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JRS Umadhay’s Tax reviewer

“Strictly for CSR students only and Not to be distributed”

Transfer Taxes
Estate Tax
REVOCABLE TRANSFER
It is a transfer 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 to alter or amend or revoke or terminate such
transfer by:
1. Decedent alone;
2. By the decedent in conjunction with any other person without regard to when or from what
source the decedent acquired such power, to alter, amend, revoke or terminate; or
3. Where any such power is relinquished in contemplation of the decedent’s death other than a
bone fide sale for an adequate and full consideration in money or money’s worth (Sec. 85(C)(1),
NIRC).

GENERAL POWER OF APPOINTMENT (GPA)

It is the right to designate by will or deed, without restrictions, the persons who shall succeed to the
property of the prior decedent. The appointment could be in favor of anybody, including himself, his
estate, his creditors, or the creditors of his estate.
NOTE: A power is specific if it can be exercised only in favor of one or more designated person or
classes of persons exclusive of the decedent, his estate, his creditors and creditors of his estate, or if
it expressly not exercisable in favor of the decedent, his estate, his creditors, or creditors of his
estate.

PROCEEDS OF LIFE INSURANCE

When the proceeds of an insurance policy considered as part or not part of the gross
estate:
1. Part of the gross estate to the extent of the amount receivable when the beneficiary in a
life insurance is:
a. The estate of the decedent, his executor or administrator taken out by the decedent upon his own
life regardless of whether the designation is revocable or irrevocable; OR
b. A third person, other than the decedent’s estate, executor, or administrator provided that the
designation is not irrevocable
Under the Insurance Code, in the absence of an express designation, the presumption is that the
beneficiary is revocably designated. Notwithstanding the foregoing, in the event the insured does
not change the beneficiary during his lifetime, the designation shall be deemed irrevocable
(Sec. 11, R.A. 10607).
2. Not part of the gross estate when:
a. Proceeds from a life insurance policy is receivable by a 3rd person (NOT the decedent’s estate,
executor or administrator) AND that the said beneficiary is designated as irrevocable;
b. Where the life insurance was not taken by the decedent upon his own life even though the
beneficiary is the decedent’s estate, executor, or administrator;
c. Accident insurance proceeds. NIRC specifically mentions only life insurance policies;
d. Proceeds of a group insurance policy taken out by a company for its employees;
e. Proceeds of insurance policies issued by the GSIS to government officials and employees are
exempt from all taxes;
f. Benefits accruing from SSS law;
g. Proceeds of life insurance payable to heirs of deceased members of military personnel.
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PRIOR INTEREST
Prior Interest are all transfers, trusts, estates, interests, rights, powers and relinquishment of
powers made, created, arising existing, exercised or relinquished before or after the effectivity of
the NIRC (Sec. 85, NIRC).
Coverage of prior interest
1. Transfers in contemplation of death
2. Revocable transfers
3. Life insurance proceeds to the extent of the amount receivable by the estate of the deceased,
executor or administrator under policies taken out by the decedent upon his own life or to the
extent of the amount receivable by any beneficiary not expressly designated as irrevocable.

TRANSFERS FOR INSUFFICIENT CONSIDERATION

When a transfer is for insufficient consideration, only the excess of the fair market value of the
property at the time of the decedent’s death over the consideration received shall be included in the
gross estate.

This is applicable to:

1. Transfers in contemplation of death
2. Revocable transfers
3. Transfers under general power of appointment

NOTE: The above transfers should be made/exercised for a consideration in money/money’s worth
but is not a bona fide sale for an adequate and full consideration in money and money’s worth.
It is also subject to Donor’s Tax if there is no reference to:
1. Revocable transfer
2. Contemplation of death
c. General power of appointment.

NOTE: It is subject to estate tax if the 3 instances mentioned are present (Sec. 100 in rel. to Sec
85[B], NIRC).

SHARE OF THE SURVIVING SPOUSE

Under Section 85 (H) of the NIRC capital pertains to the property of the spouses brought into the
marriage. Under the Civil Law capital means property brought by the husband to the marriage
while the properties brought into the marriage by the wife is called paraphernal property.
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Exclusive properties under the system of absolute community of properties (ACP):
The following are the three exclusive properties under the system of absolute community:
1. Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well
as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they
shall form part of the community property;
2. Property for personal and exclusive use of either spouse. However, jewelry shall form part of the
community property;
3. Property acquired before the marriage by either spouse who has legitimate descendants by a
former marriage, and the fruits as well as the income, if any, of such property.
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Exclusive properties under the system of conjugal partnership of gains (CPG):

Art. 109 of the Family Code provides that the following shall be the exclusive property of each
spouse:
1. That which is brought to the marriage as his or her own;
2. That which each acquires during the marriage by gratuitous title (note that the fruits and income
of those acquired by gratuitous title during marriage shall be community property);
3. That which is acquired by right of redemption, by barter or by exchange with property belonging
to only one of the spouses; and
4. That which is purchased with exclusive money of the wife or the husband.

DEDUCTIONS FROM ESTATE RC, NRC or RA NRA (EPTraN)

(EPTran-FS-MAN)

1. Expenses, losses, indebtedness, and taxes 1. Expenses, losses, indebtedness, and taxes
(ELIT): FJC2ULT (ELIT):
a. Funeral expenses a. Funeral expenses
b. Judicial expenses for testamentary or b. Judicial expenses for testamentary or
intestate proceedings intestate proceeding

c. Claims against the estate c. Claims against the estate

d. Claims against insolvent persons included in d. Claims against insolvent persons included in
the gross estate the gross estate
e. Unpaid mortgages or indebtedness upon the e. Unpaid mortgages or indebtedness upon the
property property
f. Unpaid Taxes f. Unpaid taxes
g. Losses incurred during the settlement of the g. Losses incurred during the settlement of the
estate estate
2. Property previously taxed 2. Property Previously Taxed
3. Transfers for public use 3. Transfers for Public Use
4. The Family home 4. Net share of the surviving spouse in the
5. Standard deduction conjugal or community property.
6. Medical expenses
7. Amount received by heirs under R.A. No.
4917 (Death Benefits from Employer of
decedent)
8. Net share of the surviving spouse in the
conjugal or community property.

DEDUCTIONS
1. FUNERAL EXPENSES
If Filipino decedent (whether resident or non-resident) or of a resident alien decedent:
The amount deductible is the lower between:
1. actual funeral expenses (paid or unpaid) or
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2. 5% of the gross estate

**But not exceeding P200,000.

If the decedent is a Non-Resident Alien (NRA):
Amount of funeral expenses deductible from the gross estate is the proportion which, actual funeral
expenses or amount equal to 5% of the gross estate whichever is lower but not to exceed P200,000,
bears to the value of the entire gross estate wherever situated.
Illustration:
Gross Estate Philippines = P2M (20%)
Gross Estate Abroad = P8M (80%)
WORLD GE = P10M (100%)
Actual Funeral expenses (world) = P400K
The funeral expense deductible shall be the lower between:
1. (Phil. GE/World GE) x Actual F.E. World =

(2M/10M) x 400K =
20% x 400K = P80K (lower)
2. 5% x Phil. GE =

5% x P2M = P100K
Since the lower between P80K and P100K is P80K, AND because it did not exceed the P200K limit,
P80K is the deductible funeral expense. Note, the formula in #1 above is the same for the
computation of the other deductible ELIT.
Funeral Expenses include:
1. Mourning apparel of the surviving spouse and unmarried minor children of the deceased, bought
and used in the occasion of the burial;
2. Expenses of the wake preceding the burial including food and drinks;
3. Publication charges for death notices;
4. Telecommunication expenses in informing relatives of the deceased;
5. Cost of burial plot, tombstone monument or mausoleum but not their upkeep. In case deceased
owns a family estate or several burial lots, only the value corresponding to the plot where he is
buried is deductible;
6. Interment and/or cremation fees and charges;

2. JUDICIAL EXPENSES OF
TESTAMENTARY OR INTESTATE PROCEEDINGS
Expenses allowed as deduction under this category are those incurred in the:
1. Inventory-taking of assets comprising the gross estate;
2. Administration;
3. Payment of debts of the estate;
4. Distribution of the estate among the heirs.

NOTE: 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.
Examples of judicial expenses:
1. Fees of executor or administrator
2. Attorney’s fees
3. Court fees
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4. Accountant’s fees
5. Appraiser’s fees
6. Clerk hire
7. Costs of preserving and distributing the estate
8. Costs of storing or maintaining property of the estate
9. Brokerage fees for selling property of the estate (Sec. 6[A][2], R.R. 2-2003)

3. CLAIMS AGAINST THE ESTATE

Claims are debts or demands of a pecuniary nature which could have been enforced against the
deceased in his lifetime and could have been reduced to simple money judgments.
Sources of claims (CTO):
1. Contract
2. Tort
3. By Operation of law

Claims against the estate may be claimed as a deduction by a Filipino citizen, whether resident or
not, or of a resident alien decedent provided that:
1. At the time the indebtedness was incurred the debt instrument was duly notarized; and
2. 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 (Sec 86[A][1][c], NIRC).

Requisites for its deductibility (2015 Bar)

[TiG-VaCS]
1. The liability represents a personal obligation of the deceased existing at the Time of his death
except unpaid obligations incurred incident to his death such as unpaid funeral expenses and
unpaid medical expenses;
2. The liability was contracted in Good faith and for adequate and full consideration in money or
money’s worth;
3. Must be a debt or cl

4. CLAIMS OF DECEASED AGAINST INSOLVENT

Requisites for deductibility:
1. The full amount of the receivables be included first in the gross estate; and
2. The incapacity of the debtors to pay their obligation is proven not merely alleged.

NOTE: Judicial declaration of insolvency is not necessary. It is enough that the debtor’s liabilities
exceeded his assets.

5. UNPAID MORTGAGE
Requisites for its deductibility:
1. The value of the property to the extent of the decedent’s interest therein, undiminished by such
mortgage or indebtedness is included in the gross estate; and
2. The mortgage indebtedness was contracted in good faith and for an adequate and full
consideration in money or money’s worth.
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NOTE: In case unpaid mortgage payable is being claimed by the estate, and the loan is found to be
merely an accommodation loan where the loan proceeds went to another person, the value of the
unpaid loan, to the extent of the decedent’s interest therein must be included as a receivable of the
estate.

6. TAXES
Taxes which have accrued as of the death of the decedent which were unpaid as of the time of death
are deductible.
Taxes not deductible are those accruing after death, such as:
1. Income tax on income received after death
2. Property tax not accrued before death
3. Estate tax due from the transmission of his estate

7. LOSSES
Requisites for its deductibility:
Losses are allowed as deductions from the gross estate of a Filipino citizen whether resident or non-
resident and resident alien are allowed provided that they:

8. PROPERTY PREVIOUSLY TAXED

(VANISHING DEDUCTIONS)
Vanishing Deduction is the deduction allowed from the gross estate of citizens, resident aliens and
non-resident estates for properties which were previously subject to donors or estate taxes.
NOTE: The purpose of vanishing deduction is to lessen the harsh effects of double taxation.
The rate of deduction depends on the period from the date of transfer to the death of the decedent, as
follows:

PERIOD DEDUCTION
1 day to 1 year 100%
1 year and 1 day to 2 years 80%
2 years and 1 day to 3 years 60%
3 years and 1 day to 4 years 40%
4 years and 1 day to 5 years 20%
More than 5 years No deduction allowed

9. TRANSFER FOR PUBLIC USE

Requisites for deductibility: [WIG-PD]
1. The disposition is in a last Will and testament;
2. To take effect after Death;
3. In favor of the Government of the Philippines or any political subdivision thereof;
4. For exclusive Public purposes; and
5. The value of the property given is Included in the gross estate.

In case of a non-resident alien decedent, the property transferred must be located within the Philippines
and included in the gross estate.
Atty. JRS Umadhay’s Tax reviewer
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10. FAMILY HOME

Family home (maximum: P10,000,000)
It is the dwelling house, including the land where it is situated where the married person or an
unmarried head of the family and his family resides.
It is deemed constituted on the house and lot from the time that it is constituted as a family residence
and is considered as such so long as any of the beneficiaries actually resides therein.

NOTE: Actual occupancy for the house and lot as the family residence shall not be considered
interrupted or abandoned in such cases as the temporary absence from the constituted family home
due to travel or studies or work abroad etc. The family home is generally characterized by
permanency, that is, the place to which, whenever absent for business or pleasure, one still intends
to return (R.R. No. 2-2003).
Requisites for its deductibility
1. The family home must be the actual residential home of the decedent and his family at the time of
his death, as certified by the Barangay Captain of the locality where the family home is situated;
2. The total value of the family home must be included as part of the gross estate of the decedent;
and
3. Allowable deduction must be in the amount equivalent to:
a. The current FMV of the family home as declared or included in the gross estate, or
b. The extent of the decedent’s interest (whether conjugal/community or exclusive property),
whichever is lower, but not exceeding P10, 000,000.

11. STANDARD DEDUCTION

P5 Million, without need of any substantiation (Sec. 86 (A)(5)).
NOTE: Nonresident (NRA) decedents are not entitled to standard deduction because it is not among
those enumerated under Sec. 86 (b) of the NIRC.

STANDARD DEDUCTION in OPTIONAL STANDARD DEDUCTION in

ESTATE TAX INCOME TAX
(Sec. 86 [A][5]) (Sec. 34 [L])
As to nature Deduction in addition to the other Deduction in lieu of itemized deductions
deductions
As to Fixed at P5,000,000 40% of gross income or gross sales/receipts
amount of as the case may be
deduction
As to Available to resident citizens, non- Applies to all individual taxpayers except
availability resident citizens and resident non-resident aliens, and non resident
aliens foreign corporations

12. MEDICAL EXPENSES

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All medical expenses (cost of medicine, hospital bills, doctors’ fees, etc.) incurred (whether
paid or unpaid), but should not exceed P500,000
Requisites for deductibility:
1. Medical expenses incurred by the decedent;
2. Incurred within one (1) year prior to the decedent’s death;
3. Must be substantiated with receipts; and
4. Shall not exceed 500,000 whether paid or unpaid.

NOTE: Any amount of medical expenses incurred within 1 year prior to the decedent’s death in
excess of P500,000 shall no longer be allowed as a deduction. Neither can any unpaid amount
thereof in excess of the P500,000 threshold nor any unpaid amount for medical expenses incurred
prior to the 1 year period from date of death shall be allowed to be deducted from the gross estate
as claim against the estate (Sec. 86 (A)(6)).

13. AMOUNTS RECEIVED UNDER RA 4917

Any amount received by the heirs from the decedent’s employer as a consequence of the death of
the decedent-employee in accordance with RA No. 4917 shall be allowed as a deduction from the
gross estate
Requisites for deductibility:
1. Amounts received by the heirs from the decedent’s employer;
2. Received as a consequence of the death of the decedent-employee; and
3. Amount is included in the gross estate of the decedent (Sec. 86[A][7], NIRC).

EXCLUSIONS FROM ESTATE

Exclusions from estate under Sec. 85 and 86 NIRC:
1. Exclusive Property (capital/paraphernal) of surviving spouse (Sec. 85 (H), NIRC);
2. Property outside the Philippines of a non-resident alien decedent;
3. Intangible personal property in the Philippines of a non-resident alien if there is reciprocity.

Exclusions from estate under NIRC:

1. The Merger of the usufruct in the owner of the naked title
2. The transmission or the delivery of the inheritance or legacy by the fiduciary heir or
legatee to the Fideicommissary
3. The transmission from the first heir, legatee or donee in favor of Another beneficiary, in
accordance with the desire of the predecessor
4. All the bequests, devises, legacies or transfers to social welfare, cultural and charitable
Institutions no part of the net income of which inures to the benefit of any individual: provided that
not more than 30% of the value given is used for administrative purposes (Sec. 87, NIRC).

Exclusions from estate under special laws:

1. Benefits received by members from the Government Service Insurance System (PD 1146)
and the Social Security System (RA 1161, as amended) by reason of death
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2. Amounts received from the Philippine and United States governments for damages
suffered during the last war (RA 227)
3. Benefits received by beneficiaries residing in the Philippines under laws administered by
the U.S. Veterans Administration (RA 360)
4. Grants and donations to the Intramuros Administration (PD 1616) (Mamalateo, 2014).

TAX CREDIT FOR ESTATE TAXES PAID IN A

FOREIGN COUNTRY
Estate Tax Credit is a remedy against international double taxation to minimize the onerous effect
of taxing the same property twice.
Only the estate of a citizen or a resident alien at the time of death can claim tax credit for any estate
taxes paid in a foreign country.

EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS

Transmissions exempted from the payment of estate tax
1. The merger of usufruct in the owner of the naked title
E.g. Y died leaving a condominium unit, the naked title belongs to W and usufruct to F for a period
of 5 years, then F died after two years. Upon the death of F, the usufruct will merge into the owner
of the naked title W who shall become the absolute owner of the said condominium unit. The
transfer from F to W is exempt from estate tax.

2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary, Provided that:
a. The substitution must not go beyond one degree from the heir originally instituted
b. The fiduciary or the first heir must be both living at the time of death of the testator.
e.g. X dies and leaves in his will a lot to his brother, Y, who is entrusted with the obligation to
transfer the lot to Z, a son of X, when Z reaches legal age. Y is the fiduciary heir and Z is the
fideicommissary. The transfer from X to Y is subject to estate tax. But the transmission or delivery
to Z upon reaching legal age shall be exempt from estate tax.

3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor

4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions.
Provided:
i. no part of the net income of which inures to the benefit of any individual; and
ii. Not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be
used by such institutions for administration purposes (Sec. 87, NIRC).

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Q: What is the rationale for the exemption of donation mortis causa to social welfare,
cultural, and charitable institutions?
A: The law encourages donation mortis causa to social welfare, cultural, and charitable institutions
because of the belief that the loss of revenue may be compensated by the shifting of burden of
ministrant function to these institutions.