6. Estate TAX - Lecture notes 1 PDF

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Warning: TT: undefined function: 32ESTATE TAXI. SUCCESSIONSuccession 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 o...

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ESTATE TAX I.

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 of the Philippines) The rights to the succession are transmitted from the moment of the death of the decedent. (Art. 777, supra.) Estate Tax is the tax imposed on the transfer of property from the decedent to the heirs. It is an excise tax on the privilege/right to transfer property gratuitously at the time of death.

Applicable Law: estate taxation is governed by the law in force at the time of death of the decedent. (Sec. 3, RR No. 2-2003) Accordingly, the provisions of the Tax Reform for Acceleration and Inclusion Act (TRAIN) amending pertinent portions of the estate tax would apply only to deaths that occurred January 1, 2018 onwards. For deaths prior to said date, the provisions of the Tax Code before the amendment would apply. Accrual vs. Payment of Tax: the estate tax accrues from the time of death; while payment of the estate tax is at the time the estate tax return is filed, which is 1 year from the date of the decedent’s death (6 months prior to the TRAIN), except in cases when extensions are granted by the Commissioner or when installment payment of the estate tax is allowed. II. GROSS ESTATE KINDS OF DECEDENT FOR ESTATE TAX PURPOSES: 1. Resident and/or citizens:

“Residence” refers to the permanent home, the place to which, whenever absent for business or pleasure, one intends to return, and depends on facts and circumstances, in the sense that they disclose intent. (Lorenzo vs. Posadas, Jr.; GR No. L-43082; June 18, 1937) Rules on Domicile: a. b. c.

A man must have a residence or domicile somewhere; That where once established it remains until a new one is acquired; A man cannot have but one domicile at a time. (Limbona vs. COMELEC, GR No. 181097, June 25, 2008; Ugdoracion vs. COMELEC, GR No. 179851, April 18, 2008)

Acquisition of new domicile; Requisites: a. Residence or bodily presence in the new locality; b. Intention to remain there (animus manendi); and c. Intention to abandon old domicile (animus non-revertendi). (Jalosjos vs. COMELEC, GR No. 193314, Feb. 26, 2013) Note that in income tax, the term “non-resident citizen” includes a citizen who is physically present abroad “most of the time” which is understood to be 183 days. This rule is not applicable to estate taxation. As long as the decedent had the intention of returning to the Philippines (animus revertendi), he/she will be considered resident of the Philippines for estate tax purposes. Resident Aliens: necessary falls within this classification since they are “residents” of the Philippines. But still, the rule is the intention to make the Philippines the domicile and not that for income tax purposes. 2.

Non-resident aliens: are individuals who are not citizens of the Philippines nor residents herein.

Importance of classification: A resident and/or citizen of the Philippines is taxed on his worldwide property, i.e., all real and personal property, wherever situated; while, A non-resident alien is taxable only for his properties within the Philippines.

1. 2.

VALUATION In general, the value of the properties shall be determined as the fair market value at the time of the decedent’s death. Section 88 of the Tax Code, as implemented by RR No. 2-03, as reiterated under RR No. 12-18, prescribes the valuations as follows: 1. Real Property – whichever is higher of the following: a. Fair market value as determined by the Commissioner of Internal Revenue; or b. Fair market value as shown in the schedule of values fixed by the provincial or city assessors. (Sec. 5, RR No. 2-03) Note that fair market values as determined by an Independent Assessor is not an available option and will be used only if both of the above are not available. 2.

Shares of Stock – depending whether: a. Listed or traded in the stock exchange – (1) The quotation available at the date of death; or (2) the arithmetic mean between the highest and lowest quotation at the date nearest the date of death, if none is available on the date itself (Sec. 5, RR No. 2-03); b. Not listed or traded in the stock exchange (1) Common shares - book value for the common shares; (2) Preferred shares – par value. RR No. 6-2013 which requires the use of the Adjusted Net Asset Method for purposes of computing book value per share does NOT apply to estate taxation since it is applicable only for onerous transfers.

3.

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. 4.

Right of 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. (Sec. 5,

RR No. 2-03) PROPERTIES PHYSICALLY IN THE ESTATE These are the properties which are in the name of the decedent at the time of his death. Real properties and tangible personal properties – the location of the properties would be determinative of inclusion in the gross estate. Thus, if the properties are located in the Philippines, they are deemed to be “within the Philippines”; if located not within the Philippines, they are deemed to be properties outside of the Philippines. The location is material since residents and/or citizens are taxable on their worldwide estate regardless of location, but non-resident aliens are taxable only on properties within the Philippines. Intangible personal properties – the following are considered to be intangible personal properties located within the Philippines: (1) (2) (3) (4) (5)

Franchise which must be exercised in the Philippines; Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; Shares, obligations or bonds issued by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; Shares, obligations or bonds issued by any foreign corporation, if such shares, obligations or bonds have acquired a business situs in the Philippines; and Shares or rights in any partnership, business, or industry.

Reciprocity Clause: “no tax shall be collected xxx in respect of intangible 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 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 intangible personal property owned by citizens of the Philippines not residing in that foreign country.” (Sec. 104 of the Tax Code) Applicability: the exemption by virtue of the reciprocity clause applies only to: 1. Estate of Non-Resident Alien Decedents; and 2. Only as to their intangible properties located in the Philippines (note that if the intangible is located in outside the Philippines, it is already excluded in the estate of the non-resident alient with or without a reciprocity clause). Thus, if the decedent is a non-resident alien and the intangible property is located in the Philippines, it wlll still be deemed excluded by virtue of the reciprocity clause.

Donor’s Tax: The reciprocity clause likewise applies to Donor’s Tax. Decedent’s Interest: To the extent of the interest therein of the decedent at the time of his death. (Sec. 85, Tax Code) Joint Account: Interest on a deposit account maintained by two persons is deemed to be equally owned by them for income tax purposes. The same presumption may likewise apply for estate tax purposes, thus, only half of the balance of the deposit should be reported for estate tax purposes pertaining to the decedent. (BIR Ruling No. 023-12) Right to Redeem for a valuable consideration: the right to redeem by the various lot owners, which was assigned in favor of the decedent for a considerable price, and which is the subject of the various deeds of assignment in question is property duly includible in determining the value of the gross estate of the decedent. The value indicated in the deeds of assignment are conclusive on the value of these properties in the determination of his "gross estate" to determine the applicable estate tax on his estate. (BIR Ruling No. 169-98) Foreclosed property forms part of the gross estate of a deceased borrower when he dies prior to the expiration of the redemption period thereof. However, the unpaid mortgage or indebtedness must be deducted from the gross estate for purposes of computing the net estate. (BIR Ruling No. DA-540-04) Transferred real property to a corporation; only the value of the shares of stock will be included: Considering that at the time of death of the decedent, the only property left by the latter consists merely of shares of stock in a corporation to which he had beneficial interest, it is this value of corporate stocks owned by the decedent that should be included in his gross estate for purposes of estate tax. Accordingly, the properties which are now registered in the name of the corporation should now be excluded from his gross estate. (BIR Ruling [DA-091-05] dated March 14, 2005) Dividends already declared prior to decedent’s death: are likewise included in the computation of the gross estate, regardless if they have not been paid yet. PROPERTIES NOT PHYSICALLY IN THE ESTATE: these are properties no longer in the name of the decedent but may still be considered as part of his gross estate: 1. Transfer in Contemplation of Death: To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bonafide sale for an adequate and full consideration in money or money's worth. (Sec. 85, Tax

Code) Transfer in Contemplation of Death covers two types of transfers: a.

Transfer in contemplation of death – the purpose of which is to avoid payment of estate tax on the property;

b.

Transfer to take effect after death or a donation mortis causa where the decedent retained the possession or enjoyment of, or the right to the income from the property, or the right to designate the person who shall possess or enjoy the property or the income therefrom.

Exception: if the transfer was made under a bona fide sale for an adequate and full consideration in money or money’s worth. Survivorship Agreement: Survivorship Agreement executed by the joint depositors of a joint bank/deposit account which expressly stipulates that upon death of any one of the joint depositors, the entire remaining balance of the deposit shall belong to the surviving depositor/s and, in effect, may be forthwith withdrawn by the latter, has an effect of a gift or donation mortis causa made by the deceased co-depositor during his lifetime but effective upon death. The acquisition by the survivor of the share of the decedent in the joint account is considered to be acquired by bequest and hence subject to estate tax as transfer in contemplation of death under Section 85(B) above. (BIR Ruling No. 010-03) 2.

Revocable Transfers

A revocable transfer is one where the terms of enjoyment of the property may be altered, amended, revoked or terminated by the decedent. It is sufficient that the decedent had the power to revoke, though he did not exercise the power to revoke.

Revocable Trust Agreement: In a revocable transfer of property, the property continues to be owned by the transferor during his lifetime notwithstanding the transfer, as he still retains beneficial ownership. The rationale for taxing such transfer in trust at the time of death of the trustor is to reach transfers which are really substitutes for testamentary disposition and thus prevent evasion of estate tax. To be exempt from estate tax, the transfer by inter vivos must be absolute and outright with no strings attached whatsoever by the transferor, which is not the case in a revocable trust agreement. In other words, all properties covered by the Revocable Living Trust Agreement of the spouses shall be considered as forming part of the decedent's gross estate subject to estate tax upon the death of the owner of the property. (BIR Ruling No. 013-05 dated Aug. 16, 2005) 3.

Transfer under a general power of appointment

A power of appointment is the right to designate the person or persons who will succeed to the property of a prior decedent. a. b.

General Power of Appointment – is one which may be exercised in favor of anybody, including the decedent. Special Power of Appointment – is one which may be exercised only in favor of a certain person or persons designated by the prior decedent.

In order that property passing under a power of appointment may be included in the estate of the transferor, the power of appointment must be a general power of appointment. Note that the exemption related to a special power of appointment pertains only to the subsequent transfer, which, in effect, is still the transfer made by the earlier decedent for which the estate tax was already paid. ILLUSTRATION: A died leaving a parcel of land in favor of B under a special power of appointment, where B is required to transfer the same parcel of land to C upon B’s death. • • 4.

The parcel of land will form part of A’s estate Upon the death of B, the parcel of land will be transferred to C, but will not be included in the gross estate of B. Proceeds of Life Insurance

Proceeds of life insurance under policies taken out by the decedent upon his life shall constitute part of the gross estate if the beneficiary is: a. The estate of the decedent, his executor or administrator; b. A third person and the designation of the beneficiary is revocable.

Presumption of revocability: Under the Insurance Code, a designation is revocable, unless stated expressly by the insured, and indicated in the policy, that the designation is irrevocable. Therefore, to be excluded from the gross estate, two things must concur: a. The beneficiary designated is a third person, i.e., NOT the estate, executor or administrator thereof; AND b. The designation is irrevocable.

Life insurance taken by an employer not included: Considering that the insurance policies upon the life of the decedent were taken by his employer for its employees, the proceeds thereof shall not form part of the gross estate of the decedent for the purpose of determining the estate tax due. (BIR Ruling No. DA-396-98) The designation of the beneficiary whether revocable or irrevocable is immaterial. (BIR Ruling DA-[ET-016] 485-09)\ 5.

Claims against insolvent person

Under Sec. 86 of the NIRC, claims against insolvent persons which are not collectible may be considered as deductions from the gross estate. For this to apply, the whole amount of the claim must be included in the gross estate, regardless of collectability, and the amount uncollectible will be considered as a deduction. 6.

Prior Interests

Prior interests are included in the gross estate regardless if it was made, created, arising, existing or exercised before or after the effectivity of the NIRC. (Sec.

85[F]) 7.

Transfers of Insufficient Consideration

Here, the property is no longer included in the gross estate if the transfer was made under a bona fide sale for a consideration in money or money’s worth. However, if the transfer is made for less than the market value of the property, the excess of the fair market value of the property at the time of death over the amount of consideration received is included in the gross estate. (Sec. 85[G])

Steps to be taken: a. Compare the fair market value at the time of transfer to the proceeds thereof; (1) If the proceeds are higher or equal to the fair market value, then there is nothing to include in the gross estate since the transfer is considered as a bona fide sale; (2) If the proceeds are less than the fair market value at the time of transfer, it is considered as a transfer for insufficient consideration. b. If it is considered as a transfer for insufficient consideration, compare the fair market value at the time of death with the proceeds; (1) If the proceeds are less, the difference will be included in the gross estate; (2) If the proceeds are higher, there is nothing to include in the gross estate anymore. 8.

Capital of the Surviving Spouse

For purposes of determining the gross estate, the exclusive property of the surviving spouse is not included. (Sec. 85[H]) EXEMPTIONS The following acquisitions and transmissions will not be subject to the estate tax: a. The merger of usufruct in the owner of the naked title; In this case, the usufruct and the naked title to the property were given to different persons. Upon the death of the usufructuary, the usufruct merges with the naked title. This merger is no longer subject to estate tax since it has already been subjected thereto upon the death of the original owner thereof. b.

The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary; A fideicommissary substitution by virtue of which the fiduciary or first heir instituted is entrusted with the obligation to preserve and to transmit to a second heir the whole or part of the inheritance, shall be valid and shall take effect, provided such substitution does not go beyond one degree from the heir originally instituted, and provided further, that the fiduciary or first heir and the second heir are living at the time of the death of the testator. (Art. 863,

Civil Code) Elements of Fideicommissary Substitution: (1) There is a first heir who is tasked to preserve the property and transmit it to the second heir; (2) There is a second heir to whom the property will be transferred once the right of the first heir expires; (3) The second heir is one degree from the first heir – which can either mean by relationship or by degree of transfer. c.

The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and This is the transfer subject to a special power of appointment and the rules are similar to a fideicommissary substitution. However, the requirement of onedegree transfer is not applicable.

d.

All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which insures to the benefit of any individual: Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes.

Does not include religious institutions: are not included in the above exemptions. Accordingly, it is subject to estate tax. ...