Deductions from Gross Estate

ATTY. KJCM
 DEDUCTIONS ALLOWED FROM THE ESTATE OF A
CITIZEN OR A RESIDENT

I. Ordinary Deductions
A. CUCUL
1. Claims against the estate
2. Unpaid mortgages
3. Claims of the decedent against insolvent person
4. Unpaid taxes
5. Losses
B. Transfer for Public Use
C. Vanishing Deductions
II. Special Deductions
A. Family home
B. Standard Deduction
C. Amount received by heirs under RA 4917

III. Share of Surviving Spouse in the Conjugal/

Community Properties
 General Principles of Estate Deductions

1. The substantation rule

2. Matching principle
3. “No double classification” rule
4. Default presumption on ordinary deduction
 Claims against the estate

“Claims” = debts or demands of a pecuniary nature

-Could have been enforced against the deceased in his

lifetime and could have been reduced in simple money
judgements.

Sources of claims:
1. Contract
2. Tort
3. Operation of law
 Requisites of deductibility of claims against the estate:

1. Personal obligation of the deceased existing at the

time of his death;
2. Liability was contracted in good faith and for an
adequate and full consideration in money or
money’s worth;
3. Claim is valid in law and enforceable in court;
4. The indebtedness must not have been condoned or
the action must not have prescribed.
 Substantation requirements

A. In case of simple loans

1. The debt instrument must be duly notarized at the
time the indebtedness was incurred.
2. Duly notarized certification from the creditor of the
unpaid balance. If the creditor is:
a) Corporation- sworn certification should be signed
by President, or VP or other principal officer of the
corporation.
b) Partnership- sworn certification should be signed
by any of the general partners.
c.) Bank or other financial institutions- must be
executed by the branch manager.
d.) Individual-sworn certification should be signed by
him.

3.) Proof of financial capacity of the creditor to lend

the amount at the time loan was granted.
B. If the unpaid obligation arose from purchase of
goods or services:

1. Pertinent documents evidencing purchase of goods

or services duly acknowledged, executed and
signed by the decedent debtor and creditor
2. Duly notarized certification from the creditor as to
the unpaid balance of the debt, including interest
as of the time of death.
C. Where the settlement is made through the Court in
a testate or intestate proceeding, pertinent
documents filed with the Court evidencing the
claims against the estate, and the Court Order
approving the said claims, if already issued, in
addition to the documents mentioned in the
preceding paragraphs.
 Claim against the estate- unmarried decedent

Illustrative example:
Mr. Y, single, died on December 20, 2019:

Personal loan condoned by creditor 50,000

Prescribed promissory note 10,000
Balance on the purchase price of 100 70,000
Cavans of rice for his grocery store
Bank loan 250,000
The deductible “claims against the estate” shall be:

Unpaid balance on purchased of 100

Cavans of rice 70,000
Bank loan 250,000
Claims against the estate 320,000
Claims against the estate- married deceent
 Claims against insolvent persons

Insolvency is the state of not being able to pay the money owed
because of insufficient assets to pay all debts.

Types:
1. Voluntary- an insolvent debtor may apply to be discharged
from his debts and liabilities by filing a petition with court of
competent jurisdiction.
2. Involuntary- a court petition filed by three or more creditors,
against a debtor, whose credits accrued in the Philippines.

Claims against insolvent persons are otherwise known as “bad

debts.”
 Illustrative example

A died leaving a 800,000 promissory note from XYZ

company which is currently undergoing liquidation
due to bankruptcy. The note was secured by a parcel
of land with current value of 500,000. The fiduciary
of XYZ Company estimates a 20% recovery for
unsecured creditors.

A also loaned XYZ Company for 300,000 in a written

instrument which prescribed a year ago prior to his
death.
Let’s compute the recoverable amount first:

Total claim 800,000 (value of PN)

Less: Fair value of the
Collateral (parcel of land) 500,000 500,000
Unsecured portion 300,000
Multiply by: Recovery ratio 20% 60,000
560.000
The claim against insolvent person shall be computed
as:

Total Claim: 800,000

Less: Recoverable amount: 560,000

Claim against insolvent person 240,000

*Prescribed loan is no longer enforceable due to

prescription.
 Unpaid mortgages

-May either involve Personal property (Chattel mortgage)

or immovables and/ or alienable rights imposed on
immovables (real mortgage)

Requisites/ Conditions to be met:

1. Value of the decedent’s interest therein, undiminished
by such mortgage indebtedness, is included in the value
of gross estate;
2. That they were contracted bona fide and for an
adequate and full consideration in money or money’s
worth.
Rules on whether the unpaid mortgage is chargeable against the exclusive
property of the decedent o from the common property of the spouses is
summarized below:

1. Contracted before marriage

FOR THE BENEFIT OF- CHARGEABLE AGAINST-

Donor/ prior decedent EP

Exclusive property EP

Conjugal/ communal property CP

Family CP
2. Contracted during marriage:
FOR THE BENEFIT OF- CHARGEABLE AGAINST-

Conjugal/ communal property CP

Exclusive property of one spouse EP

Property of donor/ prior decedent EP

 Illustrative example:

M died leaving a property worth 1,000,000. The

property which is co-owned with K is mortgaged
with a bank for a loan in the amount of 700,000.
Because the liability is solidary in character, the
executor of the estate of M paid the entire loan after
her death.

Q1: How much is the net estate of M?

Answer:

Share in the co-ownership (1M/2) 500,000

Less: Share in the unpaid mortgage 350,000
Net estate 150,000

The receivable from K for the latter’s share in the obligation shall
not be included anymore as part of the gross estate although the
executor would be subrogated to the rights of the mortgagee.

*If M is a non-resident alien and the property is situated and

mortgaged abroad, then the property tax exempt. For the same
reason, the unpaid mortgage shall not also be deductible.
 Illustrative example 2

A decedent had a family home worth 1,500,000 which was encumbered by a

mortgage.

Original amt. 900,000

Less:
Paid before death 200,000
Paid after death 400,000
Present balance 300,000

*Family home is a common property. The proceeds of the mortgage were used
for the family.

*A deductible mortgage must have been incurred before death and remain
unpaid at the point of death. Hence:
Original amount 900,000
Less: Paid before death 200,000
Balance at the date of death 700,000

Presentation in the tax return:

Exclusive Common
Gross estate 1,500,000
Deductions:
Unpaid mortgage 700,000
 Illustration example 3

During the marriage, Mr. Y inherited a commercial lot with a zonal

value of 4,000,000. When one of his children got sick, he mortgaged
the property for 2,000,000. He was able to pay 400,000 until his
death.

Presentation in the tax return:

Exclusive Common
Gross estate 4,000,000
Deductions:
Unpaid mortgage 1,600,000

*The mortgage shall be presented under common property because the

proceeds of the same is use for the benefit of the family.
 Unpaid taxes

-To be deductible, the taxes must have accrued and unpaid as of

the death of the decedent.

The ff. Are the taxes which are not deductible from the gross
estate:
a. Income taxes on income received after the death;
b. Property taxes which have not accrued prior to the death of the
decedent;
c. Estate tax due from the transmission of his estate.

*Unpaid RPT at the time of death are deductible even if payable

after death because RPT accrue on January 1st of every year.
 Losses

-pertain to losses of properties of the estate during the settlement of the

estate. These may arise from casualty such as fires, storms, shipwreck,
robbery, theft or embezzlement when such losses are not compensated for
by insurance.

Requisites:
1. Value of the property lost must have been included in the gross estate;
2. Lost must arise from fire, storm, shipwreck or other casualties or from
robbery, theft or embezzlement;
3. Such losses were incurred after the death but not later than the last day
for the payment of the estate tax;
4. Not compensated by insurance or otherwise;
5. At the time of filing the return such losses have not been claimed as a
deduction in an income tax return.
 Illustrative example:

C, an american residing in Olongapo City, shipped his car worth P

1,200,000 from the US to the Philippines. While riding a bus going to
Bataan, he met an accident and died. Two weeks after his death, the
ship carrying his car sank somewhere in the Pacific Ocean towards
Philippine islands. The insurance paid 50% of the value of the car.

Questions:
a. Is the loss deductible from the gross estate of C? How much?
b. How about if loss occurred ahead of C’s death?
c. How about if the loss occurred before he died, but discovered after
C’s death?
d. How about if the entire amount was indemnified by insurance?
 Answer:

a. Yes, because the shipwreck occurred after the death

but before the deadline for filing estate tax return. As
a rule, losses are deductible from gross estate if it
occurred within the period for filing of estate tax
return which is 1 year from the death of the decedent.

However, since the insurance company indemnified

the 50% of the value of the car, only the actual loss of
600,000 can be claimed as deduction from gross
estate.
b. If the loss occurred before C’s death, it is not deductible
because the lost property is not included in the gross estate.

c. No. The law uses the phrase “losses incurred during the
settlement of the estate.” Therefore, to be considered as a
valid deduction, the loss should occur after death irrespective
of the time it was discovered.

d. If the value of the car lost was indemnified by the insurer,

then the estate of C, did not suffer any actual loss.
Consequently, it cannot claim loss as deduction from gross
estate.
 Transfer for Public Purpose

-It includes the amount of all bequests, legacies,

devises or transfer to or for the use of the
Government of the Republic of the Philippines, or
any political subdivision thereof, for the exclusive
public purposes.
 Illustrative example

A devised in his will the ff. Properties:

Commercial land to a public school2,000,000

Land and building to a GOCC 3,000,000

Total 5,000,000

The 5,000,000 must be included in gross estate. Only

2,000,000 can be claimed as transfer for public use.
GOCC’s are commercial and are not for public purposes.
 Vanishing Deduction (Property Previously Taxed)

-An allowed deduction from the gross estate situated

in the Philippines of a person who died within five
(5) years from the acquisition of the property by gift
or inheritance.

-Vanishing deduction is allowed on the second

transmission of property. The first transfer must be
either by succession or donation inter vivos, but the
second transfer must be by succession only.
 Requisites:

1. Property must be situated in the Philippines.

2. The donor’s tax or estate tax imposed on the first transfer
was finally determined and paid;
3. The property can be identified as the one received from
such prior decedent by gift, devise or inheritance, or from
the donor by gift, or which can be identified as having
been acquired in exchange of property so received; and
4. The property must have formed part of the gross estate of
the prior decedent, or have been included in the total
amount of the gifts of the donor made within five (5) years
prior to the death of the present decedent.
 Steps involved:

Step 1: Determine the initial value. Initial value is the FMV of

the property at the date of first transfer (i.e. Date of prior
decedent’s death or date of gift) or the fair value at the date
of death whichever is lower.

Illustration:
The following relates to a property that was donated to the
decedent:
Upon donation Upon death of decedent
Zonal value 1,200,000 900,000
Fair value per
Assessor 1,100,000 1,000,000
The respective fair value at those dates shall be the
higher:
Upon donation Upon death of decedent
1,200,000 1,000,000

Hence, the initial value shall be the lower which is 1M.

Step 2: Determine the initial basis:

The initial basis is the initial value reduced by any indebtedness on

the property which was assumed and paid by the present decedent
before his or her death.

This is computed as:

Initial value xxx

Less: Indebtedness assumed and
paid before death xxx
Initial basis xxx
Step 3: Determine the final basis.

The final basis is the initial basis reduced by a proportion of other ordinary
deductions (i.e. Loss/Indebtedness/Taxes + Transfer for public purpose)
which the initial basis bears over the gross estate of the decedent.

This is computed as:

Initial basis xxx

Less:
(Initial basis/Gross estate)
x (LIT and Transfer for public
purpose)xxx
Final basisxxx
Step 4: Determine the vanishing deduction

The VD is the final basis multiplied by the following

vanishing percentages:
More than Not more than Rate
Xx 1 year 100%
1 year 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%
More than 5 years Xxx 0%
GD died on October 21, 2019 leaving a parcel of land which she
inherited from her mother, Dina who died May 20, 2016. The
value of the property at the time of death of her mother was
3,500,000 but it has appreciated to 4,750,000 in 2019.

The gross estate, deductions and other data consisted of the ff.:
Community property9,500,000
Exclusive prop. Of the
decedent6,500,000
Bequest to the government
for PP 100,000
Claims against the estate 150,000

At the time of death of Dina, the land had an unpaid mortgage of

500,000 which 200,000 was paid by Gina.

Compute the VD
 Value in estate of prior decedent 3,500,000
Value in estate of present decedent 4,750,000
Lower value 3,500,000
Less: Mortgage paid 200,000
Initial basis: 3,300,00
Less: Deductions
TFP use 100,000
Claims against
the estate 150,000
Unpaid mort-
gages 300,000
TOTAL 550,000
Deductible (3,300,000/16,000,000 x 150,000) 113, 437.50
Base 3,186,562.50
Rate (more than 3 years, but not more than 4 years 40%
Vanishing deduction 1,274,625.00

The denominator of 16,000,000 represents the gross estate which is the total of the
community property of 9,500,000 and the exclusive property of 6,500,000.
 Classification of Vanishing Deductions

The vanishing deduction is always chargeable against the

exclusive (separate) property of the decedent if the spouses
were under CPG. Thus, it is always classified as separate
deduction.

However if they were under the ACP, the vanishing

deduction may be either chargeable against the community
property of the spouses, or from the exclusive property of
the decedent, depending upon the classification of the
subject property. It may therefore be classified either as an
exclusive or community property deduction.
 SPECIAL DEDUCTIONS

A. Family home (10,000,000)

B. Standard deductions (5,000,000)
C. Benefits under RA 4917
 Family home

Requisites:
1. The family home must be the actual residential home
of the decedent and his family at the time of his death,
as certified by the Barangay Captain of the locality
where the family home is situated;
2. The value of the family home must be included as part
of the gross estate of the decedent; and
3. The allowable deduction must not exceed the lowest of
fair market value of the family home as declared or
included in gross estate, the extent of the decedent’s
interest therein, or 10,000,000.
 Illustrative example:

The assessor’s value of the family home at the time of

death of B is 10,200,000 while the zonal value is
11,350,000.

What value of family home is to be included in and

deducted from the gross estate?
 Answer:

The amount included in the gross estate is the zonal value

of 11,350,000 because it is higher than the current value.

The family home deductible from the gross estate is

10,000,000 only because it is the maximum amount
allowed under the law.

If the family home is a conjugal or community property,

the amount deductible is 5,675.00, the share of the
decedent in such property.
 Illustrative example 2:

A’s family home was gutted by fire which resulted in

his death. The family home had a value of
15,000,000 at the time of the fire. How much is to be
deducted?
 Answer:

There shall be no deduction for family home as the

property was already destroyed at the point of death.
Neither shall the loss be claimed as casualty loss
pursuant to the matching rule.
 Standard Deduction

This is a fixed amount equivalent to Five Million

Pesos (5,000,000) which is automatically deductible
and not subject to any substantation.
 Benefits under RA 4917

This is pertaining to benefits granted and received by

the heirs of the decedent from his employer, as a
consequence of separation from service, due to death
of the decedent. Provided, however, that such
amount is included in the gross estate of the
decedent.
 Illustrative example:

In 2018, W resigned from his employment and received a

2,000,000 retirement pay from his employer’s private benefit
plan. W invested 1,000,000 in the stock market and used the
other 1,000,000 to purchase a car. In 2019, W died leaving the
car which now has a value of 800,000 and his investments with
a value of 1,500,000.

The amount to be included in the gross estate shall be:

Car 800,000
Investment in stocks 1,500,000
Total inclusion in gross estate 2,300,000
 Answer:

The deduction for benefits under RA 4917 shall be 0.

The NIRC qualified the exemption of benefits
received as a consequence of death rather than
retirement or termination benefit received during
the lifetime of the decedent.
 Illustrative example 2:

H, a bachelor, died in a car accident. His heirs received

a 1,500,000 termination pay from his employer on
account of H’s death.
 Answer:

The 1,500,000 termination pay shall be included in the

gross estate and shall be likewise be presented as a
deduction against gross estate.
 Share of the Surviving Spouse

The share of the surviving spouse in the conjugal or

communal property as diminished by obligations
properly chargeable to such property shall be
deducted from the gross estate.
 Illustrative example:

The following data pertains to a married decedent:

Conjugal property 5,000,000

Exclusive property 2,200,000
Charges against conjugal property 850,000
Charges against exclusive property 600,000

How much is deductible share of the surviving spouse?

 Answer:

The amount deductible is 2,075,000, computed as follows:

Conjugal property 5,000,000

Less: Conjugal deductions 850,000
Net conjugal 4,150,000
Multiply by the share of decedent ½
Deductible share by the surviving
Spouse 2,075,000

The conjugal deductions shall not include the standard

deductions in computing the share of the surviving spouse.
 DEDUCTIONS OF
NON-RESIDENT ALIENS
It should be emphasized that non-resident aliens
cannot claim the special deductions. Non-resident
aliens can claim only the ff. Deductions:

1. Prorated Losses, Indebtedness and Taxes

2. Property Previously taxed (Vanishing Deductions)
3. Transfer for public use
4. Share of surviving spouse
5. Standard deduction
 Formula:

Philippine Gross Estate Ordinary Deductions

Total Gross Estate
 Additional Requirements on Deductions of Non-
Resident Aliens

No deduction shall be allowed in the case of a non-

resident alien decedent, unless the executor,
administrator, or anyone of the heirs, as the case
may be, includes in the return the value at the time
of the decedent’s death that part of his gross estate
not situated in the Philippines.
 Summary of Deduction Rules

Residents or citizens Non-resident aliens

Losses YES Pro-rated amount
Claims against the estate YES
Indebtedness YES
Taxes YES
Transfer for public use YES YES
Vanishing deductions YES YES
Family home YES NO
Standard deductions YES YES
Benefits under RA 4917 YES NO
Share of the surviving YES YES
spouse
 Exercise 1:

The following data are available during the death of N, a resident citizen:

Personal property within 1,700,000

Real property within 2,600,000
Personal property without 2,300,000
Real property without 3,000,000
Funeral expenses 120,000
Unpaid mortgage on property without 120,000
Claims against the estate, creditor is
residing abroad 30,000
RA 4917 200,000
Claims against insolvent (20% collectible) 85,000

The taxable net estate of N is?

Personal property within 1,700,000
Real property within 2,600,000
Personal property without 2,300,000
Real property without 3,000,000
RA 4917 200,000
Gross estate 9,800,000
Less: Deductions
Unpaid mortgage on property 120,000
Claims against the estate 30,000
RA 4917 200,000
Bad debt (85,000 x 80%) 68,000
Standard deduction 5,000,000 (5,418,000)
NET TAXABLE ESTATE 4,382,000
 Exercise 2:

Juan, Filipino, died intestate during the year. He left the following properties:

Real estate, conjugal:

House in Cebu (family home) 4,000,000
House in Japan 2,500,000

Personal properties, exclusive:

Domestic shares 100,000
Household appliances in Japan 450,000
Accounts receivable from debtor
residing in the Philippines 135,000

Expenses:
Cost of cemetery lot 60,000
Expenses of interment 265,000
Accounts payable, notarized 120,000
Mortgage on house in Japan 65,000
Claims against debtor in Japan, insolvent 85,000
Mortgage on house in Cebu City 50,000
a. How much is the gross estate?
b. How much is the net taxable estate?
 Conjugal Exclusive Total
Family home 4,000,000
House in Japan 2,500,000
Domestic shares 100,000
Appliances in Japan450,000
Accounts receivable 135,000
Claims against insolvent 85,000
Gross estate6,585,000 685,000 7,270,000
Less: Deductions
Ordinary-
Claims against E 120,000
Unpaid mortgage, J 65,000
Bad debts 85,000
Unpaid mortgage, C 50,000 (320.000)
Special -
Family home (4m/2) (2,000,000)
Standard deductions (5,000,000)
Net estate (50,000)
Less: Share of surviving spouse
Gross conjugal 6,585,000
Less: CD 320,000
Net conjugal 6,265,000
Share (1/2) (3,132,500)

Net estate -------