Definition of Estate Tax

I.

DEFINITION AN AND PU PURPOSE OF OF ES ESTATE TA TAX Estate tax is a tax on the right of the deceased person to transmit his estate to his lawful heirs and beneficiaries. It is not a tax on property. Estate tax is held to be an excise tax imposed on the privilege of transmitting property upon the death of the owner. The estate tax is generated by the death and accrues at the time of death. It is governed by the law in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary. Tax rates prescribed under RA 8424 apply to estate taxes falling due or  have accrued beginning January 1, 1998, the effectivity of the said law otherwise known as “The Law Reform Act of 1997” Aside from the reason that transfer taxes provide income to the government, there are other justifications for their imposition. First is the benefit – received theory that recognizes the role of the State in the distribution of the estate of a decedent to the heirs whether it is in accordance with the decedent’s will or by operation of law. Next is the privilege theory. Inheritance is a privilege granted by the State. Estate acquired and accumulated is under the State’s protection. The next theory is the ability to pay theory that asserts that the heirs because of the inheritance they received are able and capable to pay the taxes due the State. Last is the redistribution of wealth theory that reduces the property received by the heirs through taxes.

II.

GROSS ESTATE Estate tax applies to citizen, resident, and Non – resident Alien decedent with properties in the Philippines. Resident decedent includes that resident alien decedent. According to the definition in an Estate Tax Return form, Gross Estate for  citizens and resident aliens shall include all the property of the decedent at the time of death, real or personal, tangible or intangible, where situated but excluding the exclusive properties of the surviving spouse. For Non-resident alien, it shall include the property situated in the Philippines. A. Gross Estate of Citizen Citizen and and Resident Resident Decedent 1. Real Real Property Property located located within within and without without the Philip Philippine pines s 2. Tangible personal personal property property located located within and without without the Philippines 3. Intangible Intangible personal personal property property located within and without without the Philippines

A. Gross Estate Estate of of a Non Non – Resident Resident Alien Decedent Decedent 1. Real Real Property Property locate located d within within the Philipp Philippines ines 2. Tangible personal personal property property located within the Philippines Philippines 3. Intangible Intangible personal personal property property located within the Philippines Philippines unless there is reciprocity in which case is not taxable in the Philippines SITUS OR PLACE OF TAXATION 

Property has a situs or location or a jurisdiction for tax purposes. Situs is decisive in determining the estate of a deceased person taxable in the Philippines. The situs of a real property is the country where it is situated; while in tangible personal property, the situs is the country where such is actually located at the time of the death of the decedent. In intangible personal property, the following are considered as intangible personal properties situated in the Philippines: (for non – resident alien decedent with property within the Philippines) a) Franchise Franchise which which must be exercised exercised in the Philippines Philippines b) Shares and obligations obligations or bonds bonds issued issued by any corporation corporation organized in the Philippines c) Shares and obligations obligations or bonds bonds issued issued by any foreign foreign corporation corporation 85% of the business of which is located in the Philippines d) Shares and obligations or bonds issued by a foreign corporation if  such shares have acquired a business situs in the Philippines e) Shares or or rights in in any partnership partnership business or industry industry established established in the Philippines Properties includible in the Gross Estate Decedent’s Interest shall include all properties, rights and interest which the decedent owns at the time of  death. It shall include: 1. Properties Properties owned owned by the the decedent decedent actually actually and and physically physically present present in his estate at the time of his death such as land, buildings, shares of  stock, vehicles, bank deposit, etc. 2. The value of any interest in property owned or possessed by the decedent at the time of his death such as dividends declared before his death but received after his death, partnership profits which have accrued before his death, usufructuary rights, etc. 3. The value value of property, property, right or interest interest in the the property, property, transferre transferred d by the decedent during his lifetime which, under the law, are in the nature of testamentary disposition such as insurance proceeds in favour of  revocable beneficiary.

TRANSFER IN CONTEMPLATION OF DEATH 

Impelled by the thought of death, or the motivating factor or controlling motive for transfer of the property is the thought of death without regard to the state of health of the transferor. Donation Mortis Causa

Takes effect upon the death of the donor. Its characteristics are: a. There is no conveyance conveyance of title or ownership ownership to the done done or transferee transferee b. The transfer transfer is revocable revocable by the the donor donor at will will during during his lifetime c. The transf transfer er shall shall be void void if the donor donor surviv survives es the done done REVOCABLE TRANSFER 

Where the enjoyment of the property transferred may be altered, amended, revoked or terminated by the decedent. The revocability is not affected by the failure of the decedent to exercise the power to revoke during his lifetime. If the notice has not been given, the power to revoke has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised on the date of his death. PROPERTY PASSING UNDER GENERAL POWER OF APPOINTMENT 

The rule is the gross estate shall include any property passing or  transferred under general power of appointment exercised by the decedent a. By will b. By deed to take effect effect in possession possession or enjoyment enjoyment at or or after his his death c. By deed deed under under which which he has retain retained ed for his his life or any any period period not ascertainable without reference to his death or for any period which does not in fact end before his death d. The possession possession or enjoyment enjoyment of, or the the right to the income from the the property e. The right either alone, or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom The donee of a general power of appointment holds the appointed property with all the attributes of ownership thus, the appointed property shall form part of the gross estate of the donee of the power upon his death.

These following transfers do not actually convey full ownership over the property transferred hence the property still remains part of the gross estate of the transferor: 1. Transfers with Retention and Reservation of Certain Rights over 

the income or enjoyment of the property transferred 2. Transfers Transfers where where the donor donor reserves reserves the the right to the income of the property until death; or  3. Transfers where the donor reserves the right to the possession or  enjoyment of the property until death Transfer for Insufficient Consideration

1. If the transfer is a bona fide sale for adequate and full

consideration in money or money’s worth, no value shall be included in the gross estate. 2. If the transfer is not a bona fide sale for an adequate and full consideration in money or money’s worth, there shall be included in the gross estate only the excess of the fair market value of the property at the time of death over the value of the consideration received by the decedent . 3. If an inter vivos transfer of the decedent is proven to be fictitious, the total value of the property at the time of death shall be included in the gross estate.

PROCEEDS OF LIFE INSURANCE 

Proceeds of life insurance under policies taken out by the decedent upon his own life shall be included in his gross estate in the following cases: 1. when the the beneficiary beneficiary is the estate estate of the deceased, deceased, his executor executor or  administrator whether or not the deceased retained the power of  revocation 2. when the the beneficiary beneficiary is other than the the estate estate of the the deceased, deceased, his executor or administrator and the decedent retained the power of  revocation

CLAIMS AGAINST INSOLVENT PERSONS 

Are receivables due or owing from persons who are not financially capable of meeting theirobligations. The receivables shall be included in the gross estate at their full amount. CAPITAL OF THE SURVIVING SPOUSE 

The gross estate of a married decedent shall consist of the following: 1. conjuga conjugall or commun community ity properti properties es 2. exclu exclusiv sive e proper propertie ties s The capital of the surviving spouse shall not be deemed part of the gross estate.

I.

VALUATION OF GROSS ESTATE 1. Valua Valuatio tion n Date Date - tim time e of deat death h 2. Basis of of Valuation Valuation - fair fair market market value, value, which which is the the price which a property will bring when it is offered for sale by one who desires, but is not obligated to sell and is bought by one who is under not necessity of buying it 3. Valuation of UsufructUsufruct- probable probable life of the beneficiary beneficiary in accordance accordance with the latest Basic Standard Mortality Table 4. Valua Valuatio tion n of Rea Reall Proper Property ty – a) FMV as deter determine mined d by the the Commis Commission sioner; er; or  b) FMV as shown in the schedule of values values fixed by the Provincial Provincial or City Assessors 1. Valuation of Personal Personal PropertiesProperties- FMV at the time time of the the decedent’s decedent’s death 2. Valua Valuatio tion n of Shar Shares es of Stock Stock a. Unlisted Shares i. Common Common – book value ii.Preferred – par value b. List Listed ed Shar Shares es The value is the arithmetic mean between the highest and lowest quotation at a date nearest the date of death, if none is available on the date of death itself.

I.

EXEMPTIONS FROM ESTATE TAX 1. The merger merger of the usufruct usufruct in the owner owner of the naked 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 donee in favor of 

another beneficiary in accordance with the desire of the predecessor  4. All bequests, bequests, devises, devises, legacies or transfers transfers to social welfare, welfare, cultural and charitable institutions, no part of the income of which inures to the benefit of any individual; Provided, however, that no more than 30% of  the said bequests, devices, legacies or transfers shall be used by such institutions for administration purposes.

I.

PROBLEMS 1. Adequacy Adequacy of Consi Considera deration tion for Trans Transfer  fer  For each case, determine the value to include in the gross estate computation:

Cases A

B

C

Consideration received by transferor decedent at the time of transfer 

1000, 000

500, 000

0

Fair market value at the time of transfer

1000, 000

1000, 000

1000, 000

Fair market value at the time of death of transferor

1250, 000

1250, 000

1250, 000

0

750, 000

1250, 000

VALUE TO INCLUDE IN GROSS ESTATE

Cases A

B

C

Fair market value at the time of death of transferor

900, 000

900, 000

900, 000

Fair market value at the time of transfer

800, 000

800, 000

800, 000

0

500, 000

800, 000

900, 000

400, 000

0

Consideration received by transferor decedent at the time of transfer  VALUE TO INCLUDE IN GROSS ESTATE

2. Situs and Gross Estate

Determine the situs of each property and for each type of decedent, be able to compute the gross estate of Mr. To if he left the following property: a. b. c. d. e.

Resi Reside dent nt citi citize zen n Non Non – resi reside dent nt cit citiz izen en Resi Reside dent nt Ali Alien en Non – reside resident nt alien, alien, with reciproc reciprocity ity f. Non – resident alien without reciprocity

Value 1. Bank Bank deposit deposit at China China Bank, Bank, Ayala Ayala Ave., Ave., Makati City

IN

2500, 000

2. House & lot in Thailand

OUT

1500, 000

3. Buildin Building g & land land on which which it stands stands in Pasay Pasay City

IN

5000, 000

4. Trees, Trees, plants plants,, growing growing fruits fruits & land land on on w/h they are planted in Baguio City

IN

250, 000

5. Car in the Philippines

IN

350, 000

6. Appliances in house & lot in the Philippines

IN

100, 000

7. Appliances in house & lot in Thailand

OUT

200, 000

8. Jewelry in the Philippines

IN

600, 000

9. Jewelry in Thailand

OUT

250, 000

10.Bank deposit deposited ed in Zurich, Zurich, Switzer Switzerland land

OUT 7500, 7500, 000

11. House & lot in the Philippines

IN

1250, 000

12.Interest 12. Interest in an industry established established in Brisbane, Australia

OUT

1000, 000

13. Notes receivable, debtor residing in

IN

75,000

14.Accoun 14. Accounts ts receivable, debtor residing in Switzerland

OUT

87,500

15. Fish Pond in Laguna

IN

100, 000

16. Co Copyright exercised in the Philippines

IN

150, 000

17. Van in Malaysia

OUT

400, 000

Philippines

18. Trademark used in Malaysia

OUT

200, 000

19. Obligations issued by foreign corporation with

OUT

375, 000

20. Franchise used in the Philippines

IN

350, 000

21.Shell 21. Shell Corporation Corporation certificate of stocks kept in safe in Thailand

IN

225, 000

22. Globe Telecom certificates of stocks kept in the Philippines

IN

275, 000

23. Treasury bonds issued by Bangko Sentral ng

IN

425, 000

no business situs in the Philippines

Pilipinas 24. Patent exercised in China

OUT

300, 000

25.Foreign 25. Foreign shares, shares, 80% of the business is in the Philippines

OUT

450, 000

26. Foreign bonds with business situs in the

IN

325, 000

27.Busines 27. Business s right in corporation corporation established in Macau, China

OUT

750, 000

28.Investm 28. Investment ent in a partnership partnership established in the Philippines

IN

1125, 000

29.Foreign 29. Foreign shares, shares, 90% of the business is in the Philippines

IN

875, 000

Philippines

a. resi reside dent nt citi citize zen n Value 1. Bank dep depo osit at China ina Bank, Ayala yala Ave. ve., Ma Makati City ity

2500 500, 000

2. House & lot in Thailand

1500, 000

3. Building & land on which it stands in Pasay City

5000, 000

4. Trees, Trees, plants plants,, growing growing fruits fruits & land land on w/h they they are planted in Baguio City

250, 000

5. Ca Car in the Philippines

350, 000

6. Appliances in house & lot in the Philippines

100, 000

7. Appliances in house & lot in Thailand

200, 000

8. Jewelry in the Philippines

600, 000

9. Jewelry in Thailand

250, 000

10.Bank 10. Bank deposited deposited in Zurich, Switzerland Switzerland

7500, 000

11. House & lot in the Philippines

1250, 000

12.Interest 12.Interest in in an an indus industry try establi established shed in Bris Brisbane bane,, Austr Australia alia

1000, 1000, 000

13. Notes receivable, debtor residing in Philippines

75,000

14.Acc .Accounts receiva ivable, ble, deb debtor tor resi esiding ing in Switze itzerrlan land

87,5 7,500

15. Fish Pond in Laguna

100, 000

16. Copyright exercised in the Philippines

150, 000

17. Van in Malaysia

400, 000

18. Trademark used in Malaysia

200, 000

19. Obligations issued by foreign corporation with no

375, 000

business situs in the Philippines 20. Franchise used in the Philippines

350, 000

21.Shell 21. Shell Corporation Corporation certificate of stocks kept in safe in Thailand

225, 000

22. Globe Telecom certificates of stocks kept in the Philippines

275, 000

Treasu sury ry bond bonds s issu issued ed by Bang Bangko ko Sent Sentra rall ng Pili Pilipi pina nas s 23. Trea

425, 425, 000 000

24. Patent exercised in China

300, 000

25.Foreign 25. Foreign shares, shares, 80% of the business is in the Philippines

450, 000

oreign ign bonds with ith busin usines ess s situ itus in in the Ph Philip ilipp pines ines 26. Fore

325 325, 000

27.Busines 27. Business s right in corporation corporation established in Macau, China

750, 000

28.Investm 28. Investment ent in a partnership partnership established in the Philippines

1125, 000

29.Foreign 29. Foreign shares, 90% of the business is in the

875, 000

Philippines TOTAL 26997500

a. non non – reside resident nt citize citizen n Value 1. Bank dep depo osit at China ina Bank, Ayala yala Ave. ve., Ma Makati City ity

2500 500, 000

2. House & lot in Thailand

1500, 000

3. Building & land on which it stands in Pasay City

5000, 000

4. Trees, Trees, plants plants,, growing growing fruits fruits & land land on w/h they they are planted in Baguio City

250, 000

5. Ca Car in the Philippines

350, 000

6. Appliances in house & lot in the Philippines

100, 000

7. Appliances in house & lot in Thailand

200, 000

8. Jewelry in the Philippines

600, 000

9. Jewelry in Thailand

250, 000

10.Bank 10. Bank deposited deposited in Zurich, Switzerland Switzerland

7500, 000

11. House & lot in the Philippines

1250, 000

12.Interest 12.Interest in in an an indus industry try establi established shed in Bris Brisbane bane,, Austr Australia alia

1000, 1000, 000

13. Notes receivable, debtor residing in Philippines

75,000

14.Acc .Accounts receiva ivable, ble, deb debtor tor resi esiding ing in Switze itzerrlan land

87,5 7,500

15. Fish Pond in Laguna

100, 000

16. Copyright exercised in the Philippines

150, 000

17. Van in Malaysia

400, 000

18. Trademark used in Malaysia

200, 000

19. Obligations issued by foreign corporation with no

375, 000

business situs in the Philippines 20. Franchise used in the Philippines

350, 000

21.Shell 21. Shell Corporation Corporation certificate of stocks kept in safe in Thailand

225, 000

22. Globe Telecom certificates of stocks kept in the Philippines

275, 000

Treasu sury ry bond bonds s issu issued ed by Bang Bangko ko Sent Sentra rall ng Pili Pilipi pina nas s 23. Trea

425, 425, 000 000

24. Patent exercised in China

300, 000

25.Foreign 25. Foreign shares, shares, 80% of the business is in the Philippines

450, 000

oreign ign bonds with ith busin usines ess s situ itus in in the Ph Philip ilipp pines ines 26. Fore

325 325, 000

27.Busines 27. Business s right in corporation corporation established in Macau, China

750, 000

28.Investm 28. Investment ent in a partnership partnership established in the Philippines

1125, 000

29.Foreign 29. Foreign shares, shares, 90% of the business is in the Philippines

875, 000

TOTAL

26997500

a. resi reside dent nt ali alien en Value 1. Bank ank deposit sit at Chi Chin na Bank, Ayala Ave. ve., Mak Maka ati Cit City y

2500, 000 000

2. House & lot in Thailand

1500, 000

3. Building & land on which it stands in Pasay City

5000, 000

4. Trees, Trees, plants, plants, growin growing g fruits fruits & land on w/h w/h they they are planted in Baguio City

250, 000

5. Ca C ar in the Philippines

350, 000

6. Appliances in house & lot in the Philippines

100, 000

7. Appliances in house & lot in Thailand

200, 000

8. Jewelry in the Philippines

600, 000

9. Jewelry in Thailand

250, 000

10. Bank deposited in Zurich, Switzerland

7500, 000

11. House & lot in the Philippines

1250, 000

12.Interest 12.Interest in in an an indus industry try establis established hed in Brisban Brisbane, e, Austr Australia alia

1000, 1000, 000 000

13.Notes receivable, debtor residing in Philippines

75,000

14.Acc .Account unts rece eceiva ivable, debtor tor resid esidin ing g in Switze itzerrlan land

87,500 ,500

15. Fish Pond in Laguna

100, 000

16. Copyright exercised in the Philippines

150, 000

17. Van in Malaysia

400, 000

18. Trademark used in Malaysia

200, 000

19.Obligations issued by foreign corporation with no

375, 000

business situs in the Philippines 20. Franchise used in the Philippines

350, 000

21.Shell Corporation certificate of stocks kept in safe in Thailand

225, 000

22.Globe 22. Globe Telecom certificates certificates of stocks kept in the Philippines

275, 000

Treasu sury ry bond bonds s issu issued ed by Bang Bangko ko Sent Sentra rall ng Pili Pilipi pina nas s 23.Trea

425, 425, 000 000

24. Patent exercised in China

300, 000

25.Foreign 25. Foreign shares, shares, 80% of the business is in the Philippines

450, 000

oreign ign bonds nds with ith busin siness ess situ itus in in the the Philip ilipp pines ines 26.Fore

325, 25, 000 000

27.Business 27. Business right in corporation established established in Macau, China

750, 000

28.Investme 28. Investment nt in a partnership partnership established in the Philippines

1125, 000

29.Foreign 29. Foreign shares, shares, 90% of the business is in the Philippines

875, 000

TOTAL

26997500

a. non – residen residentt alien, alien, with reciproc reciprocity ity Value 1. Building & land on which it stands in Pasay City

5000, 000

2. Trees, Trees, plants, plants, growi growing ng fruits fruits & land on on w/h they they are planted in Baguio City

250, 000

3. Ca Car in the Philippines

350, 000

4. Appliances in house & lot in the Philippines

100, 000

5. Jewelry in the Philippines

600, 000

6. House & lot in the Philippines

1250, 000

7. Notes receivable, debtor residing in Philippines

8. Fi Fish Pond in Laguna TOTAL

75,000 100, 000 7650000

a. non – residen residentt alien, alien, witho without ut recipr reciprocit ocity y Value 1. Bank deposit at China Bank, Ayala Ave., Makati City

2500, 000

2. Building & land on which it stands in Pasay City

5000, 000

3. Trees, Trees, plants, plants, growing growing fruits fruits & land land on w/h they are are planted planted in Baguio City

250, 000

4. Ca Car in the Philippines

350, 000

5. Appliances in house & lot in the Philippines

100, 000

6. Jewelry in the Philippines

600, 000

7. House & lot in the Philippines 8. Notes receivable, debtor residing in Philippines

1250, 000 75,000

9. Fish Pond in Laguna

100, 000

10. Copyright exercised in the Philippines

150, 000

11. Franchise used in the Philippines

350, 000

12.Shell 12. Shell Corporation Corporation certificate of stocks kept in safe in Thailand

225, 000

13.Globe Telecom Telecom certifica certificates tes of stocks stocks kept in the Philippi Philippines nes

275, 275, 000

easury ury bonds iss issued by Bangk ngko Sentr ntral ng Pilip ilipin ina as 14. Treas

425, 25, 000

15. Foreign bonds with business situs in the Philippines

325, 000

16.Invest 16.Investme ment nt in a part partne nersh rship ip establ establish ished ed in the the Phil Philipp ippine ines s

1125, 1125, 000

17. 17. Fore Foreig ign n shar shares es,, 90% 90% of the the busi busine ness ss is in the the Phil Philip ippi pine nes s

875, 875, 000 000

TOTAL

13985000

References: 1. Abella, Atty. Edwin R. (n.d.). News and Views: Guidelines in Estate

and Donor’s Tax. Retrieved December 6, 2009, from http://www.thetrustguru.com/newspg4.htm 2. Scribd. (2008). Tax2-Ch 1-5 Estate Taxes Reviewer. Retrieved

December 6, 2009, from http://www.scribd.com/doc/3914010/Tax2-Ch15-Estate-TaxesReviewer  3. BIR. BIR. Estat Estate e Tax Tax Retu Return rn ftp://ftp.bir.gov.ph/webadmin1/pdf/16261801%20(final).pdf  4. Ballada, Susan. Ballada, Win. (2009). Transfer and Business Taxation.

10 Ed. Philippines.

TRANSFER AND BUSINESS TAXATION GROSS ESTATE

Maria Princess G. Bacungan December 7, 2009