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Concept of Succession and Estate Tax and Gross Estate Common Rules & Special Rules (Married Decedents)

1) Succession is the transmission of a decedent's property, rights and obligations to heirs upon death through a will or by operation of law. There are three types of succession: testate, intestate, and mixed. 2) Estate taxation applies to the gratuitous transfer of a decedent's properties to heirs. The gross estate includes all properties owned by the decedent regardless of location for resident decedents. Certain transfers like to charities may be excluded from the gross estate. 3) The gross estate is calculated by taking the total value of properties owned at death and removing exclusions like property not owned or transfers to charities to arrive at the taxable estate amount.
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100% found this document useful (2 votes)
9K views12 pages

Concept of Succession and Estate Tax and Gross Estate Common Rules & Special Rules (Married Decedents)

1) Succession is the transmission of a decedent's property, rights and obligations to heirs upon death through a will or by operation of law. There are three types of succession: testate, intestate, and mixed. 2) Estate taxation applies to the gratuitous transfer of a decedent's properties to heirs. The gross estate includes all properties owned by the decedent regardless of location for resident decedents. Certain transfers like to charities may be excluded from the gross estate. 3) The gross estate is calculated by taking the total value of properties owned at death and removing exclusions like property not owned or transfers to charities to arrive at the taxable estate amount.
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THE CONCEPT OF SUCCESSION AND ESTATE TAX

➢ 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.

➢ The inheritance includes all the property, rights and obligations of a person which are not extinguished by
his death.

Types of Succession
1. Testate or Testamentary Succession
-with a written will (with designation of an heir).
-Last will and testament (Testator)

2. Legal or Intestate Succession


-without a will or with an invalid one.
-provision of the Civil Code on succession (operation of law)

3. Mixed Succession
-Partly by virtue of a written will and partly by operation of law
Types of will
1. Holographic will- handwritten and need not to be witnessed.
2. Notarial will- a notarized will signed by the decedent and witnesses.
3. Codicil- a supplement or addition to a will (added to or altered to the original will)
Elements of Succession
1. Decedent
2. Estate-property, rights and obligation of the decedent not extinguished by his death.
3. Heirs
Heirs under intestate succession
1. Compulsory heirs (Primary heirs/Secondary heirs/Concurring heirs)
2. Relatives up to 5th degree of consanguinity
3. Republic of the Philippines
*second cousins both are in the 6th degree in the collateral line; hence, they cannot inherit.
Heirs under Testamentary Disposition
1. Compulsory heirs
2. Other persons specified by the decedent in his will
The rules on Legitime/Repudiation/Disinheritance of an heir are matters of law which are irrelevant to estate
taxation. (Title IV of Book III of the Civil Code)
Other persons in succession
1. Legatee- a person whom gifts of personal property is given by virtue of a will.
2. Devisee-a person whom gifts of real property is given by virtue of a will.
3. Executors-person appointed by the decedent to carry out the provisions of his will
4. Administrators- person appointed by the court to manage the distribution of the estate of the decedent.
Estate Taxation pertains to the taxation of the gratuitous transfer of properties of the decedent to the heirs upon
the decedent’s death.

Decedents who died Between Jan 1, 1998 to Dec 31, 2017 On or after January 1, 2018
Shall be governed by NIRC Train Law
Nature of Estate Tax
1. Excise tax-privilege to transfer property through death
2. Revenue or general tax- fiscal measure
3. Ad valorem tax-value of the estate
4. National tax- national government
5. Proportional tax- 6% on the net estate
6. One-time tax- once in a lifetime

Classification of Decedents for Taxation Purposes


1. Resident or Citizen Decedents 2. Non-resident Alien Decedents

Estate Tax Model


Gross estate (Separate/ exclusive properties + common properties) xx
Less: Deductions from gross estate xx
Net taxable estate xx

Exclusions in gross estate-excluded by law from estate taxation.


Inclusions in gross estate- included as part of the taxable gross estate.

GROSS ESTATE
Gross estate consists of all properties of the decedent, tangible or intangible, real or personal, and wherever
situated at the point of death.

Summary of rules on gross estate

Residents or Citizens NRA without reciprocity NRA with reciprocity


Property Location Within Without Within Without Within Without
Real Properties ✓ ✓ ✓ X ✓ X
Personal Properties
-Tangible ✓ ✓ ✓ X ✓ X
-Intangible ✓ ✓ ✓ X X X

Procedures in establishing gross estate


1. Inventory count of existing properties at the point of death
2. Adjustments for exempt transfers and taxable transfers
THE GROSS ESTATE FORMULA
Inventory of properties at the point of death xxx,xxx
Less: Exempt transfers
Properties not owned xxx,xxx
Properties owned but excluded by law xxx,xxx xxx,xxx
Inventory of taxable properties present properties xxx,xxx
Add: Taxable transfers xxx,xxx
GROSS ESTATE xxx,xxx

Transfer of properties not owned by the decedent


1. Merger of the 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
fideicommissary
3. The transmission from the first heir, legatee, or done in favor of another beneficiary, in accordance with
the desire of the predecessor
4. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate, executor or
administrator
5. Properties held in trust by the decedent
6. Separate properties of the surviving spouse of the decedent (husband’s capital/wife’s paraphernal)
7. Transfer by way of bona fide sales (adequate consideration)
Summary of Rules: Proceeds of Life Insurance
Designation of beneficiary
Beneficiary Revocable Irrevocable
Estate, administrator, or executor Include Include
Other parties Exclude Exclude

Legal exclusions
List of properties owned by the decedent at the point of death which naturally forms parts of the
hereditary state but are not subjected to estate tax by law: (exclusions in gross estate)
1. Proceeds of group insurance taken out by a company for its employees
2. Proceed of GSIS policy or benefits from GSIS
3. Accruals from SSS
4. United States Veterans Administration (USVA) benefits-RA 136
5. War damage payments
6. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no
part of net income of which inures to the benefit of any individual; provided, however, that no more than
30% of the said bequest, devises, legacies or transfers shall be used by such institutions for administration
purposes.

The 30% conditional exclusion is deemed satisfied if the donee is an accredited non-profit donee
institution.
7. Acquisitions and/or transfers expressly declared as non-taxable by law (properties acquired using benefits
or proceeds from item number 1 to 5 are still exempt so long as the heirs or administrators can prove that
the properties were acquired using these exempt properties)
8. Bank deposits withdrawn from the decedent account during the settlement of the estate
These properties must be removed from the gross estate of the decedent. (1-8)

Illustration:
A decedent had the following properties:
Family home 5,000,000
Truck 1,200,000
Cash 200,000*
Commercial Land 800,000 X
Other properties 600,000
Total 7,800,000

In his will, the decedent designated the cash to be given to a public elementary school. The commercial land was
also devised to a non-profit charitable institution restricted to be used for program expenses of the latter.

Gross estate= P7,000,000


*transfers to the government and its instrumentalities are not items of exclusion but items of deduction. They are
included in gross estate and then separately presented as deductions from gross estate in the estate tax return.

Taxable Transfers
➢ Taxable transfers are mortis causa transfers of properties in the guise and form of inter-vivos transfers.
These are referred to as inclusions in gross estate.

Types of Taxable Transfers


1. Transfer in contemplation of death
2. Revocable transfers, including conditional transfers
3. Property passing under general power of appointment (the same shall be included in his/her gross estate)

Composition of Gross Estate


1. Properties, movable or immovable, tangible or intangible
2. Decedent’s interest on properties
3. Proceeds of life insurance:
a. Designated as revocable to any heir
b. Designated to estate, administrator or executor as beneficiary
4. Taxable transfers

Illustration 1:
A resident decedent died with the following properties at the point of death:
Cash in bank 1,000,000
Receivables from friends and relatives 200,000
Borrowed car from a friend 120,000
House and lot 2,000,000
Motorcycle, registered in the name of his youngest son 80,000
Total 4,400,000

The Gross estate shall be computed as:


Inventory of present properties 4,400,000
Less: Not owned
Borrowed car 120,000
Motorcycle 80,000 200,000
Gross estate 4,200,000

Illustration 2:
Mr. A, a citizen decedent, died leaving the following properties:
Cash proceeds of life insurance designated to a brother as revocable beneficiary 1,000,000
Building, properties held as usufructuary 4,000,000
Cash in bank 2,400,000
Agricultural land 3,000,000
House and lot, from Mr. A’s industry 7,000,000
Benefits from GSIS 500,000
Total properties 17,900,000

Additional information:
1. The agricultural land was designated by Mr. A’s father in his will to be transferred to D, Mr. A’s son, upon
Mr. A’s death.
2. Mr. A made a revocable donation involving a residential lot to his brother E. Mr. E paid P400,000 when
the lot was worth P1m. The lot was currently valued at P2m zonal value upon Mr. A’s death.
3. The heirs withdrew P376,000 cash from the decedent’s bank account for Mr. A’s wake, net of 6% final tax
deducted by the bank.
The gross estate shall be computed as:
Inventory of present properties P17,900,000
Less:
Properties not owned
Building, held as usufructuary P4,000,000
Agricultural land, under special power 3,000,000
Total 7,000,000
Properties exempted by law
GSIS benefits 500,000
Bank withdrawal (P376,000/94%) 400,000 7,900,000
Taxable present properties 10,000,000
Add: Taxable transfers (2m-400k) 1,600,000
Gross estate 11,600,000

Illustration 3:
An inventory of Mr. D’s properties was taken two years after his death. He had the following properties during the
inventory-taking:
Cash (40% from income of properties after death) 4,000,000
Car (bought for 1.2 M a week before Mr. D’s death) 800,000
House and Lot (worth 8M on Mr. D’s death) 10,000,000
Business interest (worth 6M on Mr. D’s death) 7,000,000
Total 21,800,000

The following possible deductions can be claimed by the estate:


Funeral and judicial expenses paid 1,100,000
Wreck of a fishing boat, one year after Mr. D’s death 800,000
Obligations of Mr. D paid from his property 1,500,000

The gross estate shall be established as:


Inventory of property 21,800,000
Add: Decreases in properties since death
Funeral and judicial expense 1,100,000
Wreck of a fishing boat 800,000
Obligations paid after death 1,500,000
Decrease in value of car (1.2m-.8m) 400,000 3,800,000
Total 25,600,000
Less: Increases in properties after death
Cash income of properties (4M*40%) 1,600,000
Increase in value of house and lot(10m-8m) 2,000,000
Increase in business interest (7m-6m) 1,000,000 4,600,000
GROSS ESTATE 21,000,000

Valuation rules
FV at the time of death//FV set by law//FV under GAAP//Encumbrances on the property or decrease in value
thereof after death shall be ignored.

1. Real properties
Zonal value (CIR) or fixed by the provincial or city assessor, whichever is higher
2. Shares of stock
Preference shares-par value
Unlisted common share-financial statement method (Book value per share)
Listed shares- arithmetic mean of highest and lowest quotation at a date nearest the date of death.
3. Usufruct and annuities (PV of OA)

Additional guidelines in determining FV


Newly purchased property- FV, purchase price/second-hand value
Pawned properties-grossed up value by the loan to value ratio
Property fixed in monetary terms-Principal + accrued income thereto
Foreign currencies- peso value at the prevailing rate at the date of death.

Taxable Transfers
➢ Taxable transfers made without consideration are included in gross estate at the FV of the transferred
property at the date of death.
➢ Taxable transfers made for a consideration are valued as: FV at the date of death less consideration
paid at the date of transfer.

Illustration:
At the date of transfer
FV at death
FV Consideration
To A 300,000 - 200,000
To B 200,000 195,000 300,000
To C 100,000 40,000 120,000
To D 150,000 80,000 70,000

ESTATE TAX: Gross Estate of Married Decedents


Gross Estate of Married Decedents
The gross estate of a married decedent is composed of:
1. The decedent’s exclusive properties
2. The common properties of the spouses

The property interest of the spouse shall be determined based on their agreed of property regime.

Common types of property regimes:


1. Absolute separation of property (ASP)- technically, all properties of the spouses are separate
properties, except those properties which they may acquire jointly.

2. Conjugal partnership of gains (CPG)- all properties that accrue as fruit of their individual or joint labor
or fruits of their properties during the marriage will be common properties of the spouses.

3. Absolute community of property (ACP)- all present properties owned by the spouses at the date of
celebration of the marriage shall become common properties of the spouses including future fruit of their
separate or joint industry or fruits of their common properties.

Applicable property regime in default of an agreement


➢ In the absence of an agreement or when the regime agreed by the spouses is void, marriages celebrated
before August 3, 1988 shall be governed by the conjugal partnership of gains. Marriages celebrated
starting August 3, 1988 shall be governed by the absolute community of property.
CONGUGAL PARTNERSHIP OF GAINS (CPG)
This property relation views marriage as a partnership of gains.

Conjugal Partnership of Gains (CPG)


Classification
Properties before the marriage Exclusive
Properties derived during the marriage
From fruits income and gains Common
From gratuitous acquisitions Exclusive*

• Conjugal if designated to both spouses

Before marriage: All properties here are exclusive

During marriage: All properties here are common


Except: gratuitous acquisitions received by either spouse

A detailed look
Before marriage During marriage
Fruit of labor or industry Exclusive Conjugal
Fruit of properties Exclusive Conjugal
Inheritance or donation received Exclusive Exclusive*
*conjugal if designated to both spouses

Note: The sale of exchange of properties do not alter their classification. Properties acquired using separate
properties are separate properties. Likewise, properties acquired using common properties are common
properties.

Accruals in value or gains on sale of properties are fruits subject to the rules of the property regime agreed upon
by the spouses.

Illustrations: CONJUGAL PARTNERSHIP OF GAINS


Illustration 1:
Spouses Rene and Bebe who were under the conjugal partnership of gains had the following properties:
Rene Bebe
Before Marriage
1. Donations or inheritance received 100,000 150,000
2. Income of property from No 1 10,000 20,000
During Marriage
3. Properties acquired from separate industry or labor 400,000 300,000
4. Property received by donation or inheritance 800,000 500,000
5. Income of property from No.1 and No.2 15,000 25,000
6. Income of property from No. 3 40,000 30,000
7. Income of property No. 4 80,000 50,000

Separate properties of the spouses


Separate properties
Rene Bebe
Before Marriage
1. Donations or inheritance received 100,000 150,000
2. Income of property from No.1 10,000 20,000
During Marriage
4. Property received by donation or inheritance 800,000 500,000

Total separate properties 910,000 670,000

Common properties of the spouses:


Rene Bebe Total
During marriage
1.Properties acquired from separate industry or labor 400,000 300,000 700,000
5.Income of property from 1&2 15,000 25,000 40,000
6.Income of property from No.3 40,000 30,000 70,000
7.Income of property from No.4 80,000 50,000 130,000
Total common properties 940,000

Illustration 2:
Mr. Crocs died. An inventory of the properties of Mr. and Mrs. Crocs is prepared below:

Mr. Crocs Mrs. Crocs Total


Properties accruing before marriage:
Properties inherited before marriage 200,000 100,000 300,000
Other properties brought into the marriage 400,000 500,000 900,000

Properties accruing during marriage:


Properties inherited during marriage 250,000 150,000 400,00
Properties as fruit of own labor 140,000 160,000 300,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 100,000 50,000 150,000
Properties inherited during marriage 20,000 80,000 100,000
Properties acquired from own labor 20,000 40,000 60,000
Properties earned from common labor 50,000

The following shows an analysis of the properties of the spouses under the CPG:
Exclusive properties Common
properties
Mr. Crocs Mrs. Crocs
Properties accruing before marriage:
Properties inherited before marriage 200,000 100,000
Other properties brought into the marriage 400,000 500,000

Properties accruing during marriage:


Properties inherited during marriage 250,000 150,000
Properties as fruit of own labor 300,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 150,000
Properties inherited during marriage 100,000
Properties acquired from own labor 60,000
Properties earned from common labor 50,000
Total 850,000 750,000 910,000
Note: All properties accruing during marriage are common properties except those received by way of gratuitous title.

The gross estate of Mrs. Crocs shall be:


Exclusive property of Mr. Crocs 850,000
Common property of Mr. and Mrs. Crocs 910,000
Gross estate 1,760,000

ABSOLUTE COMMUNITY OF PROPERTIES (ACP)


➢ Under ACP, marriage is viewed as a union of the properties of the spouses at the time of marriage
including fruits of their labor and industries in the marriage.
Special features of ACP
1. Retroactive feature
All properties which the spouses owned before the marriage which they brought into the marriage will
become common properties.

Exception:
a. Properties of a spouse with descendant/s in a prior marriage
b. Properties for exclusive personal use of either spouse, except jewelry

2. Prospective feature
All properties which the spouses may acquire during the marriage from their separate or joint labor or
industry are common properties.
Exception:
a. Gratuitous acquisition received by either spouse.
b. Fruits of exclusive property
c. Properties acquired for exclusive personal use of either spouse, except jewelry
Before marriage: (Retrospective)
All properties here are common
Exceptions:
Properties of spouse with descendants in a prior marriage
Properties of personal exclusive use of either spouse, except jewelry

During marriage: (Prospective)


All properties here are common
Exceptions:
Gratuitous acquisitions received by either spouse
Fruits of exclusive property
Properties of personal exclusive use of either spouse, except jewelry

Spouses with descendants in prior marriage


Illustration:
Ms. Beauty Fool, 20 years old, married Don Mario Montero Montemayor Milagroso, a wealthy 65-year old
businessman known for his alias “Mr. 4M.” Mr. 4M had a child with his deceased wife in a prior marriage.

Ms. Beauty brought into the marriage properties totaling P50,000. Mr. 4M also brought into the marriage properties
totaling P70,000,000. During the marriage, Ms. Beauty accumulated P300,000 from her salaries.

Mr. 4M can no longer work at his age so he is totally dependent from the fruits of his properties. His properties
earned P11,000,000 during the marriage.
The following shows an analysis of the properties of either spouse:

Exclusive Properties Common Properties


Mr. 4M Ms. Beauty
Properties brought into the marriage
Mr. 4M 70M
Ms. Beauty 50K

Properties acquired during marriage:


Fruits of properties 11M
Cash-salaries of Beauty 300K
81M 350K

*in ACP, fruits follow the principal

Properties received by way of gratuitous title


➢ Similar to CPG, properties received by way of gratuitous title such as donation or inheritance during
marriage is a separate property unless designated by the donor or decedent to be for both spouses.

Summary of Rules: Absolute Community of Property


Properties acquired Before marriage During marriage
From gratuitous acquisitions Communal Exclusive*
From fruit of industry Communal Communal
From fruit of property:
Separate property Communal Exclusive
Community property Communal Communal
For exclusive use of either spouse:
Jewelry Communal Communal
Non-jewelry Exclusive Exclusive

*communal if designated to both spouses

Illustrations: ABSOLUTE COMMUNITY OF PROPERTY


Illustration 1:
Spouses Rene and Bebe who were under the absolute community of property had the following properties:
Rene Bebe
Before Marriage
1. Donations or inheritance received 100,000 150,000
2. Income of property from No. 1 10,000 20,000

During Marriage
3. Properties acquired from separate industry 400,000 300,000
4. Property received by donation or inheritance 800,000 500,000
5. Income of properties from No.1 and No.2 15,000 25,000
6. Income of property from No. 3 40,000 30,000
7. Income of property from No. 4 80,000 50,000
Separate properties of the spouses
Separate properties
Rene Bebe
Before marriage
1. Donations or inheritance received - -
2. Income of property from No.1 - -

During Marriage
4. Property received by donation or inheritance 800,000 500,000
7. Income of property from No.4 80,000 50,000
Total separate properties 880,000 550,000

Common properties of the spouses:


Rene Bebe Total
Before marriage
1. Donations or inheritance received 100,000 150,000 250,000
2. Income of property from No.1 10,000 20,000 30,000

During marriage
3. Properties acquired from separate industry 400,000 300,000 700,000
5. Income of properties from 1&2 15,000 25,000 40,000
7. Income of property from No.3 40,000 30,000 70,000
Total common properties 1,090,000

Illustration 2:
Mr. Crocs died. An inventory of the properties of Mr. and Mrs. Crocs is prepared below:

Mr. Crocs Mrs. Crocs Total


Properties accruing before marriage:
Properties inherited before marriage 200,000 100,000 300,000
Properties for exclusive personal use 50,000 60,000 110,000
Other properties brought into the marriage 350,000 440,000 790,000

Properties accruing during marriage:


Properties inherited during marriage 250,000 150,000 400,000
Properties as fruit of own labor 140,000 160,000 300,000
Properties acquired for exclusive use 30,000 40,000 70,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 100,000 50,000 150,000
Properties inherited during marriage 20,000 80,000 100,000
Properties acquired from own labor 20,000 40,000 60,000
Properties earned from common labor 50,000
The following shows the classification of the properties of the spouses under ACP:
Exclusive properties Common
Properties
Mr. Crocs Mrs. Crocs
Properties accruing before marriage:
Properties inherited before marriage 300,000
Properties for exclusive personal use 50,000 60,000
Other properties brought into the marriage 790,000

Properties accruing during marriage:


Properties inherited during marriage 250,000 150,000
Properties as fruit of own labor 300,000
Properties acquired for exclusive use 30,000 40,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 150,000
Properties inherited during marriage 20,000 80,000
Properties acquired from own labor 60,000
Properties earned from common labor 50,000
Total 350,000 330,000 1,900,000

The gross estate of Mrs. Crocs shall be:


Exclusive property of Mr. Crocs 350,000
Common property of Mr. and Mrs. Crocs 1,900,000
Gross estate 2,250,000

Acquisition of Exempt Properties


➢ The acquisition of exempt properties will be included as exclusive or common properties of the spouses
but shall be excluded in the computation of the gross estate.
➢ The principal of exempt properties shall be removed from the reportable gross estate.
➢ The exclusion of exempt properties cannot be extended to the income of exempt properties.

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