Tax 2 Notes Finals 3

SEC. 84. Rates of Estate Tax. - There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax based on the value of such net estate, as computed in accordance with the following scheduleOverBut not overThe tax shallPlusOf the Excess

beOver

P200kExempt

P200kP500k05%P200k

P500kP2mP15k8%P500k

P2mP5mP135k11%P2m

P5mP10mP465k15%P5m

P10mP1.215m20%P10m

Properties in the EstateSEC. 85. Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: *Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.

(A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his death;

For estate tax purposes, residence - refers to the domicile of the person.

For residents and citizens, gross estate includes ALL properties, real or personal, tangible or intangible, WHEREVER situated. For non-resident aliens, gross estate includes only properties those situated in the Philippines.

Except with respect to INTANGIBLE personal property, its inclusion to the gross estate is the subject to the rule of reciprocity. If the FOREIGN COUNTRY of the NRA:

does not impose a transfer tax of any character on the intangible personal property (IPP) of Filipinos not residents of that foreign country; or

allows a similar exemption from transfer tax in respect of IPP owned by Filipinos not residents of that foreign country, Then IPPs of the non-resident alien here are exempt from the estate tax.

o Reciprocity must be total. If any of the two states or countries collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any character, reciprocity does not apply. (CIR v Fisher)

o Reciprocity in exemption does not require the foreign country to possess international personality. (CIR v Campos Rueda)

The following, among others, are ipps located in the Philippines:

1. Franchise which must be exercised in the Ph 2. Shares, obligations or bonds a issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws b issued by any foreign corporation 85% of the business of which is located in the Philippines c issued by ay foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines, and

3. Shares or rights in any partnership, business or industry in the Philippines.

Properties not in the estate

There may be properties, which at the time of the decedents death are not in the estate because they were transferred by him during his lifetime.

These transfers are: 1. Transfers in contemplation of death, 2. Revocable transfers, 3. Transfers under a general power of appointment, and 4. Transfers for an insufficient consideration.

o The values of these properties will be included in the determination of the gross estate for estate tax purposes. As such, the gross estate, for purposes of the estate tax, may exceed the actual value of his assets at the time of his death as it includes the value of transfers of property by him during his lifetime that partake of the nature of testamentary dispositions. These kinds of transfers have the following in common: o They are ostensible transfers, usually with the purpose to evade the estate tax o They are extension of interests

*If the transfers are in fact for a bona fide consideration, then they will not form part of the gross estate (this proviso is present in all the provisions regarding these transfers)

GROSS ESTATE:A. As to RESIDENT or FILIPINO decedent if the decedent was a resident or citizen of the PH, the Gross Estate shall INCLUDE, to the extent of his INTEREST, the VALUE at the time of his death of ALL:1. REAL property wherever situated;2. TANGIBLE personal property wherever situated; &3. INTANGIBLE personal property wherever situated. B. As to NRA decedent in case of a NRA decedent who at the time of his death, was NOT a CITIZEN of the PH, it shall INCLUDE to the extent of his INTEREST, the VALUE at the time of his death of ALL:1. REAL property situated in the PH;2. TANGIBLE personal property situated in the PH;3. INTANGIBLE personal property w/ a SITUS in the PH unless exempted on the basis of reciprocity.

The law ensures the inclusion of every type of property interest transmitted from the dead to the living. The gross estate shall be valued as of the time of the death of the decedent regardless of any subsequent increase/decrease in value because the R to the succession are transmitted from the moment of death of the decedent (777 CC).

SITUS of INTANGIBLE PERSONAL PROPERTY (IPP)IPP, such as credits, bills receivable, bank deposits, bonds, promissory notes, judgments, corporate stocks, does NOT admit of actual location.GR: The situs is at the RESIDENCE (domicile) of the owner.: Exceptions: This principle is n/a1. When it is inconsistent w/ express provisions of law2. When justice does not demand that it shld be, as where the property has in fact a situs elsewhere. Thus, shares of stock of a domestic corp of a NRA is taxable in the PH.

The GROSS ESTATE of a decedent for purposes of Estate Tax (ET) is not limited to & may exceed the actual value of his assets at the time of his death. INCLUDED in the taxable estate are the FF:1. INTEREST in PROPERTY POSSESSED the value of any interest in property w/c @ the time of the decedents death are in his actual/constructive possession/enjoyment; 2. INTEREST in PROPERTY OWNED the value of any interest in property w/c the decedent owned @ the time of his death; &3. PROPERTY or INTEREST TRANSFERRED in addition for the purpose of preventing tax avoidance, the value of transfers of property or interest in property made by the decedent during his lifetime w/c partake of the nature of testamentary dispositions.

SPECIFIC ITEMS INCLUDIBLE in GROSS ESTATE1. REAL & PERSONAL PROPERTY, whether tangible or intangible, or mixed, wherever situated * PROVIDED that where the decedent/donor was a NRA @the time of his death/donation, his real & personal property so transferred but w/c are situated OUTSIDE the PH shall NOT be included2. FRANCHISE w/c must be exercised in the PH;3. SHARES, OBLIGATIONS or BONDS a. Issued by any DOMESTIC corpb. Issued by any FOREIGN corp 85% of the business of w/c is located in the PHc. Issued by any FOREIGN corp, IF such have acquired a business SITUS in the PH (if they are used in the furtherance of its business in the PH by the foreign corp)4. SHARES/RIGHTS in any partnership, business or industry established in the PH.

Transfers in contemplation of death(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, a. in contemplation of or intended to take effect in possession or enjoyment at or after death, or b. of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death 1. the possession or enjoyment of, or the right to the income from the property, or 2. the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bonafide sale for an adequate and full consideration in money or money's worth.

A transfer in contemplation of death - is a transfer motivated by the thought of death, although death may not be imminent. Ex. Survivorship agreement

The following are examples of circumstances which may be taken into consideration in determining whether the transfer was made in contemplation of death:

o We can look at the age and state of health of the decedent at the time of the transfer (is he terminally ill ?) o Length of time between the transfer and the date of the death. o Concurrent making of a will or making of a will within a short time after the transfer.

But again, in the case of a bona fide sale for an adequate and full consideration in money or moneys worth, the value of the property transferred will not be considered in determining the gross estate.

INTER VIVOS TRANSFERS SUBJECT to ESTATE TAXThe GE extends to gratuitous transfers made by the decedent during his lifetime w/c are treated by law as substitutes for testamentary dispositions (inter vivos transfers in form but mortis causa in substance).1. Transfers in CONTEMPLATION of DEATH2. Tranfers w/ RETENTION or RESERVATION of certain rights;3. REVOCABLE transfers4. Transfers of property arising under a GENERAL POWER of APPOINTMENT5. Transfers for INSUFFICIENT CONSIDERATION.

Transfers by virtue of a BONA FIDE sale of property for an ADEQUATE & FULL CONSIDERATION in money/moneys worth excluded (not taxable)

Donation MORTIS CAUSADonation INTER VIVOS

Made in consideration of death, without the donors intention to lose the thing of its free disposal in case of survivalmade without such consideration but out of the donors generosity, although delivery may be made post mortem

A TRANSFER mortis causa, being testamentary in nature, should be embodied in a will. It is not a contract (unlike a donation mortis causa). It is in reality a legacy.If not embodied in a will void.

Transfer conveys not title or ownership to the transferee before the death of the transferor, or the transferor retains the ownership of the property conveyed; It is the donors death that determines the acquisition of, or the R to the property.Its effect is produced while the donor is still alive.

Transfer is revocable before the transferors death & revocability may be provided indirectly by means of the reserved power in the donor to dispose of the property conveyed.

Transfer is void if the transferor survived the transferee.

Donations being in the form of a will, are never accepted by the donees during the donors lifetime. Acceptance is a requirement.

GR: Donations inter vivos are subject to donor's tax, whereas donations mortis causa are subject to estate tax.: in the case of the so-called Substitutes for testamentary dispositions.

Revocable transfers

(C) Revocable Transfer. -

(1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exerciseable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to:a. alter, b. amend, c. revoke, or d. terminate, or e. where any such power is relinquished in contemplation of the decedent's death. (2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though a. the exercise of the power is subject to a precedent giving of notice or b. the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power 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.

A revocable transfer - is a transfer where the terms of the enjoyment of the property may be altered, amended, revoked or terminated by the decedent.

* It is sufficient that the decedent had the power to revoke, though he did not exercise the power to revoke.

* Again, the same rule with bona fide sales applies.

TRANSFER with RETENTION or RESERVATION of CERTAIN RIGHTSThis contemplates cases where the owner transfers his property during life but still retains the economic benefits the possession or enjoyment of the property, or the power to designate persons who may exercise such rights. By reason of the restriction or encumbrance, the transferee is incapable of freely enjoying & disposing of the property until the transferors death, & the transfer may be regarded as having been intended to take effect in possession or enjoyment @ the time of the transferors death. PROPERTY COVERED by the TRANSFERThe GE shall INCLUDE any interest in property of w/c the decedent has @ any time made a transfer by trust or otherwise 1. Transfer WITHOUT RETENTION of interest, but EFFECT POSTPONED a transfer intended to take effect in possession or enjoyment @ or after his death (donations mortis causa).2. Transfer WITH RETENTION of interest to INCOME or w/ RIGHT to DESIGNATE persons who will enjoy income/property a transfer under w/c a person has retained for his life or for any period not ascertainable without reference to his death of for any period w/c does not in fact end before his death: (example pp. 33-44)a. The possession/enjoyment of or the R to the income of the property orb. The R (either alone/in conjunction w/ any person) to designate the persons who shall possess/enjoy the property/income.

REVOCABLE TRANSFERSAlso to be included in the GE is the interest in property of w/c the decedent has @ any time made a transfer by trust or otherwise:1. With RESERVED POWER to ALTER, etc where the enjoyment thereof was subject @ the date of his death to any CHANGE through the exercise of a power (in whatever capacity exercisable) by the decedent (alone or in conjunction w/ another) without regard to when or from what source the decedent acquired such power, to ALTER, AMEND, REVOKE or TERMINATE, or2. w/ such POWER RELINQUISHED where any such power w/c would bring the property in the taxable estate, is relinquished in contemplation of the decedents death. The POWER to ALTER, AMEND or REVOKE shall be considered to exist on the date of the decedents death even though: The exercise of the power is subject to a precedent of giving NOTICE; or The alteration, amendment or revocation TAKES EFFECT only on the expiration of a STATED PERIOD after the exercise of the power. If the notice has NOT been given, or the power has not been EXERCISED on/before the date of decedents death such NOTICE or the POWER shall be considered to given or exercised on the date of his death. (85 C,2).

Transfers Under a General Power of Appointment(D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by deed executed a. in contemplation of, or b. intended to take effect in possession or enjoyment at, or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death:(a) the possession or enjoyment of, or the right to the income from, the property, or

(b) 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; except in case of a bona fide sale for an adequate and full consideration in money or money's worth.

Power of appointment - the right to designate the person or persons who will succeed the property of a prior decedent.

A general power of appointment - is one which may be exercised in favor of anybody.

o Carles donated property to Andres, with a provision that Andres can transfer the property to anyone. Andres transferred it to Iker. The property should be included in the gross estate of Andres.

A limited power of appointment - one which may be exercised only in favor of a certain person or persons designated by the prior decedent.

o Carles donated property to Andres, with a provision that Andres should transfer the property to Iker, and only Iker. The value of the property should not be included in the gross estate of Andres.

In order that property passing under a power of appointment may be included in the gross estate of the transferor, the power of appointment must be a general power of appointment. Again, the bona fide sale rule applies.

TRANSFER of PROPERTY under GENERAL POWER of APPOINTMENTAlso included in the GE is property arising under a general power of appointment exercised by the decedent:a. By WILL orb. By DEED executed IN CONTEMPLATION of or intended to TAKE EFFECT in possession/enjoyment @ or after his death; orc. By DEED under w/c he has RETAINED a. for his life or b. any period not ascertainable w/o reference to his death or c. for any period w/c does not in fact end before his death - a) the POSSESSION/ENJOYMENT of, or the R to the INCOME from the property, orb) the RIGHT (either alone/in conjunction w/ another), to DESIGNATE the persons who shall enjoy or possess the property or the income therefrom.

Life Insurance Proceeds

(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable.

Proceeds of life insurance are paid by the insurance company directly to the beneficiary. Proceeds of insurance under policies taken out by the decedent upon his life shall constitute part of the gross estate if the beneficiary is: 1. The estate of the decedent, his executor or administrator; or 2. A third person (not those in #1), and the designation of the beneficiary is revocable. The Insurance Code states that the designation of a beneficiary is generally revocable.

Except of course, when the policy states that the designation is irrevocable. In such cases, the proceeds are not considered as part of the decedents estate.

So, gross estate is made up of:

1. The decedents interests at the time of his death

2. Transfers made during his lifetime (in contemplation of death, revocable, and under a GPA, and

3. Life insurance proceeds 4. Some other stuff required by law to be included in the gross estate in order to allow deductions (claims against insolvent persons, unpaid mortgage, value of the family home, and the retirement benefits under RA 4917)

PROCEEDS of LIFE INSURANCEWhen TAXABLE (INCLUDED)NOT TAXABLE (NOT INCLUDIBLE)

1. Beneficiary is the ESTATE of the decedent the amt receivable by the estate of the deceased, his EXECUTOR/ADMIN as insurance under policies taken out by the decedent upon his OWN LIFE, irrespective of whether or not the insured retained the power of revocation; &2. Beneficiary is OTHER than the decedent the amt receivable by any beneficiary DESIGNATED in the policy except when it is expressly stipulated that the designation of the beneficiary is irrevocable. GR: insurance proceeds are revocable includible irrevocable & taxable only where the insured reserved to himself the power to change or revoke the name of the beneficiary during his lifetime, whether or not he has during his lifetime exercised such power of revocation.1. ACCIDENT insurance proceeds - unless one of the risks insured against is the death of the insured by accident2. GROUP insurance policy takent out by a company for its ees 3. Amt receivable by any beneficiary IRREVOCABLY designated in the policy by the insured because the transfer is absolute & insured did not retain any legal interest in the sinsurance.4. GSIS 5. sss

Prior Interests(F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the 1. transfers, 2. trusts, 3. estates, 4. interests, 5. rights, 6. powers and 7. relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this Code.

(G) Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's worth, but 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, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent.

In the transfers in contemplation of death, revocable transfer, or transfer under a GPA, the value to include in the gross estate will be determined under the following rules:

o If the transfer was in the nature of a bona fide sale for an adequate and full consideration in money or moneys worth, no value will be included in the gross estate;

o If the consideration received on the transfer was less than adequate and full, the value to include in the gross estate will be the excess of the fair market value at the time of the decedents death over the consideration received;

o If there was no consideration received on the transfer (donation mortis causa), the value to include in the gross estate will be the fair market value of the property at the time of the decedents death.

When looking at transaction, ask yourself, was the consideration insufficient? a. If yes, then add the balance of the FMV at the time of death and the consideration.

b. If no, then it was a bona fide sale. Dont add the value to the gross estate.

When it comes to transfers done during the lifetime of a decedent, there is a disputable presumption that the transfers are in contemplation of death if the recipients are compulsory heirs.

o The government presumes that one is transferring property beforehand to escape the estate tax, and instead pay the lower donors tax. o The case of Zapanta showed that the presumption is disputable. There, the Court considered the gifts as not advances even if the recipients were compulsory heirs. The reason for this was the condition imposed upon the recipients by the decedent (they had to pay the decedent a certain amount of rice and money during his lifetime). It showed that the transfer was not in contemplation of death, because the decedent in fact, would benefit from the transfer.

o The presence of a will also plays a part. In the cases of Tuason and Vidal de Roces, the Court considered the transfers as advances because a will was made making the transferees legatees. This played a part in the Courts impression that there was an intention of the decedent to minimize his gross estate.

o Thus, when looking at cases like these, the totality of all the factors and facts must be taken into consideration. Does the government always want to consider a transfer an advance (to be covered by the estate tax)? Not necessarily. There are instances where they will argue for it to be considered under the donors tax.

Capital of the Surviving Spouse(H) CAPITAL of the SURVIVING SPOUSE The capital of the surviving spouse of a decedent shall NOT for the purpose of this Chapter, be deemed part of his/her gross estate.

If the decedent was married his GE would consist of:1. his exclusive properties &2. his share in the conjugal or community properties.

Computation of Net EstateSec. 86. COMPUTATION of the NET ESTATE For the purpose of the tax imposed in this Chapter, the VALUE of the NET ESTATE shall be determined:(A) DEDUCTIONS, ALLOWED to the ESTATE of a CITIZEN or a RESIDENT of the PH, by DEDUCTING from the value of the NET ESTATE:1) EXPENSES, LOSSES, INDEBTEDNESS & TAXES (ELIT). Such amounts a) For actual FUNERAL expenses or in amount equal to 5% of the GE, (w/chever is LOWER, but in no case to exceed P200k);b) For JUDICIAL EXPENSES of the testamentary or intestate proceedings;c) For CLAIMS against the estate; Provided: that i. @ the time the indebtedness was incurred the DEBT INSTRUMENT was duly NOTARIZED & ii. if the loan was contracted w/in 3yrs before the death of the decedent, the ADMIN or EXECUTOR shall submit a STATEMENT showing the disposition of the proceeds of the loan;d) For CLAIMS of the DECEASED against INSOLVENT persons where the value of the decedents interest therein is INCLUDED in the GE; &e) For UNPAID MORTGAGES upon, or any INDEBTEDNESS in respect to, PROPERTY where the value of the DECEDENTS INTEREST therein, undiminished by such mortgage or indebtedness, is INCLUDED in the value of the GE, but NOT including any i. INCOME TAX upon income received after the death of the decedent, or ii. PROPERTY TAXES not accrued before his death, or iii. any ESTATE TAX. The DEDUCTION herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness, shall, when founded upon a PROMISE or AGREEMENT, be LIMITED to the EXTENT that they were CONTRACTED BONA FIDE & for an ADEQUATE & FULL CONSIDERATION in money or moneys worth.

There shall also be DEDUCTED, LOSSES incurred during the settlement of the estate, arising form i. fires, storms, shipwreck, or other casualtiesii. robbery, theft or embezzlement when i. such losses are NOT COMPENSATED for by INSURANCE or otherwise, & ii. if @the time of the filing of the return (up to 6 months after the death), such losses have NOT BEEN CLAIMED as a DEDUCTION for INCOME TAX purposes in an ITR, & iii. provided that such losses were INCURRED NOT later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Sec. 91.

2) PROPERTY PREVIOUSLY TAXED An amount equal to the VALUE specified below of any PROPERTY forming part of the GE situated in the PH of any person who DIED w/in 5yrs prior to the death of the decedent or TRANSFERRED to the DECEDENT by GIFT 5yrs prior to his death, where such property can be IDENTIFIED as a. having BEEN RECEIVED by the decedent by a) Giftb) Bequestc) Devise ord) Inheritance, b. Or having been AC QUIRED in EXCHANGE for PROPERTY so received:

100% of the value if the PRIOR DECEDENT died or PROPERTY was TRANSFERRED to the DECEDENT by GIFT w/in 1yr prior to the death of the decedent80% of the value if more than 1yr up to 2yrs60% of the value if more than 2 yrs up to 3yrs40% of the value if more than 3yrs up to 4yrs20% of the value if more than 4yrs up to 5yrs.

These deductions shall be allowed only where i. a DONORS TAX or ESTATE TAX imposed under this Title was FINALLY DETERMINED & PAID by or on behalf of such donor, or the ESTATE of such PRIOR DECEDENT as the case may be, &ii. only in the AMOUNT FINALLY DETERMINED as the value of such property in determining the value of the gift, or the GE of such prior decedent & iii. only to the extent that the value of such property is INCLUDED in the decedents GE &iv. only if in determining the value of the estate of the prior decedent, NO DEDUCTION was allowable under Par. 2 in respect of the property or properties given in EXCHANGE therefor.

Where a DEDUCTION was allowed of any mortgage or other lien in determining the DONORS TAX, or the ESTATE TAX of the PRIOR DECEDENT, w/c was paid in whole or in part prior to the decedents death, then the DEDUCTION ALLOWABLE under said Subsection shall be REDUCED by the amount so paid.

Such DEDUCTION allowable shall be REDUCED by an amount w/c bears the SAME RATIO to the amounts allowed deductions under paragraphs 1 & 3 of this Subsection as the amount otherwise deductible under said paragraph 2 bears to the value of the decedents estate.

Where the property referred to CONSISTS of 2/more items, the AGGREGATE value of such items shall be used for the purpose of computing the deduction.

3) TRANSFERS for PUBLIC USE The amount of ALL bequests, legacies, devises or transfers to or for the use of the GOVT of the PH, or any political subd, for EXCLUSIVELY PUBLIC PURPOSES.

4) The FAMILY HOMEAn amount equivalent to the CURRENT FMV of the decedents family home.PROVIDED HOWEVER, that if said current FMV exceeds P1m the EXCESS shall be subject to ET.As a sine qua non condition for the exemption or deduction, said family home must have been the decedents family home as CERTIFIED by the Brgy. Captain of the locality.

5) STANDARD DEDUCTION P1m

6) MEDICAL EXPENSES Medical expenses incurred by the decedent w/in 1 yr prior to his death w/c shall be duly SUBSTANTIATED by receipts.Provided, P500k maximum.

7) AMOUNT RECEIVED by HEIRS under RA 4917Any amount received by the heirs form the DECEDENTs ER as a consequence of death of the decedent-EE in accdance w/ RA 4917 (Retirement benefits of ees of private firms).Provided that such amt is INCLUDED in the GE of the decedent.

(B) DEDUCTIONS ALLOWED to NONRESIDENT ESTATESIn the case of a NR not a citizen of the PH, by DEDUCTING from the value of that part of his GE w/c @the time of his death is SITUATED in the PH:1) EXPENSES, LOSSES, INDEBTEDNESS & TAXESThat proportion of the deductions specified in (A) Par.1 w/c the value of such part bears to the value of his entire GE wherever situated2) PROPERTY PREVIOUSLY TAXED An amt equal to the value specified below of any property forming part of the GE situated in the PH of any person who DIED w/in 5yrs prior to the death of the decedent, or transferred to the decedent by gift w/in 5yrs prior to his death, where such property can be IDENTIFIED as c. having BEEN RECEIVED by the decedent by e) Giftf) Bequestg) Devise orh) Inheritance, d. Or having been AC QUIRED in EXCHANGE for PROPERTY so received:


3) TRANSFERS for PUBLIC USEThe amount of ALL bequests, legacies, devises or transfers to or for the use of the GOVT of the PH, or any political subd, for EXCLUSIVELY PUBLIC PURPOSES

(C) SHARE in the CONJUGAL PROPERTYThe NET SHARE of the SURVIVING SPOUSE in the Conjugal Partnership Property (CPP) as DIMINISHED by the obligations properly chargeable to such property shall, for the purpose of this section, be DEDUCTED from the NET ESTATE of the decedent. (D) MISCELLANEOUS PROVISIONSNO DEDUCTION shall be allowed in the case of a NONRESIDENT not a citizen of the PH,unless the EXECUTOR, ADMIN or anyone of the HEIRS as the case may be, INCLUDES in the RETURN required to be filed under Sec 90 the value @ the time of his death of that part of the GE of the nonresident not situated in the PH.

(E) TAX CREDIT for ESTATE TAXES PAID to a FOREIGN COUNTRY1) In GENERAL The tax imposed by this Title shall be CREDITED w/ the amounts of any ESTATE TAX imposed by the authority of a FOREIGN COUNTRY.2) LIMITATIONS on CREDIT The AMOUNT of CREDIT taken under this Sec. shall be subject to each of the FF LIMITATIONS:a) The amount of the CREDIT in respect to the TAX paid to any country shall NOT EXCEED the same proportion of the tax against w/c such credit is taken, w/c the decedent net estate situated w/in such country taxable under this Title bears to his ENTIRE NET ESTATE; &b) The TOTAL AMOUNT of CREDIT shall NOT EXCEED the same proportion of the tax against w/c such credit is taken, w/c the decedent net estate situated outside the PH taxable under this Title bears to his ENTIRE NET ESTATE.

PROCEDURE for COMPUTING NET ESTATE & ESTATE TAX DUESTEP 1: Get the GROSS ESTATESTEP 2:SUBTRACT from the GE the ALLOWABLE DEDUCTIONS = NET ESTATESTEP 3:DEDUCT the net share of the surviving spouse from properties w/c are conjugal/community & the family home allowance;STEP 4: DEDUCT the P200k EXEMPTION (&other exemptions) as allowed by law = TAXABLE NET ESTATESTEP 5: APPLY the tax rates = ESTATE TAX

Gross estate (exclusive & conjugal/community)Less:Allowable (ordinary & special) deductions=Estate after deductions

Less: Net share of surviving spouse in conjugal/community property (if applicable)=Net Estate of the Decedent

Less: P200k (& other exemptions)=Net Taxable Estate

xTax Rate (Sec 84)=Estate Tax Due

Important:1. The FUNERAL expenses & other ordinary deductions, not including the special deductions, are SUBTRACTED from the CONJUGAL/COMMUNITY properties from w/c as diminished shall be taken the o the surviving spouse.2. The NET TAXABLE ESTATE is the difference bet the GE & the sum of the TOTAL (ordinary & special) DEDUCTIONS (including exemptions) & the share of the surviving spouse3. If the NET ESTATE is less than P500k, the P200k exemption must be deducted to get the taxable net estate. In the schedule, it is already deducted where the Taxable Net estate is P500k or above; hence it should not be deducted anymore. Thus, using the schedule, if the net estate is P400k, the tax is P10k (5% of P200k); if P600k, the tax is P23k: 4. The FF deductions have CEILINGS:Funeral expenses

Actual funeral expenses, orWhichever is the LOWEST

5% of the gross estate; or

P200k

Medical expenses

Actual medical expenses, orWhichever is LOWER

P500k

Family home

FMV, orWhichever is LOWER

P 1 million

5. The VALUE of the estate is determined @ the time of decedents death. Therefore, taxes accruing to the property after the death is not allowable as a deduction.

Valuation of the gross estateSEC. 88. Determination of the Value of the Estate. -

(A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner.

(B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is higher of:

(1) The fair market value as determined by the Commissioner, or

(2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors.

The properties comprising the gross estate shall be valued based on the FMV as of the time of death.

In case of real property, the fair market value shall be: 1. The FMV as determined by the Commissioner; or 2. The FMV as shown in the schedule of values fixed by the Provincial and City Assessorso Whichever is HIGHER In case of personal property recently acquired by the decedent, the purchase price may indicate the FMV.

o In case of personal property not recently acquired, there should be some evidence of the FMV. For shares of stock, the FMV shall depend on whether the shares are isted or unlisted in the stock exchange.

o If unlisted Common shares based on their book value Preferred shares based on their par value o If listed The mean between the highest and lowest quotation on the date of death; If none, then the date nearest the death. For use of usufruct, there be taken into account the probable life of the beneficiary in accordance with the latest basic standard mortality table, to be approved by the Secretary of Finance.

Computation for the net estate

The basic equation to determine the net taxable estate is (gross estate deductions) The complication arises when the decedent is married at the time of his death. Well tackle that later.

First, lets take a look at the deductions.

Deductions

The deductions from the gross estate are:

1. Ordinary deductions a. Expenses, losses, indebtedness, taxes, etc: i. Funeral expenses ii. Judicial expenses of testamentary or intestate proceedings iii. Claims against the estate

2. Court fees 3. Accountants fees 4. Appraisers fees 5. Clerk hire 6. Costs of preserving and distributing the estate 7. Costs of storing or maintaining property of the estate 8. Brokerage fees for selling property of the estate

Expenses on extrajudicial settlement of the estate are allowed as deductions. They come within the meaning of administration expenses.

The notarial fee paid for the extrajudicial settlement is deductible since such settlement effected a distribution of the decedents estate to his lawful heirs. (CIR v CA & Pajonar)

In that case, the notarial fees and the guardianship fee of the attorney were considered deductibles.

Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible.

Expenses for the improvement and renovation of the decedents residential house were allowed as a deductible. (Testate Estate of Felix de Guzman v de Guzman-Carillo)

Admin expenses should be those which are necessary for the management of the estate, for protecting it against destruction or deterioration, and possible for the production of fruits.

Attorneys fees paid by the heirs to their respective lawyers arising from conflicting claims are not deductible as judicial expenses. These shall be separately borne by them.

So, gross estate is made up of:

1. The decedents interests at the time of his death

2. Transfers made during his lifetime (in contemplation of death, revocable, and under a GPA), and

3. Life insurance proceeds 4. Some other stuff required by law to be included in the gross estate in order to allow deductions (claims against insolvent persons, unpaid mortgage, value of the family home, and the retirement benefits under RA 4917)

Claims against the estate

c) For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan;

Claims means debts or demands of a pecuniary nature, which could have been enforced against the deceased in his lifetime and could not have been reduced to simple money judgments.

o In other words, if enforceable against him when he was alive, the obligations will be claims against his estate when he shall be dead. o So, an obligation that has prescribed during his lifetime, or that was unenforceable against him, will not be a claim against his estate when he shall be dead.

Requisites: 1. The liability must represent a personal obligation of the deceased at the time of his death (except unpaid obligations incurred incident to his death and unpaid medical expenses classified as a deduction), 2. The liability was contracted in good faith and for adequate and full consideration, 3. The claim must be a debt or claim which is valid in law and enforceable in court 4. The indebtedness must not have been condoned by the creditor during the lifetime of the decedent, or the actions to collect must not have prescribed.

Regarding the 4th requisite, if the debts were condoned AFTER the decedents death, the debts are deductible, following the date-of-death valuation rule. (Dizon v CTA) If the claim arose out of a debt instrument, the debt instrument must be notarized.

EXCEPT for loans granted by financial institutions where notarization is not part of the business practice or policy of the institution. If the loan was contracted within 3 years before the death of the decedent, the admin or executor must submit a statement showing the disposition of the proceeds of the loan.

If a monetary claim against the decedent did not arise out of a debt instrument, the requirement of a notarized debt instrument does not apply.

There is no requirement to add the amount to the gross estate (as compared to claims against insolvent persons/mortgage). This is a DIRECT DEDUCTION.

CLAIMS AGAINST the DECEDENTs ESTATE Claims debts or demands of a pecuniary nature w/c could have been enforced against the deceased in his lifetime & could have been reduced to simple money judgments. Claims against the estate or indebtedness in respect of property may arise out of contract, tort or operation of law.REQUISITES to be DEDUCTIBLE:1. They were contracted in GF & for an ADEQUATE & FULL consideration in money or moneys worth;2. They must REPRESENT UNPAID PERSONAL OBLIGATION of the deceased existing at the time of his death;3. They must be VALID & ENFORCEABLE 4. They must be REASONABLY CERTAIN in amount;5. At the time the indebtedness was incurred, the DEBT INSTRUMENT was duly NOTARIZED & if the loan was contracted w/in 3yrs before the death of the decedent, the admin/executor shall submit a STATEMENT showing the disposition of the proceeds of the loan.Hence, an indebtedness that has been condoned by the creditor or the action to collect w/c has prescribed, may NOT be claimed as a deduction. however, where a lien claimed against the estate was certain & enforceable on the date of the decedents death, the fact that the creditor subsequently settled for a lesser amount does not prevent the estate from deducting the entire amount of the claim for estate tax purposes. Unpaid obligations of the deceased incurred incident to his death are classified under a different category of deduction (funeral or medical). Unpaid taxes such as income & real estate taxes that accrued AFTER the death of the decedent are NOT deductible as they are properly chargeable to the income of the estate.

Claims against insolvent persons

(d) For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross estate;

Claims against insolvent persons are deductions from the gross estate

1. SUBJECT to the condition that the full amounts of the receivables are first included in the gross estate. The deduction from the gross estate will be the uncollectible portion.

CLAIMS AGAINST INSOLVENT PERSONS In order that claims of the deceased against insolvent persons (bad debts) may be deductible, it is essential that:1. The AMOUNT of said claims has been INITIALLY INCLUDED as part of his GT; &2. The INCAP of the DEBTOR to PAY is PROVEN;Since the debts are uncollectible, they are worthless, & it is therefor both unfair & unreasonable for the heir to pay taxes on them.

Unpaid mortgage or indebtedness on propertye) For UNPAID MORTGAGES upon, or any INDEBTEDNESS in respect to, PROPERTY where the value of the DECEDENTS INTEREST therein, undiminished by such mortgage or indebtedness, is INCLUDED in the value of the GE, but NOT including any iv. INCOME TAX upon income received after the death of the decedent, or v. PROPERTY TAXES not accrued before his death, or vi. any ESTATE TAX. The DEDUCTION herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness, shall, when founded upon a PROMISE or AGREEMENT, be LIMITED to the EXTENT that they were CONTRACTED BONA FIDE & for an ADEQUATE & FULL CONSIDERATION in money or moneys worth.When a person leaves property encumbered by a mortgage or indebtedness, his gross estate must include the fair market value of the property, undiminished by the mortgage or indebtedness.

The mortgage or indebtedness will be claimed as a deduction from the gross estate.

1 Pique died leaving real property with a FMV of P1m, subject to a mortgage in the amount of P600k. Before he can deduct the P600k, he has to include the total FMV of his property to the gross income.

If the loan is merely an accommodation loan, where the proceeds of the loan went to another person, the value of the unpaid loan must be included in the receivable of the estate. In the cases of claims against insolvent persons and unpaid mortgage/indebtedness on property, it is imperative that the values of each are first added to the gross estate.

These are called zero-sum computations. They dont really benefit the heirs because these transactions werent supposed to be part of the gross estate anyway.

Taxes

Taxes are deductions from the gross estate if such taxes accrued prior to the decedents death.

Those that accrued after the decedents death are not deductions from gross estate. These taxes CANNOT be deducted:

1. Income tax on income received after death 2. Property taxes not accrued before death 3. Estate tax CONDITIONS: - in order that any unpaid mortgage indebtedness of a decedent may be deducted, the ff must be complied w/:1. FMV of the property mortgaged (without deducting the mortgage indebtedness) has been INCLUDED as part of the GE;2. The mortgage indebtedness was contracted in GF & for an ADEQUATE & FULL CONSIDERATION in money/moneys worth.

Example: X, decedent, mortgaged during his lifetime his real property worth P200k to Y to secure an indebtedness of P150k, w/c remains unpaid at his death. The value of the real property (P200k) should be included first in the GE in order that the P150k may be deducted.

However, where the MORTGAGOR is a NRA, indebtedness secured by mortgage of real property situated OUTSIDE the PH may not be deducted where such property is not includible in the GE.

UNPAID TAXES taxes owed by the decedent & unpaid at the time of death, being debts in favor of the GOVT, are also DEDUCTIBLE as a claim against the estate.except: The ff taxes are chargeable to the INCOME of the ESTATE.1. Income taxes upon income received AFTER the death2. Property taxes not accrued BEFORE his death3. Any estate tax due from the TRANSMISSION of his estate.

Losses

There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91.

Losses are deductible from the gross estate if:

a. Arising from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement

b. Not compensated by insurance or otherwise c. Not claimed as a deduction in an income tax return of the estate subject to income tax d. Occurring during the settlement of the estate, and e. Occurring before the last day for the payment of the estate tax (6 months after the decedents death, or the allowed extension)

Example: Dude died January 1, 2010. A fire razed his house on March 1, 2010. His estate was settled January 1, 2012. He can claim a deduction (within 6 months!)

Dude died January 1, 2010. A fire razed his house on January 1, 2011. He cant claim a deduction.

CASUALTY LOSSES include all losses incurred during the settlement of the estate arising from fires, storms, shipwreck or other casualties, or from robbery, theft or embezzlement.REQUISITES for DEDUCTIBILITY:1. There must be a LOSS arising from any of the causes given above;2. Such loss is NOT COMPENSATED for by insurance or otherwise;3. Such loss has NOT BEEN CLAIMED as a DEDUCTION for INCOME TAX purposes;4. The VALUE of the property lost must have been INCLUDED in the GE.

Transfers for public use

(3) Transfers for Public Use. - The amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes.

Transfers for public use - mean dispositions in a last will and testament, or a transfer to take effect after death, in favor of the Government of the Philippines, or any political subdivision thereof, for exclusively public purposes.

You can deduct the value of the property transferred to the government. Transfer must be TESTAMENTARY in character. Oral transfers are NOT deductible.

Vanishing deductions2) PROPERTY PREVIOUSLY TAXED An amount equal to the VALUE specified below of any PROPERTY forming part of the GE situated in the PH of any person who DIED w/in 5yrs prior to the death of the decedent or TRANSFERRED to the DECEDENT by GIFT 5yrs prior to his death, where such property can be IDENTIFIED as e. having BEEN RECEIVED by the decedent by i) Giftj) Bequestk) Devise orl) Inheritance, f. Or having been AC QUIRED in EXCHANGE for PROPERTY so received:


These deductions shall be allowed only where v. a DONORS TAX or ESTATE TAX imposed under this Title was FINALLY DETERMINED & PAID by or on behalf of such donor, or the ESTATE of such PRIOR DECEDENT as the case may be, &vi. only in the AMOUNT FINALLY DETERMINED as the value of such property in determining the value of the gift, or the GE of such prior decedent & vii. only to the extent that the value of such property is INCLUDED in the decedents GE &viii. only if in determining the value of the estate of the prior decedent, NO DEDUCTION was allowable under Par. 2 in respect of the property or properties given in EXCHANGE therefor.

Where a DEDUCTION was allowed of any mortgage or other lien in determining the DONORS TAX, or the ESTATE TAX of the PRIOR DECEDENT, w/c was paid in whole or in part prior to the decedents death, then the DEDUCTION ALLOWABLE under said Subsection shall be REDUCED by the amount so paid.

Such DEDUCTION allowable shall be REDUCED by an amount w/c bears the SAME RATIO to the amounts allowed deductions under paragraphs 1 & 3 of this Subsection as the amount otherwise deductible under said paragraph 2 bears to the value of the decedents estate.

Where the property referred to CONSISTS of 2/more items, the AGGREGATE value of such items shall be used for the purpose of computing the deduction.

Property may change hands within a very short period of time by reason of the early death of the owner who received it by inheritance or by donation (gift).

To provide relief to the burdened taxpayer, vanishing deductions are allowed to reduce the gross estate.

Vanishing deductions are allowed when:

a. The present decedent died within 5 years from receipt of the property from a prior decedent or donor;

b. The property on which the vanishing deduction is being claimed must be located in the ph

c. The property must have formed part of the taxable estate of the prior decedent, or of the taxable gift of the donor

d. The estate tax on the prior succession or the donors tax on the gift must have been finally determined & paid

e. The property must be identified as the one received from the prior decedent or donor, or something acquired in exchange therefor

f. No vanishing deduction on the property was allowable to the estate of the prior decedent

How do we compute? Step 1: Get the basis. Either the value of the property in the prior estate/value used for donors tax purposes OR the value of the property in the present estate, whichever is LOWER.Step 2: The Step 1 value will be reduced by any payment made by the present decedent on any mortgage or lien on the property (when such mortgage/lien was used as a deduction on the prior dead guys estate, or gift of the donor)Step 3: The Step 2 value shall be further reduced by:

Step 2 valuexExpenses, losses, indebtedness, taxes and transfers for

Gross Estatepublic use

This is done to prevent double deduction.

Step 4: Look at the chart below and multiply to get the value which you can actually deduct.

%If received by inheritance or gift

100Within one year prior to death of the decedent

80More than one year but not more than two years

60More than two years but not more than 3 years

40More than 3 years but not more than 4 years


Example

Che inherited land from his pop with a fmv of P500k when inherited. Two and a half years later, Che died. The FMV of the land was P600k at that time. The gross estate, on which the land was part, was P2m. deductions from the gross estate (not including the family home, medical expenses, standard deduction or RA 4917 receivable) amounted to P400k. Whats the vanishing deduction?Step 1: Get the lower value. - P500k

Step 2: No mortgage mentioned, so P500k

Step 3: P500kxP400k =P100k

P2m

Basis of the vanishing deduction (500k-100k) =P400k

Vanishing deduction (60% of P400k)=P240

VANISHING DEDUCTION of PROPERTY PREVIOUSLY TAXED

INHERITED or DONATED PROPERTY PREVIOUSLY TAXED commonly referred to as VANISHING DEDUCTION, is an amount allowed to reduce the taxable estate of a decedent, where property:a. RECEIVED by him from a PRIOR DECEDENT by gift, bequest, devise or inheritance, orb. TRANSFERRED to him by gift, has been the object of previous transfer taxation.

CONDITIONS:1. There are 2 deceased persons & the 1st is the donor; &2. The 2nd decedent DIES w/in 5yrs after the death of the prior decedent, or in case of GIFT, the decedent-donee dies w/in the same period after the date of the gift.

RATE of DEDUCTION the rate gradually diminishes & entirely vanishes depending on the time interval between the 2 successive transfers. The vanishing deduction is allowable to the GE situated in the PH of a resident or Filipino decedent as well as to the GE of a NRA decedent.

REQUISITES for VANISHING DEDUCTION:1. DEATH the present decedent died w/in 5yrs from the date of death of the prior decedent or date of gift;2. IDENTITY of the property the property can be identified as a. the one received from prior decedent or from the donor, or b. as the property acquired in exchange for the original property so received.3. INCLUSION of the property the property must have formed part of the GE situated in the PH of the PRIOR DECEDENT, or have been INCLUDED in the total amount of the gifts of the donor made w/in 5yrs prior to the present decedents death.4. PREVIOUS TAXATION of the property the estate tax on the prior succession, or the donors tax on the gift, must have been FINALLY DETERMINED & PAID by the prior decedent or by the donor, as the case may be, &5. NO PREVIOUS VANISHING DEDUCTION on the property no such deduction on the property or the property given in exchange therefor, was allowed in determining the value of the net estate of the prior decedent.

LIMITATIONS upon the AMOUNT of DEDUCTION ALLOWABLE1. VALUE of PROPERTY the deduction is limited by a. the value of the property previously taxed or b. the aggregate value of such property if more than one item, as finally determined for the purpose of the prior estate tax (or gift tax) or c. the value of such property in present decedents GE, whichever is LOWER

2. DEDUCTION for MORTGAGE or OTHER LIEN the initial value in #1 above shall be REDUCED by the total amount paid, if any, by the present decedent, on any mortgage or other lien on the property where a deduction was allowed, by reason of the payment, of such mortgage or other lien from the GE of the prior decedent, or gift of the donor, in determining the estate tax of the prior decedent or donors tax.3. DEDUCTION for EXPENSES, etc the value as reduced in #2 above shall be further reduced by an amount w/c bears the same ratio to the amounts allowed as deductions for a. Expenses, losses, indebtedness & taxes (ordinary deductions) &b. Transfers for public useAs the amount otherwise deductible for property previously taxed bears to the value of the decedents GE &

4. PERCENTAGE of DEDUCTIONS The vanishing deduction shall be the VALUE (final basis) in #3 multiplied by the ff percentage of deduction:%If received by inheritance or gift

100Within one year prior to death of the decedent

80More than one year but not more than two years

60More than two years but not more than 3 years



COMPUTATION:1)Value Taken of PPTLess:Mortgage debt (or other lien) Paid, if any (1st deduction)=Initial basis

2)Initial basisxExpenses, etc=(2nd deduction)Value of GE& transfer for of present decedentpublic purposes3)Initial basisLess:2nd deduction=Final basisxRate of deduction (86 A,2)=Vanishing deduction

*If there is no mortgage debt paid, the value taken of PPT would be the initial basis. *If only part of the mortgage is paid, then only that part is deductible.

Special deductions

Family Home

(4) The Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said current fair market value exceeds One million pesos (P1,000,000), the excess shall be subject to estate tax. As a sine qua non condition for the exemption or deduction, said family home must have been the decedent's family home as certified by the barangay captain of the locality.

The deduction is an amount equivalent to the current FMV of the decedents family home.

o BUT the maximum is P1m only. Do not forget to add the amount of the family home to the gross estate. Kasama yan! Zero-sum? Yes, but only to the extent of P1m. Lugi yung rich folk. The deduction will be allowed when the famly home is certified to be as such by the barangay captain of the locality where it is located.

For a person married at the time of death, and who was under a system of conjugal partnership or absolute community, the deduction for the family home is of the FMV, but should not exceed P1m, if such family home was conjugal property or community property. (Remember this!)

Family Home the dwelling house, including the land on w/c it is situated, where the H&W or an unmarried person who is the head of the family & members of their family reside, as CERTIFIED by the Brgy Captain of the locality. A person may constitute only one family home.AMOUNT DEDUCTIBLE from the GE: - amount equivalent to the current FMV of the decedents family home, the total value of w/c has been included as part of his GE. However, if the said FMV exceeds P 1 million, the EXCESS shall be subject to estate tax.REQUISITES for DEDUCTIBILITY:1. The family home must be the ACTUAL residential home of the decedent & his family @ the time of his death, as CERTIFIED by the Brgy Capt of the locality;2. The TOTAL VALUE of the family home must be INCLUDED as part of the GE;3. Allowable deduction must be in an amount equivalent to the current FMV as declared or included in the GE or the extent of the decedents interest (whether CP or AC property), whichever is LOWER, but NOT exceeding P 1 million.

Standard deduction

(5) Standard Deduction. - An amount equivalent to One million pesos (P1,000,000).

Do not forget to deduct P1m every time! Its standard!

Medical expenses

(6) Medical Expenses. - Medical Expenses incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts: Provided, That in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos (P500,000).

All medical expenses incurred (whether paid or unpaid) within ONE YEAR before the death of the decedent shall be allowed as a deduction, PROVIDED,

o that the same are duly substantiated with official receipts, and o The total amount, whether paid or unpaid, does NOT exceed P500k. If its more than P500k, can you deduct it as a claims against the estate? No. See requisites of claims against the estate.

MEDICAL EXPENSES

MAXIMUM AMOUNT All medical expenses incurred (whether paid or unpaid) w/in one yr before the death of the decedent shall be allowed as a deduction, PROVIDED that the same are duly substantiated w/ receipts & other documents. The TOTAL AMOUNT thereof, whether paid/unpaid, must NOT EXCEED P500k. Any amount of medical expenses incurred w/in one year before the death in EXCESS of 500k shall no longer be allowed as a deduction. Neither can any unpaid amount thereof in excess of the 500k threshold nor any unpaid amount for medical expenses incurred prior to the one-yr period from the date of death be allowed to be deducted from the GE as claim against the estate.

CONDITIONS Medical expenses incurred by the decedent to be deductible form his GE:1. They were INCURRED w/in one year prior to his death;2. Duly substantiated w/ receipts3. Shall not exceed 500k.

Amounts receivable under RA 4917

(7) Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a consequence of the death of the decedent- employee in accordance with Republic Act No. 4917: Provided, That such amount is included in the gross estate of the decedent.

Retirement benefits received by employees of private firms in accordance with a reasonable benefit plan maintained by the employer are EXEMPT from all taxes, provided that the retiring employee has been in the services of the same employer for at least 10 years and is not less than 50 years old at the time of his retirement.

The amount must: o have been received by the heirs of the decedent-employee as a consequence of the latters death, and

o included in the gross estate of the descendent. (important!)

Deductions from the gross estate with ceilings

Funeral expenses

Actual funeral expenses, orWhichever is the LOWEST

5% of the gross estate; or

P200k

Medical expenses

Actual medical expenses, orWhichever is LOWER

P500k

Family home

FMV, orWhichever is LOWER

P1m

DEDUCTIONSIn case of a CITIZEN/RESIDENT of the PH, the deductions from the GE may be classified as follows:1. ORDINARY DEDUCTIONS they consist of expenses, losses, indebtedness & taxes or more specifically:i. Funeral expenses (not to exceed P200k)ii. Judicial expenses of proceedings;iii. Claims against the estate;iv. Claims against insolvent persons;v. Unpaid mortgagesvi. Unpaid taxes &vii. Casualty losses (86 A,1 )2. SPECIAL DEDUCTIONS other deductions provided by lawi. Property previously taxes (Vanishing Deduction)ii. Transfers for public useiii. Value of Family Home (not to exceed P 1 million)iv. Standard deduction (P 1 million)v. Medical expenses (not to exceed P500k) &vi. Retirement benefits received by heirs under RA 4917 (Sec 86 A, 2-7)3. SHARE of SURVIVING SPOUSE it refers to the NET () share of the surviving spouse in the CP or AC Property as diminished by the obligations property chargeable to the property (86 C).

FUNERAL EXPENSES actual funeral expenses, whether paid/unpaid those actually incurred in connection w/ the interment/burial of the deceased & paid from the estate of the deceased. Must be duly supported by receipts/invoices/other evidence.A. DEDUCTIBLE:1) The mourning apparel of the surviving spouse & unmarried minor children bought & used on the occasion of the burial2) Expenses of the wake, including food & drinks3) Publication charges for death notices4) Telecommunication expenses in informing relatives5) Cost of burial plot, tombstones, monument or mausoleum their upkeep. In case deceased owns a family estate/several burial plots, only the value corresponding to the ploy where he is buried is deductible;6) Interment &/or cremation fees & charges7) All other expenses incurred for the performance of the rites & ceremonies incident to interment.* If the deceased is one of the spouses, the funeral expenses including the construction of a tombstone shall be chargeable to the CP/AC Property.B. NOT DEDUCTIBLE expenses incurred after the interment such as for prayers, entertainment or the like. Any portion of the funeral & burial expenses borne or defrayed by relatives & friends of the deceased, such as contributions.JUDICIAL EXPENSES of TESTAMENTARY or INTESTATE PROCEEDINGSA. DEDUCTIBLE those incurred in the inventory-taking of assets comprising the GE, including their administration & collection, payment of debts & distribution of the property to persons entitled to the estate. In short, these deductible items are expenses incurred during the settlement of the estate but NOT beyond the last day prescribed by law or the extension thereof, for the filing of the estate tax return. Any unpaid amount under judicial expenses should be supported by a statement of account issued & signed by the creditor. In case the estate is settled EXTRAJUDICIALLY a reasonable amount for legal fees & accounting expenses may be allowed.

B. NOT DEDUCTIBLE on the other hand, expenses NOT ESSENTIAL to the proper settlement of the estate but incurred for the individual benefit of the heirs, legatees or devisees are NOT allowed as deductions

Deductions for a NON-RESIDENT, NOT CITIZEN of the Philippines(B) DEDUCTIONS ALLOWED to NONRESIDENT ESTATESIn the case of a NR not a citizen of the PH, by DEDUCTING from the value of that part of his GE w/c @the time of his death is SITUATED in the PH:4) EXPENSES, LOSSES, INDEBTEDNESS & TAXESThat proportion of the deductions specified in (A) Par.1 w/c the value of such part bears to the value of his entire GE wherever situated5) PROPERTY PREVIOUSLY TAXED An amt equal to the value specified below of any property forming part of the GE situated in the PH of any person who DIED w/in 5yrs prior to the death of the decedent, or transferred to the decedent by gift w/in 5yrs prior to his death, where such property can be IDENTIFIED as g. having BEEN RECEIVED by the decedent by m) Giftn) Bequesto) Devise orp) Inheritance, h. Or having been AC QUIRED in EXCHANGE for PROPERTY so received:


6) TRANSFERS for PUBLIC USEThe amount of ALL bequests, legacies, devises or transfers to or for the use of the GOVT of the PH, or any political subd, for EXCLUSIVELY PUBLIC PURPOSES

A non-resident decedent who was not a citizen of the Philippines at the time of death, with properties within and outside the Philippines, is subject to tax only on his estate within the Philippines.

Due to this, the estate in the Philippines is allowed deductions for: 1. Expenses, losses, indebtedness, taxes, etc, computed by: Gross Estate, Philippines xWorld expenses, losses, indebtedness,

Gross Estate, Worldtaxes, funeral expenses, judicialexpenses, etc

It does not matter where the expenses are paid or incurred. On the total of the items, the formula provided by law will be applied.

Moreover, it also doesnt matter if you can pinpoint specifically where the expenses were incurred, you have to use the formula.2. Transfers for public use of property in the Philippines

3. Vanishing deduction on property in the Philippines.

A non-resident, not citizen is NOT allowed:

1. Deduction for family home 2. Standard deduction 3. Deduction for medical expenses 4. Deduction for amount receivable under RA 4917

DEDUCTIONS ALLOWED to NONRESIDENT ESTATESA. SAME DEDUCTIONS as to CITIZENS & RESIDENTS The deductions allowed to estates of a deceased NRA, w/c @the time of his death are SITUATED in the PH, are the ff:1. ELIT (expenses, losses, indebtedness & taxes)2. PPT (property previously taxed)3. TPU (transfers for public use). The NET SHARE of the surviving spouse in the CP/AC Property as diminished by obligations properly chargeable to such property shall be DEDUCTED from the NET ESTATE of the decedent.B. As to ELIT in the case however of the deductions for ELIT, the amount of the allowable deduction is LIMITED only to that proportion of such deductions w/ the value of such part of his GE w/c at the time of his death, is situated in the PH, bears to the value of his ENTIRE GE wherever situated. (86, B,1 ).

PH Gross estatexDeductions claimed=Allowable deduction ofEntire GE whereverfor ELITNR EstateSituated

C. REQUIREMENT for DEDUCTION: - it is indispensable as a prerequisite to the deduction, in case of NRA, that the executor/admin or anyone of the heirs, as the case may be, INCLUDES in the RETURN required to be filed under Sec 90, the value @the time of his death of that part of the GE of the NR NOT SITUATED in the PH. This requirement is necessary to determine the RATABLE PORTION of the deduction for ELIT.If no statement of the net asset situated outside the PH is attached to the return, then no deduction for ELIT shall be allowed.

Miscellaneous Provisions. - No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the value at the time of his death of that part of the gross estate of the nonresident not situated in the Philippines.

No deduction shall be allowed for a non-resident alien unless the executor, administrator or anyone of his heirs, includes in the return required to be filed under Sec. 90 the value at the time of the decedents death that part of his gross estate not situated in the Philippines. (Needed for the formula specified above)

Net Estate Computation of Married Persons

Section 85 (H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate.Share in the CONJUGAL PROPERTYSection 86 (C) Share in the Conjugal Property. - the net share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property shall, for the purpose of this Section, be deducted from the net estate of the decedent.

Gross estate

The gross estate of a decedent who was married and who was under the system of absolute community of property during the marriage consists of:

1. The EXCLUSIVE properties of the decedent, and 2. The COMMUNITY propertiesThe exclusive properties are:

1. Property acquired during the marriage by gratuitous title (inheritance/donation) by either spouse, and the fruits as well as the income thereof Unless the donor, testator or grantor states that they will be part of the community property 2. Property for personal & exclusive use of either spouse But jewelry will form part of the community property 3. Property acquired BEFORE the marriage by either spouse who have legitimate descendants by a former marriage, and the fruits as well as the income of such property

Community property will consist of all properties owned by the spouses at the time of the celebration marriage or acquired thereafter (presumed to belong to the community) o The family home constituted by the husband and wife is community property.

Proceeds of life insurance taken out by the decedent on his own life, when includible in the gross estate, will be exclusive property if the premiums were paid out of exclusive funds. o They will be community property if the premiums were paid out of community funds. A claim against an insolvent person will be included in the gross estate as exclusive or community depending on whether the claim is for exclusive or community property.

Deductions from gross estate

The same rules and ceilings which were discussed on the part of deductions will apply The following are the community/conjugal deductions:

1. Funeral expenses and judicial expenses 2. Special deductions of a. family home, b. standard deduction, c. medical expenses and d. amounts receivable under RA 4917 3. Those obligations contracted during the marriage which are presumed to have benefited the family (debts incurred during the marriage, etc)

The following are exclusive deductions:

1. Debts before the marriage by either spouse that did NOT redound to the benefit of the family 2. Support of the illegitimate children of either spouse 3. Liabilities incurred by either spouse of a crime

So, how do we get the net estate of a married person?

Step 0: Know which are community/conjugal and which are exclusive

Step 1: Get the net conjugal estate (gross conjugal estate conjugal deductions) Step 2: Get the decedents share (net conjugal estate 2)

Step 3: Get the gross estate of the decedent (decedents share + exclusive properties) Step 4: Get his net estate (gross estate of the decedent exclusive & special deductions) Step 5: Once you reach step 4, yun na yon! Thats the decedents taxable estate.

Mao, a citizen and resident of the Philippines, was married under the system of absolute community of property during the marriage. He died leaving the following properties andobligations:

Real properties inherited from his father 10 years ago and before the marriageP200k

Real property received as a gift from the mother 7 years ago,

during the marriageP1.115m

Cash income from the property received as giftP5k

Real property owned by Mrs. Mao before the marriageP300k

The family homeP500k

Medical expensesP70k

Funeral expensesP50k

Judicial expenses for settlement of estateP100k

Obligations incurred during the marriageP150k

Debt of Mao before the marriageP120k

Step 0: Determine what are conjugal/community and what are exclusive

Step 1: Get the net conjugal estate (gross conjugal estate conjugal deductions) (P200k1 + P300k2 +500k3) - (P50k4 + P100k5 + P150k6) = P700k

Step 2: Get the decedents share (Step 1s NCE/2)

P700k/2 = P350k

Step 3: Get the gross estate of the decedent (decedents share + exclusive properties) P350k + P1.115m7 + P5k8 = P1.47m

Step 4: Get his net estate (Gross estate decedent exclusive deductions & special deductions)

P1.47m (P120k9 + P250k10 + P70k11 + P1m12) = P30k

1 Real property inherited from the father2 Real property owned by Mrs. Mao before the marriage 3 Value of the family home4 Funeral expenses5 Judicial expenses6 Obligations incurred during the marriage7 Real property gift from mom during marriage8 Income from the gift9 debt before marriage10 the value of the family home11 Medical expenses12 Standard deduction! Dont forget!

Step 5: The net taxable estate is P30k. Check the schedular rate, and youll find out that his estate is tax exempt!

Tips:

Do not forget the limitations and ceilings imposed by the general rule of deductions. o Family home only up to P1m. o Funeral expenses only up to P200k whatevers lower of the actual expense and 5% of the gross estate (exclusive + conjugal) o Medical expenses not to exceed P500k Remember that only of the family home is counted as a special deduction (since half belongs to the still living spouse).

o And also remember that if the value of the family home (once halved) is above P1m, the deduction allowed is still P1m because of the ceiling imposed by law. Dont forget to subtract the standard deduction. Its not usually given as part of the facts but you still have to deduct that.

Medical expenses are special deductions and are deducted from the gross estate of the decedent. Funeral deductions are conjugal deductions and are deducted from the gross conjugal/community estate.

EXCLUSIONS:The exclusive property of the surviving spouse is NOT deemed part of the GE of the decedent spouse. If the decedent was married, his GE would consist of his exclusive properties & his share in the conjugal/community properties (85 H).

EXCLUSIVE PROPERTY of EACH SPOUSEA. ABSOLUTE COMMUNITY of PROPERTY in the absence of marriage settlement executed before the celeb of the M or when the regime agreed upon is void, System of ACP shall governa. COMMUNITY PROPERTY shall consist of i. ALL the property owned by the spouses @the time of the celeb of the Marriage or ii. ACQUIRED thereafterb. EXCLUDED from the Community Property i. Property ACQUIRED by GRATUITOUS TITLE by either spouse, its FRUITS & INCOME, if any it is expressly provided by the donor/testator/grantor that they shall form part of the community propertyii. Property for PERSONAL & EXCLUSIVE USE of either spousejewelry part of community propertyiii. Property ACQUIRED before the marriage by either SPOUSE who has LEGIT DESCENDANTS by a FORMER MARRIAGE & its FRUITS & INCOME* Property ACQUIRED during the M presumed to belong to the community unless it is proved that it is excluded

B. CONJUGAL PARTNERSHIP of GAINS a. CONJUGAL PROPERTIESi. the PROCEEDS, PRODUCTS, FRUITS & INCOME from their separate properties, & ii. those ACQUIRED by either/both spouses through their efforts or by CHANCE, *Upon dissolution of the M or partnership, the NET GAINS/benefits obtained by either/both spouses shall be DIVIDED EQUALLY between them. b. EXCLUSIVE PROPERTY of EACH SPOUSEi. That w/c is brought to the M as his/her OWN;ii. That w/c each ACQUIRES during the M by GRATUITOUS TITLE;iii. That w/c is ACQUIRED by R of REDEMPTION, by BARTER or by EXCHANGE w/ property belonging to only one of the spouses;iv. That w/c is PURCHASED w/ EXCLUSIVE MONEY of the W/H. Property bought on INSTALLMENTS paid partly from funds of either/both spouses & partly from conjugal funds belongs to the BUYER/s if FULL OWNERSHIP was VESTED before the M, subject to REIMBURSEMENT advanced by the CP Funds or by either/both spouses. Whenever an AMOUNT/CREDIT PAYABLE within a period of time belongs to one of the spouses, the sums collected during the M in partial payments or by installments on the principal are considered the EXCLUSIVE property of the spouse. However, interests falling due during the M on the principal belong to the CP All property ACQUIRED during the M whether the acquisition appears to have been made, contracted or registered in the name of one/both spouses, is presumed to belong to the CP Unless it be proved that it pertains exclusively to the h/w.C. SEPARATION of PROPERTY may refer to present or future property or both. It may be total/partial. In partial, the property not agreed upon as separate shall pertain to absolute community. To each spouse shall belong all earnings from his/her profession, business, industry & all fruits (natural, civil, industrial) due or received during the M from his/her separate property.

NET SHARE in the CONJUGAL (or COMMUNITY) PROPERTY of the SURVIVING SPOUSE (p. 76)A. DEDUCTIBLE from the NET ESTATE the net share of the surviving spouse in the CP or AC Property as diminished by the obligations properly chargeable to such property is also DEDUCTIBLE from the net estate of the decedent.

In other words, where the decedent was married:1. The CP or AC Property shall first be determined2. Then, all obligations (ordinary deductions) properly chargeable to the CP/AC property shall be deducted from it.3. From the balance (Net Conjugal/community estate), the NET SHARE ( thereof) of the surviving spouse shall be deducted from the net estate of the decedent for purposes of imposing the estate tax. 4. The amount of the SPECIAL DEDUCTIONS is NOT SUBTRACTED from the value of the CP/AC property. It is not taken into account in determining the Net Conjugal/Community Estate from w/c is deducted the share of the surviving spouse. B. WHERE DECEASED SPOUSE was a FILIPINO CITIZEN or RESIDENT or NRA a. Deceased spouse was a RESIDENT/CITIZEN of the PH the net share of the surviving spouse in real property or personal property situated ABROAD belonging to the conjugal property shall be DEDUCTED from the GE.b. Deceased spouse was a NRA only the share in real & tangible personal property situated in the PH & intangible property w/ SITUS in the PH unless exempted on the basis of reciprocity, are DEDUCTIBLE. In either case, the value of the CP/AC property must have been INITIALLY INCLUDED in the GE.

Exemption from Estate Tax

SEC. 87. Exemption of Certain Acquisitions and Transmissions. - The following shall not be taxed:

(A) The merger of usufruct in the owner of the naked title; (B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary;

(C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and

(D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which insures to the benefit of any individual: Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes.

The following are exempt from estate tax:

1. Merger of usufruct in the owner of the naked title 2. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommisary.

3. Transmission from the 1st heir, legatee or donee in favor of another beneficiary in accordance with the desire of the predecessor, and 4. All bequests, devises, legacies or transfers to social welfare, cultural & charitable institutions, no part of the net income inures to the benefit of any individual, provided that not more than 30% of the said bequests, devises, legacies or transfers shall be used by such institutions for the administration purposes * The above specific exemptions are IN ADDITION to the P200k exemption under 84.

Tax Credit for Foreign Estate TaxE) Tax Credit for Estate Taxes paid to a Foreign Country. -

In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country.

Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:

(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under this Title bears to his entire net estate; and(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under this Title bears to his entire net estate.

To minimize the onerous effect of taxing the same property twice, a tax credit against Philippine estate tax is allowed for estate taxes paid to foreign countries.

One foreign country

What you paid to the foreign country

Tax Credit Limit = Net foreign estate x Tax here in the Philippines Entire Net Estate

Between what you paid to the foreign country and the tax credit limit here, you choose whatevers lower as what you can credit.

See example in donors tax part.

If tax is paid to 2 or more foreign countries: Limitation A: see above

Limitation B: Tax Credit Limit = Total foreign net estate x Tax here in the Philippines Entire Net Estate

Between limitation A and B, you choose whatevers lower as your credit.

Admin Provisions

SEC. 89. Notice of Death to be Filed. - In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds Twenty thousand pesos (P20,000), the executor, administrator or any of the legal heirs, as the case may be, within two (2) months after the decedent's death, or within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner.

A notice of death must be filed within two months after the decedents death:

o In all cases of transfers subject to tax, or p When exempt, the value of the estate exceeds P20,000

Estate Tax ReturnsSEC. 90. Estate Tax Returns. -A. Requirements. - In 1. all cases of transfers subject to the tax imposed herein, or 2. where, though exempt from tax, the gross value of the estate exceeds P2OOk or 3. regardless of the gross value of the estate, where the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the BIR is required as a condition precedent for the transfer of ownership thereof in the name of the transferee, the executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth:

(1) The value of the GE of the decedent at the time of his death, or in case of a NRA, of that part of his gross estate situated in the Philippines;

(2) The deductions allowed from gross estate in determining the estate as defined in Section 86; and (3) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes.

Provided, however, That estate tax returns showing a gross value exceeding P2M shall be supported with a statement duly certified to by a CPA containing the following:

(a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a NRA, of that part of his gross estate situated in the Philippines;

(b) Itemized deductions from gross estate allowed in Section 86; and (c) The amount of tax due whether paid or still due and outstanding.

B. Time for Filing. - For the purpose of determining the estate tax provided for in Section 84 of this Code, the estate tax return required under the preceding Subsection (A) shall be filed within six (6) months from the decedent's death.

A certified copy of the 1. schedule of partition and o2. rder of the court approving the same shall be furnished the Commissioner within 3Odays after the promulgation of such order. C. Extension of Time. - The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding 30 days for filing the return. D. Place of Filing. - Except in cases where the Commissioner otherwise permits, the return required under Subsection (A) shall be filed with an a) authorized agent bank, or b) Revenue District Officer, c) Collection Officer, or d) duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner.

An estate tax return is required to be filed when the estate is:

1 Subject to estate tax, 2 Exempt from estate tax, but the gross estate exceeds P200,000 3 Regardless of the amount of the gross estate, where the said gross estate consists of registered or registrable property, motor vehicle or shares of stock, or other similar property for which clearance from the BIR is required as a condition precedent for the transfer of ownership thereof in the name of the transferee.

The return shall be under oath and shall include the following: 1. Value of the gross estate at the time of the decedent (for non-resident aliens, the value of the gross estate here in the Philippines)

2. Deductions allowed from the gross estate 3. Whatevers necessary to establish the correct estate tax If the estate tax return shows that the gross estate exceeds P2,000,000, it shou

Documents

Tax 2 Notes Finals 3