03 Co Ownership Estates Trusts PDF

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PART 3

Co-ownership, Estates and Trusts

I.

CO-OWNERSHIP Co-ownership occurs when two or more heirs inherit an undivided property from a decedent, or a donor makes a gift of an undivided property in favor of two or more donees. GENERAL RULE: A Co-ownership is exempt from income tax. The income of the Coownership will be taxable (basic tax) to the co-owners in their respective capacities,

1)

2) 3)

4)

II.

EXCEPTION: The following are the instances when the co-ownership may become an unregistered general co-partnership and therefore becomes a taxable corporation: Co-owners appoint an administrator who manages the affairs of the co ownership by making investments therein from which profits are realized. This applies even if there is already a partition ordered by the court should the joint management be given to one of the co-owners. The co-owners used the common properties and/or income derived therefrom as a common fund with intent to make profits, When the property remained undivided for more than ten (10) years and no attempt was ever made to divide the same among the co-heirs, nor was the property under administration proceedings nor held in trust. In all other instances when the co-ownership activities are already beyond mere preservation of the co-owned property, ESTATES AND TRUSTS The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of individuals.

However, the following additional deductions shall be allowed: 1) The amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries; and 2) The amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct. 3) Basic exemption of P20,000 (Prior to effectively of TRAIN Law only)

NOTE: 1) The above additional deductions allowed shall be taxable (basic tax) to the beneficiaries. 2) In case of a trust administered in a foreign country: a. The above mentioned additional deductions is not allowed; b. The income distributed to beneficiaries is not deductible.  ESTATE JUDICIAL VS JUDICIAL

EXTRAJUDICIAL SETTLEMENT EXTRAJUDICIAL

Taxable as a separate entity

Net taxable as a separate entity. The income of the estate is to be declared by the Beneficiaries.

Fiduciary/trustee files the ITR and pays the tax thereon.

Heir and beneficiaries file the ITR of the estate and pay the tax due thereon

Shown below to the pro-forma computation of the taxable income of the estate and the heirs/beneficiaries TAXABLE INCOME OF THE ESTATE GROSS INCOME OF THE ESTATE Less: Deductions Expense Special Deduction: Distribution of year's income to the beneficiaries Personal exemption (before 2018 only) Taxable income of the Estate Tax Due (Section 24 A), as amended)

Pxxx Pxxx xxx 20,000

xxx Pxxx Pxxx

Taxable income of the Beneficiary Compensation income, if any Gross income from business or practice of profession Add: Amount received from the estate's income during the year Less: Business expenses Pxxx Basic personal exemption (before 2018 only) 50,000 Additional exemption (before 2018 only) xxx Health and/or hospitalization

Pxxx xxx

Insurance premium (before 2018 only) Taxable income of the Beneficiary Tax Due [Section 24(A), as amended]

 TRUSTS KINDS  Irrevocable Trust

xxx

(xxx) Pxxx Pxxx

TAXATION Taxable as a separate entity



Revocable Trust -is a trust where title can revert back to the grantor anytime.

-

Not a taxable as a separate entity



Trust which income is per the benefit and taxed on the GRANTOR

-

The income of the trust is to be declared

Shown below the pro-forma computation of the taxable income of a Trust and a Beneficiary: Gross income of the Trust Pxxx Less: Deductions Business Expense Pxxx Special Deduction Distribution of year's income to the beneficiaries xxx Personal exemption (before 2018 only) 20,000 (xxx) Taxable income of the Trust Pxxx Tax Due Section 24 AL Pxxx Taxable income of the Beneficiary Compensation income, if any Gross income from business or practice of profession Add: Amount received from the trust's income during the year Less: Business expenses Pxxx Basic exemption (before 2018 only) 50,000 Additional exemption (before 2018 only) xxx Health and/or hospitalization insurance premium (before 2018 only) xxx Taxable income of the Beneficiary

Pxxx

xxx

(xxx) Pxxx

Tax Due [Section 24(A)]

Pxxx

CONSOLIDATION OF TWO OR MORE TRUSTS REQUISITES FOR CONSOLIDATION: 1) There are two or more trusts which derive income: 2) The creator of the trust in each instance is the same person, and the beneficiary in each instance is the same.

QUIZZER Choose the letter of the correct answer. 1.It arises as when two or more heirs or beneficiaries inherit and undivided property from a decedent, or when a donor makes a gift of an undivided property in favour of two or more donees a. partnership c. Joint Account b. Trust d. Co-ownership  Answer: D 2.When will an inherited property be considered as owned by an unregistered partnership? I. When the property remained undivided for more than ten (10) years. II. When no attempt was ever made to divide the same among the co-heirs, nor was the property under administration proceedings nor held in trust a. Only condition I is required, b. Only condition II is required c. Conditions I and II are required d. None of the above  Answer: C Use the following data for the next three (3) questions: Pedro, Juan and Antonio are heirs of Luna who died on November 1, 2017. The properties of Luna comprised solely of real property valued at P50, 000,000 at the time of his death. The property is subject to lease earning rental income. During 2018, the property remained undivided and it derived a net rental income of P15, 000,000. 3. For income tax purposes, the heirs will be tax on net rental income from the inherited property for the year 2018 as: a. Partners in a commercial partnership b. Partners in a general professional partnership c. Partners in an unregistered co-partnership d. Co-owners  Answer: D 4. What amount should be reported as taxable income of the co-ownership in 2018? a. P50,000,000 c. P14,9809,000 b. P15,000,000 d. P0  Answer: D A co-ownership is a non-taxable entity

5. What amount should each heir report in their individual returns as their share in the net rental income of the property they inherited in 2018? a. P50, 000,000 c. P10, 000,000 b. P15, 000,000 d. P5, 000,000  Answer: D Share of each co-owner = P15M/3 = P5,000,000 6. Income received by the estate during the period of administration or settlement of the estate, for tax purposes is known as a. Income of the estate b. Income of the heirs c. Income of the trustee d. Income of the testator  Answer: B 7. Statement 1: For taxation purposes, the taxable income of the estate shall be determined inthe same manner and basis as in the case of individual taxpayers. Statement 2: Prior to the affectivity of the TRAIN Law, the income from the estate is allowed with a personal exemption of P20, 000. a. Statements 1 & 2 are false b. Statement 1 is true but statement 2 is false c. Statement 1 is false but statement 2 is true d. Statements 1 and 2 are true  Answer: D 8. Statement 1: Where the estate is under judicial administration, the income of the estate shall be taxable to the fiduciary or trustee. Statement 2: Where the estate is not under judicial administration, the income of the estate shall be taxable to the heirs and beneficiaries a. Statements 1 & 2 are false b. Statement 1 is true but statement 2 is false c. Statement 1 is false but statement 2 is true d. Statements 1 and 2 are true  Answer: D 9. Statement 1: The amount of income of the estate for the taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, is a special item of deduction from the gross income of the estate.

Statement 2: An allowance paid to a widow or heir out of the corpus of the estate, is not deductible from the gross income of the estate. a. Statements 1 & 2 are false b. Statement 1 is true but statement 2 is false c. Statement 1 is false but statement 2 is true d. Statements 1 and 2 are true Answer: D 10.  Statement 1: When an estate under administration has income purchasing properties the annual income of the estate becomes part of the taxable gross estate.  Statement 2: When an estate under administrative has income purchasing properties and its income during the year is distributed to the heirs as part of the gross income for the year a. Statements 1 & 2 are false b. Statement 1 is true but statement 2 is false c. Statement 1 is false but statement 2 is true d. Statements 1 and 2 are true  Answer: A Annual income of the estate is subject to transfer tax, but not to estate tax (a transfer tax) Inheritance and donation are not classified as income, hence not subject to income tax 11. The following statements refer to the rules in determining the taxable income and the applicable income tax liability of an estate. Which of the statements are correct? I. The items of gross income of the estate are the same items as the items of gross income of individual taxpayers. II. Deductions from the gross income of the estate are the same as the terms of deductions allowed to an individual taxpayer. III. In addition to the allowable deductions under Section 34 of the Tax Code, the estate is allowed to deduct the amount of income of the estate during the taxable year that is paid or credited to the legatee, heir or beneficiary IV. The amount of income of the estate during the year that is paid or credited to the legatee, heir or beneficiary is subject to final withholding tax of 15% a. I and II only b. l, ll and ill only c. I, II, III, and IV d. None of the above  Answer: "B" Item “IV” is false. Income of the estate during the year that is paid or credited to the legatee, heir or beneficiary is subject to creditable withholding tax of 75%, a

final tax 12. Which of the following is included in the income of the estate of a decedent? a. Income received by the estate of a deceased person during the period of administration or settlement of the estate b. Excess of selling price over the appraised value placed upon the property at the time of death, where the property was sold after the settlement of the estate, c. Appreciation in the value of properly passed to the executor or administrator death of decedent. d. Delivery of property in kind to legatee or devisee.  Answer: A Use the following data for the next three (3) questions: Namahinga Nah died leaving an estate worth P10, 000,000. The estate is under administration. In 2017 the properties in the estate earned a gross income of P600, 000 and the estate incurred expenses of P150, 000. Francis one of the heirs, received P100, 000 and P120, 000 from the 2016 and 2017 income of the estate, respectively 13. The income tax payable of estate in 2017 is a. P119.000 c. P68 000 b. P110,000 d. P59,000  Answer: C Gross income OPEX Income of the estate distributed to Francis Personal exemption Estate's taxable net income Income Tax Due (Tax Table prior to 2018) 14.

P500, 000 150,000 (120,000) (20,000) P310, 000 P68, 000

Assume that Francis also earned net income of P500, 000 from his trading business. What amount should Francis report as his taxable income for 2017? a. P620,000 c. P500,000 b. P570, 000 d. P450, 000  Answer: B Gross income Amount received from the Income of the estate Personal exemption Taxable Net income of Francis

15. The income tax payable of estate assuming the taxable year is 2018 a. P16, 000 c. P68, 000 b. P110, 000 d. P59, 000

P 500,000 120,000 (50,000) P570, 000

 Answer: A Gross income OPEX Income of the estate distributed to Francis Personal exemption Estate's taxable Net Income Tax Due (Tax Table-TRAIN Law)

P600, 000 (150,000) (120,000) N/A P330, 000 P16, 000

16. Which of the following statements is not correct? a. An irrevocable trust is subject to income tax b. An irrevocable trust is taxed in the same manner as an individual taxpayer. c. Prior to 2018 taxable year, a taxable trust is allowed to claim personal exemption of P20,000 d. An irrevocable trust is taxed at a rate of 30% of net taxable income  Answer: D 17. Mr. Nag-aalangan created a trust naming his eldest son. Kadudaduda as beneficiary if the eldest son could not abide with the terms provided in the trust instrument. Mr. Nag-aalangan has the power to cancel the trust agreement. For the current taxable year (2018), the trust earned a net income before personal exemptions of P1.000.000. on the other hand, the grantor earned a compensation income of P1,500,000and business income of P1,000,000. The taxable income of the trust is a. P1.000.000 c. P950, 000 b. P980, 000 d. nil  Answer: D If the trust agreement is revocable, its income shall be taxable to the grantor 18. Based on the above data, how much is the taxable income of Mr. Nag-aalangan? a. P3.450.000 c. P2, 450,000 b. P3, 500,000 d. nil

 Answer: B Gross income-trust Compensation income Business income Personal exemption Net Taxable Income-Grantor

P1, 000,000 1,500,000 1,000,000 N/A P3, 500,000

Use the following data for the next two (2) questions:

On January 1, 2018, Binay established a trust fund for the benefit of his comrade, Mar Binay appointed Atty. Digong as the trustee. The property transferred to the trust is a piece of land with a dormitory earning rental income. During the year, the trust earned P40, 000,000 revenues and incurred expenses of P10, 000,000. Out of the trust's income, Atty. Digong gave Mar P10, 000,000 cash. In the same year, Mar earned compensation income of P3, 000,000 19. The taxable income of the trust is a. P30,000,000 c. P19, 980,000 b. P29, 980,000 d. P20, 000,000  Answer: D Solution: Gross income-trust Expenses Income of the trust given to Mar Net Taxable income-trust

P40, 000,000 10,000,000 10,000,000 P20, 000,000

20. The taxable income of Mar is a. P30,000,000 c. P13,000,000 b. P12,950,000 d. P11,450,000  Answer: C Solution: Compensation Income trust Income of the trust distributed to Mar Net Taxable Income trust

P3 000 000 10,000,000 P13.000.000

21. The taxable income of the trust if it is administered abroad is a. P30, 000 000 c. 219,980,000 b. P29, 980,000 d. P21, 480,000  Answer: "A" Solution: Gross income-trust Expenses Income of the trust given to Mar Net Taxable income-trust

P40, 000,000 10,000,000 NA P30, 000,000

In case of a trust administered in a foreign country, the amount of the income of the estate or trust for the taxable year which is distributed currently by the fiduciary to the beneficiaries is not deductible from the gross income of the estate or trust. 22. Based on the preceding number, the taxable income of Mar should be: a. P2, 950,000 c. P11, 500,000 b. P3, 000,000 d. P11, 450,000  Answer: B.

Compensation income only

Use the following data for the next two (3) questions: In 2018, Bongbong Jr. created two (2) trusts for his minor son, Chiz. During the year, the trusts earned net income before exemption as follows: Trust 1 P4,000,000 Trust 2 6,000,000 23. How much is the total income tax payable of the two Trusts? a. P3, 110,000 c. P3,152,200 b. P3, 165,000 d. nil  Answer: A Solution Net income Trust 1 Net income Trust 2 Consolidated Taxable Net Income

P4 000 000 P6, 000,000 P10, 000,000

Consolidated Income Tax Due (TRAIN Law) 1st P8, 000,000 In excess of PBM @ 35% Consolidated Income Tax Due (TRAIN Law) 24. How much is the income tax due of Trust 1? a. P1.263,440 c. P1.244,000 b. P1, 266,000 d. nil  Answer: C Solution Consolidated Income Tax Due ALLOCATION Trust 1=4/10 x P3, 110,000 Trust 2 Taxable net income

P3,110,000 1,244,000 1,866,000 P3,110,000

P2, 410, 000 700,000 P3,110,000

25. How much is the income tax payable by Trust 2? a. P1,895,160 c. P1,891,320 b. P1, 899,000 d. P1, 866,000  Answer: D...