Chapter 13 - The Concept of Succession and Estate Tax PDF

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Succession Is a mode of acquisition by virtue by 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.-The inheritance includes all the property, rights,...

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Chapter 13 - The Concept of Succession and Estate Tax Tuesday, 19 October 2021

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Succession - Is a mode of acquisition by virtue by 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. - The inheritance includes all the property, rights, and obligations of a person which are not extinguished by his death. - The rights of succession are transmitted from the moment of the death of the decedent. - The decedent is a deceased or dead person. Types of Succession 1. Testate or Testamentary Succession - Is that which results from the designation of an heir, made in a will executed in the form prescribed by law. - A person can specify the recipient of his properties upon death. This designation must be made through a written document call last will and testament. - A person who died with a will is said to be the "testate". A person who died with a written will is called a "testator". 2. Legal or Intestate Succession - When a decedent dies without a will 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 - Is an act whereby a person is permitted, with the formalities prescribed by law, to control a certain degree the disposition of this estate, to take affect after his death. - It is an expression of the decedent's desire as to how his properties will be distributed after his or her death. - It is strictly a 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. 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 decedent and witnesses. 3. Codicil - A supplement or addition to a will, made after the execution of a will and annexed to be taken as part thereof, by which disposition made in the original will is explained, added to, or altered. - Every will must be acknowledged before a notary public by the testator and the witnesses. - A holographic will need not to 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 or property from a deceased person in favor of his succession. - 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

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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. 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 will or by operation of law. WHO ARE THE HEIRS? Heirs under intestate succession - The heirs shall be following in the descending order of priority: a. Compulsory Heirs b. Relatives up to fifth degree of consanguinity c. 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 to the government. Types of Compulsory Heirs 1. Primary Heirs - Legitimate children and their direct descendants. 2. Secondary Heirs - Legitimate or illegitimate parents and ascendants. 3. Concurring Heirs - The surviving spouse and illegitimate descendants. Definition of Terms 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. - 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 compulsory heirs, the following shall inherit in the following order of priority: a. Collateral relatives up to the fifth degree of consanguinity b. The Philippine Government - Priority is given to collateral relatives in the closest degree. Summary of Rules: 1. Concurring heirs and a. Descendants, or in their default, b. Ascendants 2. Relatives in the collateral line up to the fifth (5th) degree 3. Republic of the Philippines

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- Succession in the collateral line cannot extend to the second cousin because he/she is beyond the fifth degree of consanguinity.

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: a. Exclusive property of the decedent b. 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 - The surviving spouse and each of the children have one share each. Each illegitimate child is entitled to a half share. Heirs under Testamentary Disposition 1. Compulsory heirs 2. Other persons specified by the decedent in his will 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. The excess properties of the decedent is called "free potion". - By means of a last will and testament, a testator can designate the free portion of his estate for additional heirs irrespective of their relationship to him but he cannot exclude of disinherit compulsory heirs without a valid basis under the law. Disinheritance and Repudiation - A decadent can actually disinherit an heir on certain ground. Similarly, heirs may repudiate their share in the inheritance of the decedent. - The determination of the estate tax does not require prior identification of the heir. Once a person dead, the estate of the decadent is simply determined and reduced by deductions allowed by law.

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- 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. - 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 a will. 2. Devisee- A person whom gifts of real property is given by virtue of a will. 3. Executors - A person named by the decedent who shall carry out the provisions of his will. 4. Administrators - A person appointed by the court to manage the distribution of the estate of the decedent. Estate Taxation - Pertains to the taxation of the gratuitous transfer of properties of the decedent to the heirs upon the decedent's death. - Is governed by the law in force at the time of the decedent's death. The estate tax accrues as of the decedent's death and the accrual of the tax is distinct from the obligations 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 - Tax on the privilege to transfer property through death. 2. Revenue or general tax - Estate tax is intended as a revenue or fiscal measure. 3. Ad Valorem Tax - Estate Tax is dependent upon the value of the estate. 4. National Tax - Estate Tax is imposed by the national government. 5. Proportional Tax - Estate Tax is imposed as 6% on the next estate. 6. One-time Tax - Estate Tax applies to a person only once in a 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 personal property when reciprocity rule applies. The Estate Tax Model

- Gross Estate pertains to the totality of the properties owned by the decedent at the point of his death. - There are two concepts to be discussed under gross estate: a. Exclusions in Gross Estate - Those properties or transfers excluded by law from estate taxation. b. Inclusions in Gross Estate - Those properties which are to be included as part of the taxable gross estate. - Deductions generally pertain to reductions in the inheritance 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. - Net taxable estate is the net properties of the decedent after all pertinent deductions allowable by law that is subject to tax. - Not 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.

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