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TAXATION 2 foreign country of which the decedent or donor was a citizen and resident

at the time of his death or donation allows a similar exemption from


transfer or death taxes of every character or description in respect of
Complex Transfer intangible personal property owned by citizens of the Philippines not
More applicable on transfer of shares of stock NOT LISTED AND TRADED residing in that foreign country. ( 104, NIRC)
on the stock exchange; OR LISTED BUT NOT TRADED on the stock
exchange. (For sale of shares of stocks, what usually happens is that the In other words, If the country of the resident alien exempts estate tax of
parties agree that the transfer will be only at par value [the value the citizens of the Philippines in their country then the Philippines will also
appearing in the stocks certificate]) extend such exemptions to the intangible personal property of the alien
who has a situs here in the Philippines.
However, the BIR now strictly implements the ADJUSTED BOOK VALUE
METHOD (looking at the net assets of the corporation) Residents/Citizens NRA without NRA with
Example The assets especially when it involves real property would have Reciprocity Reciprocity
to be adjusted first to its fair market value. Within Without Within Without Within Without
FMV = 1,000,000 PH PH PH PH PH PH
Selling price = 100,000
Gratuitous portion = 900,000 [subject to donors or estate tax] Real YES YES YES NO YES NO

ESTATE TAX Personal YES YES YES NO YES NO


Accrues at the time of the death of the decedent. Tangible

Personal YES YES YES NO NO NO


What will you do next?
Intangible
1. Conduct an inventory of all the properties of the decedent.
2. Settle obligations of the decedent.
Examples of intangible personal properties: shares of stock (stock
3. Subtract the ordinary and extraordinary deductions
certificates are only evidences of ownership), franchises, royalties, bonds,
4. Notify the BIR about the death within 2 months from date of
cash (the bill is basically a representation of the value)
death
5. Pay estate taxes within 6 months from the date of death
Some properties are exempted or excluded from estate taxation perhaps
TN: Surcharges, penalties and interests may be imposed if you
because the decedent DID NOT ACTUALLY OWN the property, i.e. when
were not able to pay taxes within the prescribed period.
the decedent is merely holding it as a trustee, or excluded because it is
provided under special law (proceeds from SSS or GSIS)
GROSS ESTATE
The value of the gross estate of the decedent shall be determined by
EXEMPT TRANSFERS UNDER THE TAX CODE (Section 87):
including the value at the time of his death of all property, real or personal,
tangible or intangible, wherever situated.
Relevant provision
SEC. 87 Exemption of Certain Acquisitions and Transmissions. - The
Provided, a nonresident decedent who at the time of his death was not a
following shall not be taxed:
citizen of the Philippines, only that part of the entire gross estate which is
(A) The merger of usufruct in the owner of the naked title;
situated in the Philippines shall be included in his taxable estate.
(B) The transmission or delivery of the inheritance or legacy by the
1. Properties owned by the decedent whether real or personal,
fiduciary heir or legatee to the fideicommissary;
tangible or intangible, existing at the time of his death
(C) The transmission from the first heir, legatee or donee in favor of
2. Revocable transfers
another beneficiary, in accordance with the desire of the
3. Transfer in contemplation of death
predecessor; and
4. Transfer for insufficient consideration
(D) All bequests, devises, legacies or transfers to social welfare,
5. Property passing under general power of appointment
cultural and charitable institutions, no part of the net income of which
6. Proceeds of life insurance policy payable to a revocable
inures to the benefit of any individual: Provided, however, That not
beneficiary
more than thirty percent (30%) of the said bequests, devises,
legacies or transfers shall be used by such institutions for
administration purposes.
CLASSIFICATION OF TAXPAYERS IN ESTATE TAXATION
1. Resident citizens
2. Non-resident citizens
THE MERGER OF USUFRUCT IN THE OWNER OF THE NAKED TITLE
3. Resident alien
4. Non-resident alien
Usufruct the legal right to use and enjoy the benefits and profits of
property belonging to another.
CLASSIFICATION FOR PURPOSES OF ESTATE TAX
Owner of the Naked Title the person who is vested with the ownership,
1. Residents or citizens
dominion, or title of property under the usufruct agreement. He is not the
a. Resident citizens, nonresident citizens
absolute owner of the property because he has to respect the right of the
b. Resident alien
usufructuary over the fruits and use of the property.
2. Non-resident
a. Non-resident alien
If you are the owner of the naked title, you do not enjoy the benefits out
TN: Subject to reciprocity rule.
of the property transferred under your name.

RECIPROCITY RULE
That no tax shall be collected under this Title in respect of intangible
Illustration
personal property: (a) if the decedent at the time of his death or the donor
at the time of the donation was a citizen and resident of a foreign country
which at the time of his death or donation did not impose a transfer tax
of any character, in respect of intangible personal property of citizens of
the Philippines not residing in that foreign country, or (b) if the laws of the

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X X
(Predecessor) (Predecessor)

estate tax
subject to estate tax

Y Z
Y Z (First Heir) (Second Heir)
(usufructuary) (Owner of the Naked Title) (Trustee) (beneficiary)
Not subject to estate tax

Special Power of Appointment it is specified in the decedents will to


X, in his last will and testament, transferred the possession of his house whom the property will go to. In this case, X, in his will and testament,
and lot to Y (usufructuary), but the title of such properties were specifies that the house and lot will go to Z. However, Y will temporarily
transferred in the name of Z (owner of the naked title). take care of the properties.

Transfer from X (decedent) to Z (owner of the naked title) subject to Here, X appoints Y as the trustee of the house and lot but the beneficiary
estate tax of the house and lot is Z. Z will become the ultimate owner of the house
Transfer from Y (usufructuary) to Z (naked title owner) not subject to and lot. In this case, Y holds the property temporarily. When Y dies, the
estate tax transfer from Y to Z will not be subject to estate tax. In other words, the
property will not form part of the gross estate of Y. However, when X, the
TN: For this exemption to apply, the one who should die first predecessor, died, it formed part of his gross estate.
should be the USUFRUCTUARY (merger of the Usufruct in the
Owner of the naked title). If the naked title owner dies first (merger General Power of Appointment If X did not specify that the house will
of the Owner of the naked title in the Usufruct), this exemption will not go to Z upon Ys death, then thats a general power of appointment. If X
apply. So if Z will die first, the house and lot will go to his heirs. If Y entrusted the house to Y, and Y, upon his death, can appoint anybody
(usufructuary) is Zs (naked title owner) heir, then the merger of the naked to whom the house will belong to. When Y dies, the property will form
owner title to the usufructuary is subject to estate tax. part of the gross estate of Y.

TN: If SPA, the property will not form part of the gross estate of the one
TRANSMISSION OR DELIVERY OF THE INHERITANCE OR LEGACY BY THE being appointed; in this case, Y. If GPA, the property will form part of the
FIDUCIARY HEIR OR LEGATEE TO THE FIDEICOMMISSARY gross estate of the one being appointed.

Illustration The relationship of X and Y is that of trustor-trustee. Their relationship


could also be donor-donee in the case of a conditional donation, the
estate no estate condition being that upon the death of donee (Y), the latter will give the
tax tax property to Z. In a conditional donation, Y will not have absolute title to
X Y Z the property. So there is really no donation that will be subject to transfer
(Predecessor) (Fiduciary (Fideicommissary) tax since there was no transfer of ownership.
Heir)

BEQUESTS, DEVISES, LEGACIES OR TRANSFERS TO SOCIAL WELFARE,


CULTURAL AND CHARITABLE INSTITUTIONS
Fiduciary Heir the first heir of the property who is usually a trustee in
relation to a beneficiary. He is a usufructuary and does not own the What are the 3 requisites in order to consider that non-taxable?
property. 1. Transfer to a social welfare, cultural and charitable institution.
2. No part of the income inures to the benefit of any individual.
Fideicommissary the second heir who is the beneficiary of the 3. Provided that not more than 30% of the said bequests, devises,
property. He is the rightful heir upon reaching the age of majority. His legacies or transfers shall be used for administrative purposes.
relationship to the fiduciary heir must be one degree of generation such
that of a parent and a child or vice versa. He is the owner of the naked
title. PROPERTIES EXEMPTED BECAUSE NOT OWNED BY THE DECEDENT
Proceeds of life insurance policy payable to the beneficiary other than the
TN: There should be one-degree relationship between the fiduciary estate, executor or administrator of the estate.
heir and the fideicommissary. 1. Designation of the beneficiary must be irrevocable
2. Beneficiary must not be the estate, executor or
Reason for the exemption: To prevent double taxation, the second transfer administrator of the estate.
from the fiduciary heir to the fideicommissary should be exempt from
Revocable it can be taken back or that it can be impugned. May be changed or altered.
estate tax, since the first transfer from the predecessor to the fiduciary
Irrevocable it cannot be impugned, it cannot be questioned, it is permanent.
heir was already taxed.
TN: Proceeds of life insurance are received upon the death of the
The fiduciary heir holds the property temporarily while waiting for the
insured.
qualifications of the fideicommissary. Ultimately, the property will go to
the fideicommissary. This usually happens when the fideicommissary is
still a minor.

TRANSMISSION OF PROPERTY FROM THE FIRST HEIR, LEGATEE, OR


DONEE IN FAVOR OF ANOTHER BENEFICIARY, IN ACCORDANCE WITH
THE WILL OF THE PREDECESSOR (TESTAMENTARY)

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Designation Beneficiary

Estate, Executor, Others (Not the


Administrator estate, executor
or administrator)

Revocable include include

Irrevocable include exclude

If your beneficiary is the estate, executor, administrator, and the


designation is revocable, the proceeds form part of the gross estate.

If the beneficiary is the estate and the designation is irrevocable, proceeds


are included in the gross estate because the beneficiary is the very estate;
forms part of the gross estate subject to tax.

TN: Whether revocable or irrevocable, proceeds of life insurance are


included in the gross estate of the decedent.

If the beneficiary is other than the estate, executor, or the administrator,


you will only include the proceeds of the life insurance if the designation
is revocable. In this case, the insured still has the control until his death;
thus, it forms part of his gross estate.

If the beneficiary is irrevocable, decedent did not have control anymore.

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