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Chapter 13 —The Concept of Succession and Estate Tax CHAPTER 13THE CONCEPT OF SUCCESSION & ESTATE TAXChapter Overview and Objecives This chapter discusses only the basic rules of succession and provides an introducion to estate tax. Ater this chapter. readers are expected to understand: The ...

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Chapter 13 —The Concept of Succession and Estate Tax CHAPTER 13

THE CONCEPT OF SUCCESSION & ESTATE TAX

Chapter Overview and Objectives This chapter discusses only the basic rules of succession and provides an introduction to estate tax. After this chapter. readers are expected to understand: The concept of succession The types and elements of succession The nature of estate tax The types of decedents and their taxation rules The model of estate taxation

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). The inheritance includes all the property, rights and obligations of a person which are not extinguished by his death (Art 776, Ibid.). The rights to the succession are transmitted from the moment of the death of the decedent (Art 777, Ibid.). The decedent is a deceased or dead person.

TYPES OF SUCCESSION 1. Testate or Testamentary Succession Testamentary succession is that which results from the designation "fan heir. made in a will executed in the form prescribed by law. (Art 779 Civil code)

A person can specify the recipient of his properties upon death. This designation must be made through a written document called last will and testament. A person who died with a will is said to be •testate' A person who died with a written will is called a "testator-.

2. Legal or Intestate Succession When a decedent dies without a wili or with an invalid one. the distribution of the estate shall be in accordance with the default provision of the Civil Code on succession.

3. Mixed Succession Transmission of the decedent properties shall be partly by virtue of a written will and partly by operation of law.

Will 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 this estate, to take effect after his death (Art. 783, Ibid). A will is an expression of the decedent's desire as to how his properties will be distributed after his or her death. The making of a will is a strictly personal act; it cannot be left in whole or in part of the discretion of a third person, or accomplished through the instrumentality of an agent or attorney. (Art 784, Ibid.)

Types Of will 1. Holographic will — a will which is entirely written, dated, and signed by the hand of the testator himself 2. Notarial will — a notarized will signed by the decedentandwitnesses 3. Codicil — a 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 (Art 825 Ibid) Every will must be acknowledged before a notary public by the testator and the witnesses. A holographic will need not be witnessed. A codicil needs to be executed as in the case of a will to be valid.

NATURE OF SUCCESSION SUCcession is a gratuitous transmission Of property from a deceased person in favor of his successors. SUccession involves only the net properties of the decedent. The heirs will inherit what remains of the decedent's property after satisfying the decedent's indebtedness and obligations including the estate tax. The heirs shall not inherit the debt of the decedent.

ELEMENTS OF SUCCESSION 1. Decedent - the general term applied to the 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 (Art. 775, Ibid.). 2. Estate - the property. rights and obligations of the decedent not extinguished by his death. This is also referred to as the - inheritance- of the decedent 3. Heirs-a person called to the succession either by the provision of a or by operation of law (Art. 782, Ibid.).

WHO ARE THE HEIRS? Heirs under intestate succession In intestate succession, the heirs shall be the following in descending order of priority: 1. Compulsory heirs 2. Relatives up to fifth degree of consanguinity 3. Republic of the Philippines The law identified certain persons which it designated as -compulsory heirs' These are the persons who will inherit the estate by default. Only by their absence shall the estate be partitioned to other relatives. In the absence of relatives, the estate will go the government.

Types of compulsory heirs 1. Primary heirs: Legitimate children and their direct descendants

2. Secondary heirs: Legitimate/illegitimate parents and ascendants 3. Concurring heirs: The surviving spouse and illegitimate descendants

Definition ofterms 1. Legitimate children are those born out of a legal marriage. 2. Direct descendants refer to children or. in their absence. grandchildren. 3. Legitimate parents refer to biological parents. 4 Illegitimate parents are adopting parents to an adopted child. 5. The surviving spouse is the widow or widower of the decedent. 6. Illegitimate descendants are illegitimate children.

Note: Under the Revised Family Code. adoptive parenb can now quaii$• as secondary heirs sharirw 50:50 with biological parents The secondary compulsory heirs shall inherit only in default of the primary heirs. Normally. only the primary heirs and concurring heirs share in the hereditary estate. In the absence of primary heirs, the secondary heirs and concurring heirs shall share in the hereditary estate.

In the absence of compulsory heirs. the following shall inherit in the following order of priority: 1. Collateral relatives up to the fifth degree of consanguinity 2. The Philipptne government

Illustration 1 Mr. X died. He was survived by his wife and four children. Mr. X has two brothers and one surviving parent.

The compulsory heirs are: a. Mrs. X b. The four children

The surviving parent (secondary heirs) of Mr. X will not inherit because there are descendants (i.e., four children).

Illustration 2 Ms. X died single and without a child. MS. X's parents, three brothers. and two sisters were her surviving relatives. The compulsory heirs are Ms. X's parents. The collateral relatives (brothers and sisters) cannot inherit since there are compulsory heirs

Illustration 3 Mr. Y died a bachelor. He had no child. His parents were all dead long before his death. He only had a brother and a sister. a first cousin. and a second cousin. Since there is no compulsory heir, the brother and sister in the collateral line shall inherit Without them. thefirst cousin shall inherit Assuming further that only the second cousin is living. the government shall inherit the estate. Succession in the collateral line cannot extend to the second cousin because he/she is beyond the fifth degree ofconsanguinity.

Basic Intestate Partition Procedures 1. The decedent and the surviving spouse shall first share in their common properties. The common properties net of expenses and obligations chargeable to the common properties of the spouses is divided between the decedent and the surviving spouse. 2. Determination of the decedent's net interest. The decedent's net interest comprising Of the following is computed: Exclusive property of the decedent Share of the decedent in the net common properties

3. Partition of the decedent's net interest to the heirs: a. Surviving spouse

b . Legitimate children c. Illegitimate children

In testamentary succession, the heirs shall be the following: Compulsory heirs Other persons specified by the decedent in his will

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 (Art 886, Ibid). The excess properties f the decedent is called "free portion e. By means of a last will and testament. a testator designate the free portion of his estate for additional heirs irrespective of their relationship to him but he cannot exclude or disinherit compulsory heirs without a valid basis under the law.

Disinheritance and Repudiation A decedent can actually disinherit an heir on certain grounds. Similarly, heirs may repudiate their share in the inheritance of the decedent. The rules on legitime, free portion, disinheritance of an heir or repudiation of inheritance are matters of law which are irrelevant to estate taxation. Hence. these topics will not be emphasized in our discussion. Readers with particular interest in these matters are advised to consult Title IV ofBook Ill ofthe Civil Code. The determination of the estate tax does not require prior identification of the heirs. Once a person is dead, the estate of the decedent is simply determined and reduced by deductions allowed by law. Then. the estate tax is computed out of the net estate. Neither does the validity or invalidity of the decedent's will nor the absence of an heir affect estate taxation. In fact the estate tax is due even if the decedent does not have relatives who will inherit the property.

Furthermore, the determination of the share Of each heir in the distributable estate is done only after all charges to the hereditary estate. including estate tax. had been deducted.

Other persons in succession 1. Legatee - a person whom gifts of personal property is given by virtue of 2. Devisee - a persm whom gifts of real property is given by virtue of a will tors 3. Executors - a person named by the decedent who shall carry out the pkovisions of his will 4. Administrators - a person appointed by the court to manage the disp•ibution of the estate of the decedent

ESTATE TAXATION Estate taxation pertains to the taxation of the gratuitous transfer Of properties pf the decedent to the heirs upon the decedent's death. Estate taxatiG1 is governed by the law in force at the time of the decedenes death. The estate tax accrues as of the decedenes death and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death.

NATURE OF ESTATE TAX 1. Excise tax- estate tax is not a tax on the property but on the privilege to transfer propero• through death 2. Revenue orgeneral tax — estate tax is intended as a revenue or fiscal measure 3. Advalorem tax— estate tax is dependent upon the value ofthe estate 4. National tax — estate tax is imposed by the national government 5. Proportional tax- estate tax is imposed as on the net estate 6. One-time tax - estate tax applies to a person only once ina lifetime

Classification of Decedents for Taxation Purposes 1. Resident or Citizen Decedents— taxable on properties located within or outside the Philippines

2. Non-resident Alien Decedents- taxable only on properties located in the Philippines. except intangible rrrsonal property when the reciprocity rule applies

"Gross Estate" pertains to the totality of the properties by the decedent at the point of his death.

There are two concepts to be discussed under gross estate: 1. Exclusions in gross estate - those properties or transfers cluded bylaw from estate taxation 2. Inclusions in gross estate — those properties which includedas part ofthe taxable gross estate

The concept of gross estate will be extensively discuss 13.A and 13-B.

"Deductions" generally pertain to reductions in the i"heritance of the heirs such as obligations of the decedent. and losses of property during administration, but also include exemptions from the estate tax under the law. Deductions are extensively discussed in Chapter 14.

"Net taxable estate" is the net properties of the decedent after all pertinent deductions allowable by law that is subject to tax. Note that the net taxable estate is not equivalent to the hereditary estate before estate tax because Of exclusions, exemption rules and deduction criteria imposed by the law. The determination of estate tax. including other pertinent tax reportorial requirements, are extensively discussed in Chapter 15....