Lesson 1

Introduction to Transfer Taxes

Transfer Taxes
are excise taxes imposed upon the privilege of gratuitously
transmitting one’s property to another. There are two transfer taxes in
the National Internal Revenue Code, namely:
1. Estate tax – a tax imposed upon the right of transmitting property
at the time of death and the privilege of controlling the
disposition of one’s property to take effect upon death.
2. Donor’s tax – a tax on the privilege of transmitting one’s property
to another during his lifetime without adequate and full valuable
consideration.

Reasons Justifying the Imposition of Estate Tax

1. Benefit-received theory – considers the service rendered by the
government in the distribution of the estate of the decedent,
either by law or in accordance with his wishes. For the performance
of these services and other benefits that accrue to the estate and
the heirs, the State collects the tax.
2. Privilege theory/State partnership theory – inheritance is not a
right but a privilege granted by the state, and large estates have
been acquired only with the protection of the State. Consequently,
the State as a passive and silent partner in the accumulation of
property has the right to collect the share which is properly due
to it.
3. Ability to pay theory – receipt of inheritance which is in the
nature of an unearned wealth or windfall, place assets into the
hands of the heirs and beneficiaries hereby creating an ability to
pay the tax and thus contributes to government income.
4. Redistribution of wealth theory – the receipt of inheritance is a
contributing factor to the inequalities in wealth and incomes. The
imposition of death tax reduces the property received by the
successor, thus helping bring about a more equitable distribution
of wealth in society.

Succession (Art. 774, Civil Code of the Philippines)

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.

Elements of succession
1. Decedent – a 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.
2. Heir – a person called to the succession either by the provision of
a will or by operation of law. (Or successor is the person to whom
the estate is to be transferred.)
3. Estate – refers to all the property, rights and obligations of a
person which are not extinguished by his death. (A bulk of property
left behind by the decedent.)
NOTE: The rights to the succession are transmitted from the moment of the
death of the decedent.

Things transmissible in succession

1. Properties;
2. Rights;
3. Obligations, to the extent of the value of the inheritance.

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Introduction to Transfer Taxes
Kinds of succession
1. Testamentary – a succession which results from the designation of
an heir, made in a will executed in the form prescribed by law.
2. Legal or intestate – a transmission of properties where there is no
will or if there is a will, the same is void or nobody succeeds in
the will.
3. Mixed – a transmission of properties which is effected partly by
will and party by operation of law.

Kinds of successors in a testamentary succession

1. Devisee – a person to whom gifts of real property are given by
virtue of a will.
2. Legatee – a person to whom gifts of personal property are given by
virtue of a will.
NOTE:
 Devise – the gift of real property by will.
 Legacy – a gift of personal property or money to a beneficiary
(legatee) of a will

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.

Codicil
is 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.

Kinds of last will and testament

1. Holographic will – a will 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.
2. Non-holographic will – a will that is created for the testator by a
third party, usually his lawyer, follows proper form, signed and
dated in front of the required number of witnesses and acknowledged
by the presence of a notary public. (Notarial will)
NOTE:
 Probate of the last will and testament – special proceeding to
establish the validity of a will. Probate is mandatory, which means
that no will passes either real or personal property unless it is
proved and allowed in a proper court.
 Revocation of will – the testator may revoke his last will and
testament at any time before he dies.

Persons authorized to manage the estate

1. Executor – the person named in a will to administer the estate.
2. Administrator – the person appointed by the court to administer the
estate of someone who died without a will.

Illustration 7
Mr. Osmeña died with a last will and testament. He was survived by his
son and mother. In his last will and testament, he gave one-half of his
properties mentioned in the last will and testament to his son, and one-
half to his mother. After the last will and testament was executed, he
acquired additional properties. What kind of succession is this?

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Introduction to Transfer Taxes
Kinds of heirs
1. Compulsory or forced heir – a person to whom the law reserves a
part of his predecessor’s estate and who would inherit unless
disinherited for serious grounds mentioned in the last will and
testament.
2. Voluntary heir – an heir who inherits because of a last will and
testament, and who would not have inherited without being mentioned
in the last will and testament.
NOTE: An heir called to an inheritance may accept or refuse the
inheritance. Refusal of an inheritance is called repudiation of the
inheritance. The repudiation must be made in a public or authentic
document, or by petition to the court having jurisdiction over the
testamentary or intestate proceedings.

The following are compulsory or forced heirs:

1. Legitimate children and descendants, with respect to their
legitimate parents or ascendants; Including legally adopted and
legitimated children (Primary compulsory heirs)
2. In default of the foregoing, legitimate parents or ascendants, with
respect to their legitimate children and descendants; (secondary
compulsory heirs)
3. Widow or widower; and legitimate surviving spouse (concurring
compulsory heirs)
4. Illegitimate children (concurring compulsory heirs)
NOTE: Primary compulsory heirs” are preferred over secondary heirs, who
receive only in default of the primary. “Concurring compulsory heirs”
generally succeed as compulsory heirs, together with primary or secondary
heirs.

Legitime
is the portion of the decedent's estate which the law reserves to
compulsory heirs.

Free portion
is the portion of the decedent's estate in excess of the legitimes.
The free portion may be given to anybody.
NOTE: The rules on legitimes are not substitutes for testamentary
dispositions. Violations of the rules on legitimes do not make the last
will and testament void. The rules on legitimes are tests only on the
testamentary dispositions. If the testamentary dispositions do not impair
the legitimes, such dispositions must be followed. On the other hand, if
the testamentary dispositions impair the legitimes, the dispositions must
be modified in such a manner that any compulsory heir not mentioned in the
will, or receiving by provisions of the will lesser than his or her
legitime, must be paid his or her legitime in full.

Illustration 8
Mr. Mabini died with a legitimate son, Paulo. In his last will and
testament, he left all his properties worth ₱800,000 to his mother, without
leaving anything to Paulo. What kind of heir is Paulo? Is he entitled to a
legitime? If yes, how much is his share?

Disinheritance of children and descendants

The following shall be sufficient causes for the disinheritance of
children and descendants, legitimate as well as illegitimate: (Art. 919,
Civil Code of the Philippines)
1. When a child or descendant has been found guilty of an attempt
against the life of the testator, his or her spouse, descendants,
or ascendants;
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Introduction to Transfer Taxes
2. When a child or descendant has accused the testator of a crime for
which the law prescribes imprisonment for six years or more, if the
accusation has been found groundless;
3. When a child or descendant has been convicted of adultery or
concubinage with the spouse of the testator;
4. When a child or descendant by fraud, violence, intimidation, or
undue influence causes the testator to make a will or to change one
already made;
5. A refusal without justifiable cause to support the parent or
ascendant who disinherits such child or descendant;
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
interdiction.

Donation
Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another, who accepts it.
(Art. 725, ibid.)

Kinds of donations
1. Donation inter vivos – one made between living persons, and which
is perfected from the moment the donor knows of the acceptance of
the donee. It is subject to donor’s tax. (Donor’s tax or Gift tax)
2. Donation mortis causa – one which is to take effect upon the death
of the donor and therefore, partakes of the nature of testamentary
disposition. It is subject to estate tax. (This is similar to a
transfer in contemplation of death, and in the nature of a
testamentary disposition which is subject to estate tax, not to
gift tax.)

Persons who may give or receive a donation

1. All persons who may contract and dispose of their property may make
a donation.
2. Guardians and trustees cannot donate the property entrusted to
them.
3. The donor's capacity shall be determined as of the time of the
making of the donation.
4. All those who are not specially disqualified by law therefor may
accept donations.
5. The following donations shall be void:
a. Those made between persons who were guilty of adultery or
concubinage at the time of the donation;
b. Those made between persons found guilty of the same criminal
offense, in consideration thereof;
c. Those made to a public officer or his wife, descendants and
ascendants, by reason of his office.
NOTE:
 The donation of a movable may be made orally or in writing. An oral
donation requires the simultaneous delivery of the thing or of the
document representing the right donated.
 If the value of the personal property donated exceeds five thousand
pesos (₱5,000), the donation and the acceptance shall be made in
writing, otherwise, the donation shall be void.
 In order that the donation of an immovable may be valid, it must be
made in a public document, specifying therein the property donated
and the value of the charges which the donee must satisfy.
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Introduction to Transfer Taxes
 The acceptance may be made in the same deed of donation or in a
separate public document, but it shall not take effect unless it is
done during the lifetime of the donor.
 If the acceptance is made in a separate instrument, the donor shall
be notified thereof in an authentic form, and this step shall be
noted in both instruments.
 Donation or gift; there is no monetary consideration received by the
donor.

Limitations
1. The donations may comprehend all the present property of the donor,
or part thereof, provided he reserves, in full ownership or in
usufruct, sufficient means for the support of himself, and of all
relatives who, at the time of the acceptance of the donation, are
by law entitled to be supported by the donor. Without such
reservation, the donation shall be reduced in petition of any
person affected.
2. Donations cannot comprehend future property.
3. No person may give or receive, by way of donation, more than he may
give or receive by will.
NOTE: Upon the death of a donor, a donation is theoretically brought back
to the estate. This is called collation. The properties in the estate plus
the donation collated are what the decedent theoretically can dispose of
at death (theoretical estate). If collation results in a finding that
because of the donation the compulsory heirs are receiving less than their
legitimes from the theoretical estate, the donation becomes what is called
inofficious. There is a violation of the rule that a person can give by
way of donation only what he can give by will (meaning out of the free
portion). Such donation shall be reduced so that the legitimes shall be
satisfied. The donee gives back to the estate the excess of the donation
over what is allowed.

Illustration 9
During his lifetime, Jason donated a piece of land to Melanie a
friend. The value of this piece of land at the time of Jason’s death was
₱2,000,000. At death, the properties of Jason, net of liabilities and
charges, amounted to ₱1,000,000. He left a legitimate son. How much is the
net distributable estate? How much is the legitime of the son?

NOTE: Taxpayer in estate tax is the estate of the deceased person;

taxpayer in donor’s tax is the donor

Legitime of the Compulsory Heirs and Shares of Heirs in Intestacy

All Forced Heirs
Survivors Legitimes Intestacy
Legitimate
- First, their
parents/ascendants
legitimes will be
Legitimate
½ satisfied, then
children/descendants
participate in the
Equal to legitime of a
Spouse free portion in the
legitimate child
same free portion
1/2 of legitime of
Illegitimate child as their legitimes.
legitimate child

All Forced Heirs, except legitimate children and/or descendants

Survivors Legitimes Intestacy
Legitimate parents or ascendants 1/2 1/2
Spouse 1/8 1/4

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Introduction to Transfer Taxes
Illegitimate children 1/4 1/4

Legitimate ascendants and spouse

Survivors Legitimes Intestacy
Legitimate ascendants 1/2 1/2
Spouse 1/4 1/2

Spouse and Illegitimate Children

Survivors Legitimes Intestacy
Spouse 1/3 1/2
Illegitimate children 1/3 1/2
Spouse only
Survivors Legitimes Intestacy
Spouse 1/2 1/2

Spouse, brothers and sisters

Survivors Legitimes Intestacy
Spouse 1/2 1/2
Brothers and sisters - 1/2

Brothers and sisters

Survivors Legitimes Intestacy
Brothers and sisters - All

Collateral relatives within the fifth civil degree

Survivors Legitimes Intestacy
Collateral relatives within the fifth civil degree - All

State
Survivors Legitimes Intestacy
State - All
NOTES:
 Legitimate children share equally in their legitime of 1/2 of the
hereditary estate.
 When the spouse survives with one legitimate child only, the legitime
of the spouse is 1/4 of the hereditary estate. If there are several
legitimate children, the legitime of the spouse is equal to the
legitime of a legitimate child.
 When the surviving spouse was married in articulo mortis and the
testator died within three months from the time of marriage, his or
her legitime, if sole compulsory heir, is 1/3 of the hereditary
estate, unless they have been living together as husband and wife for
more than five years, in which case his or her legitime is 1/2 of the
hereditary estate.
 The legitimes of the legitimate children and descendants and that of
surviving spouse take precedence over those of illegitimate children.
If the estate is not sufficient to pay in full the legitimes, the
legitimate children and spouse shall first be paid their legitimes in
full. The balance of the estate shall then be available for legitimes
of the illegitimate children.
 In articulo mortis – at the point of death
 If conjugal property, estate divide by 2 = ½ will go to the surviving
spouse