Introduction to Transfer Taxation

Chapter 12
 Transfer
• Any transmission of property from one person
to another
• Person may be natural or juridical
 Types of Transfers
• Bilateral transfers
• Unilateral transfers
• Complex transfers
 Bilateral Transfers
• Involve transmission of property for a
consideration
• Also referred to as onerous transactions or
exchanges
• Examples are sale and barter
• Subject to income taxation
 Unilateral transfers
• Involve transmission of property by a person
without consideration
• Also known as gratuitous transactions or
transfers
• Subject to transfer taxes
 Types of unilateral transfers
• Donation
• Succession
 Donation
• Gratuitous transfer of property from a living
donor to a donee
• Both the donor & donee are living persons so
it is called donation inter vivos
 Succession
• The gratuitous transfer of property from a
deceased person upon death to his heirs
• Transfer is either by operation of law or by will
• Succession is effected by death, hence it is
called donation mortis causa
 Complex transfers
• Transfers for less than full and adequate
consideration
• Made at prices significantly lower than the fair
value of the property sold
 What constitutes adequate
consideration?
• No fixed quantitative rule
• Requires consideration of the facts &
circumstances surrounding the sale
 Examples
• Consideration of P7,000 for a property which
is readily saleable at P10,000 may be
considered inadequate
• Consideration of P9,500 for a property w/fair
value of P10,000 may be adequate
 Tax rules on transfers for adequate
consideration
• Subject to income tax
• Not subject to transfer tax
Transfer for less than adequate & full consideration

Fair market value P50,000

Transfer element subject to D.T. P20,000

Selling price 30,000

Exchange element subject to I.T. P20,000

Cost or tax basis 10,000

 Note
If the sale is made in contemplation of the
death of the seller or if title to the property is
agreed to be transferred upon the death of the
seller, the gratuity is considered a mortis causa
donation
 Types of Transfer Taxes
• Donor’s tax – imposed on donation inter vivos
• Estate tax – imposed on donation mortis
causa
Rationale of Transfer Taxation
Tax Evasion or Minimization Theory
• Exchanges may be structured to evade income
taxation especially when buyer & seller are
related
• If a property with fair value of P4,000 & tax
basis of P1,000 is sold for P2,000, gain subject
to income tax is only P1,000.
• As a remedy, the government taxes lost profits
to transfer taxation
 Tax Recoupment Theory
• Transfers have a natural effect of decreasing
future income tax collections by government
• When income of a property is taxed to 1
owner only, it will fall under a higher tax
bracket but will be under lower tax bracket if
there are many beneficiaries
 Benefit Received Theory
• The government is a party in the orderly
transfer of the property to the donee or heir
through its role of putting in place laws which
enforce donation and succession
• This theory is the most dominant
rationalization of transfer taxation
 State Partnership Theory
• This theory asserts that the State is a “passive
& silent partner” in the accumulation of
wealth as it protects individual within its
territory
• The government should take its fair share by
taxing the transfer of wealth to other persons
 Wealth Redistribution Theory
• This theory views that the properties given for
free contributes to the unequal distribution of
wealth & earnings because the recipient has
not actually worked for it
• When one transfers wealth for free, it should
be taxed so that part of the wealth will be
redistributed to benefit society
 Ability to Pay Theory
• Ability to transfer property indicates ability to
pay tax
• Transfer is subject to tax
Nature of Transfer Taxes
 Privilege Tax
• Transfer taxes are not imposed on the value of
the property itself but on the act of
transmitting one’s property to another for free
 Ad valorem Tax
• The amount of transfer tax is dependent on
the value of properties transferred
 Proportional Tax
• Fixed rate of 6% for both estate tax and
donor’s tax under TRAIN Law
• Used to be a progressive tax under the old Law
at 5%-20% for estate and 2%-15% for donor’s
tax
 National Tax
• They are collected by BIR, the National
Government’s agency responsible in the
assessment & collection of all national
revenue taxes, charges & penalties
 Direct Tax
• They are imposed on the property left by the
decedent or donor transmitting the property,
not on the recipient of the property
 Fiscal Tax
• They help to increase the revenue of the
government to support itself
Classification of Transfer Taxpayers
• Residents or citizens
a. Resident citizen
b. Resident alien
c. Non-resident citizen
• Non-resident aliens
• Corporations for donor’s tax purposes
a. Citizens
b. Aliens
 Situs of Transfer
• Transfers occur in the location of the property
• Properties are transferred mortis causa in the
place where they are located at the point of
death
• Properties are transferred inter vivos in the
place where they are located at the date of
donation
General Rules on Transfer Taxation
• Residents or citizens are subject to tax on ALL
TRANSFERS regardless of location
• Non-resident aliens are taxable only on
properties transferred which are located in
the Philippines at the date of transfer
 Properties located in the Philippines
1. Interest in domestic businesses
a. Shares, obligations & bonds by any corporations organized in
PH
b. Shares in any partnership, business or industry established in
PH
2. Foreign securities under certain conditions:
a. Shares, obligations & bonds issued by any foreign corporation
w/85% of business in PH
b. Shares, obligations & bonds of foreign corporation that have
acquired PH situs
3. Franchise exercisable in the Philippines
4. Any personal property, tangible or intangible, located in PH
Reciprocity rule on non-resident aliens
• Non-resident aliens are exempt from
Philippine transfer tax on INTANGIBLE
PERSONAL PROPERTIES if their country
exempts transfers by Filipino non-residents in
their country for the same properties
 Examples of intangible assets
• Financial intangibles • Accounting intangibles
a. Cash a. Patent
b. Receivables b. Franchise
c. Investment in bonds c. Leasehold right
d. Shares of stock d. Copyright
e. Interest in partnership e. Trademark
 Timing of Valuation of Transfers
• Donation inter vivos →valued at the date of
completion or perfection of donation
• Donation mortis causa →valued at date of
death
 Donation Inter vivos
• Donation made during the lifetime of the
donor
• Note though that donation made by a living
person motivated by thought of death is
considered donation mortis causa
 Donation Mortis Causa
• One inspired by or effected by death of the
donor
 Motive of Donation
• The controlling rule to transfer taxation
• Hence, donation is inter vivos or mortis causa
depending upon motive of donor
 Motives associated with life
• Examples of wordings in deed of donation:
1. To reward services rendered
2. To relieve the donor of the burden of
management of property
3. To save on income tax
4. To see children financially independent
5. To see children enjoy the property while the
decedent still lives
6. To settle family disputes
Transfers intended to take effect upon
death
• Donation that is made during the lifetime of
the decedent with a stipulation that
ownership shall transfer upon his death is
treated as donation mortis causa
• Donation made on decedent’s last will &
testament is a donation mortis causa
 Incomplete Transfers
• Involve the transmission or delivery of
properties from one person to another but
ownership is not transferred at the point of
delivery
• Transfer of ownership will take effect upon the
happening of certain future events/conditions
and transfer tax is then imposable at this time
 Types of Incomplete Transfers
• Conditional transfers
• Revocable transfers
• Transfers with reservation of title to property
until death
 Conditional transfer
On June 1, 2019, Don Lucio donated a luxury car with
value of P4,000,000 to his son, Boy, under a condition
that Boy must be a topnotcher in the October 2019 CPA
Board Exam. To motivate Boy, Don Lucio delivered the car
to him on June 1, 2019.

*It shall not be subject to donor’s tax in June 1 since title

vests only upon fulfillment of condition.
*If Boy would make it to the top in the October 2019 CPA
Board Exam, the car shall be subject to donor’s tax at that
point.
*If Don Lucio dies before the CPA board exam, the car
shall be included in his estate subject to estate tax.
 Revocable transfer
• On February 14, 2018, Mark transferred an
iPhone to Goldemaire but subject to
revocation if Mark so pleases.

*This is not subject to donor’s tax in February 14

because it is revocable by donor.
*If Mark waives his right to revoke, It shall be
subject to donor’s tax at fair value on the date of
waiver.
How incomplete transfers are
completed
Conditional transfers are completed inter vivos
upon:
a. fulfillment of the condition by the transferee
b. waiver of the same by transferor
Revocable transfers are completed inter vivos
upon:
a. Waiver by the transferor to exercise his right of
revocation
b. The lapse of his reserved right to revoke
Transfers in contemplation of death and transfers
with reservation of title to property until death are
completed by the death of the decedent

Conditional transfers and revocable transfers

become donation mortis causa when transfer is
pre-terminated by the death of the decedent. They
will then be included in properties of decedent
subject to estate tax.
 Timing of Taxation for Incomplete
Transfers
• Revocable & conditional transfers completed
during the lifetime of transferor are subject to
donor’s tax at fair value upon date of
completion or perfection
• Revocable transfers and conditional transfers
that are pre-terminated by death of the
transferor is subject to estate tax at the point
of death of the transferor
 Complex incomplete transfers
• Gratuity component is subject to appropriate
transfer tax:
Inter vivos = fair value at date of completion
or transfer less consideration given
Mortis causa = fair value at date of death less
consideration given at the date of
transfer
 Illustration
On June 1, 2017, Mr. D transferred his car worth
P1,000,000 to E but for a minimal consideration
of P200,000 only. The transfer shall be revocable
by D in 5 years.
 Case 1
• On July 3, 2019, D intimated to E that he is
waiving his right of revocation. The fair value
of the car is P800,000

P600,000 (P800,000 – P200,000) is subject to

donor’s tax
 Case 2
Assume instead that D died on January 3, 2019
without waiving his right to revoke the transfer.
The fair value of the property was P900,000 at
that time.

P700,000 (P900,000 – P200,000) is subject to

estate tax
 Test of taxability of incomplete
complex transfers
1. The incomplete transfer must have been paid
for less than full and adequate consideration
at the date of delivery of the property
2. The property must not have decreased in
value less than the consideration paid at the
completion of the transfer
Non-taxable Transfers
 Void Transfers
• Those prohibited by law & do not conform to
legal requirements for their validity
• Not taxable to either donor’s tax or estate tax
• Examples:
1. Transfer of property not owned
2. Donation between spouses
3. Donation refused by donee
4. Donation of real properties orally
 Quasi-Transfers
• Transmission of property not involving transfer of
ownership
• Examples:
1. Transmission of property by a person with a
right of usufruct over the property to the
owners of the naked title
2. Transmission of property by trustee to the real
owner
3. Transmission of the property from the 1st heir to
the 2nd heir in accordance w/ predecessor’s
desire
 Illustration
Mr. A died leaving a track of land to C but since C
is a minor, A devised in his will to give B a
usufructuary right to use & enjoy the land for 10
years before turning it over to C. After the lapse
of 10 years, B transferred the land to C.

B only has the usufructuary right to the land.

His transfer of the same to C, the owner of
naked title, is not subject to transfer tax.
The Concept of Succession &
Estate Tax
Chapter 13
 Topics Covered
1. The concept of succession
2. The types and elements of succession
3. The nature of estate tax
4. The types of decedents & their taxation rules
5. The model of estate taxation
 Succession
➢mode of acquisition by virtue of which the
property, rights and obligations to the extent of
the value of the inheritance of a person are
transmitted through his death to another by
will (testate) or by operation of law (intestate)
 Inheritance
➢Includes all properties, rights and obligations
of a person which are not extinguished by his
death, as well as those which have accrued
thereto since the opening of the succession
Kinds of succession

➢Testamentary Succession
➢Intestate Succession
➢Mixed Succession
 Testamentary succession
➢That which results from the designation of an
heir, made in a will and executed in the form
prescribed by law. (Article 779, Civil Code of
the Philippines)
➢A person who died with a will is said to be
“testate”
 Intestate Succession
➢It is a legal succession because it takes effect
through the operation of law for there is no
decedent’s last will and testament to dispose
the estate (Article 960, Civil Code of the
Philippines)
 Mixed Succession
➢This is effected partly by will and partly by
operation of law (Article 780, Civil Code of the
Philippines)
 Will
➢A document that determines the disposition
of an inheritance
➢An act whereby a person is permitted, with
the formalities prescribed by law, to control to
a certain degree the disposition of his estate
(Article 783, Civil Code)
➢The making of a will is strictly a personal act
Types of Will
 Holographic Will
➢One entirely written, dated and signed in the
very handwriting of the testator himself and is
subject to no required form, and maybe made
in or out of the Philippines, and maybe made
without witness. (Article 810, Civil Code)
 Notarial Will
➢A will written in public instruments, notarized
by a lawyer, signed by the testator and
witnesses (Article 805,806, Civil Code)
 Codicil
➢A supplement or an addition to a will, made
after the execution of a will and annexed to be
taken as a part thereof, by any disposition
made in the original will is explained, added
to, or altered. (Article 825, Civil Code)
 Nature of Succession
➢Gratuitous transmission of property from
deceased person in favor of his successors
➢Involves only the net properties of decedent
➢Heirs shall not inherit the debt of decedent
Elements of Succession

➢Decedent
➢Estate
➢Heirs
Types of Compulsory Heirs
 Primary heirs
➢Legitimate children & their direct descendants
 Secondary heirs
➢Legitimate /illegitimate parents and
ascendants
 Concurring heirs
➢Surviving spouse & illegitimate descendants
 Definition of Terms
Legitimate children – those born out of legal
marriage
Direct descendants – children or in their absence,
grandchildren
Legitimate parents – biological parents
Illegitimate parents – adopting parents to an
adopted child
Surviving spouse – widow or widower of decedent
Illegitimate descendants – illegitimate children
 Rules
➢ Only the primary heirs and concurring heirs, if
present, share in the hereditary state
➢ In the absence of primary heirs, the secondary
heirs & concurring heirs shall inherit
➢ If no compulsory heirs, these will inherit in the
order of priority:
1. Collateral relatives up to 5th degree of
consanguinity
2. The Philippine Government
 Summary of Rules
Illustration

B3

C4 B2 2nd Priority

C5 C3 B1

C4 C2 Decedent Spouse (A1)

C5 C3 A1

C4 A2 1st Priority

C5 A3

3rd Priority

Model:
A1 - Children C2 - 2nd degree relatives
A2- Grandchildren (i.e., brothers and sisters)
A3 - Great grandchildren C3 - 3rd degree relatives
B1 - Parents (uncle, auntie, niece; nephew)
B2 - Grandparents C4 - 4th degree relatives

B3 - Great grandparents (1st cousins, 1st cousins of grandparents)

C5 - 5th degree relatives
Priority Levels: (children of 1st cousins)
1st Priority - A = From A1 onwards in descending order of priority
2nd Priority - B = From B1 onwards in descending order of priority
3rd Priority - C = From C2 to C5 in descending order of priority
4th Priority - Philippine government
 Illustration 1
Mr. X died. He was survived by his wife and four
children. Mr. X has two brothers and one
surviving parent.

The compulsory heirs are: Mrs. X & 4 children

The surviving parent (secondary heirs) of Mr. X

will not inherit because there are descendants.
 Illustration 2
Ms. X died single and without a child. Ms. X’
parents, three brothers and 2 sisters were her
surviving relatives.

The compulsory heirs are Ms. X’s parents. The

collateral relatives (brothers & sisters) cannot
inherit since there are compulsory heirs.
 Illustration 3
Mr. Y died a bachelor. He had no child. His parents
were all dead long before his death. He only had a
brother & a sister, a first cousin & second cousin.

Since there is no compulsory heir, the brother &

sister in the collateral line shall inherit. Without
them, the first cousin shall inherit. If the first
cousin is also dead already, the government shall
inherit because the 2nd cousin is beyond 5th degree.
 Legitime
➢That part of the testator’s property which he
cannot dispose of because the law has
reserved it for the compulsory heirs.
➢Specifically, the legitime is ascertained to
protect the children and the surviving spouse
from the unjustified distribution of properties
 Disinheritance & Repudiation
➢This refers to an act by which the owner of an
estate deprives a person who would otherwise
be his heirs, or have the right to inherit.
➢Similarly, heirs may repudiate their share in
the inheritance of decedent
 Sufficient causes of disinheritance of
children & descendants
1. If found guilty of an attempt against the life
of the testator, his or her spouse,
descendants and ascendants
2. If he/she/they accused the testator of a
crime subject to imprisonment of 6 years or
more & such accusation was found
groundless
 Sufficient causes of disinheritance of
children & descendants… (continued)
3. Conviction of adultery or concubinage with
the spouse of the testator
4. If he/she/they cause the testator to make a
will or to change the one already made by fraud,
violence, intimidation or undue influence
5. A refusal without justifiable cause to support
the parent/ascendant
 Sufficient causes of disinheritance of
children & descendants…(continued)
6. Maltreatment of the testator by word or
deed, by the child or descendant
7. When a child or descendant leads a
dishonorable or disgraceful life
8. Conviction of a crime which carries with it the
penalty of civil inderdiction
 Sufficient causes of disinheritance of a spouse

1. If convicted of an attempt against the life of the

testator
2. If he/she accused the testator of a crime subject
to imprisonment of 6 years or more & such
accusation was found to be false
3. If he/she causes the testator to make a will or to
change the one already made by fraud, violence,
intimidation or undue influence
 Sufficient causes of disinheritance of a
spouse…(continued)
4. When the spouse has given cause for legal
separation
5. When the spouse has given the grounds for
the loss of parental authority
6. Unjustifiable refusal to support the children
or the other spouse
Other persons in succession
 Legatee
➢A person whom gifts of personal property is
given by virtue of a will
 Devisee
➢A person whom gifts of real property is given
by virtue of a will
 Executors
➢The person named in the will who is entrusted
to implement its provisions
➢If the named executor is female, she is called
executrix
 Administrators
➢The person assigned by the court for the
management of the estate of a decedent until
the estate is distributed to the heirs
➢A female administrator is called Administratrix
Other terms which are good to know
 Testate Estate
➢An estate of a deceased person which is
settled or to be settled with a valid last will
and testament
 Intestate Estate
➢An estate of a deceased person without will
 Probate
➢A special proceeding to establish the validity
of a will.
➢It is mandatory.
 Reprobate
➢A special proceeding to establish the validity
of a will previously proved in a foreign country
 Escheat
➢A proceeding whereby the State, by virtue of
its sovereignty, steps in and claims the real or
personal property of a person who dies
intestate without heir
 Testator
➢Refers to a decedent who transferred his
properties in a written will
 Free Portion
➢The portion of the estate in excess of the
legitime
➢That part of the whole estate which the
testator could dispose of freely through a
written will irrespective of his relationship to
the recipient
Testamentary Distribution of the Net Estate
Table 1
Testamentary Distribution of the Net Estate
(Article 888 to 903 of the Civil Code of the Philippines)
Primary compulsory heirs Secondary compulsory heirs
Legitimate Legitimate
Survivor Children and Surviving Illegitimate Parents and Illegitimate
Descendants Spouse Children Ascendants Parents
1. Legitimate Children only 1/2
2. Spouse alone 1/2
3. Legitimate child & spouse 1/2 1/4
4. Legitimate children, spouse Equal to a 1/2 of
& illegitimate children 1/2 share of 1 LC the LC
5. Surviving spouse &
illegitimate children 1/3 1/3
6. Illegitimate children only 1/2
7. Legitimate parents only 1/2
8. Legitimate parents & spouse 1/4 1/2
9. Legitimate parents, spouse
& illegitimate children 1/8 1/4 1/2
10. Illegitimate parents only 1/2
11. Illegitimate parents & spouse 1/4 1/4
12. Spouse, brothers & sisters 1/2
Illustration 1-Legitimate Children only
If the net hereditary estate is P5,000,000 of Mr.
A who died with children X and Y as heirs, how
much is legitime and the free portion?
 Solution
The legitime and free portion is computed as
follows:
Hereditary estate P5,000,000

Legitime (P5,000,000 x ½) (2,500,000)

Free portion P2,500,000

===========

The total legitime of P2,500,000 is to be shared

by X & Y equally.
 Illustration 2 – Surviving Spouse with
legitimate children
Don Pichon died leaving a net hereditary estate
of P20,000,000 to his daughter, Cheche, and his
wife, Vanessa.
How much is the legitime of each compulsory
heirs and the free portion?
 Solution
The legitime of each compulsory heir is
determined as follows:
Total hereditary estate P20,000,000

Less: Legitime of Che-che (P20,000,000 x ½) 10,000,000

Legitime of Vanessa, spouse (P20,000,000 x ¼) 5,000,000

Free portion P 5,000,000

If there are 2 or more legitimate children, they shall divide the

P10,000,000 equally.
 Illustration 3 – Heirs are Illegitimate
children & surviving spouse
Don Pichon died leaving a net hereditary estate
of P20,000,000 to his two illegitimate sons, and
his legal wife, Vanessa.
How much is the legitime of each compulsory
heirs and the free portion?
 Solution
The legitime of each compulsory heir is
determined as follows:
Total hereditary estate P20,000,000

Legitime of the illegitimate children, 1/3 6,666,667

Legitime of legal spouse, 1/3 6,666,667

Free portion P 6,666,666

============
 Illustration 4 – Two or more legitimate children,
Illegitimate children & surviving spouse

Don Pichon died leaving a net hereditary estate

of P20,000,000 to his two legitimate children,
his two illegitimate children and his legal wife,
Vanessa.
How much is the legitime of each compulsory
heir and the free portion?
 Solution
The legitime of each compulsory heir is
determined as follows:
Total hereditary estate P20,000,000

Less: Legitime of the legitimate children (1/2 of P20M) 10,000,000

Legitime of legal spouse, (equal to share of 1 LC) 5,000,000

Legitime of illegitimate children (1/2 of the LC or ½ of 1 LC) x 2 5,000,000

Free portion P0
==============
 Illustration 5 – Survivors are parents only

Mr. A died with his living father and mother as

heirs of his P5,000,000 net estate.
How much is legitime of the heirs and the free
portion?
 Solution
The legitime and free portion shall be computed
as follows:
Hereditary estate P5,000,000

Legitime, 1/2 2,500,000

Free portion P2,500,000

===========

The total legitime of P2,500,000 is shared by the father and

the mother equally.
Illustration 6 – Survivors: Ascendants &
surviving spouse
The son leaves his parents F & M and his wife,
W, the net hereditary estate of P20,000,000.
Compute legitime of parents and the spouse, as
well as the free portion.
 Solution
The legitime and free portion are computed as
follows:
Hereditary estate P20,000,000

Legitime, of parents F & M, 1/2 (10,000,000)

Legitime of spouse, 1/4 ( 5,000,000)

Free portion P5,000,000

===========
 Illustration 7 – Survivors: Ascendants, surviving
spouse and illegitimate children

X leaves his parents F and M, his wife, W, and his

illegitimate son the hereditary estate of
P20,000,000.
Compute the legitime of the heirs and the free
portion.
 Solution
The distribution would be:
Hereditary estate P20,000,000

Legitime of parents, F & M, 1/2 10,000,000

Legitime of spouse, 1/8 2,500,000

Legitime of illegitimate child, 1/4 5,000,000

Free portion P 2,500,000

===========
 Rules if heir is a legitimate spouse alone
Rule 1: As a general rule, the surviving spouse shall receive ½ of the
net distributable estate.

Rule 2: Exception to the general rule.

a. When the marriage is conceived for purely financial gain, the
decedent’s surviving spouse shall receive 1/3 of the net distributable
estate when the testator died within 3 months from marriage. This
rule is applicable only if the decedent was the party in danger of death
at the time of marriage due to sickness, illness or injury existing at the
time of the marriage.
b. When the marriage is made at the moment or point of death

Rule 3: However, the surviving legitimate spouse gets ½ of the net

distributable estate despite Rule No. 2 when the couple had been
living in for more than 5 years before actual marriage.
 Intestate Succession
➢It is a legal succession because it takes effect
through the operation of law for the reason
that the decedent has no last will and
testament to dispose the estate according to
his wishes.
Intestate Distribution of Net Estate
Table 2
Intestate Distribution of Net Estate
(Articles 979 to 1011, Civil Code of the Philippines)

Survivors Distribution of net estate

1. Spouse alone
2. Legitimate child alone
3. Illegitimate child alone ALL
4. Legitimate parents alone
5. Illegitimate parents alone
6. Spouse and 1 legitimate child 1/2 each
7. Spouse and legitimate children total # of children + spouse divided shares equally
8. Spouse and 1/2
illegitimate children 1/2
9. Spouse and 1/2
brothers, sisters, nieces and nephews 1/2
10. Spouse, 1/4
illegitimate children, 1/4
and legitimate parents 1/2
11. Spouse and 1/2
illegitimate parents 1/2
 In case of doubt
Testamentary succession is preferred over legal
or intestate succession.
 Illustration 1 – Survivors: Legitimate children as surviving
relatives in an intestate succession

The net estate to be inherited under intestate

succession is P5,000,000. There are 5 children as
heirs.
How much should each child receive?
 Solution
Each will receive P1,000,000 (P5,000,000/5)
 Illustration 2 – Survivors: Legitimate children & parents as
surviving relatives in an intestate succession

Assuming the net estate to be inherited under

intestate succession is P5,000,000. If the
surviving relatives are both the parents of the
deceased and his 5 children, how much would
be the distribution to each heir?
 Solution
The distribution shall be:

Children (P1,000,000 each) P5,000,000

Parents P-0-
 Illustration 3– Legitimate children &
surviving spouse
Assuming that the net estate to be inherited
under intestate succession is P6,000,000. The
surviving relatives are the 5 children of the
deceased and his wife.
How much would be the distribution to each
heir?
 Solution
Distribution:
5 children = 5 units
Spouse = 1 unit
Total = 6 units
=====
Children (P6,000,000 x 5/6) P5,000,000
Spouse (P6,000,000 x 1/6) P1,000,000
 Illustration 4 – Legitimate children &
illegitimate children
Assuming that the net estate to be inherited
under intestate succession is P6,000,000. The
surviving relatives are the 5 legitimate and 2
illegitimate children of the deceased. How much
would be the distribution to each heir?
 Solution
Distribution:
5 legitimate children = 5 units
2 illegitimate children(1/2) = 1 units
Total = 6 units
======
Legitimate children (P6,000,000 x 5/6) - P5,000,000
Illegitimate children (P6,000,000 x 1/6) – P1,000,000
 Illustration 5 – Legitimate &
Illegitimate children + surviving spouse
Assuming the net estate to be inherited under
intestate succession is P7,000,000 and that the
surviving relatives are 5 legitimate children, 2
illegitimate children and the surviving spouse.
How much would be the distribution to each
heir?
 Solution
Distribution:
5 legitimate children = 5 units
Surviving spouse = 1 unit
2 illegitimate children(1/2) = 1 unit
Total = 7 units
======
Legitimate children, (P7M x 5/7) – P5,000,000
Spouse, (5M/5 children x 1 unit or 7M x 1/7) - 1,000,000
Illegitimate children, (P7M x 1/7) - 1,000,000
Total inheritance P7,000,000
=========
 Estate Taxation
➢Pertains to the taxation of the gratuitous
transfer of properties of the decedent to the
heirs upon his death
 Nature of Estate Tax
➢Excise Tax
➢Revenue or general tax
➢Ad valorem tax
➢National Tax
➢Proportional tax (previously progressive)
 Classification of Decedents
➢Resident or Citizens – taxable on properties
within and outside PH
➢Non-resident alien – taxable only on
properties within PH, except intangible
personal property subject to reciprocity rule
 Estate Tax Model
Gross Estate ₱-
Less: Deductions -
Net taxable estate ₱-
• Gross estate pertains to the totality of properties owned by
decedent at death.
• Exclusions in gross estate – properties excluded by law (e.g., SSS
benefits)
• Deductions – generally pertain to reduction in the inheritance
• Net taxable estate – net properties of decedent after all
pertinent deductions allowed by law
Estate Tax – Gross Estate
Chapter 13A
 Gross Estate
• Consists of all tangible or intangible, real or personal properties of the
decedent wherever situated at the point of death
 Summary Rules on Gross Estate
Residents/Citizens NRA w/o Reciprocity NRA w/reciprocity
Property location Within Outside Within Outside Within Outside
Real properties √ √ √ x √ x
Personal properties
- Tangible √ √ √ x √ x
- Intangible √ √ √ x x x
Procedures in Establishing Gross Estate
 Inventory of Properties
• Inventory count at the point of death to determine gross estate
• If the list of properties of properties at the point of death is known,
the list is simply drawn directly
• If inventory is prepared at a later date after death, inventory must be
worked back to establish the list of properties present at point of
death
 Adjustments to the Inventory
• Exempt transfers (exclusions)
a) Properties existing at death but not owned by decedent
b) Properties owned by decedent by excluded by law from ET
• Taxable transfers (inclusions) – properties absent at point of death but
are owned by decedent
 Gross Estate Formula
Inventory of properties at point of death ₱-
Less: Exempt transfers
Properties not owned ₱-
Properties owned but excluded by law - -
Inventory of taxable present properties ₱-
Add: Taxable transfers -
Gross estate ₱-
 Exempt transfers
• Transfers of properties not owned by decedent
• Transfers legally excluded
Transfer of properties not owned by decedent
Merger of usufruct in the owner of naked title
Mr. A died on June 2017. In his will, he devised an agricultural land to B
who shall use the property for 10 years & thereafter to C.
Subsequently, B died resulting in transmission of the property to C.

Predecessor Current decedent

+ +
A B

Usufructuary Owner of naked title

 Transmission of inheritance by fiduciary to
fideicommissary
Mr. A died leaving an inheritance consisting of several real estates to his
favorite grandson, C. Because C is a minor, Mr. A appointed B, an older
brother of C, as fiduciary to the inheritance. Before transferring the property
to C, B died.

Predecessor Current decedent

+ +

A B

Fiduciary heir Fideicommissary

Transmission from the first heir, in favor of another
beneficiary, in accordance w/desire of predecessor
Mr. A devised in his will a piece of land to B as the first heir &
thereafter to C as the second heir. B subsequently died & transmitted
the property to C in accordance with Mr. A’s will.

Predecessor Current decedent

+ +
A B

1st heir 2nd heir

Proceeds of irrevocable life insurance policy payable to beneficiary other
than the estate, executor or administrator

• No longer owned by the decedent at death, hence it should not be

included in gross estate

Summary of rules:
Beneficiary
Designation of beneficiary Estate, administrator, executor Other parties
Revocable Include Include
Irrevocable Include Exclude
 Properties held in trust by the decedent
• These are not owned by decedent, hence, they should not form part
of gross estate
 Illustration
The following properties were identified upon the death of Mr. Ubaldo:
Car, registered in the name of his brother ₱ 800,000
Merchandise, consigned to Mr. Ubaldo 200,000
House and lot 2,400,000
Motorcycle, borrowed from a friend 150,000
Boarding house, held as trustee 4,000,000
Taxicab 1,000,000
Taxicab franchise 600,000
Dress, books, equipment & other personal belongings 400,000

How much are the inclusions in gross estate? P4,400,000

How much are the exclusions from gross estate? P5,150,000
 Separate properties of surviving spouse
• Refers to the husband’s capital or wife’s paraphernal
• Wife’s paraphernal should not be included in gross estate of husband
v.v.
 Transfer by way of bona fide sales
• This is an onerous transaction, hence not subject to estate tax
 Legal Exclusions
• Naturally form part of hereditary estate but exempted by law, hence should
be removed from the gross estate of the decedent:
1) Proceeds of group insurance
2) Proceeds of GSIS policy or benefits from GSIS
3) Accruals from SSS
4) USVA benefits – RA 136
5) War damage payments
6) All bequests, devises, legacies or transfers to social welfare…..
7) Acquisitions or transfers expressly declared as non-taxable by law
8) Bank deposits withdrawn from decedent’s account during settlement of
estate
 Note on property acquisitions using exempt
benefits
Properties acquired using GSIS benefits, SSS accruals, USVA benefits,
proceeds of group insurance & war damage payments shall still be
exempt so long as the heirs/administrators can prove that the
properties are acquired using these exempt properties
 Note on bequest, device or legacies to social
welfare, cultural and charitable institution
• To be exempt, donee institution must not use more than 30% of the
bequest for administration purposes
• 30% conditional exclusion is deemed satisfied if the donee is an
accredited non-profit donee institution
• Transfers to these institutions are initially included in the inventory
list of taxable properties but are removed from the list if the donee is
verified as a qualified donee institution
Deposits w/drawn from decedent’s bank
account
• Prohibited under the old law, except for P20,000 used for funeral
expenses
• Allowed under TRAIN law at unlimited amounts provided that 6%
final withholding tax is made by bank for any withdrawals made
within 1 year from decedent’s death.
• Withdrawals subjected to the 6% final WT must be excluded from
gross estate
Taxable Transfers
 Transfers in contemplation of death
• Donations made by the decedent during his lifetime which are
motivated by the thought of death
• Include:
a) Transfer of property to take effect in possession after death
b) Transfer of property with retention of the right of possession,
enjoyment or over income until death (to the extent of decedent’s
interest)
c) Transfer w/ retention of right to designate the person who shall
enjoy the property or the income therefrom
 Revocable transfers
• Transfer of possession over property during lifetime of decedent but
not ownership
• Decedent owns the property at point of death hence part of gross
estate
Transfer under general power of appointment
• Enables the holder of such power to do with property anything which
he could do as if the property is his own
• Shall be included in gross estate of decedent
 Illustration
Don Jose died. In his will, he gave Josefa a house and lot with the right
to designate the property with whomever heir she wants. Josefa
eventually died & appointed Josefina as heir to the property.

Josefa has general power over the property. The same shall be included
in her gross estate. If Josefa had limited power, the same shall not be
included in her gross estate.
 Composition of Gross Estate
1) Properties, movable or immovable, tangible or intangible
2) Decedent’s interest on properties
3) Proceeds of life insurance
a) designated as revocable to any heir
b) regardless of designation, if the beneficiary is the estate,
administrator or executor
4) Taxable transfers
 Illustration 1
A resident decedent died with the following properties at the point of death:
Cash in bank ₱1,000,000
Receivables from friends & relatives 200,000
Borrowed car from a friend 120,000
House and lot 2,000,000
Motorcycle, registered in the name of his youngest son 80,000
Total ₱3,400,000
==========
How much is gross estate?
 Solution
Inventory of properties ₱3,400,000
Less: Not owned
Borrowed car ₱120,000
Motorcycle 80,000 200,000
Gross estate ₱3,200,000
==========
 Illustration 2
Mr. A, a citizen decedent, died leaving the following properties:
Cash proceeds of life insurance designated to a brother as revocable beneficiary ₱ 1,000,000
Building, properties held as usufructuary 4,000,000
Cash in bank 2,400,000
Agricultural land 3,000,000
House & lot, from Mr. A’s industry 7,000,000
Benefits from GSIS 500,000
Total properties ₱17,900,000
Additional information: ==========
1) The agricultural land was designated by Mr. A’s father in his will to be transferred to D, Mr. A’s
son, upon Mr. A’s death.
2) Mr. A made a revocable donation involving a residential lot to his brother E. Mr. E paid
P400,000 when the lot was worth P1,000,000. The lot was valued at P2M upon Mr. A’s death.
3) The heirs w/drew P376,000 cash from the decedent’s bank account for Mr. A’s wake, net of 6%
final tax deducted by the bank.
 Solution
Inventory of present properties ₱17,900,000
Less: Building held in usufructuary ₱4,000,000
Agricultural land, under special power 3,000,000
Bank withdrawal (376,000/94%) 400,000
GSIS benefits 500,000 7,900,000
Taxable present properties ₱10,000,000
Add: Taxable transfers (₱2M- ₱400,000) 1,600,000
Gross estate ₱11,600,000
===========
 Valuation of Gross Estate
• Properties subject to estate tax shall be appraised at their fair values
at the point of death using fair value rules set by law or in its absence,
GAAP rules
• Encumbrances shall be ignored
 Real Properties
• Whichever is higher of:
a) Zonal value
b) Assessed fair value (the value fixed by provincial or city assessor)
• The value of improvement shall be the construction cost per building
permit or fair value that appears in the latest tax declaration
Share of stocks
• Preference shares – valued at par
• Unlisted common shares – valued at book value per share
• Listed shares – arithmetic mean of highest & lowest quotation at date
nearest the date of death, if none is available on the date of death
itself

Adjusted net asset method under RR6-2013 is no longer followed.

 Usufruct and annuities
• Fair value of usufruct must be included in gross estate if decedent
transfers usufructuary right to income over a property to his heirs
• To determine the value of the right to usufruct, probable life of the
beneficiary shall be taken into account in accordance with the latest
BASIC STANDARD MORTALITY TABLE (BSMT)
 Illustration - Annuity
Mr. Mairugin, 60 years old, sold his company under a condition that the
acquirer shall pay his 35-year old wife & their child a P300,000 yearly
support payments for 30 years. Mr. Mairugin died after the fifth
payment was made by the acquirer. Assuming that the appropriate
discount rate is 12%.
How much shall be the annuity to be included in the gross estate of Mr.
Mairugin?

Value of annuity = P300,000 x 7.843139 = P2,352,941.73

 Illustration - Usufruct
Don Midas transferred to Aurelius and his heirs usufructuary right over
a P50M property for 10 years. After 10 years, the property shall be
given to Marcus who is designated as the owner of the naked title.
Aurelius died just after the end of the 6th year of the usufruct. The
property earns P1M annual income. Discount rate is 12%. How much
should be included in the gross estate of Aurelius?

Value of usufruct = P1,000,000 x 3.037349 = P3,037,349

 Other properties
Properties Valuation
1) Newly acquired property Purchase price
2) Not newly acquired Second-hand value
3) Pawned properties Pawn value ÷ LTAV
4) Loan or receivable Amount per contract + Accrued Income

5) Foreign currencies Exchange rate at death

 Taxable transfers
• Transfers made without consideration are included in gross estate
using fair value at the point of death
• Transfers made for a consideration are valued at fair value at the
date of death less consideration paid at the date of transfer
 Illustration
Before death, Mrs. Power made the following mortis causa transfers
during her lifetime:
At the date of transfer Fair value
Fair value Consideration at death
To Alexander P300,000 P 0 P200,000
To Bee Jay 200,000 195,000 300,000
To Cedric 100,000 40,000 120,000
To Donnie 150,000 80,000 70,000

How much should be included in gross estate?

 Solution
FV at death Consideration Value in GE
To Alexander P200,000 P0 P200,000
To Bee Jay -
To Cedric 120,000 - 40,000 80,000
To Donnie 70,000 - 80,000 -
Total amount included in gross estate P280,000
========
Gross Estate: Special Rules
for Married Decedents
Chapter 13B
 Gross Estate of Married Decedents
• Decedent’s exclusive properties
• Common properties of the spouses
 Property Relations between spouses
• Regime must be agreed by the spouses before their marriage
• This must be set in their “pre-nuptial agreement”
Property regimes
 Absolute Separation of Property (ASP)
• All properties of the spouses are separate properties, except those
which they acquire jointly
 Conjugal Partnership of Gains (CPG)
• All properties that accrues as fruit of their individual or joint labor or
fruits of their properties during the marriage will be common
properties of the spouses
 Absolute Community of Property (ACP)
• All present properties owned by the spouses at the date of
celebration of marriage shall become common properties including
future fruit of their separate or joint industry or fruits of their
common properties
 Applicable property regime in default of
agreement

Conjugal partnership of gains Absolute community of property

August 3, 1988
Basic Rules in the Determination of Property
Interest
 Presumption in the inventory taking of the
estate
• ASP
- Properties are presumed separate of either spouse unless proven to
be joint properties of the spouses
• CPG & ACP
- Properties are presumed common properties unless proven to be
exclusive properties
 The sale or exchange of properties do not
alter their classification
• Properties acquired using separate properties are still separate
properties
• Properties acquired using common properties are still common
properties
 Accruals in value or gains on sale of
properties
• Increase in value or gains on the sale of properties are subject to the
rules of the property regime agreed by the spouses
 Conjugal Partnership of Gains (CPG)
• All fruits of labor & fruits of properties of the spouses during marriage
are common properties (prospective in application)
• Exclusive properties include:
a) That which is brought to the marriage as his/her own
b) That which each acquires during marriage through gratuitous transfer,
unless the donor/decedent designated the transfer for both spouses
c) That which is acquired by right of redemption or by exchange with other
property belonging to only one of the spouses
d) That which is purchased with the exclusive money of the wife or the
husband
 Illustration
Mr. Crocs died. An inventory of the properties of Mr. & Mrs. Crocs is prepared below:
Mr. Crocs Mrs. Crocs Total
Properties accruing before marriage:
Properties inherited before marriage P200,000 P100,000 P300,000
Other properties brought in the marriage 400,000 500,000 900,000
Properties accruing during marriage:
Properties inherited during marriage 250,000 150,000 400,000
Properties as fruit of own labor 140,000 160,000 300,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 100,000 50,000 150,000
Properties inherited during marriage 20,000 80,000 100,000
Properties acquired from own labor 20,000 40,000 60,000
Properties earned from common labor 50,000

Determine exclusive and common properties of the spouses.

 Solution
Exclusive Properties
Mr. Crocs Mrs. Crocs Common
Properties accruing before marriage:
Properties inherited before marriage P200,000 P100,000
Other properties brought in the marriage 400,000 500,000
Properties accruing during marriage:
Properties inherited during marriage 250,000 150,000
Properties as fruit of own labor P300,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 150,000
Properties inherited during marriage 100,000
Properties acquired from own labor 60,000
Properties earned from common labor 50,000
TOTAL P850,000 P750,000 P910,000
======== ======== ========
Gross estate of Mr. Crocs is P1,760,000 (P850,000 + P910,000)
 Absolute Community of Properties (ACP)
• Marriage is viewed as union of present property of the spouses
including fruits of labor & industries of spouses during marriage

---------Retrospective------------- ------------Prospective--------------
Date of Marriage
 Special features of ACP
• Retrospective
- Properties acquired before marriage become common properties
• Prospective
- Properties which the spouses may acquire during marriage from their
separate or joint industry shall be common
 Exclusive Properties under ACP
1) Properties received by way of gratuitous title during marriage
2) Fruits of separate properties of the spouses
3) Properties for the exclusive personal use of either spouses, except
jewelry
4) Properties brought into the marriage by either spouse with
descendant by a prior marriage
 Exceptions to prospectivity feature of ACP
• Properties received by gratuitous title
• Fruits of separate properties during marriage
 Fruits
• Fruits arising from labor or industry of either or both spouses are
common properties
• Fruit of exclusive property is exclusive property & fruit common
property is common property (fruits follow principal)
 Illustration 1
Mr. Crocs died. An inventory of the properties of Mr. & Mrs. Crocs is prepared below:
Mr. Crocs Mrs. Crocs Total
Properties accruing before marriage:
Properties inherited before marriage P200,000 P100,000 P300,000
Properties for exclusive use 50,000 60,000 110,000
Other properties brought in the marriage 350,000 440,000 790,000
Properties accruing during marriage:
Properties inherited during marriage 250,000 150,000 400,000
Properties as fruit of own labor 140,000 160,000 300,000
Properties acquired for exclusive use 30,000 40,000 70,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 100,000 50,000 150,000
Properties inherited during marriage 20,000 80,000 100,000
Properties acquired from own labor 20,000 40,000 60,000
Properties earned from common labor 50,000

Determine exclusive and common properties of the spouses.

 Solution
Exclusive Properties
Mr. Crocs Mrs. Crocs Common
Properties accruing before marriage:
Properties inherited before marriage P300,000
Properties for exclusive use P 50,000 P60,000
Other properties brought in the marriage 790,000
Properties accruing during marriage:
Properties inherited during marriage 250,000 150,000
Properties as fruit of own labor 300,000
Properties acquired for exclusive use 30,000 40,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 150,000
Properties inherited during marriage 20,000 80,000
Properties acquired from own labor 60,000
Properties earned from common labor 50,000
TOTAL P350,000 P330,00 P1,900,000
======== ======= =========
Gross estate of Mr. Crocs shall be P2,250,000 (P350,000 + P1,900,000)
 Illustration 2
During marriage, Mrs. Aguilar received a gold bracelet worth
P400,000 as inheritance from her grandparents. Using her salaries,
Mrs. Aguilar bought P100,000 worth of shoes and clothes and a
P200,000 diamond ring for her own use.
On the other hand Mr. Aguilar bought a Rolex watch worth
P30,000 from the income of a property that was donated to him during
marriage. Using his business income, Mr. Aguilar also bought shoes
and clothes worth P70,000 and a platinum necklace worth P250,000
for his exclusive personal use.

Compute the exclusive properties and common properties.

 Solution
Exclusive Properties Common
Mr. Aguilar Mrs. Aguilar Properties
Inherited gold bracelet P- P 400,000 P–
Shoes and clothes 70,000 100,000 -
Rolex watch 30,000 - -
Diamond ring - - 200,000
Platinum necklace - - 250,000
TOTAL P100,000 P500,000 P450,000
======== ======= ========
Properties inherited during marriage are still separate properties, even if they are jewelry. Fruits of separate
properties are still separate properties. Hence, the inherited gold bracelet and the Rolex watch are separate
properties.
 Acquisition of Exempt Properties
• Will be included as exclusive or common properties of the spouses
but shall be excluded in the computation of gross estate
 Illustration
Mr. & Mrs. Ravena are both government employees. Mrs. Ravena died
and before her death, she received a lump sum GSIS benefit amounting
to P1M. P200,000 of these were expended before her death. The
balance was invested in a property which now has a value of P900,000.
Aside from these, the spouses have P4M other common properties.
Mr. & Mrs. Ravena also have separate properties of P1,800,000 and
P2,200,000, respectively.

How much is gross estate?

 Solution
Investment:
- Original principal GSIS benefits P 800,000
- Income of investment (P900,000-P800,000) 100,000
Investment value P 900,000
Other common properties 4,000,000
Total common properties P4,900,000
Less: Exempt properties (GSIS benefits principal) 800,000
Taxable common properties P4,100,000
Add: Exclusive property of Mrs. Ravena 2,200,000
Gross estate P6,300,000
=========
Income earned from investment of exempt properties is taxable.
 Exempt Properties of Non-Resident Alien
• Exempt foreign properties of married non-resident alien decedent
must be excluded from gross estate
 Illustration
Mr. Speedy Gonzales, a non-resident Mexican, died in Korea. Mr. & Mrs. Gonzales had the following properties:
Mexico Philippines Korea Total
Capital properties P100,000 P200,000 P300,000 P600,000
Paraphernal properties 250,000 350,000 600,000 1,200,000
Common properties-tangible 550,000 200,000 200,000 950,000
Common properties-intangible - 500,000 150,000 650,000
Total P900,000 P1,250,000 P1,250,000 3,400,000
The gross estate of Mr. Gonzales shall be: ======== ========= ========= ========
Husband’s capital properties P200,000
Common properties – tangible 200,000
Common properties – intangible 500,000
Gross estate P900,000
If reciprocity applies, gross estate shall be: =======
Husband’s capital properties P200,000
Common properties – tangible 200,000
Gross estate P400,000
=======
Deductions from Gross State
Chapter 14
 Deductions from gross estate
• Items which the law on estate tax allows to be subtracted from the
value of the gross estate in order to arrive at the net taxable estate
 Category of Deductions
Exclusive Conjugal/Communal Total
Gross Estate ----- ----- -----
I. Ordinary deductions
Actual funeral expenses (no longer included in TRAIN LAW) ----- ----- -----
Judicial expenses (no longer included in TRAIN LAW) ----- ----- -----
Claims against the estate ----- ----- -----
Claims against insolvent person ----- ----- -----
Unpaid mortgages ----- ----- -----
Unpaid taxes ----- ----- -----
Casualty losses ----- ----- -----
Property previously taxed (Vanishing deduction) ----- ----- -----
Transfer for public use ----- ----- -----
Estate after ordinary deductions ----- ----- -----
II. Special deductions
Family home -----
Standard deduction -----
Medical expenses (no longer included in TRAIN LAW) -----
Others (benefits under RA#4917) -----
Net estate -----
III. Share of surviving spouse x 1/2 ----
Net taxable estate -----
 Classification of Deductions
• Ordinary deductions – items that diminish the amount of inheritance
(except vanishing deductions)
• Special deductions – do not reduce the inheritance
• Share of the surviving spouse – interest of the surviving spouse in the
net conjugal or communal properties of the spouses
General Principles of Estate Deductions
 The substantiation rule
• Documentary evidence to establish validity of claim for deduction
• Not required for standard deduction
 Matching Principle
• No deduction allowed for those which are not part of the gross estate
• Example: Losses of properties before the death of the decedent are
not deductible because the properties are no longer part of the gross
estate at the point of death
 “No double classification” rule
• An item of deduction cannot be claimed under several deduction
classifications
• Example: Losses claimed in the income tax return of the estate cannot
be claimed again as deduction in the estate tax return
 Default presumption on ordinary deduction
• For married decedents, ordinary deductions are presumed to be
against common properties unless proven to be deductible from
exclusive properties of either spouse
 Ordinary deductions
• Losses, indebtedness and taxes (LIT)
(Funeral and judicial expenses are no longer included in TRAIN)
• Transfer for public use
• Vanishing deductions
 Losses
• Pertain to losses of properties of the estate during the settlement
• May arise from fires, storms, shipwreck or other casualties or from
robbery, theft or embezzlement when such losses are not
compensated by insurance
• Losses must occur during estate settlement before deadline of ETR
filing (1 year from death under TRAIN – used to be 6 months in the old
law)
 Claim against insolvent person
• A form of loss but is presented as a separate item of deduction in the
ETR
• The deductible amount of claim is the unrecoverable amount
 Illustration
Upon learning that 2 of his debtors became insolvent, Mr. Naba Gok, collapsed & died due to heart
attack. His administrator reported the following:
Family home P2,000,000
Claims against insolvent persons 500,000
The insolvent debtors are comprised of the following:
Miss Beauty Ms. Pretty
Amount of Gok’s claims P200,000 P 300,000
Debtor’s financial condition:
Assets 600,000 620,000
Accounts payable 800,000 1,000,000
Unpaid taxes 20,000
Subsequent to the date of death, the court declared Beauty & Pretty insolvent.

How much is net estate?

 Solution
Family home P2,000,000
Claims against insolvent persons 500,000
Gross estate P2,500,000
Less: Ordinary deductions
Claims against insolvent persons 170,000
Net estate before special deductions P2,330,000
=========
Notes:
1) Uncollectible claims is computed as follows:
Beauty Pretty
Amount of claims P200,000 P300,000
X Percentage uncollectible:
Beauty: 100% - (P600k/P800k) 25%
Pretty: 100% - (P600k/P1M) 40%
Uncollectible claims P 50,000 P120,000
======== ========
2)Government has preference over the assets of an insolvent person – Tax Lien (P620,000 – P20,000) = P600,000
 Classification of Losses
• Loss of separate/exclusive property is a deduction against
separate/exclusive property
• Loss of common property is a deduction against common property
 Claims against the estate (Indebtedness)
• Debts or demands of pecuniary nature
• May arise out of contract, tort (wrongful act) or operations of law
Special rules on certain claims against the
estate
 Unpaid mortgage
• Property used as collateral for the mortgage loan must be included in
gross estate
• Unpaid balance of mortgage at the point of death is deductible from
gross estate
 Unpaid taxes
• Income tax, business tax and property tax which have accrued &
unpaid at the point of decedent’s death
 Accommodation Loan
• Loan contracted by decedent in behalf of another person
• Presented as a receivable in the gross estate
• The same amount is also presented as deduction
 Illustration
While Patio was still alive, he received P1,800,000 loan from Bank Raft. The
loan is secured by Patio’s family home which has a fair market value of P3M
at the date of his death. It was found out that the P1,800,000 was borrowed
by Lungon, Patio’s brother. The unpaid balance of the mortgage bank loan at
the date of death of Patio is P1M, but the brother has not yet paid any
amount of the loan.
The net estate of Patio before special deductions would be:
Family home P3,000,000
Add: Receivable from brother 1,800,000
Gross estate P4,800,000
Less: Unpaid mortgage on Bank Raft Loan 1,000,000
Net estate before special deductions P3,800,000
=========
 Requisites of deductibility of claims
• It is a personal obligation of decedent unpaid at point of death
• Contracted in good faith
• Valid in law and enforceable in court
• Must not have been condoned by creditor or action to collect from
decedent must not have prescribed (no action made by creditor to
collect within 6 years if orally constituted or 10 years if w/written
contract)
Substantiation Requirements on claims
against the estate
 1. Simple Loan and advances
• Debt instrument must be duly notarized, except loans by FIs
• Duly notarized certification from the creditor on unpaid balance
• Proof of financial capacity of creditor to lend, latest audited BS with
detailed schedule of receivables showing unpaid balance of deceased
• Statement under oath by administrator/executor reflecting
disposition of proceeds if contracted 3 years prior to death
 2. Purchase of goods or services
• Pertinent documents (sales invoice, delivery receipt, contract)
• Statement of account duly received by decedent-debtor
• Duly notarized certification from the creditor on unpaid balance
• Certified true copy of latest audited BS with detailed schedule of
receivables showing unpaid balance of deceased
 3. Settlement made through the courts
Pertinent documents filed with the court evidencing the claims against
the estate & the court order approving the said claims if already issued
 Classification rules for claims against the
estate
• Family benefit rule
- if contracted for family benefit, it is a deduction from common
properties (e.g., loan contracted for tuition of children)
• Property classification rule
- Claims follow the classification of relevant property (e.g., unpaid taxes
on exclusive property is deductible from exclusive property), unless it
accrued or was used for the benefit of the family
 Transfer for Public Use
• Includes the amount of all transfers to the Government to be used
exclusively for public purposes as indicated in the decedent’s last will
and testament (testamentary succession)
• Unless the other spouse has written consent with respect to conjugal
property to be transferred in favor of the government, the donated
property is deductible from the exclusive portion of the estate
 Property previously taxed (Vanishing
deduction)
• Instances where properties are transferred between persons (inter
vivos or mortis causa) in short periods of time causing a series of
transfer taxation
• The purpose is to mitigate the impact of successive transfer taxation
 Requisites of vanishing deduction
1) Present decedent must have died w/in 5 years from date of death
of prior decedent or date of gift
2) Property must have been previously subjected to transfer tax
3) Property must be identified as the same property received from
prior decedent or donor or one received in exchange therefore
4) Transfer taxes must have been finally determined and paid
5) No vanishing deduction on the property was allowed in the estate
of the immediate prior decedent to the present decedent
6) Property must be located in the Philippines
Procedural Computation: Vanishing deduction
 1) Determine the initial value
• Initial value is the fair market value of the property at the date of the
first transfer or the fair value at the date of death, whichever is lower
 2) Determine the initial basis
Initial value ₱-
Less: Indebtedness assumed & paid before death of present decedent -
Initial basis ₱-
 3) Determine the final basis
Initial basis ₱-
Less: (Initial basis/Gross estate) x (LIT & TFPU) -
Final Basis ₱-
4) Determine vanishing deduction
 Illustration
Mr. H died with the following properties and allowable deductions:
Value at inheritance Value at death
Car received as inheritance 3 years ago ₱1,200,000 ₱ 1,000,000
Other properties 9,000,000
Gross estate ₱10,000,000
Allowable ordinary deductions: ===========
Mortgage on the car 300,000 100,000
Indebtedness & taxes 1,300,000
Transfer for public use 300,000
Total ordinary deductions ₱ 1,700,000
===========
How much is vanishing deduction?
 Solution
Initial value (lower of P1.2M & P1M) ₱1,000,000
Less: Mortgage assumed & paid 200,000
Initial Basis ₱ 800,000
Less: Proportional ordinary deduction (800k/10M x 1.7M) 136,000
Final basis ₱ 664,000
X Vanishing deduction % 60%
Vanishing deduction ₱ 398,400
=========
 Special deductions
1) Family home
2) Standard deductions
3) Benefits under RA 4917

Medical expenses are no longer included under TRAIN Law

 Family home
• The dwelling house, including the land on which it is situated, where
the husband & wife, or a head of the family & members of their
family reside
• Characterized by permanency
• Decedent is entitled only to 1 family home
 Requisites for deduction
• Family home must be the actual residential home of decedent & his
family at death as certified by barangay captain
• Value of family home must be included in gross estate
• The allowable deduction must not exceed the lowest of fair market
value, extent of decedent’s interest or P10M (used to be P1M)
Illustration from RR12-2018
 Standard Deduction
• A deduction from gross estate of P5,000,000 (used to be P1M) shall
be allowed without need for substantiation
 Benefits under RA 4917
• Amount received by heirs from decedent’s employer as a
consequence of the death of the decedent-employee
• Allowed as deduction provided that the amount of benefit is included
as part of the gross estate
Presentation of deduction for RA 4917 benefit
• Either as ordinary or special deduction
• If classified as ordinary deduction, amount of benefits must be
included in conjugal/communal properties but deducted in full under
ordinary deductions
• If classified as special deduction, the deduction shall only be ½ of its
value
 Illustration
A married decedent died with RA4917 death benefits of P800,000,
family home of P12,000,000, other conjugal properties of P14,000,000
& P500,000 exclusive property. Losses, indebtedness & taxes
chargeable against the conjugal properties were P700,000.

Present computation with:

1) RA4917 as ordinary deduction
2) RA4917 as special deduction
 Solution 1
Exclusive Conjugal Total
Family home P12,000,000 P12,000,000
Benefits under RA4917 800,000 800,000
Other properties P500,000 14,000,000 14,500,000
Gross estate P500,000 P26,800,000 P27,300,000
Less: Ordinary deductions
LIT 700,000 700,000
Benefits under RA4917 800,000 800,000
Estate after deductions P500,000 P25,300,000 P25,800,000
Less: Special deductions
Family home (1/2 x 12,000,000) 6,000,000
Standard deductions 5 ,000,000
Net estate P14,800,000
Less: Share of surviving spouse (P25,300,000 x ½) 12,650,000
Net taxable estate P 2,150,000
===========
 Solution 2
Exclusive Conjugal Total
Family home P12,000,000 P12,000,000
Benefits under RA4917 800,000 800,000
Other properties P500,000 14,000,000 14,500,000
Gross estate P500,000 P26,800,000 P27,300,000
Less: Ordinary deductions
LIT 700,000 700,000
Estate after deductions P500,000 P26,100,000 P26,600,000
Less: Special deductions
Benefits under RA4917 (P800,000 x 50%) 400,000
Family home (1/2 x 12,000,000) 6,000,000
Standard deductions 5 ,000,000
Net estate P15,200,000
Less: Share of surviving spouse (P26,100,000 x ½) 13,050,000
Net taxable estate P 2,150,000
===========
 Solution 3 (Exclusive-special deduction)
Exclusive Conjugal Total
Family home P12,000,000 P12,000,000
Benefits under RA4917 P800,000 800,000
Other properties 500,000 14,000,000 14,500,000
Gross estate P1,300,000 P26,000,000 P27,300,000
Less: Ordinary deductions
LIT 700,000 700,000
Estate after deductions P1,300,000 P25,300,000 P26,600,000
Less: Special deductions
Benefits under RA4917 800,000
Family home (1/2 x 12,000,000) 6,000,000
Standard deductions 5,000,000
Net estate P14,800,000
Less: Share of surviving spouse (P25,300,000 x ½) 12,650,000
Net taxable estate P 2,150,000
===========
Assumption here is that marriage contract is already terminated upon death.
 Share of the surviving spouse
• Equal to 1/2 of the net conjugal or community properties of the
spouses after deducting ordinary deductions
• Deducted so that only the decedent’s interest in the estate is taxed
 Note on ordinary & special classification of
deductions
• The classification is not found in the NIRC but only in RR2-2003 or
RR12-2018
• Ordinary deductions are claimable by any decedent
• Special deductions used to be claimed ONLY by residents and citizens
but NRAs can now claim P500,000 standard deduction under TRAIN
 Rules on claimable deductions
Resident or Citizen Non resident alien
Ordinary deduction √ √
Special deduction √ x*
Share of surviving spouse √ √
*except for the P500,000 standard deduction allowed under TRAIN
 Deductions allowed to non-resident aliens
1) Standard deduction of P500,000 (new under TRAIN Law)
2) Prorated LIT - (Phil Gross Estate/World Gross Estate) x World Total
Losses, Indebtedness & Taxes
3) Property previously taxed (vanishing deductions) – computation
modified on pro-rated deduction [(Initial basis/Philippine Gross Estate)
x prorated Losses Indebtedness & Taxes + Transfer for Public Use)]
4) Transfers for public use (deductible only if properties are situated in the
Philippines)
5) Net share of surviving spouse – computed on Philippine
conjugal/communal properties
 Additional requirements on deductions for
NRAs
No deduction shall be allowed in the case of non-resident alien
decedent unless the executor, administrator, or anyone of the heirs
includes in the return the value at the time of the decedent’s death
that part of his gross estate not situated in the Philippines