Deductions From Gross Estate

CHAPTER 4 DEDUCTIONS FROM GROSS ESTATES

Deductions from Gross Estate  items w/c the law on estate tax allows to be subtracted from the GE to arrive at the net taxable estate  to protect the interest of innocent persons who have claims over the GE  there must be a specific provision of the statute authorizing the deduction and must be able to justify the claim towards the deduction Rules: 1. 2. 3. 4.

deductions presumed to be conjugal deductions those deducted in gross income are not allowed to be deducted in GE deductions must not be compensated by any means generally, deductions only accrue before or until the decedent’s death, and before the settlement of estate tax

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Valuation:  date-to-death valuation rule: FMV at the time of death; outstanding amount of the obligation  should be consistent with estate situs principle Deductions allowed from GE: Resident/Citizen: NRA:

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Ordinary, Special, Share of Spouse Ordinary, Share of Spouse

ELITENRA = World ELITE x (Phil. GE/World GE)

ORDINARY DEDUCTIONS (reduced taxable and distributable estate) I.    

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FUNERAL EXPENSES Actual amount (paid or unpaid), 5% of GE, P200,000 whichever is lower Expenses must be supported by evidences (receipt, invoices) to be deductible Memorial plans: part of GE, then deduction as funeral expense include: o interment/cremation fees o mourning apparel for spouse and unmarried minor children o expenses for decedent’s wake o fees and charges for the rites and ceremonies o expenses for death notices o cost of burial lot, tombstone or monument excluding cost of upkeep unless it is in the form of legacy January 1, 1998 – medical expenses separated from funeral expenses to be deducted from conjugal/community property first

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nondeductible: o w/o receipts or documentary evidence o in excess with statutory limit o expenses donated/contributed o expenses after interment

JUDICIAL EXPENSES for the administration, inventory taking of assets , and settlement of the estate extra-judicial settlement allowed. expense w/ necessary contribution toward settlement of estate not beyond last day of filing estate tax return, including extension (6 months and 30 days) include: o executor/administrator fees o attorney’s fees o court fees o accountant’s fees o appraiser’s fees o clerk hire o cost of preserving/distributing estate o costs of storing/maintaining property o brokerage fees nondeductible o incurred by beneficiary seeking to establish interest over estate o compensation of trustee for benefit of devisee/legatee o premiums paid on the bond filed by administrator o w/o required documentation o incurred beyond the last day of filing

CLAIMS AGAINST ESTATE may rise from contract, tort, operation of law “claims” as something that is owed or obligation to pay only to the extent of accrued amount as of the decedent’s death not to include any reimbursable amount requisites: o represents a personal obligation except funeral and medical exp. o contracted in good faith and for adequate consideration o valid in law and enforceable in court o not have been condoned by creditor substantiation requirements: o duly notarized except when notarization not part of business policy of the lender o duly notarized certification from creditor as to amount and interest  one to certify must not be a relative up to the 4th degree of consanguinity/affinity

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 if relative, copy of promissory note to be filed with the RDO proof of financial capability of the creditor at the time of loan statement under oath if loan made 3 years prior to the death

CLAIMS AGAINST INSOLVENT PERSONS requirements: o amount initially included as part of GE o insolvency is proven not merely alleged o fomula:  claims from insolvent persons  less”: recoverable amount = free assets x claim/total liab

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VIII.     

UNPAID MORTGAGES unpaid indebtedness secured by a decedent’s property must be part of GE at FMV gross of any unpaid mortgage if decedents own a part of the property, only a proportional amount is deductible accommodation loan: loan where the proceeds of the loan went to/borrowed by another person treatment: add amount of loan as receivable, then unpaid debt balance as deductions = asset mortgaged + accommodation loan amount – unpaid mortgage loan

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UNPAID TAXES general rule: taxes incurred prior to the death of decedent and remained unpaid are deductible to be deductible: should qualify as claims against estate taxes deductible: o property taxes accrued prior to death o unpaid taxes in income o gift taxes on lifetime gifts o excise or transfer tax in connection w/ either sale or distribution. part of “judicial expenses” not unpaid taxes not deductible o income tax on income after the death o property taxes not accrued before death o estate tax

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must not be compensated by any means not been claimed as deduction in gross income

TRANSFERS FOR PUBLIC USE for the use of the Government of the Republic of the Philippines or any political subdivisions as long as used exclusively for public purpose transfer should be through testamentary succession. Oral transfer not deductible donated from exclusive property of the decedent unless spouse has written consent with respect to conjugal property deemed to be made by decedent alone unless spouse expressly joined property generally presumed as an exclusive property of the decedent

PROPERTY PREVIOUSLY TAXED to lessen burden of paying estate tax due to short period of property transfers by reason of early deaths, vanishing deductions is allowed conditions: o property included as GE of present decedent (PrD) o PrD died w/in 5 years from receipt of property through gratuitous trans. o must be located in the Philippines o estate/donor’s tax have been actually paid on the property o property must be identified as the one received from prior decedent/donor o No similar deduction must have been allowed for the same property in the estate of the prior decedent (not allowed: w/ prior vanishing deduc) computations o value to be taken = lesser bet. FMV date previous transfer and FMV date of PrD’s death o if several items: lower amount of each item o initial basis = value taken – mortgage paid by PrD o proportionate deduction = (ELITE + TPU) x InitialBasis/GE o basis of vanishing deductions = InitialBasis – Prop. deductions allowed o vanishing deductions = FinalBasis x Deduct.Level%  100% within 1 year  80% 1 year – 2 years  60% 2 years – 3 years  40% 3 years – 4 years  20% 4 years – 5 years

SPECIAL DEDUCTIONS (allowances permitted by special laws; does not reduce estate) VII.  

LOSSES all losses incurred during the settlement of the estate from robbery, theft, embezzlement, casualty losses incurred on property included in GE, loss incurred not later than last day of payment of estate tax

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STANDARD DEDUCTION (RA 8424) P1,000,000 as SD for residents and citizens w/o need of substantiation not optional, every resident/citizen decedent is allowed

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FAMILY HOME (RA 8424) dwelling house and lot of husband and wife or head of the family includes residential house and residential lot deduction = FMV of RH&L or P1,000,000 whichever is lower permanency; decedent is entitled only to 1 family home rules: o if unmarried: (RH + RL) compare to P1M o if RH and RL conjugal/community: (RH + RL)/2 compare to P1M o if only RH conjugal/community: [(RH/2) + RL] compare to P1M o if only RL conjugal/community: [RH + (RL/2)] compare to P1M

MEDICAL EXPENSES (RA 8424) costs of medicine, hospital bills, doctors’ fees, etc. rules: o must be incurred 1 year before the death of the decedent o maximum amount allowed: P500,000 all not classified as medical expenses cannot be allowed as deduction as “claims against the estate”

AMOUNTS RECEIVED BY THE HEIRS UNDER RA 4917 allowed as deduction from gross estate if the same was included as part of gross estate include: o retirement benefits received, whether individual or corporate, provided:  decedent in service for 10 years  decedent not less than 50 years old  retirement benefits availed only once by the decedent o termination/separation benefits granted due to any cause beyond the control of the decedent RA 4917 provides that retirement benefits should not be subject to any attachment, levy, execution, or any tax amount classified as exclusive property of the decedent

 fruits/income of common property during marriage  gratuitous/onerous transfer before marriage or brought to the marriage  fruits/income of exclusive property during marriage

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SHARE OF SURVIVING SPOUSE share of surviving spouse = 50% of net estate before special deductions classifications: Conjugal Partnership Absolute Community of Gains Exclusive Exclusive  gratuitous transfer during marriage Conjugal Community  acquired (onerous) during marriage  property acquired from labor during Conjugal Community marriage

Absolute Community

Conjugal

Community

Exclusive

Community

Conjugal

Exclusive

ALLOCATION OF DEDUCTIONS decedent citizen/resident with property w/in and outside the Philippines expenses/obligations to be allocated if not traceable to a specific country where the property is located, or the amount of expense exceeds the statutory limit. rules: o when specifically identified per country but exceeds the statutory limit, allocate using total amount (e.g. funeral and medical expenses)  deduction = P200,000 x (FEcountry/total FE)  deduction = P500,000 x (MEcountry/total ME) o when there are no means to trace the deductions, allocate using the total gross estate (e.g judicial expenses and standard deductions)  deduction = JudExp x (GEcountry/total GE)  deduction = StanDed x (GEcountry/total GE)

NONRESIDENT ALIEN DECEDENT I.   

II.   

Conjugal Partnership of Gains

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ALLOWED DEDUCTIONS ELITE: allowable deduction = World ELITE x Phil.GE/WorldGE Transfer for Public Use: as long as given to the GPH and used exclusively for public purpose Vanishing Deduction: property located in the Philippines previously subjected to estate/donor’s tax DEDUCTIONS NOT ALLOWED when decedent is NRA, no deduction shall be allowed unless, when exec., admin., or heir includes in the estate tax return the value of properties not situated in the Philippines (ordinary deductions) Special deductions