Chapter 13-A-Estate Tax: Gross Estate CHAPTER 13-A ESTATE TAX: GROSS ESTATE Chapter Overview and Objectives After this chapter, readers are expected t The concept of gross estate The procedures in determining gross estate The list of exempt transfers The list of taxable transfers The treatment of mortis causa tra consideration The rules of valuation of gross estate ‘o comprehend: nsfers made for insufficient “PYNE a 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. In the case of a non-resident alien decedent, gross estate includes only properties situated in the Philippines except intangible personal property when the reciprocity rule applies. Summary of rules on gross estate Residents or | NRA without NRA with Citizens reciprocity reciprocity Property location > Abroad | Within Within | Outside Real properties a v x v x Personal properties [_ Tangible Zz a EA x v x [___Intangible v v v x x x Illustration ‘A decedent died leaving the following property: Location Philippines. _ Abroad __ T. Total — P 2,000,000 P 3,000,000 Pp 5,000,000 er Real property al property 1,000,000 500,000 1,500,000 Tangible person: 0.000 A iproperty 800.000 1.200.009 _ 2.000.000 Intangible persons 3.900.000 B4700,000 Totalpat 43-A-Estate Tax: Gross Estate state: crs ecedent isa: ihe esident citizen, non-resident citiz, % Non-resident alien without recipr Non-resident alien with reciproci en or resident alien - P ocity-P3 pong 0000 ty - P 3,000,000 ocEDURES IN ESTABLISHING GROSS ESTATE inventory count of existing properties at the poi 1 Adjustments for exempt transfers and vara tone inventory of Properties lish the amount of the it qo establish t tT oF tie gross estate, an inventory of the properties of the decedent and their fair values at the point of death shall first be gstablished. Date of death (Inventory count) Ifthe list of properties existing at the point of death is known, the list is simply drawn directly. However, if the inventory is prepared as of a later date after the decedent's death, the inventory must be worked back to establish the list of properties present at the point of death. Illustration Adecedent died on June 30, 2019. An inventory was not immediately prepared because of the funeral of the decedent. An inventory count of his properties was drawn only on July 15, 2019. ich had a total fair value of P5,000,000. On jul ties whi luly 15, there were propertifs Wr earned after death while P400,000 °100,000 of this represents income Tepresents income earned before death. total of P50, sd for funeral expenses and judicial expenses of the State, A total oer206 O00 = pligations ofthe decedent was pad since his death. Thegross estate shall be recomputed as: P 5,000,000 — igerties as of July 15, 2019 100,000 Agu Increase in properties since deat sox P2008) a > 4: Decrease in properties since death (P50 ary Zeenat Petties existing at the date of death (Gross 461Chapter 13-A-Estate Tax: Gross Estate Gross Estate: ifthe decedent is a: a. Resident citizen, p. Non-resident ali Non-resident ali Ron-resident citizen or resident alien - P 8,500,000 len without reciprocity ~ P 3,800,000 len with reciprocity - P 3,000,000 PROCEDURES IN ESTABLISHING GROSS ESTATE 1, Inventory count of existing properties at the point of death 2. Adjustments for exempt transfers and taxable transfers Inventory of Properties wy) aa the amount of the gross estate, an inventory of the properties of the dece lent and their fair values at the point of death shall first be established. Date of death I (Inventory count) If the list of properties existing at the point of death is known, the list is simply drawn directly. However, if the inventory is prepared as of a later date after the decedent's death, the inventory must be worked back to establish the list of properties present at the point of death. Illustration ‘A decedent died on June 30, 2019. An inventory was not immediately prepared because of the funeral of the decedent. An inventory count of his properties was drawn only on July 15, 2019. On July 15, there were properties which had a total fair value of P5,000,000. P100,000 of this represents income earned after death while P400,000 represents income earned before death. aid for funeral expenses and judicial expenses of the A total of P500,000 was A O obligations of the decedent was paid since his death. estate, A total of P200,000 The gross estate shall be recomputed as: Properties as of July 15, 2019 P s,000000 Less: Increase in properties since death 1004 Add: Decrease in properties since death (P500K + P200K) 00.000 Properties existing at the date of death (Gross Estate) P.5,600,000 461Chapter 13-A-Estate Tax: Gross Estate 1. 2 3. ™ ting income earned before death properly form part of y erties represen f - Proper epreent because these were present atthe polnt of death, #8 eats gies roprsenting income accruing after death must be excluded sin e Were not yet present at the point of death, thes Enpenses or obligations which were pald since death must be added back these were present at the point of death, sin THE GROSS ESTATE FORMULA: Inventory of properties at the point of death P xK,xxx Less: Exempt transfers Properties not owned P XXX,Xxx Properties owned but excluded by law __xxxxxXX __XXxxxx Inventory of taxable present properties P xxx.xxx Add: Taxable transfers XXXLXXX GROSS ESTATE P200,xxx EXEMPT TRANSFERS 4. Transfers of properties not owned by the decedent - One cannot transfer properties he or she does not own. Properties not owned by the decedent are not part of his/her donation mortis causa, These properties must be excluded in gross estate even if they transfer to other persons at the point of death. Transfers legally excluded- There are properties that are owned by the decedent at the point of death. These properties naturally form part of his/her donation mortis causa to the heirs, but are exempted by the law from estate taxation. Hence, these are excluded from gross estate. These referred to as exclusion in gross estate. Transfer of properties not owned by the decedent 1. Zz 3 Now Merger of the usufruct in the owner of the naked title The transmission or delivery of the inheritance or legacy by the fiduciary heir or legate to the fideicommissary The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate, executor or administrator Properties held in trust by the decedent : Separate properties of the. surviving spouse of the decedent Transfer by way of bona fide sales 462ry chapter 13-A-Estate Tax: Gross Estate pnustration nvr, A died In June 2011 tn his will, he devised an agricultural land to B who sv the properly over 10 year: shall use 1 years and thereafter, to C. Subsequently, B died resulting in the transinission ofthe property toc. “iene predecessor Current decedent Aa| > |s | ——> (sufructuary) (Owner of naked title) ‘The transfer of the devise from B to Cis referred to in law a usufruct in the owner of the naked title the ‘merger of the The transfer from the usufructuary, B, to the real owner, C, upon the death of B does not constitute a donation mortis causa as it is a mere return of the property to the real owner. Hence, it is excluded from gross estate. Note that the transfer from Mr. A, the predecessor, of the usufruct to B and the naked title to C involves transfer of ownership. It is a donation mortis causa of Mr. Asubject to estate tax. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary lustration Mr. A died leaving an inheritance consisting of several real estates to his favorite grandson, C from his favorite son, B. Because C was a minor, Mr. A appointed B, as fiduciary of the inheritance. Before transferring the property to C, B died Predecessor Current decedent ——> |, | _——> A B c (Fiduciary heir) (Fideicommissary) The delivery of the inheritance upon the death of B (fiduciary heir), to C (fideicommissary) shall not be included in the gross estate of B because the transfer does not involve a transfer of ownership from B to C. Bis merely a trustee. The delivery is a mere return of the property to the real owner, C. The transmission from the first heir, legate, or donee in favor of another beneficiary, in accordance with the desire of the predecessor Mustration 463Chanter 3 A-Estate Tax Gross Estate ty bis will Me. A devised a piece of lane to Bas the Hest helt adel thereaten ig ge the second heir, B subsequently died wanstaitting the property: ty th i accordance with Mr a's will, Predecessor Current decedent + is aa (ato og ag la} > 1B c (1% heir) (heir) B to € is referred to as trun under a special power y me is not B's donation mortis causa. The transfer from Beye r which was originally mandated y appointment. Th > an implementation of the tn y or in conjunction with drawn by predecessor rule applie B were given the po rs to appoint the second heir to the property from a othe! In all previous illustrations, assuming B transferred the property during his lifetime to C, the same shall not be subject to donor's tax because there is no gratuitous transfer of ownership. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate, executor or administrator ‘The proceeds of life insurance policies which are irrevocably designated by the decedent to the beneficiary are no longer owned by the decedent at the point of his/her death. They are owned by the beneficiary designated by the decedent. Hence, these shall not be included in gross estate. ‘The proceed of life insurance policies which are revocably designated by the decedent to any beneficiary are owned by the decedent at the point of his/her death. Hence, the proceeds are included in gross estate. ther the ed to be intil his tax If the decedent named a beneficiary without indicating whet designation is revocable or irrevocable, the designation is presum revocable. However, if the decedent did not replace the beneficiary death, the designation shall be deemed irrevocable exempt from estate Estate, executor or administrator as beneficiary If the beneficiary designated is the estate, executor or a\ proceeds of life insurance is included in gross estate re! designation of the beneficiary because these beneficiaries are co extensions of the interest of the decedent. dministrator, the ardless © A nsidere* 464chapter 13-A-Estate Tax: Gross estate summary of RULeS: Proceeds of Life insu surance sa administrator, or -iti_| other parties lustration Mr. Tubod died. His heirs collected the following proces r ation of beneficiary tevocable Irrevocable Include Include Include Exclude eds of life insurance polit axa,revocably designated to wife anulife, irrevocably designated to daughter 1 eoneed sunlife, revocably designated to Mr. Tubod's estate 700,000 philAm, irrevocably designated to Mr. Tubod’s executor 400,000 The proceeds of insurance policies to be included in gross estate shall be: AXA revocably designated to wife P 800,000 Sunlife, revocably designated to Mr. Tubod’s estate 700,000 PhilAm, irrevocably designated to Mr, Tubod's executor ___ 400,000 Total B.1,900,000 Note: 1. Only the proceeds of insurance policies that are revocably designated are included in grossestate. 2. However, if the beneficiary is the estate, executor or administrator, the proceeds are included in gross estate without regard of the designation of the beneficiary as revocable or irrevocable. Properties held in trust by the decedent Properties held in trust by the decedent at the point of his death are not owned by him. These are excluded in gross estate because these will not form part of the decedent’s donation mortis causa to the heirs. lustration : The following properties were identified upon the death of Mr. Ubaldo: Car, registered in the name of his brother Se an lerchandise, consigned to Mr. Ubaldo ray House and lot “150,000 otorcycle, borrowed from a friend 4,000,000 rearding house, held as trustee 1,000,000 ‘axicab 600,000 Taxicab franchise belongings 400,000 lothes, books, equipment, and other persone 465Chapter 13-A-Estate Tax: Gross Estate i lowing: ‘The gross estate of the decedent shall consist of the fol 8; P 2,400,000 House and lot 1,000,000 Taxicab 600,000 Taxicab franchise F Clothes, books, equipment and other personal belongings. 400,001 Gross Estate P.4.400,000 s held in trust by the decedent includin, it rtie: Gross estate shall not include prope! che following shall be excluded fre other properties he does not own. Hence, gross estate. Car, registered in the name of his brother P 800,000 Merchandise, consigned to Mr. Ubaldo 200,000 Motorcycle, borrowed from a friend 150,000 Boarding house, held as trustee 4,000,000 Total exclusions in gross estate P_5,150,000 Separate properties of the surviving spouse Spouses have their separate properties and common properties. Common properties are owned jointly by the spouses while separate or exclusive properties are solely owned by either of them. The separate or exclusive properties of the husband are referred to as “husband's capital” while that of the wife is referred to as “wife's paraphernal.” The wife's paraphernal shall not be included in the gross estate of the husband upon his death since these will not form part of his donation mortis causa. Similarly, the husband’s capital shall not be included in the gross estate of the wife upon her death on the same basis. The gross estate of a married decedent includes the separate properties of the decedent and their common properties with the surviving spouse. Illustration An inventory of the properties at the point of death of Mr. Cabili revealed the following: Exclusive properties of Mr. Cabili Exclusive properties of Mrs. Cabili P Pa onn Common properties of Mr. and Mrs. Cabili ‘ofs0.00% Total properties of the spouses Ee 466rr chapter 13-A-Estate Tax: Gross Estate she gross estate of Mr. Cabili shail be; xclusive properties of Mr. Cabili er rties of Mr. and ‘ 400,000 common propel and Mrs. Cabil Gross estate nt 8,000,000 210,400,000 note: ‘The boundary between exclusive and c i i f ‘and common properties of the spous \estion of property relations which will be discussed nthe following chapter. esis aauestizn 2, The common properties are jointly owed by the spouses. The share ofthe surviving spou n properties is not an item of exchision but an item of deduction. Hence, it is initially included in the gross e t eduction from the gross estate, 8 state then later removed as an item of transfer by way of bona fide sales transfers by way of bona fide sales are onerous transactions rather than gratuitous transactions; hence, they are not subject to estate tax. Moreover, ownership over properties sold normally passes on to the buyer immediately at the point of sale. Hence, properties transferred by way of bona fide sale or for an adequate consideration are excluded in gross estate because the decedent no longer owns them at the date of his/her death. Legal exclusions The following are the list of properties owned by the decedent at the point of death which naturally forms part of the hereditary estate but are not subjected to estate tax by law: Proceeds of group insurance taken out by a company for its employees Proceed of GSIS policy or benefits from GSIS Accruals from SSS United States Veterans Administration (USVA) benefits ~ RA 136 War damage payments ; 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 not more than 30% of the said bequest, devises, legacies or transfers shall be used by such institutions for administration purposes 7. Acquisitions and/or transfers expressly declared as nontaxable by law 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. 467Chapter 13-A-Estate Tax: Gross Estate i fi Note on property acquisitions using exempt ee nt Properties acquired using GSIS benefits, 5: ae pee enef proceeds of group insurance and war damage paym' -XEMBt so Jong as the heirs or administrators can prove that the properties Wery acquired using these exempt properties. Note on bequests, device, or legacies to social welfare, cultural, and charitable institutions The conditional exclusion applies if the 30% of the bequest, device, or legacies for donee institution uses not more than administration purposes, The 30% conditional exclusion is deemed satisfied if the donee is an accredited non-profit donee institution. If the donee is a qualified non-profit donee institution, the same is excluded in gross estate. It must be noted that one of the primary requirements for the accreditation of donee institutions is that their income does not inure to the benefit of any private individual and that the level of their administration expenses does not exceed 30% of their total expenses. Transfers to these institutions are initially included in the inventory list of taxable properties, but are removed from the list if the donee is verified asa qualified donee institution. If the transfer qualifies for exclusion, the same is not reflected in both gross estate and deduction. It must be noted that there is no item of deduction for such transfer under the Tax Code and in the estate tax return. Despite this, bequests, devises or legacies which are restricted by the decedent for administrative expenses of the donee institution (whether accredited or non-accredited) shall be included in gross estate. Illustration A decedent had the following properties: Family home P 5,000,000 Truck 1,200,000 Cash 200,000 Commercial land 800,000 Other properties 600,000 In his will, the decedent designated the cash to be oi , ta schoo. The commercial land wos. wage no 08 given to a public elem ny ool " vise an itable institution restricted to be used for program ee ‘profi chart le latter. 468chapter 13-A-Estate Tax: Gross Estate spe gr0ss estate shall be coimputed as ily home ae P 5,000,000 cash 1,200,000 other properties 200,000 Gross estate 600,000 2,000,000 Not te: 1. only bequests, devises or descent institutions are exempt. srs to the gov in 4, Tronsfe aoe hament and its instrumentalities are not items of exclusion but items of deduction. They are included in to social welfare, cultural and charitable Deposits withdrawn from the decedent's bank account Previously under the NIRC, withdrawal from the bank account is prohibited except withdrawal of up to P20,000 for the funeral expenses of the decedent. The TRAIN law allows unlimited withdrawal from the decedent's bank account but requires bank with knowledge of the decedent's death to withhold 6% final withholding tax upon the withdrawal if made within one year form the decedent’s death (RR8-2019). The 6% withholding tax is a final tax and is non-creditable. As such, amounts subjected to the 6% final tax must be excluded in gross estate. However, if such withdrawal is not subjected to the 6% final tax, the amount of withdrawal must be included in gross estate. Illustration 1 The following withdrawals were made from the bank account of the decedent who died July 8, 2019: July 7, 2019 P 200,000 For payment of medical expense July 9, 2019 300,000 For payment of funeral expense uly 10,2020 500.000 For payment of claims against the estate Ending balance The P300,000 shall be excluded in gross estate. The amount of cash in bank to be "ported in gross estate shall be P3,500,000. Nate: rt teas it is expended before the death of * The 200,000 withdrawal is mot pata Te es edecedentisnotyet dena 2, Sedecedent. Thisis not subject 0 636 final TT Gene's death, the P300,000 shall be eer ae informed al be excluded in gross estate by the estate a ‘Subjected by the bank to 6% final a ter, executor or heirs. , final tax since itis beyond the 1-year * The P500,000 shall no longer be subjected £0 6% ic ‘that time. Premera ete tax might Rave even eet PAY 469Chapter 13-A-Estate Tax: Gross Estate Minseration 2 with BPI for their business ven | Kang has a joint account with feat : ae aes eal ate Mr, Jo died in an accident. A withdraw} of 100,000 is being made against the account. : ; wely Since half of the bank interest will effective! Jo, the bank shall withhold the 6% final tax on withdrawal. pe included in the gross estate of y, ly on 1/2 of the 100,009 Illustration 3 | . | ‘Assume the same data in the foregoing illustration see that Mr. Liam Madg died and that the account is a joint account with Ms. Mado. The bank shalt withhold the 6% final tax upon the total P100,000 balance sine the entire amount will be reflected in halves under separate and common properties columns of the gross estate. It must be noted that withdrawal which were not subjected by the bank to the 6% final tax must be included in gross estate. ‘The 6% final tax treatment should be a caveat to heirs or estate administrators. Withdrawal from the decedent's accounts is not advisable if the decedent is projected to have a zero or negative net taxable estate. 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 Transfers in contemplation of death These are donations made by the decedent during his lifetime which at motivated by the thought of his death. These transfer inter-vivos af usually made by the decedent in a stage of terminal illness or under belief! an Poa ae Analogons to testamentary disposition, transfers !? contemplation of death are treated b ion mortis subject to estate tax not, to donor’s a fas lava donation tt a Transfer in contemplation of death may include: a. Transfers of property to take effect in ossessi j tat OF after death Possession or enjoymen! 470chapter 13-A-Estate Tax: Gross estat fe b. Transfer of Property with ment or ri vith retenti i ene feu vor right over income ofthe, of the right of possession or ¢ Tran: nro Property with retention aaah) until death conjunction with any pers of the right to designate, alo i the income there from SO the Person who shall aise tas eeonerey ar donation mortis causa, the right le transfers, ownership transfers only when the transferor waives right of revocation, tis owas the If the transferor dies without waiving his ; ” 's the property at the poi i ‘ should be included in his gross Beet ee er otn Ob gaan Neca Illustration 1: Revocable donation In January 2017, Mr. Bala transferred a car with a fair value of P1,200,000 to Mr. Subas. The car shall be revocable by Mr. Bala until July 30, 2020. Mr. Bala died on May 30, 2020 when the car had a fair value of P1,100,000. The car shall be included in the gross estate of Mr. Bala at its fair value of P1,100,000. The transfer shall be subject to donor's tax when the right to revoke expired prior to Mr. Bala’s death or when Mr. Bala waived the right to revoke before his death. ded in gross estate. Inthis case, the property shall not be inclu Illustration 2: Conditional donation Mrs, Mulondo transferred a house an ownership is conditional upon Masiu’s Exam. On June 15, 2020, Mrs. Mulondo died. d lot to his son, Masiu. The transfer of passing of the October 2020 CPA Board te of Mrs. Mulondo at its fair ‘owned the property at her death. PA Board Exam before Mrs. Mulondo's stax at the fair value of the property The house and lot shalll be included in the gross estal value on June 15, 2020 since she sti Assuming Masiu passed the October 2020 death, the transfer shall be subject 10 donoi n October 2020. . i th; Assuming further that Mrs. Mulondo waived the Cont ‘sth retina Further ha Meter vvas Wht yg grss estate of Mrs. instances, the house and fot shall no l0n9er -_ lulondo upon her death. amChapter 13-A-Estate Tax: Gross Estate in rights cae ae ty ie se edent prior to his death but rea, i ferret 5 : If properties are enjoyment of or right to income fon the propery, a the Possession or jaded in gross estate to the extent of the deceden same shal interest therein. ral land in favor of his son. He, hovev, Illustration fa quarter of the land until his death, The Mr. Ozamis transferred an a reserved for himself the enjoyment o Jand was worth P2,000,000. The P500,000 (i.e. P2,000,000 Ozamis for himself until his dea gricultu x4) portion of the land which was reserved by yy, th shall be included in his gross estate. intment Transfer under general power of appointme Properties subject to a general power of appointment by the decedent shal} be included in the gross estate of the decedent. The presence of the genera power enables the holder of such power to do with the property anything which he could do as if the property were his own. Mlustration Don Kulot died. In his will, he gave Mama Sang a house and lot with the right to designate the property to whomever heir she wants, Mama Sang eventually ded and appointed Bebe as heir to the property. Mama Sang had a general power over the property. The same shall be included in her gross estate. If Mama Sang had limited power, the same shall not be included in her gross estate. COMPOSITION OF GROSS ESTATE 1. Properties, movable or immovable, tangible or intangible 2. Decedent's interest on properties 3. Proceeds oflife insurance: a. Designated as revocable to any heir b. Designated to estate, administrator or executor as beneficiary 4. Taxable transfers , jee OF GROSS ESTATE IN THE ESTATE TAX RETURN 5 ing gross estate under BIR Form 18 ition of the 75 estate shall be classified as follows: 301, the composition of 1. Real neal : ; familt homes ‘ll immovable properties of the decedent, excluding 2. Family home 472Chapter 13-A-Estate Tax: Grose — te 3, Personal properties _ rights or interest in any 4, Business interests all mova buss oVable properties of the decedent, except usiness INTEGRATIVE ILLUSTATIONS integrative Illustration 1 sident decedent died wi ae ont died with the following properties at the point of death: cash in bank account Receivables from friends and relati P 1,000,000 Borrowed car froma friend 200,000 House and lot 120,000 torcycle, registered i , 2,000,000 eal yl gistered in the name of his youngest son 80,000 ‘The gross estate shall be computed as: Inventory of present properties P 4,400,000 Less: Not owned _— Borrowed car P 120,000 Motorcycle 80.000 _ 200,000 Gross estate P_4.200.000 Integrative Mlustration 2 Mr. A,acitizen decedent, died leaving the following properties: Cash proceeds of life insurance designated to a brother as revocable beneficiary P 1,000,000 Building, properties held as usufructuary a Cash it 400, ash in bank E 900.000 Agricultural land House and lot, from Mr. A’s industry ae Benefits from GSIS 500,000 Total properties 17,900,000 Additi i ition: » oo 1 The petal Tand was designated by Mr. A's father in his will to be 7 ith. upon Mr.A’sdeath. ; 2 ble donation involving a residential se his brother E + Mramade revocable doa as wa P0000, Te ae f Jue upon Mr. A’s death. asin ve at P2002 9 mt dct bk ut . i it re’ > 7 ie eetaee of 6% final tax deducted by the transferred to D, Mr. A’s son, ited as: 473 The gross estate shall be compuChapter 13-A-Estate Tax: Gross Estate P17,900,000 Inventory of present properties: Properties not owned Building, held as usufructuary rp ; Pana er power wl ht Agriesleural land, under sp po yr etonn0o Properties exempted by law pte GSIS benefits e Bank withdrawal (P376,000/94%) 200,000 7,200,000 Taxable present properties vl penn enn Add: Taxable transfers (P2M ~ P400K) — 1.600.000 Gross estate P11,600,000 Integrative Illustration 3 An inventory of Mr. D's properties was the following properties during the inventory-taking: Cash (40% from income of properties after death) P 4,000,000 Car (bought for P1.2M a week before Mr. D’s death) 800,000 House and lot (worth P8M on Mr. D's death) 10,000,000 Business interest (worth P6M on Mr, D's death) 7,000,000 Total P21,800,000 The following possible deductions can be claimed by the estate: Funeral and judicial expenses paid P 1,100,000 Wreck ofa fishing boat, one year after Mr. D’s death 300,000 Obligations of Mr. D paid from his properties 1,500,000 The gross estate at the point of death shall be established as: Inventory of property P21,800,000 Add: Decreases in properties since death Funeral and judicial expense P 1,100,000 Wreck ofa fishing boat 800,000 Obligations paid after death 1,500,000 Decrease in value of car (P1.2M - P.8M) ——400,000 __ 3,800,000 Total 25,600,000 Less: Increases in properties since death fs 500000 Cash income of properties (P4M x 40%) P. 1,600,000 Increase in value of house and lot : (P10M - P@M) 2 Increase in business interest a Grosstiaate —ennang — 00.000 21,000,000 474 n two years atter his death, He hagchapter 13-A-Estate Tax: Gross Estate VALUATION OF THE GROss ESTaTE properties subject to estate tax | int of death. Conceptually, “fai willing independent buyers and abr ed at their fair value at the ir value" refers to the amount at which two lers could transact an exchange. yaluation rules , The fair value of the proper naan Paracas in eres ee ty as of the time of death shall be the value 2 a aaa law or revenue regulations must be followed. 3, In default 0 ait value rules, reference may be made to fair value rules generally accepted accounting principles. 4, Encumbrances on the property or decrease it Eoramranees 0 iy ease in value thereof after death ‘The following sections discuss fai i a ee s fair value rules for the following assets: 2. Shares of stocks 3, Usufruct and annuities 4, Other properties 5. Taxable transfers Real properties Under the NIRC, the appraisal value of real property shall be whichever is higher of: a. The value as determined by the Commissioner of Internal Revenue (zonal value), or b. The value fixed by the Provincial or City Assessor. ble base shall be the fair market value that ‘on. Note that the TRAIN law points to the market value - not the assessed value. If there is no zonal value, the taxal appears in the latest tax declarati fair value listed in the schedule of ue of the improvement shall be the the val If there is an improvement, E rmit or the fair value that appears in the construction cost per building pe’ latest tax declaration. Mlustration Mrs, Geogracia died leaving a house and 10° part of er estate. The property he ee i ered by a P1,000,000 mortgage had the following fair values: [1 Lot P_3,000,000 7,000,000 P-4,000,000 [air value, perassessor | value, per assessor “400,000 1,600,000, 500,000 4,500,000 (Appraisal value — praisal value 475Chapter 13-A~Estate Tax: Gross Estate - tuded in gross estate at P4000,999 hall be include s est . peaoee an eevee The indeandet appraisal 1 OE Wed Ay reatyoge shat nat be ofset against ene vai of he BrOPSPY. hares of stocks n whether the saree market value of stocks shall depend 0 sto ag listed or unlisted in the stock exchanges. Preferred shares are valued at par value. : .d at their book value. Unlisted common shares shall be values RR12-2018 reinstated the financial statement methog plus. The Adjusted Net Asset Method under For this purpose, which ignores appraisal sur' RR6-2013 is no longer followed. For shares which are listed in the stock exchange, RR12-2018 also reinstated the use of arithmetic mean of highest and lowest quotation ata date nearest the date of death. Illustration Mr. Yakal died leaving 1,000 preferred shares and 300,000 common stocks of MVC Company in his estate. The equity section of MVC in the its latest quarterly financial statements is as follows: Preferred stocks, 10,000 shares @ P500 par P 5,000,000 Common shares, 10,000,000 shares @P2 par 20,000,000 Share premium ~ common shares 4,000,000 Retained earnings 12,000,000 Revaluation surplus ~ PPE 2,000,000 Less: Treasury shares, 100,000 shares = 360,000 Total shareholder's equity 42,640,000 Case 1 Assuming MVC is non-listed company, the book value per share of common share shall be computed as: Common shares, 10,000,000 shares @ P2 par 20,000,000 Share premium - common shares 4,000,000 Retained earnings 12,000,000 Less: Treasury shares, 100,000 shares. = "360.000 Residual net assets P 35,640,000 a oy: Outstanding common shares — ,000,000 - 100,00 Book value per share 2 Pere 3 aa 476chapter 13-A-Estate Tax: Gross Estate Mr. Yakal's shares shall be valued as follows in his gr ‘Oss estate: preferred stocks (1,000 shares @ ordinary shares (300,000 x 3.60) coal P 500,000 Total investment — 1,080,000 P_1,580,000 case 2 Assuming MVC is listed and is t . nearest trading day to the date erica as follows in the stock market at the MVC Company The average price based on the foregoing graph shall be (4 + 6) / 2 = PS. Mr. Yakal's shares shall be valued as follows in his gross estate: Preferred stocks (1,000 shares @ P500) P 500,000 Ordinary shares (300,000 x 5.00) —1500,000 Total investment P_2,000,000 Usufruct and annuities | . A decedent may transfer usufructuary right to income over property or right to receive amounts of annuities to his/her heirs. The fair value of such usuftuct or annuities must be included in gross estate. ight to usufruct, use, or habitation, as well as ken into account the probable life of the e latest basic standard mortality table, to upon recommendation of the To determine the value of the ri that of annuity, there shall be tal beneficiary in accordance with the la! be approved by the Secretary of Finance, Insurance Commissioner. Mu i . ity contract 7 . Mn Meee so pears 0 al old his company under a condition that the acquirer “+ child P300,000 yearly support payment sh; A 7 ife and their chil a irer. i ae ie ee ee “after the fifth payment Was made by the acquirer. 477Chapter 13-A-Estate Tax: Gross Estate Assuming that the appropriate discount rate Se Camu sha ce included in the gross estate of Mr. ee tee. wohtract. Of the 25 remaining future payments to be received under ‘The present value of an annuity is mathematically computed as follows; Value of annuity = (1.= (L+i)-*) x Annuity payments i Where: {terest rate or discount rate per period = Pea : n= number of periods = 30years ~ 5 years = 25 year: Value of annuity = (1 = (1+ 12%)5) x P 300,000 12% Value of annuity = 7.843139 x P300,000 = P2,352,941,73 The annuity contract shall be included in the gross estate of Mr. Mairugin at its value of P 2,352,941.73. Note: To compute for the annuity factor, press the following in your scientific calculator: [(1 - (14.12) x- 25) + 12] = Mlustration 2: Usufruct Don Midas transferred to Aurelius and his heirs usufructuary right over a 50,000,000 property for 10 years. After 10 years, the property shall be given to Marcus who was designated as the owner of the naked title. Aurelius died just after the end of the sixth year of the usufruct. The property earns P1,000,000 annual income. Assume that the applicable discount rate is 12%, Upon the death of Aurelius, the usufruct will be transferred to his heirs for the four years (10 yrs. - 6 yrs.) remaining unexpired term of the usufruct. The fair value of the usufruct to be included in the gross estate of Aurelius shall be the present value of the annual income on the property for 4 years: Value of usufruct = 1+12%)*) x P 1,000,000 12% Value of usufruct = 3037349 x P1,000,000 Note: 1. The transfer of the property from Aurelius to his heir for the remainder of the usufructis not a merger of the usufruct to the owner of the naked title. 478chapter 13-A-Estate Tax: Gross Estate ‘assuming Don Midas gra . Asufruct to be included in they el into consideration the life exp ‘The subsequent transfer of th merger of the usufruct in the 2 " heir a life usufruct, the fair value of the Bross estate of Aurelius sh: etary arn aural ill be determined by taking © Property from the heir \ 0 vir upon his death to Marcus (i.e. Owner of the naked title) is exempt from transfer tax. 3 other properties For Ee See law or revenue regulations has not fixed valuation rules, .¢ Into consideration fair value rules under generally accepted accounting principles (GAAP), Additional Guidelines in Determining Fair Values «For newly purchased property, the fair value may be its purchase price. If not newly acquired, the fair value shall be its second-hand value. + For pawned properties, the fair value may be reestablished by grossing-up the pawn value by the loan-to-value ratio. + For property fixed in monetary terms such as a loan or receivable, the fair value is the amount fixed in the contract including accrued income thereto. + For foreign currencies, the fair value shall be its Peso value translated at the prevailing exchange rate at the date of death, Ilustration 1: Used properties Mr. Bantay died leaving a used car as part of his estate. Mr. Bantay bought the car at P400,000. Brand new units of the same car model sell at P500,000. The car sells at P250,000 if sold as is at the point of death. The used car shall be included in the gross estate at P250,000. Ilustration 2: Pawned jewelry At the point of death, Mr. X has a piece of jewelry which was pawned with Munting Pawnshop for P90,000. Munting Pawnshop maintains a 60% loan-to- appraisal value. as P90,000/60% = P150,000.The P150,000 fair The fair value shall be computed value shall be included in the gross estate. The P90,000 loan shall not be offset das an item of deduction from with the value of the jewelry but should be presented gross estate, Mlustration 3: Loans receivables On June 30, 2020, Mr. Bombay died wit! * P.50,000 non-interest bearing loan to Mr. A, in3 , - “Pe conan bearing 10% interest to Mrs. B, given January 1, 2020 and is due in one year AP 20,000 non-interest Unpaid h the following outstanding receivables: given April 1, 2020 and is due bearing loan to Mr. C, due March 30, 2020 but still 479Chapter 13-A-Estate Tax: Gross Estate ‘The foregoing loans shall be included in gross estate as: Loan to Mr. A P 50,000 Loan to Mrs. B 300,000 ‘Accrued interest on loan to Mrs. B at the date of death 15,000 Overdue loan to Mr. C 20.000 ‘Amount to include in gross estate B_385,000 Note: 1. _ Interest receivables accrued on the loan to Mrs. B from January 1, 2020 to the dite death, on June30, 2020. This is computed as P 300,000 x 10% x 6 months / 12 montne 2. Overdue claims, even if due from insolvent persons, are included in gross estate. in taxation, claims proven to be worthless are stil included in gross estate then separa presented as deductions. Taxable transfers ; Taxable transfers made without consideration are included in gross estate at the fair value of the transferred property at the date of death. Taxable transfers made for a consideration are valued as: Fair value at the date of death less consideration paid at the date of transfer. Ilustration Before her death, Mrs. Power made the following mortis causa transfers during her lifetime: —Atthe date of transfer___ Fair value To Alexander P 300,000 P 0 P 200,000 To Bee Jay 200,000 195,000 300,000 To Cedric 100,000 40,000 120,000 To Donnie 150,000 80,000 70,000 The amount of taxable transfers to be included in gross estate shall be: FVatdeath Consideration To Alexander P 200,000 -P 0 P 200,000 To Bee Jay : To Cedric 120,000 - 40,000 80,000 To Donnie 70,000 - 80,000 Note: 1. The transfer to Bee Jay is for an adequate consideration. This is bona fide sales ** Subject to estate tax but to income tax at the date of sale. ‘The transfer to Donnie decreased in fair value below the consideration. This 7 is simply ignored. 2. ster 480 échapter 13-A-Estate Tax: Gross Estate CHAPTER 13-A: SELF-TEST EXERCIsEs piscussion Questions What is gross estate? Distingu: 1. decedent taxpayer, guish the extent of ross estate of each type of 2 umerate the Tato prommeatnel mcedures of rosette * decedent. ‘y transfers which are not owned by the |. Enumerate the list of prope 4 ross estate but which oi exctiiel ee 5, Bnumerate the list of taxable transfers.” 6 Discuss the treatment of mortis oy consideration. 7, Discuss the valuation rules for real and other properties. hich are properly includible in causa transfer made for insufficient Property, stocks, usufruct and annuity True or False 1 1, The list of properties of the decedent existing at the point of death must be established in determining gross estate. 2, Gross estate consists of all real properties and tangible personal properties wherever situated, at the point of death. 3. The gross estate of a non-resident citizen includes tangible properties wherever situated. 4, The gross estate of a non-resident alien includes only tangible properties situated in the Philippines. 5. The gross estate of a resident alien includes only real properties wherever situated. 6. The list of properties of the decedent must be counted at the date of death. 7. Properties owned by the decedent which are exempted by law are initially included in gross estate, but are removed by way of deduction from gross estate, | . 8. Properties not owned by the decedent may be included in gross estate. 9. Taxable transfers consist of properties passed to other persons before death but are still owned by the decedent at the point of death. 10. The motives of the donation shalll be the basis ofits taxation. 11, Properties are valued at the higher of the fair value and acquisition cost. t ce eeaees 12. Newly-acquired properties are valued at acquisition cos! ; 18 Where ihe Lae or regulations do not prescribe for fair value rales, fair value Tules of generally accepted accounting pemncples may be sought. 14, Listed stocks are valued at their par value, 15. Non-listed common stocks are valued at their book value. 481Chapter 13-A-Estate Tax: Gross Estate ‘True or False 2 1. Transfers inter-vivos ma 2. Income earned after deat! 3. Income earned before deatl 4, The payment for obligations de before death are included in gross estate, his included in gross estate. h isincluded in gross estate. ind expenses after death is added back to th, amount of gross estate. ii in gross estate. le transfers are included in gr ; erie held by the decedent as a trustee must be included in Bross estate, dent which must be transmitted to an heir in : ties held by the dece ” Meordance with the desire ofa predecessor are excluded from gross estate, ‘The proceeds ofan irrevocable life insurance is included in gross estate 9. Properties held by the decedent as a fiduciary heir are included in gros estate. . 10. The proceeds of life insurance which is revocably designated must be included in gross estate. ; ; / 11. The proceeds of life insurance is included in gross estate if the beneficiary s the estate, the executor or administrator. 12, The separate properties of the surviving spouse are excluded from gross an 2 estate. 13, Transfers made for adequate considerations are excluded from gross estate, 14. The merger of the usufruct in the owner of the naked title is a transfer excluded from gross estate. 15. The gross estate includes only the separate properties of the decedent. 16. The proceeds of group insurance is included in gross estate. 17. The proceeds of GSIS policy and SSS benefits are included in gross estate. 18. Benefits from the USVA are exempt from estate tax. 19. Donations mortis causa to accredited non-profit institutions are exclusions in gross estate. 20. Transfers in contemplation of death are included in gross estate. 21. If the fair value of the property transferred mortis causa for an inadequate consideration declines below the amount of the consideration at the date of death, no amount is included in gross estate. 22, Revocable transfers and conditional transfers are included in gross estate the fair value of the property at the date of their transfer to the transferees. 23. Properties passing under special power of appointment are included it gross estate, 24. The gross estate is valued at the point of death. 2S. Ifa consideration is paid by the transferee in a taxable transfer, the amoutt to include in gross estate shall be the excess of the fair value of the proper! at the date of death over the consideration given. 482