Settlement of Estates

LECTURE ON SETTLEMENT OF ESTATES By: ATTY. JAIME G. BALMAS, CPA, REB National Treasurer, PAREB President, 2014, Manila Board of Realtors, Inc.

What is an Estate? An Estate comprised of the real and personal properties of a decedent.

When is the settlement of an estate required? The settlement of an estate is required when the person died has left properties, real or personal.

How is an estate settled? An Estate may be settled judicially or extrajudicially: “Extrajudicial” means “outside of court”. The heirs do not have to go to court to partition the properties left by the deceased.

What are the common requirements for an extrajudicial settlement? The common requirements are:

1. The decedent died intestate, i.e., without a valid will; 2. The estate has no outstanding debts at the time of the extrajudicial settlement; 3. The heir/s are all of age, or the minor heirs are represented by their judicial guardians or legal representatives; 4. The extrajudicial settlement is made in a public instrument, stipulation or affidavit duly filed with the Register of Deeds;

5. The fact of such extrajudicial settlement must be published in a newspaper of general circulation once a week for three (3) consecutive weeks; and 6. The parties to the extrajudicial settlement shall file a bond with the Register of Deeds in an amount equivalent to the value of the personal property involved. This bond should be filed simultaneously with the extrajudicial settlement instrument(document). Such bond will answer for the payment of any just claim at any time within two (2) years after the settlement and distribution of an estate.

Who may execute an extrajudicial settlement? 1. THE SOLE HEIR. The one and only heir may adjudicate the entire estate to himself by means of an affidavit (called an “Affidavit of Self-Adjudication”) to be filed in the Register of Deeds of the place where the decedent resided. 2. THE HEIRS ARE TWO (2) OR MORE. The heirs may agree to divide among themselves the estate by means of a notarized instrument filed in the Register of Deeds.

The steps to follow are:

a. Prepare a “Deed of Extrajudicial Settlement of Estate and Adjudication of Estate” to be signed by all of the heirs, which must contain the following information: (a) That the decedent left no will; (b) That the decedent left no debt; (c) Each heir’s relationship to the decedent (e.g. spouse, son, daughter, father, mother etc.); (d) That they are the decedent’s only surviving heirs; (e) An enumeration and a brief description of the decedent‘s properties, both real and personal, which the heirs will be dividing among themselves.

Heirs for purposes of the discussion on extrajudicial settlement, may refer to the following: 1) if the deceased was single without children – surviving parents; 2) if the deceased was single with children– legitimate and illegitimate children only; 3) if the deceased was single with illegitimate children and surviving parents – surviving parents and illegitimate children only; 4) if the deceased was married with children - legal spouse and illegitimate and legitimate children only; and 5) if the deceased was married with illegitimate children – legitimate spouse, surviving parents and illegitimate children.

b. Have the “Deed of Extrajudicial Settlement and Adjudication of Estate” notarized before a Notary Public after all the heirs have signed it. c. Secure a bond from a reputable bonding company acceptable to the Register of Deeds. The amount of the bond is equivalent to the value of the personal property included in the extrajudicial settlement.

d. Register the notarized “Deed of Extrajudicial Settlement and Adjudication of Estate” with the Register of Deeds. The bond is simultaneously filed with the “Deed of Extrajudicial Settlement and Adjudication of Estate”. e. Publish the “Deed of Extrajudicial Settlement and Adjudication of Estate” in a newspaper of general circulation once a week for three (3) consecutive weeks.

When do you resort to judicial settlement of estate? There are times when resort to court is unavoidable, particularly when the deceased left a will or debts and/or the heirs are in dispute.

What are the common requirements for judicial settlement? 1. By means of a petition filed in court.

2. Where filed? a. If the decedent was a resident of the Philippines at the time of his death, the petition must be filed before the Regional Trial Court in the place where he resided at the time of his death.

b. If the decedent was a resident of a foreign country at the time of his death, the petition must be filed in any Regional Trial Court in the province where he had estate. 3. Publication. Notice of the filing of the petition for settlement of estate and the proceedings thereof are required to be published in a newspaper of general circulation once a week for three consecutive weeks.

When is there a judicial settlement? 1. SUMMARY SETTLEMENT OF ESTATES OF SMALL VALUE. An estate of small value is worth Ten Thousand Pesos or less, regardless of whether or not the decedent left a will. The steps to follow are: a. File a petition in court alleging that the estate is of small value. b. Publish a notice of the settlement proceedings in a newspaper of general circulation once a week for three (3) consecutive weeks. c. After completion of publication, the court may set the case for hearing and proceed summarily to settle the estate.

2. PROBATE OF WILL. If the decedent left a will, such must be probated, i.e., allowed or disallowed. The steps to follow are: a. File a petition in court praying for the probate of the will and settlement of estate of the decedent. b. The court will set a time and place for the probate and shall cause notice of such to be published in a newspaper of general circulation once a week for three (3) consecutive weeks.

c. On the hearing date, the court will proceed with the probate of the will and distribute the estate to the heirs/legatees accordingly. 3. DECEDENT LEFT NO WILL. If the decedent left no will, the steps are the same as the above, except that the petition will pray for the settlement of the estate of the decedent.

What are the steps to follow when settling the estate of a deceased person in preparation to sell the property to an interested buyer?

STEP 1: Fill out BIR Form 1904 (Application for Registration). All parties that transact with the BIR should have a valid Tax Identification Number (TIN). Normally, Form 1904 is used to verify the TIN of the seller as well as the buyer. But in payment of estate taxes, the estate of the deceased will have to have a separate TIN from the seller-heirs.

In filling out Form 1904, here is what to do: (a) on the Taxpayer Type, mark with an “X” the box indicating “One-Time Taxpayer”; (b) on Classification, mark with an “X” the box indicating “Nonindividual”; and (c) on Sex, mark with an “X” the appropriate box indicating gender of the deceased. Next, write “ESTATE OF [THE DECEASED PERSON’S NAME]” in the space provided for the Taxpayer’s Name. On the Civil Status, mark with an “X” the appropriate box indicating civil status of the deceased. On the Date of Birth, write the date of death of the decedent as it appears in the Certificate of Death. Write the Local Address of the decedent in the space provided for. Take note that the Local Address of the decedent should be the one indicated in the death certificate.

If the person dies abroad and has no residence in the Philippines fill out the Foreign Address by writing the address indicated in the death certificate. In such a case, the filing of the Estate Tax Return should be made at the BIR Revenue District Office (RDO) No. 39 (South Quezon City).

Finally, put an “X” on the box indicating Transfer of Properties by Succession (Death); and on Tax Types mark an “X” the box indicating Estate Tax. Remember to indicate the name of the Taxpayer/Authorized Agent and sign the same. It is important to attach a photocopy of the certified copy of the Certificate of Death to Form 1904.

STEP 2: Prepare the mandatory documentary requirements to be submitted to the BIR for the settlement of estate of a deceased individual. You can get a copy of the list of documentary requirements HERE. Go to page 3 and 4 of the document to find the list. STEP 3: Prepare BIR Form 1801 (Estate Tax Return). Fill up the name and the TIN of the Estate on the spaces provided in Form 1801. The ONETT Officer of the Day will assist you in filling out the rest of the form based on the computation he/she has made based on the review of the documents presented. However, if the estate of the deceased is more than P3 million then it would be wise to consult a certified public account to determine the initial computation of the taxable estate.

STEP 4: Pay the estate tax as computed. You can pay the estate tax with an Authorized Agent Bank (AAB) of the RDO having jurisdiction over the place of residence of the decedent at the time of his/her death. Cash is best to settle the estate tax. But if the tax due is a large amount and security would be a problem for the one paying it then the same can be paid by means of a Manager’s or Cashier’s Check. If payment is made through a Manager’s or Cashier’s Check, the following should be written as payee: “[BANK, BRANCH] FAO BUREAU OF INTERNAL REVENUE IFO [TAXPAYER’S NAME] [TIN OF TAXPAYER].” However, if you will pay the estate tax using a AAB that is a government financial institution like Landbank of the Philippines, then the payee may simply be “BUREAU OF INTERNAL REVENUE.”

STEP 5: Submit all documentary requirements and proof of payment to the RDO having jurisdiction over the place of residence of the decedent.Upon submission of the requirements and proof of payment, the ONETT – One-Time Transaction – will issue a Claim Stub with a reference number. When you follow up if a Certificate Authorizing Registration (CAR) has already been issued then you only need to give the reference number. Please note that the processing of estate taxes requires a minimum of 60 days by the BIR. Depending on the review of the documents, the BIR has the right to require the heirs for additional requirements especially in connection to any deductions claimed by the estate.

There is a P1 million standard deduction for all estates. If one of the properties being settled is the family home then a barangay certificate should be presented to certify that the decedent is a bona fide resident of the barangay where the family home is located, if the deduction of P1 million for the family home will be claimed.The family home should be in the name of the decedent in order for the deduction to be claimed.

STEP 6. Wait for the release of the Certificate Authorizing Registration.Upon the release of the CAR, the property can now be sold to a buyer. The CAR, along with the transferring document – Extra-judicial Settlement of Estate, Affidavit of Self-Adjudication, etc. – and the Tax Clearance Certificate should be part of the documents to be presented when paying the capital gains and documentary stamp taxes covering the sale of the property. Some buyers, however, would want to have the title and tax declarations of the real property in the name of the heir or heirs before they finalize the purchase of the property. In such a case, the RESP should process the payment of transfer tax to the LGU concerned and the registration fees with the Registry of Deeds having jurisdiction over the location of the real property.

The same process mentioned above will govern if the transferring document is an Extra-judicial Settlement of Estate with Sale. A final note should be made to alert RESPs and the concerned readers. If the Extra-judicial Settlement of Estate contains a waiver of some sort for and in favor of a particular heir or heirs, the BIR shall assess the Heirs additional taxes in the form of a donor’s tax. The BIR considers such waiver as a donation on the part of the waiving heir/s to the recipient heir/s. This has been ruling of the BIR when Commissioner Henares took the helm of the bureau in 2010.

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