines;

b. Tangible personal property located in the Philippines;

c. Intangible personal property - with a situs in the Philippines such as:

d. Franchise which must be exercised in the Philippines;

e. Shares, obligations or bonds issued by corporations organized or

constituted in the Philippines;

f. Shares, obligations or bonds issued by a foreign corporation 85% of the

business of which is located in the Philippines;

g. Shares, obligations or bonds issued by a foreign corporation if such

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

Philippines that is if they are used in the furtherance of its business in

the Philippines; and

h. Shares, rights in any partnership, business or industry established in

the Philippines.

If you would read the tax law, we can also enumerate those which are excluded

from the gross estate and they are the following:

a. GSIS proceeds or benefits;

b. Accruals from SSS;

c. Proceeds of life insurance where the beneficiary is irrevocably appointed;

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 d. Proceeds of life insurance under a group insurance taken by employer

which is not taken out upon his life;

e. War damage payments;

f. Transfer by way of bona fide sales;

g. Transfer of property to the National Government or to any of its political

subdivisions;

h. Separate property of the surviving spouse;

i. Merger of usufruct in the owner of the naked title;

j. Properties held in trust by the decedent; and

k. Acquisition and/or transfer expressly declared as not taxable;

The properties comprising the gross estate shall be valued based on their

fair market value as of the time of decedent’s death. If the property is a real

property, the appraised value thereof as of the time of death shall be,

whichever is the higher of the following:

1.  The fair market value as determined by the Commissioner, or

2.  The fair market value as shown in the schedule of values fixed by the

provincial and city assessors.

In the case of shares of stocks, the fair market value shall depend on

whether the shares are listed or unlisted in the stock exchanges. Unlisted

common shares are valued based on their book value while unlisted preferred

shares are valued at par value. In determining the book value of common

shares, appraisal surplus shall not be considered as well as the value assigned

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to preferred shares, if there are any. On this note, the valuation of unlisted

shares shall be exempt from the provisions of RR No. 6-2013, as amended.

For shares which are listed in the stock exchanges, the fair market value

shall be the arithmetic mean between the highest and lowest quotation at a

date nearest the date of death, if none is available on the date of death itself.

The fair market value of units of participation in any association, recreation or

amusement club (such as golf, polo, or similar clubs), shall be the bid price

nearest the date of death published in any newspaper or publication of general

circulation.

To determine the value of the right to 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 (Sec. 5, RR No. 12-2018).

We now move on the second step which is to deduct the allowable

deductions from the gross estate in order to arrive at the net estate. Here, we

will enumerate the allowable deductions that will be deducted from the gross

estate. We have to remember that the allowable deductions will vary depending

on the law applicable at the time of the decedent’s death. For dates of deaths

occurring January 1, 2018 to present, we follow the deductions enumerated

under the TRAIN law which are the following:

A. For a citizen or resident alien:

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 1. Standard Deduction — An amount equivalent to Five million pesos

(₱5,000,000.00)

2. Claims against the estate -

The Requisites for Deductibility of Claims against the Estate are the following:

a. The liability represents a personal obligation of the deceased existing at

the time of death;

b. The liability was contracted in good faith and for adequate and full

consideration in money’s worth;

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

in court; and

d. The indebtedness must not have been condoned by the creditor or the

action to collect from the decedent must not have prescribed;

3. Claims of the deceased against insolvent persons where the value of the

decedent’s interest therein is included in the value of the gross estate;

4. Unpaid mortgages, taxes and casualty losses;

5. Property previously taxed    -   An amount equal to the value specified below

of any property forming 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:

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“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; and

“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 Title III of NIRC 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

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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 the

decedent’s gross estate, and only if in determining the value of the estate of the

prior decedent, no deduction was allowable under this item 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 this item 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 items

(2), (3), (4), and (6) of this Subsection as the amount otherwise deductible

under this item 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;

6. Transfers for Public Use;

7. The Family Home -  An amount equivalent to the current fair market value

of the decedent’s family home: Provided, however, that if the said current fair

market value exceeds Ten million pesos (₱10,000,000.00), the excess shall be

subject to estate tax; If the family home is conjugal property and does not

exceed (₱10,000,000.00), the allowable deduction is one-half (1/2) of the

amount only.

8. Amount Received by Heirs Under Republic Act No. 4917

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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: Provided, that such amount is included in the gross

estate of the decedent.

9. Net share of the surviving spouse in the conjugal partnership or community

property;

B. For a non-resident alien:

1. Standard Deduction – An amount equivalent to Five hundred thousand

pesos (₱500,000);

2. Losses and indebtedness – 

2.1. Claims against the estate

2.2. Claims of the deceased against insolvent persons where the value of the

decedent’s interest therein is included in the value of the gross estate

2.3. Unpaid mortgages, taxes and casualty losses;

3. Property previously taxed;

4. Transfers for Public Use; and

5. Net share of the surviving spouse in the conjugal partnership or community

property.

For deaths occurring January 1, 1998 to December 31, 2017, we follow

the deductions enumerated under Republic Act 8424 or the National Internal

Revenue Code of 1997 which are the following:

A. For a citizen or resident alien:

1. Expenses, Losses, Indebtedness, and Taxes:

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 a. Actual funeral expenses (whether paid or unpaid) up to the time of

interment, or an amount equal to five percent (5%) of the gross estate,

whichever is lower, but in no case to exceed P200,000.

b. Judicial expenses of the testamentary or intestate proceedings.

c. Claims against the estate.

d. Claims of the deceased against insolvent persons where the value of the

decedent’s interest therein is included in the value of the gross estate;

and,

e. Unpaid mortgages, taxes and casualty losses.

2.  Property previously taxed (Vanishing Deduction) (Section 86 (2) of the NIRC

as amended by RA No. 8424) - 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

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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; and

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 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 the decedent’s gross estate, and only if in

determining the value of the estate of the prior decedent, no Property

Previously Taxed or Vanishing Deduction was allowable in respect of the

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property or properties given in exchange therefor (Section 6 & 7 of RR No. 2-

2003);

3.  Transfers for public use;

4.  The family home - fair market value but not to exceed P1,000,000.00

The family home refers to 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 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)

5.  Standard deduction – A deduction in the amount of One Million Pesos

(P1,000,000.00) shall be allowed as an additional deduction without need of

substantiation;

6. Medical expenses – All medical expenses (cost of medicines, hospital bills,

doctor’s fees, etc.) incurred (whether paid or unpaid) within one (1) year before

the death of the decedent shall be allowed as a deduction provided that the

same 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 and provided,

further, that the total amount thereof, whether paid or unpaid, does not exceed

Five Hundred Thousand Pesos (P500,000);

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7. Amount received by heirs under RA No. 4917 - 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 is allowed as a

deduction provided that the amount of the separation benefit is included as

part of the gross estate of the decedent;

8.  Net share of the surviving spouse in the conjugal partnership or community

property.

B. For a non-resident alien:

1.  Expenses, losses, indebtedness and taxes;

2.  Property previously taxed;

3.  Transfers for public use; and

4.  Net share of the surviving spouse in the conjugal partnership or community

property.

No deduction shall be allowed in the case of a non-resident decedent not

a citizen of the Philippines, unless the executor, administrator, or anyone of

the heirs, as the case may be, includes in the return required to be filed in the

Section 90 of the Code the value at the time of the decedent’s death of that part

of his gross estate not situated in the Philippines.

And finally, for the last step, we just deduct all those above-mentioned

deductions from our gross estate in order to arrive at our net estate. The net

estate will then be multiplied to the applicable tax rate in order to get the estate

tax. The rate applicable shall be based on the law prevailing at the time of

decedent’s death. Effective January 1, 2018 to present, we follow the TRAIN

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law which states that: “There shall be an imposed rate of six percent (6%)

based on the value of such NET ESTATE determined as of the time of death of

decedent composed of all properties, real or personal, tangible or intangible

less allowable deductions.” Prior to the TRAIN law, we will follow the schedule

of rates given by the NIRC which is the previous tax law.

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