Chapter 2 - Transfer Taxes and Basic Succession

BUSINESS AND TRANSFER TAXATION 5th Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION

CHAPTER 2

TRANSFER TAXES AND BASIC SUCCESSION Problem 2-1 1. True 2. False – first P100,000 of net gift is exempt. 3. False – subject to business tax 4. False – gratuitous 5. False – an income earned 6. False – upon right to transfer 7. True 8. False – upon death 9. True 10. False – the legitime is based on value of the estate, not on the form of the estate. 11. False – they are voluntary heirs. 12. True 13. False – fixed by law 14. False – executor Problem 2-2 1. False – relatives up to the 5th degree 2. True 3. False – the relative is the legitimate heir 4. False – if part of inheritance is through the written will 5. False – if the transfer is testamentary 6. False – one for the legitimate child and half for the illegitimate child 7. True 8. True 9. False – equal rights 10. True 11. False 12. True Problem 2-3 1. A 2. C 3. A 4. A 5. C 6. C 7. C 8. D 9. A 10. D

Problem 2-4 1. C 2. A 3. A 4. C 5. D 6. B 7. B 8. B 9. D 10. B

Problem 2-5 1. B 2. C 3. D 4. A 5. B 6. A 7. C 8. A 9. C 10. A

Problem 2-6 1. C Car – first prize Amount of mortgage assumed Salary Amount of onerous transfer

P1,000,000 1,900,000 240,000 P3,140,000

BUSINESS AND TRANSFER TAXATION 5th Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION

2. C House and lot as donation, net of mortgage (P2,000,000 – P1,900,000) Farm as inheritance Amount of gratuitous transfer Problem 2-7 1. A Car 2.

C House and lot – mortis causa

P 100,000 500,000 P 600,000

P 800,000 P1,000,000

Problem 2-8 C Net value of property left by the decedent (P5,000,000 – P1,000,000) Transfers in contemplation of death Hereditary estate

P 4,000,000 2,000,000 P 6,000,000

Problem 2-9 C Net hereditary estate Legitime of children (P5,000,000 x ½) Portion for the surviving spouse (P5,000,000 x ¼) Free portion – may be distributed to strangers

P5,000,000 ( 2,500,000) ( 1,250,000) P1,250,000

Note: The distribution is testamentary because there is a devise or legacy. Problem 2-10 B Inheritance of the spouse (P5,000,000/5)

P1,000,000

Problem 2-11 A Hereditary estate Legitime of children (P3,000,000 x ½) Portion for the spouse (P1,500,000/4) Free portion Multiplied by Legacy to the sister-in-law

P3,000,000 ( 1,500,000) ( 375,000) P1,125,000 20% P 225,000

Problem 2-12 C Hereditary estate Portion for the illegitimate child (P3,000,000 x 1/3) Amount inherited by the wife

P3,000,000 (1,000,000) P2,000,000

Problem 2-13 Hereditary estate, net of charges (P7,000,000 – P1,000,000) Legitime of legitimate children (P6,000,000 x ½) Portion for the acknowledge natural child (P3,000,000/3) x 50% Portion for the surviving spouse (P3,000,000/3) Free portion – could be disposed of as legacy to the nanny

P 6,000,000 ( 3,000,000) ( 500,000) ( 1,000,000) P 1,500,000

Problem 2-14 Inheritance of each child (P5,000,000/5)

P 1,000,000

Problem 2-15 Cash in bank House and lot Investments in securities

P 100,000 5,000,000 400,000

BUSINESS AND TRANSFER TAXATION 5th Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION

Total gross estate Less: Unpaid mortgage Existing loan Funeral expense Estate tax Hereditary estate

P5,500,000 P 200,000 100,000 100,000 100,000

Problem 2-16 Legitimate child – Mario (P1,200,000 x ½) Illegitimate child – Maria (P600,000 x ½) Surviving spouse (P600,000 x ½)

500,000 P5,000,000 P 600,000 300,000 300,000 P1,200,000

Problem 2-17 With respect to legitime: Legitimate child (P4,200,000 – P200,000) x 50% Surviving spouse (P2,000,000 x ½)

Son P2,000,000

Wife P1,000,000

Remaining balance (divide based on the intention of the will) Legitimate child (P1,000,000 x ½) Surviving spouse (P1,000,000 x ½)

500,000 . P2,500,000

500,000 P1,500,000

Problem 2-18 Gross estate Less: Deduction Net estate before share of the surviving spouse Less: Share of the surviving spouse (P1,000,000 x 50%) Net estate before estate tax Less: Estate tax Net distributable estate Dorado (child) Fraction of share - intestate 1/3 Distribution of inheritance P161,667

Jess (husband) 1/3 P161,667

P2,000,000 1,000,000 P1,000,000 500,000 P 500,000 15,000 P 485,000 Total 1 P485,000

Maya (child) Free Portion ¼ ½ P165,417 P333,883

P 500,000 161,667 P 661,667 Total 1 P 661,667

Maya (child) 1/3 P161,667

Death of Jess Exclusive share when Sabel died Add: Share from distributable share Distributable estate Fraction of share - testate Distribution of inheritance

Dorado (child) ¼ P165,417

Problem 2-19

Gross taxable value for: 1. Capital gain tax

P 300,000

2. Donor’s tax

P 500,000

3. Business tax

P - 0 -

4. Estate tax

P1,800,000

Problem 2-20 Gross estate Less: Deductions

P3,000,000 1,000,000

BUSINESS AND TRANSFER TAXATION 5th Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION P2,000,000 135,000 P1,865,000

Net estate before estate tax Less: Estate tax Net distributable estate Tito (legitimate son) 1 P1,243,333

Fraction of share - intestate Distribution of inheritance

Vic (illegitimate son) ½ P621,667

Problem 2-21 1. Gross estate (P500,000 + P250,000 + P1,000,000 + P100,000)

Total 1.5 P1,865,000

P1,850,000

2. Inheritance of Tim (P500,000 x ½)

P 250,000

Problem 2-22

1. Testamentary Legitime: Legitimate son – Peter (P35,000,000 x 50%) x ½ Legally adopted son – Petros (P35,000,000 x 50%) x ½ Surviving spouse (P8,750,000 x ½) Illegitimate son – Rocky Free portion – that may be given to other relatives

P8,750,000 8,750,000 4,375,000 4,375,000 8,375,000 P35,000,000

2. Intestate Succession Legitimate son – Peter (P35,000,000/3.5) Legally adopted son – Petros (P35,000,000 x 3.5) Surviving spouse (P35,000,000 x 3.5) Illegitimate son – Rocky (P35,000,000 x 3.5) x ½

1 1 1 1/2

P10,000,000 10,000,000 10,000,000 5,000,000 P35,000,000

Problem 2-23 Legitimate child 1

Fraction of share Amount of inheritance

1 P2,857,143

Legitimate child 2

Surviving spouse

Illegitimate child

1 P2,857,143

1 P2,857,143

½ P1,428,571

Total

3.5 P10,000,000

Note: The last will and testament is void because the presence of legitimate child eliminates the parents from the inheritance. In all cases, the legitime must not be impaired by the disposition through will. Problem 2-24 1. Computation of net distributable share Total gross estate (P10,000,000 + P20,000,000 + P30,000,000) Less: Ordinary deductions Net estate before share of surviving spouse Less: Share of surviving spouse (P57,500,000 x 50%) Net estate before estate tax Less: Estate tax (P28,750,000 x 15%) Net distributable estate

2.

Computation of the shares of the heirs Share of legitimate son (P24,437,500 x ½) Share of surviving spouse (P24,437,500 x ½)

P60,000,000 2,500,000 P57,500,000 28,750,000 P28,750,000 4,312,500 P24,437,500

P12,218,750 P12,218,750

BUSINESS AND TRANSFER TAXATION 5th Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

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Chapter 2: TRANSFER TAXES AND BASIC SUCCESSION

Note: His mother and brother, as secondary heirs, are disqualified to share from the portion of the legitime due to the presence of a legitimate child. Hence, the will becomes void. Problem 2-25 1.

2.

Computation of net distributable estate: Gross estate (P4,000,000 + P1,000,000 + P200,000 + P5,000,000 + P3,000,000) Less: Ordinary deductions: Funeral expense Unpaid mortgage Allowable deduction - Standard deduction Net taxable estate Less: Estate tax (P11,900,000 x 15%) Net estate after tax Add: Standard deduction Net distributable estate

P13,200,000 P 100,000 200,000

P 300,000 1,000,000

1,300,000 P11,900,000 1,785,000 P10,115,000 1,000,000 P11,115,000

Distribution of net distributable estate: Testate succession Intestate succession Mixed succession

Christopher (son) P4,000,000 2,957,500 P6,957,500

Cristeta (daughter) P1,000,000 2,957,500 P3,957,500

Crisistomo (driver) P 200,000 . P 200,000

Total P 5,200,000 5,915,000 P 11,115,000