Succession and Estate Taxation• NU LAGUNA

Business and
Transfer Tax

Course Material No. 3:

Concept of Succession & Estate Tax

Joselito V. Abuel, LPT MBA CPA JD

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 Succession and Estate Taxation• NU LAGUNA

Succession &OUTCOMES
LEARNING Estate Tax
3
LESSON OUTLINE LEARNING OUTCOMES

After this lessons, students are expected to comprehend

• General Provision in Succession
1. The concept of transfer and its types
• Kinds of Succession
2. The concept, types and elements of succession
• Kinds
types of of Heirs
3. The nature of estate tax
• Concept of Legitime
4. The concept of heirs and legitime
• Scope of Estate Taxation
5. The composition and valuation of gross estate
• Composition of Gross Estate

• Valuation of Gross Estate RESOURCES NEEDED

For this lesson, you would need the following resources:

• Business and Transfer Taxation 2019 by Rex B. Banggawan
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 Succession and Estate Taxation• NU LAGUNA TABLE OF CONTENTS

Questions for Review and

Discussion

Accountant’s Word Hunt

Succession and Estate

Before you start, try answering the following questions. Taxation

1. Describe the scope and nature of succession

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______________________________________________________ 12 Test Yourself
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2. Enumerate the kinds of successions

______________________________________________________ 14 References
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3. Describe the types of heirs and it legitime

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4. Enumerate and describe the composition of gross estate

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5. Describe the methods of valuation of items of gross estate

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Target Co

sting
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 Succession and Estate Taxation• NU LAGUNA

Succession & Estate

Tax

The lessons covers an overview and

basic introduction of the Law on
succession under the New Civil
code such as concept of succession,
modes of transmission of property,
compulsory heirs and legitime.
It further describes the nature and
scope of estate taxation, the
composition of gross estate and
its proper valuation.

r on the

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Succession and Estate Taxation• NU LAGUNA

Accountant’s Word Hunt

Find accounting words as much as you can. You can choose any
letters inside the box but you can only use it once. The student who
has the most points will have special reward. Write your answer on
the right side of the paper.

V A L U E A D D E D C T

U A N N A I C I U N T G

O U T P U T T A X G I G

N A N A A A O O U O A I

I N P U T V A T E T T R

B O C A V C H S J V N S

F I E E D D I E O C T L

Z E R O R A T E D D L M

M B N C F D C T K R E B

V A T E X E M P T A L S

L W X L R V O S T T T N

T A X C R E D I T N A E

V A T P A Y A B L E N H

B D S J G N C T C K S T

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 Estate Taxation • NU LAGUNA

Succession and Estate Taxation

SUCCESSION

SUCCESSION – GENERAL PROVISIONS

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 (NCC, Art. 774).

Requisites of succession (DATE)

1. Death of decedent;
2. Acceptance of the inheritance by the successor;
3. Transmissible estate; and
4. Existence and capacity of successor, designated by decedent or law.

A decedent is a person whose property is transmitted through succession whether or not he

left a will. If the decedent left a will, he is also called a testator (NCC, Art. 775). Inheritance includes
all the property, rights and obligations of a person which are not extinguished by his death (NCC, Art.
776).

The inheritance of a person includes not only the property and the transmissible rights and
obligations existing at the time of his death, but also those which have accrued thereto since the
opening of the succession (NCC, Art. 781). Purely personal rights are extinguished by death. Hence,
they are not transmitted to the heirs. The heirs succeed not only to the rights of the deceased but
also to his obligations.

SUCCESSION OCCURS AT THE MOMENT OF DEATH

The rights to the succession are transmitted from the moment of the death of the decedent (NCC,
Art.777). (2000 BAR) The moment of death is the determining point when the heirs acquire a definite
right to the inheritance, whether such right is pure or conditional. The possession of hereditary
property is therefore deemed transmitted to the heir without interruption and from the moment of
death of the decedent.

The interest of the heir over the inheritance prior to the death of the decedent is merely inchoate or
a mere expectancy. It is immaterial whether a short or long period of time elapses between the
death of the predecessor and the entry in the possession of the properties of the inheritance,
because the right is always deemed to retroact to the moment of death. The law in force at the time
of the decedent’s death will determine who the heirs should be (Uson v. Del Rosario, G.R. No. L-
4963, January 29, 1953).

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 Estate Taxation • NU LAGUNA
KINDS OF SUCCESSION AND SUCCESSORS
Kinds of succession
a. Testamentary Succession - that which results from the designation of an heir, made in
a will executed in the form prescribed by law (NCC, Art. 779).

b. Legal or Intestate Succession - that which takes place if a person dies without a will, or
with a void will, or one which has subsequently lost its validity.

c. Mixed Succession - that effected partly by will and partly by operation of law (NCC, Art.
780).

KINDS OF HEIRS
1. Voluntary or Testamentary Heirs – called to succeed by virtue of the will of the testator:
a. Devisee - persons to whom gifts of real property are given by virtue of a will
b. Legatee - persons to whom gifts of personal property are given by virtue of a will

NOTE: An heir is one who succeeds to the whole (universal) or aliquot part of the estate.
Devisee or legatee is one who succeeds to definite, specific, and individualized properties.

2. Compulsory Heir – called by law to succeed to a portion of the testator’s estate known as
legitime. They succeed by force of law to some portion of the inheritance, in an amount
predetermined by law, of which they cannot be deprived by the testator, except by a valid
disinheritance.

3. Legal or Intestate Heir – those who succeed by operation of law through intestate succession.
Those who succeed to the estate of the decedent who dies without a valid will, or to the portion of
such estate not disposed of by will.

TESTAMENTARY SUCCESSION
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 his estate, to take effect after his death (NCC, Art. 783). A
will has been defined as “a personal, solemn, revocable and free act by which a capacitated person
disposes of his property and rights and declares or complies with duties to take effect after his
death” (Vitug v. Court of Appeals, G.R. No.82027, March 29, 1990).

HOLOGRAPHIC WILLS
A holographic will is one entirely written, dated, and signed by the hand of the testator himself. It
is subject to no other form, and may be made in or out of the Philippines, and need not be
witnessed (NCC, Art. 810)

CODICILS
A codicil is a supplement or addition to a will, made after the execution of a will and annexed to
be taken as part thereof, by which any disposition made in the original will is explained, added to,
or altered (NCC, Art. 825).

The formalities which are required in the execution of the codicil are the same as those required in
the execution of the will.

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 Estate Taxation • NU LAGUNA
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. (NCC, Art. 886). (2003
BAR). It is mandatory on the part of the testator to reserve that part of the estate to the legitime.

Determination of the Legitime

To determine the legitime, the value of the property left at the death of the testator shall be
considered, deducting all debts and charges, which shall not include those imposed in the will.
Donations given to children shall be charged to the legitime (NCC, Art. 908).

Kinds of Legitime
1. Fixed – If the amount (fractional part) does not vary or change regardless of
whether there are concurring compulsory heirs or not.

a. legitimate children and descendants (legitimate children’s legitime is

always ½) (2003, 2005, 2010 BAR)

b. legitimate parents and ascendants (When there are no legitimate

Children and descendants [NCC, Art. 887 (1)].

2. Variable – If the amount changes or varies in accordance with whom the

compulsory heir concur.

COMPULSORY HEIRS
The following are Compulsory Heirs (2003,2005, 2006, 2008 BAR)
1. Legitimate children and descendants, with respect to their legitimate parents and
ascendants;
2. In default of the foregoing, legitimate parents and ascendants, with respect to their
legitimate children and descendants;
3. The widow or widower;
4. Acknowledged natural children, and natural children by legal fiction;
5. Other illegitimate children referred to in Article 287.

Compulsory heirs mentioned in Nos. 3, 4, and 5 are not excluded by those in Nos. 1 and 2;
neither do they exclude one another.

In all cases of illegitimate children, their filiation must be duly proved.

The father or mother of illegitimate children of the three classes mentioned shall inherit
from them in the manner and to the extent established by this Code (NCC, Art. 887).

Classifications of Compulsory Heirs

1. Primary – They are not excluded by the presence of other compulsory heirs and have
precedence over and exclude other compulsory heirs. E.g. legitimate children and / or
descendants.

2. Secondary – Those who succeed only in default of the primary compulsory heirs. E.g.
legitimate parents and/ or legitimate ascendants; illegitimate parents.

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 Estate Taxation • NU LAGUNA

3. Concurring – Those who succeed together with the primary or secondary compulsory
heirs. e.g. Surviving spouse and illegitimate children and descendants.

LEGAL OR INTESTATE SUCCESSION

Legal or intestate succession is that which is effected by operation of law in default of a will.
It is legal because it takes place by operation of law; it is intestate because it takes place in the
absence or in default of a last will of the decedent.

Application of inheritance
The following are applied successively (ISRAI):
1. Institution of an heir (Bequest, in case of legacies or devises)
2. Substitution, if proper
3. Representation, if applicable
4. Accretion, if applicable
5. Intestacy, if all of the above are not applicable

Legal or Intestate succession takes place when:

1. There is no will; the will is void, or the will is revoked;

2. The will does not dispose all the property of the testator (partial intestacy);
3. The suspensive condition attached to the inheritance is not fulfilled;
4. The heir predeceased the testator or repudiates the inheritance and no substitution
and no right of accretion take place.
5. The heir instituted is incapacitated to succeed.

NOTE: The enumeration is not exclusive; there are other causes for intestacy which are
not included in the enumeration.

ESTATE TAXATION
SECTION 1. SCOPE. – Pursuant to the provisions of Sec. 244 of the National Internal Revenue
Code of 1997, as amended (NIRC), and Sec. 84 of Republic Act No. 10963, otherwise known as the
“Tax Reform for Acceleration and Inclusion (TRAIN) Law”, these Regulations are hereby issued to
consolidate the rules governing the imposition and payment of the estate and donor’s tax
incorporating the provisions of the TRAIN Law, particularly the provisions in Chapters I and II of
Title III of the NIRC, thereby repealing Revenue Regulations (RR) No. 2- 2003, as amended.

SEC. 2. RATE OF ESTATE TAX. – The net estate of every decedent, whether resident or non-
resident of the Philippines, as determined in accordance with the NIRC, shall be subject to an
estate tax at the rate of six percent (6%).

SEC. 3. THE LAW THAT GOVERNS THE IMPOSITION OF ESTATE TAX. –

It is a well-settled rule that estate taxation is governed by the statute in force at the time of death
of the decedent. The estate tax accrues as of the death of the decedent and the accrual of the tax
is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes
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 Estate Taxation • NU LAGUNA
place and the right of the State to tax the privilege to transmit the estate vests instantly upon
death.

Accordingly, the tax rates and procedures prescribed under these Regulations shall govern the
estate of decedent who died on or after the effectivity date of the TRAIN Law.

SEC. 4. COMPOSITION OF THE GROSS ESTATE. – The gross estate of a decedent shall be
comprised of the following properties and interest therein at the time of his/her death, including
revocable transfers and transfers for insufficient consideration, etc.:

1. Residents and citizens – all properties, real or personal, tangible or intangible, wherever
situated.

2. Non-resident aliens – only properties situated in the Philippines provided, that, with respect to
intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity
provided for under Section 104 of the NIRC.

Provided, That amounts withdrawn from the deposit accounts of a decedent subjected to the 6%
final withholding tax imposed under Section 97 of the NIRC, shall be excluded from the gross
estate for purposes of computing the estate tax.

SEC. 5. VALUATION OF THE GROSS ESTATE. – The properties comprising the gross estate shall
be valued according to their fair market value as of the time of decedent’s death.

If the property is a real property, the appraised value thereof as of the time of death shall be,
whichever is the higher of –

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

(2)The fair market value as shown in the schedule of values fixed by the provincial and city
assessors, whichever is higher.

For purposes of prescribing real property values, the Commissioner is authorized to divide the
Philippines into different zones or areas and shall, upon consultation with competent appraisers,
both from the private and public sectors, determine the fair market value of real properties located
in each zone or area.

In the case of shares of stocks, the fair market value shall depend on whether the shares are listed
or unlisted in the stock exchanges. Unlisted common shares are valued based on their book value
while unlisted preferred shares are valued at par value. In determining the book value of common
shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares,
if there are any. On this note, the valuation of unlisted shares shall be exempt from the provisions
of RR No. 06-2013, as amended.

For shares which are listed in the stock exchanges, the fair market value shall be the arithmetic
mean between the highest and lowest quotation at a date nearest the date of death, if none is
available on the date of death itself.

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 Estate Taxation • NU LAGUNA

The fair market value of units of participation in any association, recreation or amusement club
(such as golf, polo, or similar clubs), shall be the bid price nearest the date of death published in
any newspaper or publication of general circulation.

To determine the value of the right to usufruct, use or habitation, as well as that of annuity, there
shall be taken into account the probable life of the beneficiary in accordance with the latest basic
standard mortality table, to be approved by the Secretary of Finance, upon recommendation of
the Insurance Commissioner.

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Succession and Estate Taxation • NU LAGUNA

Choose the best answer

Test yourself

TRUE OR FALSE (Chapter 12, TF 2)

1 Transfer tax is intended to recoup future reduction in business

tax.
2 Transfer tax can be viewed as a mode of redistribution of
wealth to society
3 The dominant view of transfer tax is the ability to pay theory
4 Transfer tax is a tax on the privilege to transfer property
gratuitously.
5 Transfer taxes are national taxes.
6 Transfer tax is a form of specific tax.
7 Transfer tax is an indirect tax.
8 Transfer tax is a revenue tax.
9 Transfer taxpayers are classified into two groups, ie.,
residents and non-residents.
10 Non-resident aliens are subject to tax only on transfers of
Philippine properties.
11 Citizens are subject to tax on transfers of properties
regardless of location.
12 Aliens are subject to tax only on transfer of properties
situated in the Philippines
13 Residents are subject to tax on transfers of properties
regardless of location.
14 Non-residents are taxed only on transfer of property located
in the Philippines.
15 The reciprocity rule on intangible personal property applies
only to non-resident aliens.

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Succession and Estate Taxation • NU LAGUNA

TRUE OR FALSE (Chapter 13-A, TF1)

1 The list of properties of the decedent existing at the point of

death must be established in determining gross estate.
2 Gross estate consists of all real properties and tangible
personal properties wherever situated, at the point of death.
3 The gross estate of a non-resident citizen includes tangible
properties wherever situated.
4 The gross estate of a non-resident alien includes only tangible
properties situated in the Philippines.
5 The gross estate of a resident alien includes only real
properties wherever situated.
6 The list of properties of the decedent must be counted at the
date of death.
7 Properties owned by the decedent which are exempted by
law are initially included in the gross estate, but are removed
by way of deduction from gross estate.
8 Properties not owned by the decedent may be included in the
gross income.
9 Taxable transfers consists of properties passed to other
persons before death but are still owned by the decedent at
the point of death.
10 The motives of the donation shall be the basis of its taxation.
11 Properties are valued at the higher of the fair value and
acquisition cost.
12 Newly-acquired properties are valued at acquisition cost.
13 Where the law or regulations do not prescribe for fair value
rules, fair value rules of generally accepted accounting
principles may be sought.
14 Listed stocks are valued at their par value.
15 Non-listed common stocks are valued at their book value.

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Succession and Estate Taxation • NU LAGUNA

Reference

Books and Journals

Valencia, Edwin G. (2018). Transfer and Business Taxation: Principles and Laws with Accounting
Applications

Tabag, Enrico D. & Garcia, Earl Jimson. (2018).Transfer and Business Taxation

Valencia, Edwin G. and Roxas, Gregorio F. (2018). Transfer and Business Taxation: Principles and Laws
with Accounting Applications 7th ed.

Banggawan, Rex B. (2019). Business and Transfer Taxation: Laws Principles and Applications/ 2017 ed.

Reyes, Virgilio. (2018). Philippine Transfer and Business Taxation/ c2018

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