Chapter 7 Net Taxable Estate PDF

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Net Taxable Estate Rates of Estate Tax There shall be an imposed rate of six percent (6%) based on the value of such NET ESTATE determined as of the time of death of decedent composed of all properties, real or personal, tangible or intangible less allowable deductions. (RA 10963 TRAIN LAW) Reside...

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Chapter 7 Net Taxable Estate 

Rates of Estate Tax There shall be an imposed rate of six percent (6%) based on the value of such NET ESTATE determined as of the time of death of decedent composed of all properties, real or personal, tangible or intangible less allowable deductions. (RA 10963 TRAIN LAW)

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Resident decedent was single at the time of his death Illustration 1 Mr. Ilagan died a head of family, a citizen of the Philippines and a resident of Marikina City. He left the following properties, with their respective fair market values and charges thereon: Piece of land and house thereon (family home) in the Philippines………………………………………………………… Car in the Philippines……………………………………………. Personal properties in the house in Marikina City…………….. Bank deposit in the Philippines…………………………………. Bank deposit in the United States………………………………. Claim against an insolvent person……………………………..

P 6,125,000 375,000 500,000 10,375,000 312,500 62,500

Funeral expenses………………………………………………… Judicial expenses………………………………………………… Claims against the estate…………………………………………

225,000 125,000 375,000

The net taxable estate and the estate tax are computed as follows: Modified Reyes

Answer: Gross estate: Family home in the Philippines…………………………………… Car in the Philippines……………………………………………… Personal properties in Marikina City……………………………… Bank deposit in the Philippines…………………………………… Bank deposit in the United States………………………………… Claim against an insolvent person………………………………. Total……………………………………………………………... Deductions: Ordinary deductions Claims against the estate……………………….. 375,000 Claim against an insolvent person…………….. 62,500 Special deductions Family home(6,125,000 < 10M) ………………. 6,125,000 Standard deduction……………………………… 5,000,000 Total deductions…………………………………………… Net taxable estate…………………………………………………. Estate tax rate Estate tax……………………………………………………………

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6,125,000 375,000 500,000 10,375,000 312,500 62,500 17,750,000

(11,562,500) 6,187,500 6% 371,250

Non-resident alien decedent was single at the time of his death Illustration 2 Mr. Kimmel a citizen and resident of Sydney Australia died leaving properties and obligations in Australia and in the Philippines. Data on his properties and obligations follows: Properties in the Philippines…………………………………….. Properties in Australia……………………………………………. Funeral expenses in Australia………………………………….. Unpaid obligations in Australia………………………………….

P 1,500,000 4,500,000 375,000 1,050,000

The net taxable estate and the estate tax are computed as follows: Modified quizzer R eyes

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Chapter 7 Net Taxable Estate Answer: Gross estate…………………………………………………….. Deductions: Ordinary deductions Unpaid obligations in Australia………………… 1,050,000 Allowable deductions (1.5/6) x P1,050,000 = …………….. Net taxable estate…………………………………………………. Estate tax rate Estate tax……………………………………………………………

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1,500,000

(262,500) 1,237,500 6% 74,250

Property Relations between Spouses The property relationship between husband and wife shall be governed in the following order: (Sec 74 & 75 Family Code of the Philippines) http://w ww.weddingsatwor k.com/culture_la ws_familycode 04.shtml

1. By marriage settlements executed before the marriage; 2. By the provisions of the Family Code; and 3. By the local custom. The future spouses may, in the marriage settlements, agree upon the regimes: 1. Absolute community 2. Conjugal partnership of gains 3. Complete separation of property 4. Any other regime. In the absence of a marriage settlement, or when the regime agreed upon is void, 1. The system of absolute community of property shall govern marriages contracted on or after August 3, 1988, the effectivity of the Family Code of the Philippines (EO No. 209); or 2. The system of conjugal partnership of gains shall govern marriages contracted before August 3, 1988. 

Absolute Community of Property The gross estate of a decedent who was married and under the system of absolute community of property shall consist of: 1. The exclusive properties of the decedent; and 2. The community properties. Table 4-1 Classification of properties under absolute community of property a) Property acquired before the marriage, in general Community b) Property acquired during the marriage, in general Community c) Property acquired by inheritance or gift before the marriage (because of letter a) Community d) Property acquired by inheritance or gift during marriage (Unless letter e) Exclusive e) Property acquired by inheritance or gift during the marriage and the giver stated that the property should be community Community f) The income from property in (letter d) Exclusive g) The income from property in (letter e) Community h) Jewelry, by whom, how, and when acquired does not Community matter i) Clothes of the decedent (exclusive and personal use) Exclusive except jewelry j) Property owned before marriage #2 when there is legitimate descendant of marriage #1 Exclusive k) Property owned before marriage #2 when there is no legitimate descendant of marriage #1 (because of letter a) Community Textbook Reyes

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Chapter 7 Net Taxable Estate The following shall be excluded from the community property: 1. Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property; 2. Property for personal and exclusive use of either spouse, however jewelry shall form part of the community property; 3. Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property. Property acquired during the marriage is presumed to belong to the community; unless it is proved that it is one of those excluded therefrom. Illustration 3 Mr. Trinidad died married, leaving the following properties: Land inherited before the marriage………………………………. Cash income from the land inherited ……………………………. Cash received as gift during the marriage……………………….. Interest income on the cash received as gift……………………. Property unidentified as to when any by whom acquired………. Clothes of the decedent purchased with spouse’s income…….

P 1,900,000 38,000 380,000 14,250 475,000 95,000

How much is the gross estate under the system of absolute community of property? Moditied Te xtbook Reyes

Answer: Gross estate Land……………………………………… Cash income from the land……………. Cash received as gift…………………… Income from the cash received as gift… Unidentified property…………………… Clothes…………………………………… Totals……………………………….

Exclusive

Community

Total GE

1,900,000 38,000 380,000 14,250 475,000 95,000 489,250

2,413,000

2,902,250

Charges and Obligations of the Absolute Community  Debts and obligations which cannot be identified as those of exclusive properties shall be presumed to be community debts and obligations.  Debts and obligations on exclusive properties, which were already charges on the properties at the time they were acquired (e.g., by inheritance or gift), shall continue to be debts and obligations of exclusive properties.  The special deductions of family home, standard deduction, and amount receivable under RA 4917 are deductions from the total of the gross estate consisting of exclusive and communal properties.  All other deductions have to be classified into community or exclusive. As a general rule, the classification of a deduction will follow the classification in the gross estate of the property to which the deduction is related. M odified Textbook Reyes

Illustration 4 Mr. Giron, a citizen and resident of the Philippines, under the system of absolute community of property during the marriage, died on September 2011, leaving properties and obligations that follow: Property owned by Mr. Giron before the marriage…………. P 3,750,000 C Property owned by Mrs. Giron before the marriage………… 2,500,000 C Property received by Mr. Giron as inheritance on March 2011 (during the marriage)……………………………………. 4,000,000 E

Real property acquired thru the labor of Mr. and Mrs. Giron during the marriage (family home)

2 625 000 C 3

Chapter 7 Net Taxable Estate Medical expenses……………………………………………… Funeral expenses……………………………………………… Judicial expenses for the settlement of the estate………… Unpaid obligations (not including unpaid mortgage)……… Unpaid mortgage on property inherited……………………..

43,750 375,000 100,000 43,750 250,000

The property received as inheritance was part of the gross estate of the prior decedent at a fair market value of P1,375,000 with a mortgage on it at that time of P375,000, during his lifetime, he paid P125,000. Compute the net taxable estate and the estate tax. Modified Textbook Reyes Answer: Exclusive Community Gross estate Property owned by Mr. Giron before marriage……………………………… 3,750,000 Property owned by Mrs. Giron before the marriage…………………………. 2,500,000 Property received as inheritance…. 4,000,000 Family home………………………… 2,625,000 4,000,000 8,875,000 Totals…………………………….. Less: Ordinary deductions Unpaid obligations (43,750) Unpaid mortgage (250,000) Vanishing deduction (schedule 1) (1,221,481) Estate after ordinary deductions… 2,528,519 8,831,250 Less: Special deductions Family home (½ of 2,625,000 = 1,312,500 < 10M)………….... Standard deduction………………………………………………… Net estate………………………………………………………………. Less: Share of surviving spouse (½ of 8,831,250)…………………

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12,875,000

11,359,769 (1,312,500) (5,000,000) 5,047,269 (4,415,625) 631,644 6% 37,899

Net taxable estate……………………………………………………… Estate tax rate Estate tax……………………………………………………………….

Schedule 1: Step 1 Value taken (value of property at the time of the first transfer or at the time of the present decedent’s death, whichever is lower) Step 2 Less: Mortgage debt paid, if any Initial Basis Step 3 Less: IB 1,250,000 X 293,750 = GE 12,875,000 Final Basis Step 4 Pecentage of vanishing deduction Vanishing deduction

Total

P

1,375,000

(125,000) 1,250,000 (28,519) 1,221,481 100% 1,221,481

Conjugal Partnership of Gains The gross estate of a decedent who was married and under the conjugal partnership of gains shall consist of: 1. The exclusive properties of the decedent; and 2. The conjugal properties. Textbook Reyes

The deductions from the gross estate of a decedent who was married and under the property relationship of conjugal partnership of gains with the spouse shall consist of: 1. Deductions from exclusive properties; and 2. Deductions from conjugal properties.

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Chapter 7 Net Taxable Estate The following are exclusive properties of each spouse: 1. That which is brought to the marriage as his or her own; 2. That which each acquires during the marriage by gratuitous title; 3. That which is acquired by right of redemption, by barter, or by exchange with property belonging to only one of the spouses; and 4. That which is purchased with exclusive money of the wife or of the husband. All the rest are considered conjugal properties. Table 4-2 Summary of classification of properties Property Absolute Community 1. Property acquired before the marriage or brought to the Community marriage 2. Fruits or income in (No.1) Community 3. Property acquired during the Community marriage 4. Fruits or income in (No.3) Community 5. Property acquired by inheritance or gift before the Community marriage (gratuitous title) 6. Fruits or income in (No.5) Community 7. Property acquired by inheritance or gift during Exclusive marriage (gratuitous title) 8. Fruits or income in (No.7) Exclusive

Conjugal Partnership Exclusive Conjugal Conjugal Conjugal Exclusive Conjugal Exclusive Conjugal

Modified Textbook Ampongan

Illustration 5 Mr. Tecson died married, leaving the following properties: Land inherited before the marriage………………………………. Cash income from the property inherited……………………….. Cash received as gift during the marriage……………………….. Interest income on the cash received as gift…………………….. Property unidenfitied as to when and by whom acquired……… Clothes of the decedent purchased with spouse’s income…….

P 2,500,000 50,000 500,000 18,750 625,000 125,000

How much is the gross estate under the system of conjugal partnership of gains? Modified Textbook R eyes

Answer: Gross estate Land…………………………………… Cash income…………………………. Cash received as gift………………… Interest income………………………. Property unidenfitied………………… Clothes of the decedent…………….. Totals………………………………

Exclusive 2,500,000

Conjugal

Total GE

50,000 500,000

3,000,000

18,750 625,000 *125,000 818,750

3,818,750

Note: Rule #4

Charges against conjugal properties: 1. Debts and obligations contracted during the marriage; 2. Debts before the marriage of either spouse insofar as they have redounded to the benefit of the family. Debts and obligations which cannot be identified as those of exclusive properties shall be presumed to be conjugal debts and obligations. Debts and obligations on exclusive properties, which were already charges on

E C E C C C

the properties at the time they were acquired (e.g. by inheritance or gift) shall continue to be debts and obligations of exclusive properties. Vanishing deductions is always a deduction from exclusive property. 5

Chapter 7 Net Taxable Estate The special deductions of family home, standard deduction, and amounts under RA 4917 are deductions from the total gross estate, consisting of exclusive and conjugal properties. Note: In absolute community it depends on the inheritance if exclusive or community

All other deductions have to be classified into conjugal or exclusive. As a general rule, the classification of a deduction will follow the classification in the gross estate of the property to which the deduction is related. A deduction from the gross estate of the married person under the property relationship of conjugal partnership of gains with his spouse is the share of the surviving spouse in the net conjugal estate. Illustration 6 Mr. Isaac, married, a citizen and resident of the Philippines died on October 1, 2014, leaving properties and obligations with their fair market values as follows: Properties: Car inherited from the father who died in 2004…………………… Real property (family home) acquired during the marriage and thru his own efforts…………………………………………………… Cash received as gift from his father in 2001……………………… Real property (land) purchased out of cash inherited from his mother in 2001………………………………………………………… Other real property acquired during the marriage (unidentified as to whose effort resulted in the acquisition)………………………… Obligations and charges: Medical expenses in 2014…………………………………………… Funeral expenses……………………………………………………. Judicial expenses……………………………………………………. Claims against conjugal properties………………………………… Claim against an insolvent…………………………………………. Unpaid mortgage on car (constituted by the father on a loan for father’s pleasure trip)………………………………………………….

P 375,000

E

437,500 11,300,000

C E

250,000

E

750,000

C

125,000 150,000 250,000 131,250 12,500

SD

12,500

E

How much is the net taxable estate and the estate tax? Modified Textbook R eyes Modified Te xtbook Reyes

Note: Claim against an insolvent should be included in the gross estate.

Answer: Exclusive Conjugal Gross estate Car inherited from the father 375,000 Family home 437,500 Cash received as gift from his father 11,300,000 Real property (land) 250,000 Other real property 750,000 Claim against an insolvent 12,500 11,925,000 1,200,000 Totals…………………………….. Less: Ordinary deductions Claims against conjugal properties (131,250) Claim against an insolvent (12,500) Unpaid mortgage (12,500) Estate after ordinary deductions… 11,912,500 1,056,250 Less: Special deductions Family home (½ of 437,500 = 218,750 < 10M)………………… Standard deduction………………………………………………… Net estate………………………………………………………………. Less: Share of surviving spouse (½ of 1,056,250)………………… Net taxable estate……………………………………………………… Estate tax rate

Estate tax……………………………………………………………….

Total

13,125,000

12,968,750 (218,750) (5,000,000) 7,750,000 (528,125) 7,221,875 6% 433,313

C C C C...