CHAPTER 13

THE CONCEPT OF SUCCESSION & ESTATE TAX

SUCCESSION
"Succession” is a 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 or
others either by his will or by operation of law (Art 774, Civil Code).

The inheritance includes all the property, rights and obligations of a person which are not extinguished
by his death (Art 776, Ibid.).

The rights to the succession are transmitted from the moment of the death of the decedent (Art 777,
Ibid.). The decedent is a deceased or dead person.

TYPES OF SUCESSION

1. Testate or Testamentary Succession

Testamentary succession is that which results from the designation of an heir, made in a will executed in
the form prescribed by law. (Art 779, Civil Code)

A person can specify the recipient of his properties upon death. This designation must be made through
a written document called last will and testament. A person who died with a will is said to be “testate."
A person who died with a written will is called a “testator”.

2. Legal or Intestate Succession

When a decedent dies without a will or with an invalid one, the distribution of the estate shall be in
accordance with the default provision of the Civil Code on succession.

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3. Mixed Succession
Transmission or the decedent properties shall be partly by virtue of a written will and partly by
operation of law.

Will
A will is an act whereby a person is permitted, with the formalities prescribed by law, to control to a
certain degree the disposition of this estate, to take effect after his death (Art. 783, Ibid).

A will is an expression of the decedent’s desire as to how his properties will be distributed after his or
her death.

The making of a will is a strictly personal act; it cannot be left in whole or in part of the discretion of a
third person, or accomplished through the instrumentality or an agent or attorney. (Art 784, Ibid.)

Types of will
1. Holographic will – a will which is entirely written, dated, and signed by the hand of the testator
himself
2. Notarial will -a notarized will signed by the decedent and witnesses
3. Codicil – a supplement or addition to a will, made after the execution of a will and annexed to be
taken as a part thereof, by which disposition made in the original will is explained, added to, or altered
(Art 825, Ibid.)

Every will must be acknowledged before a notary public by the testator and the witnesses. A
holographic will need not be witnessed. A codicil needs to be executed as in the case of a will to be valid.

NATURE OF SUCCESSION
Succession is a gratuitous transmission of property from a deceased person in favor of his successors.

Succession involves only the net properties of the decedent. The heirs will inherit what remains of the
decedents property after satisfying the decedent’s indebtedness and obligations including the estate
tax. The heirs shall not inherit the debt of the decedent.

ELEMENTS OF SUCCESSION

1. Decedent- the general term applied to the person whose property is transmitted through succession,
whether or not he left a will. If he left a will, he is also called the testator (Art. 775, Ibid.).

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2. Estate – the property, rights and obligations of the decedent not extinguished by his death. This is
also referred to as the “inheritance” of the decedent.
3. Heirs- a person called to the succession either by the provision of a will or by operation of law (Art.
782, Ibid.).

WHO ARE THE HEIRS?

Heirs under intestate succession

In intestate succession, the heirs shall be the following in descending order of priority:
1. Compulsory heirs
2. Relatives up to fifth degree of consanguinity
3. Republic of the Philippines

The law identified certain persons which it designated as “compulsory heirs.” These are the persons who
will inherit the estate by default. Only by their absence shall the estate be partitioned to other relatives.
In the absence of relatives, the estate will go the government.

Types of compulsory heirs

1. Primary heirs: Legitimate children and their direct descendants
2. Secondary heirs: Legitimate/illegitimate parents and ascendants
3. Concurring heirs: The surviving spouse and illegitimate descendants

Definition of terms
1. Legitimate children are those born out of a legal marriage.
2. Direct descendants refer to children or, in their absence, grandchildren.
3. Legitimate parents refer to biological parents.
4. Illegitimate parents are adopting parents to an adopted child.
5. The surviving spouse is the widow or widower of the decedent.
6. Illegitimate descendants are illegitimate children.

Note: Under the Revised Family Code, adoptive parents can now qualify as secondary heirs sharing
50:50 with biological parents

The secondary compulsory heirs shall inherit only in default of the primary heirs. Normally, only the
primary heirs and concurring heirs share in the hereditary estate. In the absence of primary heirs, the
secondary heirs and concurring heirs shall share in the hereditary estate

In the absence of compulsory heirs, the following shall inherit in the following order of priority:
1. Collateral relatives up to the fifth degree of consanguinity
2. The Philippine government

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Priority is given to collateral relatives in the closest degree.

Summary of Rules:
1. Concurring heirs and
a. Descendants, or in their default,
b. Ascendants
2. Relatives in the collateral line up to fifth (5th) degree
3. Republic of the Philippines

Illustration

PAGE 449 IN THE BOOK

Note:
1. A1 includes both legitimate and illegitimate children.
2. Second cousins are in the 6th degree in the collateral line; hence, they cannot inherit.

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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:

a. Mrs. X
b. The four children

The surviving parent (secondary heirs) of Mr. X will not inherit because there are descendants (i.e., four
children).

Illustration 2
Ms. X died single and without a child. Ms. X's parents, three brothers, and two sisters were her surviving
relatives.

The compulsory heirs are Ms. X's parents. The collateral relatives (brothers and 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 and a sister, a first cousin, and a second cousin.

Since there is no compulsory heir, the brother and sister in the collateral line shall inherit. Without them,
the first cousin shall inherit.

Assuming further that only the second cousin is living, the government shall inherit the estate. Succession
n the collateral line cannot extend to the second cousin because he/she is beyond the fifth degree of
consanguinity.

Basic Intestate Partition Procedures

1. The decedent and the surviving spouse shall first share in their common properties.

The common properties net of expenses and obligations chargeable to the common properties of the
spouses is divided between the decedent and the surviving spouse.

2. Determination of the decedent's net interest.

The decedent's net interest comprising of the following is computed:

a. Exclusive property of the decedent
b. Share of the decedent in the net common properties

3. Partition of the decedent's net interest to the heirs:

a. Surviving spouse
b. Legitimate children
c. Illegitimate children
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The surviving spouse and each of the children have one share each. Each illegitimate child is entitled to a
half share.

Illustration 1
Mr. Richie Rich, a widower, died leaving P45,000,000 estate for his two legitimate children, Harold and
Alex, and two illegitimate children, Elon and John.

The estate shall be partitioned as follows:

Heirs Share Partition Inheritance
Harold (legitimate) 1.0 1/3 x P45,000,000 P 15,000,000
Alex (legitimate) 1.0 1/3 x P45,000,000 15,000,000
Elon (illegitimate) 0.5 .5/3 x P45,000,000 7,500,000
John (illegitimate) 0.5 .5/3 x P45,000,000 7,500,000
Total 3.0 P 45,000,000

Illustration 2
Don Uyong died leaving behind his widow, Mrs. Uyong, his legitimate children, Max and Rey, and
illegitimate children, Joan, Sylvia and Eunice, as heirs. Mr. and Mrs. Uyong had the following properties:

Exclusive properties of Don Uyong P 18,000,000

Exclusive properties of Mrs. Uyong 16,000,000
Net common properties 36,000,0000

he net estate of the decedent shall be computed as follows:

Exclusive properties of Don Uyong P 18,000,000

Share in net common properties (P36M/2) 18,000,000
Distributable estate P 36,000,000

The estate shall be partitioned as follows:

Heirs Share Partition Inheritance
Mrs. Uyong (spouse) 1.0 1/4.5 x P36,000,000 P 8,000,000
Max (legitimate) 1.0 1/4.5 x P36,000,000 8,000,000
Rey (legitimate) 1.0 1/4.5 x P36,000,000 8,000,000
Joan (illegitimate) 0.5 5/4.5 x P36,000,000 4,000,000
Sylvia (illegitimate) 0.5 5/4.5 x P36,000,000 4,000,000
Eunice (illegitimate) 0.5 5/4.5 x P36,000,000 4,000,000
Total 4.5 P 36,000,000

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The total properties of the surviving spouse after the partition shall be:

Exclusive properties of Mrs. Uyong P 16,000,000

Share in net common properties (P36M/2) 18,000,000
Share in the distributable estate 8,000,000
Total properties P 42,000,000

Heirs under Testamentary Disposition

In testamentary succession, the heirs shall be the following:
1. Compulsory heirs
2. Other persons specified by the decedent in his will

Legitime
Legitime is that part of the testator’s property which he cannot dispose of because the law has reserved
it for certain heirs who are, therefore, called compulsory heirs (Art 886, Ibid). The excess properties of
the decedent is called "free portion".

By means of a last will and testament, a testator can designate the free portion of his estate for
additional heirs irrespective of their relationship to him but he cannot exclude or disinherit compulsory
heirs without a valid basis under the law.
Disinheritance and Repudiation
A decedent can actually disinherit an heir on certain grounds. Similarly, heirs may repudiate their share
in the inheritance of the decedent.

The rules on legitime, free portion, disinheritance of an heir or repudiation of inheritance are matters or
law whihn are irrelevant to estate taxation. Hence, these topics will not be emphasized in our
discussion. Readers with particular interest in these matters are advised to consult Title IV of Book III of
the Civil Code.

The determination of the estate tax does not require prior identification of the heirs. Once a person is
dead, the estate or the decedent is simply determined and reduced by deductions allowed by law. Then,
the estate tax is computed out of the net estate. Neither does the validity or invalidity of the decedent’s
will nor the absence of an heir affect estate taxation. In fact, the estate tax is due even if the decedent
does not have relatives who will inherit the property.

Furthermore, the determination of the share of each heir in the distributable estate is done only after all
charges to the hereditary estate, including estate tax, had been deducted.

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Other persons in succession
1. Legatee -a person whom gifts of personal property is given by virtue of a will
2. Devisee- a person whom gifts of real property is given by virtue of a will
3. Executors- a person named by the decedent who shall carry out the provisions or his will
4. Administrators- a person appointed by the court to manage the distribution of the estate of the
decedent

ESTATE TAXATION
Estate taxation pertains to the taxation of the gratuitous transfer of properties of the decedent to the
heirs upon the decedent's death.

Estate taxation is governed by the law in force at the time of the decedent’s death. The estate tax
accrues as of the decedent’s death and the accrual of the tax is distinct from the obligation to pay the
same. Upon the death of the decedent, succession takes place and the right of the State to tax the
privilege to transmit the estate vests instantly upon death.

Hence,
Decedents who died Between January 1, 1998 to December 31, 2017 On or after January 1, 2018
Shall be governed by The NIRC The TRAIN law

Readers who are concerned about estate tax of decedents covered by the NIRC are hereby advised to
consult the old edition of the book

NATURE OF ESTATE TAX:

1. Excise tax- estate tax is not a tax on the property but on the privilege to transfer property through
death
2. Revenue or general tax – estate tax is intended as a revenue or fiscal measure
3. Ad valorem tax – estate tax is dependent upon the value of the estate
4. National tax – estate tax is imposed by the national government
5. Proportional tax- estate tax is imposed as 6% on the net estate
6. One-time tax – estate tax applies to a person only once in a lifetime

Classification of Decedents for Taxation Purposes

1. Resident or Citizen Decedents- taxable on properties located within or outside the Philippines
2. Non-resident Alien Decedents- taxable only on properties located in the Philippines, except intangible
personal property when the reciprocity rule applies

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THE ESTATE TAX MODEL

Gross estate P xxx,xxx

Less: Deductions from gross estate xxx,xxx
Net taxable estate P xxx,xxx

"Gross Estate" pertains to the totality of the properties owned by the decedent at the point of his
death.

There are two concepts to be discussed under gross estate:

a. Exclusions in gross estate - those properties or transfers excluded by law from estate taxation
b. Inclusions in gross estate - those properties which are to be included as part of the taxable gross
estate

The concept of gross estate will be extensively discussed in chapters 13-A and 13-B.

"Deductions" generally pertain to reductions in the inheritance of the heirs such as obligations of the
decedent, and losses of property during administration, but also include exemptions from the estate tax
under the law. Deductions are extensively discussed in Chapter 14.

"Net taxable estate" is the net properties of the decedent after all pertinent deductions allowable by
law that is subject to tax. Note that the net taxable estate is not equivalent to the hereditary estate
before estate tax because of exclusions, exemption rules and deduction criteria imposed by the law.

The determination of estate tax, including other pertinent tax reportorial requirements, are extensively
discussed in Chapter 15.

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