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Donee is not the absolute owner of the property. He is a mere trust.

Transfers in contemplation of death
The motivating factor for the transfer is the thought of death. Although it
is effected during the lifetime of the donor, it is not considered donation Transfer for insufficient consideration
inter vivos but rather donation mortis causa. Here there is consideration involved but it does not measure up to FMV or
the proper valuation involved. Usually, it is through the deed of sale.
Manifestations:
1. Age and state of health of the decedent at the time of gift, Take note: If land is classified as a capital asset, this does not apply
especially where he was aware of a serious illness because it is covered by capital gains.
2. Length of time between the gift and the date of death. A short
interval suggests the conclusion that the thought of death was Rules:
in the decedents mind, and a long interval suggests the 1. The transfer for insufficient consideration must fall under any of the
opposite. But there is not exact length of time. previous kinds of transfers mentioned above (transfers in contemplation
3. Concurrent making of a will or making a will within a short time of death, revocable transfers or property passing under the General Power
after the transfer. of appointment), otherwise it will not be subject to estate tax, but that of
donors tax.
See: Section 85(B) of the NIRC.
Example: You are expecting to die in 1 month so you executed a deed of
Revocable Transfer sale, but instead of selling your laptop for P50,000, you only sold it for
Transfer made during the lifetime of the decedent where the enjoyment P10,000.
of the thing transferred is subject to change through the exercise of a The first question that you will ask is whether such transaction falls under
power by the decedent to alter, amend, revoke or terminate. any of the abovementioned transfers:
If not not subject to estate tax but donors tax
It forms part of gross estate because there was no transfer of absolute If yes ask whether sufficient or insufficient
ownership. If sufficient not subject to estate tax
If insufficient subject to estate tax
Examples:
The transferor retains the economic benefit of the property. 2. Determine the Gross Estate by comparing the Fair Market Value (FMV)
The transferor retains possession over the property. of the property transferred at the time of death less the consideration paid
at the date of transfer.
Q: X executed a deed of donation over a farmland with the condition that
the proceeds of the farmland will inure to X (Revocable transfer). Then, X FMV In an arms length transaction, it is the price that the seller who is
suffered mental incompetence. Will the farmland form part of the gross willing to sell, but not compelled to sell and a buyer not compelled to buy,
estate of X? but is willing to buy. BUT for taxation purposes, there are guides on how
to ascertain the FMV.
A: Yes. The farmland will form part of the gross estate of X. The mental
incompetence/incapacity of the transferor during the lifetime does not
change the revocable nature of the transfer and it is finalized upon the PROCEEDS OF LIFE INSURANCE
death of the transferor. During the incapacity, the condition on revocable Life Insurance Proceeds that are taken out by the decedent on his
transfer is held in abeyance or deferred until such time the transferor own life. It should be the decedent who insures his own life.
recovers from the incapacity.
Proceeds of life insurance will form part of the estate of the decedent if
See: Section 85(C) of the NIRC. the beneficiary is:

Two Types of Beneficiaries

General power of appointment vs Special Power of Appointment 1. The deceaseds estate, administrator, executor
General When the power of appointment authorizes the donee to - Regardless if designation of revocable or otherwise because still goes to
appoint any person he pleases, including himself, his spouse, his estate, the estate
executor or administrator, and his creditor.
2. Persons other than the estate, administrator and executor
The donee of a GPA holds the appointed property with all the attributes - forms part if the property is designated as revocable. Absolute right will
of ownership, and thus, the property shall form part of the gross estate of be transferred after death
the donee upon his death.
If the designation is irrevocable then the property will not form part of the
Example Donor places in deed of donation that there is no restriction to estate because absolute right has already been transferred.
who he may transfer such property. No specification to whomever goes
the property once the donee dies. Property goes to the estate of donee. If the insured died, the life insurance will NOT form part of the estate
because the owner of the life insurance is the company (the third party).
Donee is the absolute owner of the property. The proceeds, in the first place, did not exist. Therefore, they do not have
any right to claim the proceeds during the lifetime.
Special Special power of appointment exists when the donee can
appoint only from a restricted or designated class of persons other SECTION 85. Gross Estate.
than himself. Property transferred under a SPA should be excluded from "(E)Proceeds of Life Insurance. - To the extent of the amount receivable
the gross estate of the donee because he merely holds the property in by the estate of the deceased, his executor, or administrator, as insurance
trust. under policies taken out by the decedent upon his own life,
irrespective of whether or not the insured retained the power of
Ex. Donor will indicate in deed of donation: I will give transfer this house revocation, or to the extent of the amount receivable by any beneficiary
to you provided that the house will be given to Mr. X, a third party, when designated in the policy of insurance, except when it is expressly stipulated
donee dies. that the designation of the beneficiary is irrevocable.

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How to know if it will form part of the gross estate: 2. Claims against insolvent persons the decedent (creditor) has
Step 1: Ascertain who took out the life insurance. a receivable. Because debtor is insolvent, such receivable is
It must be taken out by the decedent upon his own life. In short, deductible, but only if it is included in the gross estate.
the insured and the assured is the decedent at the same time
Step 2: Determine who is the beneficiary is and whats the designation of Insolvent person when liabilities exceed assets.
the beneficiary.
If the beneficiary is the deceased, administrator, executor, or Basically, in the gross estate computation you have letters A-H (refer
estate, regardless of the designation whether revocable or to syllabus), plus claims against insolvent persons, plus proceeds
irrevocable, it is part of the gross estate. from retirement benefits under RA 4917.
If the beneficiary is other than the estate, administrator,
executor, and if revocable, then it forms part of the gross estate. ALLOWABLE DEDUCTIONS
If irrevocable, it will not form part of the gross estate.
I. Citizen OR Resident decedent
When proceeds from the life insurance will not be taxable:
1.) Accident Insurance Ordinary Deductions
2.) If the beneficiary is other that the estate, administrator,
executor in which the designation is irrevocable A. Expeses, Losses, Indebtedness and Taxes (ELIT)
3.) Proceeds of the life insurance covered by GSIS or SSS
4.) Proceeds of a group insurance policy taken out by the company i. Funeral Expenses
for his employees
5.) Proceeds of life insurance payable to heirs of deceased To avail of these expenses, the following conditions must be complied
members of military personnel with:
1. Must have been actually incurred in connection with the
For the proceeds of life insurance policy, the computation of the taxable interment or burial of the deceased;
estate will matter if the decedent is married. We have to identify if the 2. Must have been incurred by the estate or by immediate family
property is conjugal or community property, because we have to take in members of the decedent;
consideration the 50% share of the surviving spouse, or if it is an exclusive 3. Need not be actually paid, as long as they are incurred within
property. You have to check WHEN THE INSURANCE POLICY WAS TAKEN. the period allowed;
4. Must be duly supported by receipts or invoices.
If the insurance policy is taken BEFORE the marriage - the
presumption is that it was his exclusive property that was used Expenses that are incurred during the kuwarinta diyas or during the suman
as premiums. So when he dies, the proceeds will also be of the deceased cannot be claimed as deductions because these are
classified as exclusive property. incurred beyond the allowed period. The expense must be from the point
of death up to the burial. And of course, supported by receipts and
If the insurance policy is taken DURING the marriage- it is invoices, and must have been paid by the estate or immediate family of
presumed that the insurance policy is conjugal. Therefore, we the deceased and not by relatives, friends or contributions from any other
need to take in consideration the one half share of the surviving person.
spouse.
The amount of deductible funeral expense from the decedents gross
PRIOR INTEREST OF THE DECEDENT estate is the lowest amount of the following:
SECTION 85. (F) Prior Interests. - Except as otherwise specifically provided 1. Actual funeral expenses (whether paid or still payable) up to the
therein, Subsections (B), (C) and (E) of this Section shall apply to the time of interment; or
transfers, trusts, estates, interests, rights, powers and relinquishment of 2. Amount equal to 5% of the gross estate; or
powers, as severally enumerated and described therein, whether made, 3. Statutory limit of P200,000.
created, arising, existing, exercised or relinquished before or after the
effectivity of this Code. What if the actual funeral expense is P300,000, can you claim the whole
amount? NO. Only up to the extent of P200,000.
Subsection B- Transfer in Contemplation of Death
C- Revocable Transfer The excess of P100,000, can you claim it as claims against the estate, if
E- Proceeds of Life Insurance for example the expenses are still payable? NO, because its already
classified under the NIRC that this falls under funeral expense. If it already
Prior interest- meaning the decedent during his lifetime retains interest exceeds the maximum amount of P200,000, the excess cannot be
over the particular property. That particular property will form part of the reclassified into another allowable deduction. You cannot claim it
gross estate. anymore.

TN: Funeral expenses are incurred after the death of the decedent while
CAPITAL OF THE SURVIVING SPOUSE claims against the estate are incurred before death.
"(H) Capital of the Surviving Spouse. - The capital of the surviving
spouse of a decedent shall not, for the purpose of this Chapter, be Examples of Funeral Expenses:
deemed a part of his or her gross estate. 1. Interment and/or cremation fees;
2. Mourning apparel of the surviving spouse and unmarried minor
In computing for the gross estate, include it initially but later on, children of the deceased bought and used in the burial occasion;
eventually, you have to deduct the surviving spouses one half share. 3. Expenses for the decedents wake, including food and drinnks
before the burial;
Other deductions which are deductible only when also included in the 4. Expenses for the death notices published, telecommunications
gross estate (The net effect is 0, but this is necessary for disclosure expense incurred in informing relatives about the death;
purposes, as required under the law): 5. Cost of the burial lot of the deceased. The tombstone,
monument, mausoleum must correspond only to the particular
1. Amount received as retirement benefits (RA 4917) lot.

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Maintenance of the burial lot or the mausoleum cannot be claimed as a. Actual judicial or court expenses
funeral expense deductions. b. The notarial fee paid for the extrajudicial settlement
c. Fees of executor or administrator
6. Fees and charges for the rites and ceremonies incident to the d. Attorneys fees (deductible only if it is related to the settlement
burial. of the estate i.e fees to the lawyers during the probate
proceedings)
Non-deductible Amount of Funeral Expenses: TN: Attorneys fees in connection with the cases filed by the
1. Funeral expenses incurred after the burial or interment, such as heirs who have conflicting claims over the estate cannot be
for prayers, masses, entertainment, etc. claimed as deduction because it is a personal expense of the
2. Medical expenses incurred as of the last illness of the deceased heirs.
(this falls under medical expenses); e. Expenses of administration such as:
3. Funeral expenses not supported with receipts or documentary e1. Accountants fees
evidence; e2. Appraisers fees
4. Any portion of the funeral and burial expenses borne by e3. Clerk hire
relatives and friends of the deceased e4. Costs of preserving and distributing the estate
e5. Costs of storing or maintaining property of the estate
Ordinary Deductions e6. Brokerage fees for selling property of the estate

1. Funeral Expenses maximum limit is P200,000. Compare first the TN: Substantiation requirements. Judicial expenses must be duly
actual funeral expense and the 5% of the gross estate, whichever is substantiated and supported by receipts or invoices.
lower. Then, ascertain if it exceeds the maximum limit of P200,000.
3. Claims Against the Estate are pecuniary in nature which
TN: The 5% provision need not be stated by the examiner. It can be enforced during the lifetime of the decedent by virtue or
should be computed automatically if you are asked how much an order or a contract.
is the allowable deduction for funeral expenses provided that - Claims against the estate are payables.
you are given the amount of gross estate. If no amount of the - These should have been contracted by the decedent during
gross estate then just compare the actual funeral expenses with his lifetime but was not settled until the point of death.
the maximum limit of P200,000. Substantiation Requirements depends on the type of payable.

Case 1 Case 2 Case 3 If mere simple loan

Gross Estate 3 million 5 million 2.5 million a. Duly notarized debt instrument at the time the indebtedness
Actual 180,000 240,000 100,000 was incurred, except if it pertains to financial institutions where
Funeral notarization is not part of the business practice or policy.
Expenses b. Duly notarized certification from the creditor in relation to the
Allowable 150,000 200,000 100,000 unpaid balance of the debt including the interest at the time of
Deduction the death.
for FE c. Proof of financial capacity of the creditor at the time of
incurrence, i.e. income tax return
If the creditor is a non-resident, a certified sworn declaration
TN: In Case 2, there is an excess of P40,000. It cannot be deducted as will suffice and it must be authenticated before it can be
claims against the estate. presented as evidence here in the Philippines.
- FE must be incurred at the point of death up to the burial or
interment. Authentication the document will be presented to the
Philippine Embassy or Consulate to have it authenticated. (aka
2. Judicial Expenses expenses which pertains to the Red Ribbon)
settlement of the estate, which can be judicial or extrajudicial. d. If the loan was contracted within 3 years prior to the death of
- Must be incurred during the settlement of the estate but the decedent statement under oath executed by the
not beyond the last day prescribed by law (6 months from administrator or executor of the estate reflecting the disposition
the time of death), or the extension thereof (additional of the proceeds.
30days) for the filing of the tax return.
- Distinction between the filing and the payment as provided Unpaid obligation which arises from purchase of goods or
for under Sections 90-91. Follow the Pay-as-you-File services
System. a. Invoice or documents evidencing the purchase of the goods or
- The deadline of the filing is 6 months from the date of service
death so it follows that the default deadline for the b. Duly notarized certification from the creditor as to the unpaid
payment is also 6 months from the date of death. balance of the debt including the interest at the time of death
However, the period of extension for the filing is different c. Certified true copy of the latest audited balance sheet of the
from the period of extension for the payment. creditor with a schedule of the receivable
- The extension for the filing, under the Tax Code, under d. If settlement is made through a testate or intestate proceeding
reasonable circumstances which will be ascertained by the a document filed with the court evidencing the claim and the
Commissioner extension of 30 days. corresponding court order approving the claims
- The extension for the payment, under Section 91 (B), Q: How about the unpaid balance of credit cards, can it be deducted as
varies depending on the mode of settlement. claims against the estate?
Judicial settlement not to exceed 5 years. A: YES. Statement of Account can be presented as proof.
Extrajudicial settlement 2 years
TN: These extension for the payment will not be Requisites for deductibility:
considered to form part as to the incurrence of judicial a. Must be a personal obligation of the decedent which was
expenses. incurred during the lifetime and existing at the time of his death
(except unpaid funeral expenses and unpaid medical expenses,
Examples of Judicial Expenses: which already have specific classifications under the law)

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b. Liability must have been contracted in good faith and for 2. Deduction is limited to the amount of mortgage contracted bona
adequate and full consideration in money or moneys worth fide and for an adequate and full consideration in money or
c. The claim must be a debt or claim which is valid in law and moneys worth.
enforceable in court
d. Indebtedness not condoned by the creditor or the action to T/N: Adequate and Full consideration means the full amount/proceeds
collect from the decedent must not have prescribed. of the loan goes to the mortgagor/decedent.
Accommodation loan loaning an amount for another person,
Q: What if the condonation happens after the death, can it be cannot be a deduction. Here, the beneficiary of the proceeds of the loan
considered in claiming for deduction? is another person and not the mortgagor/decedent. Violation of 2nd
Take note: It must be a personal obligation which exists at the time of this requisite above.
death. Proper treatment of Accommodation Loan value of the loan
must be recorded as receivable of the estate from the accommodated
A: It will be deducted. Theasda post-death development will not matter party. And it would fall as claims against the estate.
because what we are after is the existence of the claims against the estate Sirs Example:
at the point of death or at the date of death. Decedents Estate the accommodate party received the
Take note: It will be subjected to income tax, and the estate tax payable proceeds of the loan, while the decedent incurred a loan, by
will be decreased (less estate property) name/accommodation, in the bank. In effect, the Estate has a receivable
from the accommodated party and a payable to the bank because of the
Important: As far as the deductibility of claims against the estate is loan. Net effect is 0. No unpaid mortgage deduction.
concerned, do not look at the post-death development the transaction
already happens between the estate and the creditor.
LOSSES
Basis: NIRC; Sec 86
CLAIMS AGAINST INSOLVENT PERSONS There shall also be deducted losses incurred during the settlement of the
In claims against the estate, somebody a third party creditor is claiming estate arising from fires, storms, shipwreck, or other casualties, or from
against the decedent-debtor. In claims against the insolvent, its the robbery, theft or embezzlement, when such losses are not compensated
decedent who is the creditor who has extended a loan but can no longer for by insurance or otherwise, and if at the time of the filing of the return
collect the loan because the debtor of the decedent is already insolvent. 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
Insolvency assets are inadequate to discharge a persons liabilities. incurred not later than the last day for the payment of the estate tax as
Bankruptcy no assets prescribed in Subsection (A) of Section 91.

Requisites:
Requisites: 1. The losses were incurred during the settlement of the estate.
1. Amount of claims has been initially included as part of the 2. The losses arose from Acts of God, such as fires, storms,
decedents gross estate. [Entire amount must form part of the shipwreck, or other casualties, or from acts of man, such as
gross estate] robbery, theft or embezzlement.
3. The losses are not compensated by insurance or otherwise, and
2. Incapacity of the debtor to pay his debt is proven, and not if at the time of the filing of the [estate] return, such losses have
merely alleged (Not necessarily judicial order) [Proof]
not been claimed as a deduction for income tax purposes in an
income tax return.
Take note: Decedent has receivable and the debtor cannot pay anymore.
4. The losses were incurred not later than the last day for the
Example payment of the estate tax.
Q Receivable is 1M, but the debtor can only pay up to 200K. T/N: Last day of payment = w/in 6 months NO
How much will you include as part of the gross estate? extension (Sec 91. A), 30 days extension no longer included.
A Include in the gross estate is the entire amount of the
receivable from that insolvent person. Deduct the uncollectible 800K. TAXES

Requisites:
UNPAID MORTGAGES 1. The taxes have accrued as of the death of the decedent.
Basis: NIRC; Sec 86 2. The taxes were unpaid as of the time of death
(e) For unpaid mortgages upon, or any indebtedness in respect to,
property where the value of decedent's interest therein, undiminished by T/N: it includes all taxes, provided they accrued as of the date of
such mortgage or indebtedness, is included in the value of the gross death of the decedent.
estate, but not including any income tax upon income received after the
death of the decedent, or property taxes not accrued before his death, or
any estate tax. The deduction herein allowed in the case of claims against SUMMARY
the estate, unpaid mortgages or any indebtedness shall, when founded
upon a promise or agreement, be limited to the extent that they were - Deduction is accrued after the death of the decedent
contracted bona fide and for an adequate and full consideration in money
or money's worth. - Deduction must be accrued during the lifetime of the
decedent
Decedent - mortgagor, presumption owner of property.

Requisites: F uneral Expense

1. Value of the property, undiminished by such mortgage or
indebtedness, is included in the value of the gross estate at Fair J udicial Expense
Market Value.
C laims against estate and insolvent

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U npaid mortgage

L osses

T axes

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