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Estate TaxBasic Terms in TaxationTaxation – power of the Government to impose burden upon the people to earn Revenue.3 Inherent Powers of the State ( definition: Acaylar, PJ)1. Police Power – power to monitor people forthe general welfare.2. Eminent Domain – power to expropriateprivate property for ...

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Business and Transfer Taxes Notes Estate Tax Basic Terms in Taxation Right – Taxation – power of the Government to impose burden upon

The basics of human existence.Those things that are Necessary to live. You cannot live without these.

the people to earn Revenue.

Eg. Right to breathe, right to live, right to vote, Freedom of speech. Etc.

3 Inherent Powers of the State ( definition: Acaylar, PJ) 1. Police Power – power to monitor people for the general welfare. 2. Eminent Domain – power to expropriate private property for public use. 3. Taxation – power of the government to impose burden upon the people to earn revenue.

PRivilege–

U Note: Taxation is the foundation wherein government is founded on. Taxes and the government have a symbiotic relationship. “Without taxation there is no government” - Judge Cooley KINDS OF TAXES 1.

2.

3.

Income Taxes – taxes levied on the financial

Are Rights that you can live without. These are things that are allowed and granted by the state. These privileges can be Taxed. Eg. Driver’s license, Professional Licenses, etc. You can live without having to drive or be a lawyer, etc.

U

Note: Government requires us to pay taxes so that we can exercise the privileges that they have granted upon us and these taxes also work for the protection of our rights and privileges. To understand taxation, one must understand the concept of rights and privileges. Rights are usually not taxable while Privileges are usually taxable. Double Taxation - illegal in the Philippines. You cannot tax the same thing twice for the same period and for the same purpose.

a. Value Added Taxes

Capital Gains tax – A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of a noninventory asset that was purchased at a lower price.

b. Other Percentage Taxes c. Excise Tax – tax imposed on SIN products ( products that are harmful and wasteful)

2 Basic Questions in Taxation 1. Are you a Citizen? 2. Are you a Resident

Transfer Taxes – taxes on the privilege to

If the answer is YES to anyone of these this is TAXABLE.

income of persons, corporations, or other legal entities. Business Taxes- taxes levied on the privilege to enter into business

transfer of property from one person to another.

a. Estate Taxes – takes effect after death b. Donor’s Taxes – takes effect during lifetime a. Donation Inter Vivos - during life b. Donation Mortis Causa – takes effect after death. ( Last will and Testament) 4.

Documentary Taxes – taxes levied on the privilege to enter into contract.

RIGHT

VS.

PRIVILEGE

Notes from: The New Philippine Business and Transfer Taxes (Principles, Law and Problems) by Virgilio D. Reyes (Nov 2007) Business and Transfer Taxes Notes from G. Mendoza And Lectures by: ATTY. PRACKIE JAY ACAYLAR, CPA (EAC- Manila)

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Business and Transfer Taxes Notes Estate Tax W W W

Principles of Succession EleMENTS OF SUCCESSION

1. Deceased/ Decedent –Person who died. Testator/ Testatrix (F) – person who wrote the last will and testament. Also called the decedent. 2. Estate- a bulk of property left behind by the decedent. 3. Successors/ Heir- the persons to whom the estate is given to. 4. Executor/Administrator – person who will take charge of the estate before the distribution. ** Executor- person named in the will by the testator ** Administrator- person appointed by the courts in the absence of an assigned executor.

Legitimate Children &Legitimate Descendants Legitimate Surviving Spouse Legitimated Children

Legitimate Children- all children born & conceived NOT out of wedlock. ♪ Legitimate Child ♪ Legally Adopted Child ♪ Legitimated Child Illegitimate Children – all children born & conceived out of wedlock.

“All Children conceived and born outside a valid marriage are considered illegitimate.” ~(Art 165, Family Code of the Philippines)

~ Secondary Compulsory Heir – only can get part of the estate in the absence of the primary compulsory heirs. W Legitimate Ascendants W Illigitimate Ascendants ~ Voluntary Heirs – Heirs determined through

succession – mode of acquisition by virtue of which the property rights and obligations, to the extent of the value of the Estate of a person are transmitted through his death to others by will or operation of Law. ( Reyes)

the last will and testament.

Things Transmissible in Succession

1. Property – things that the decedent owned before the time of his death. a. Real Estate/ Property- land, building or anything that is attached to the soil with permanence. b. Tangible Property- property that can be seen or touched.

LAST WILL AND TESTAMENT– a will or testament is a document by which a person (the testator) regulates the rights of others over his or her property or family after death. For the devolution of property not disposed of by will, see inheritance and intestacy. In the strictest sense, "will" is a general term, while "testament" applies only to dispositions of personal property (this distinction is seldom observed). A will is also used as the instrument in a trust.

Eg. Cars, Jewelry, Electronic Gadgets, etc.

c. Intangible Property- property that cannot be seen or touched. Eg. Rights, Franchises, Shares, bonds, etc.

2. Rights – legal claims, franchises, (could be the

-

A written instrument wherein the testator would administer his properties rights and obligation after his death. (acaylar)

Codicil- addenums or attachments to the will.

same as intangible property)

3. Obligations – unpaid debt Kinds of Succession 1. Testamentary Succession- succession which

2.

3.

results from a designation of heirs made in the last will and testament executed by the testator. Intestate/Legal Succession- succession which results from the operation of law where there is no last will and testament or the LW&T is void for any reason given by law. Mixed Succession – succession which results partly from the LW&T and Partly from the operation of law.

Kinds of Heirs ~ Primary Compulsory Heirs – heirs in a succession whether there is or there is no last will and testament. These include:

Kinds of Last Will and Testaments ~ Holographic Will - a will entirely written or created by the testator himself, signed and dated and NOT subject to legal formalities on form, witnesses, or acknowledgement before a notary public. >>> This kind of will does not need formalities because many people can recognize his handwriting and it can be verified by a penmanship expert.

~ Notarial Will- a will that is created FOR the testator by a 3rd party, usually his lawyer, follows proper form, signed and dated in front of the required number of witnesses and acknowledged by the presence of a notary public.

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Business and Transfer Taxes Notes Estate Tax 2 PARTS OF THE ESTATE

~ ~

Legitime– This is a secured portion of the estate that the law reserves for compulsory heirs. Free Portion – Portion of the will that the testator can freely dispose of.

PROBATE OF THE LAST WILL AND TESTAMENT– This is a Special

2. Tangible personal property located within the Philippines 3. Intangible personal property located within the Philippines unless there is reciprocity in which case it is not taxable in the Philippines. Situs or PLACe OF TAxATION

Proceeding validating the last will and testament. “No property of a testator shall pass to an heir unless proven that all terms in the Last will and testament is legal and valid in court.”

Property has a situs or location or a jurisdiction for tax purposes. Situs is decisive in determining the estate of a deceased person taxable in the Philippines.

Revocation of Will–

the testator may revoke his last will and testament at any time before he dies. If he executed more than one Last will and testament the last one before he dies will be the prevalent one

DiSINHERITANCE–

A compulsory heir may be deprived of his legitime for a cause provided by law and effected by will where the legal cause of which is stated. If there is any discrepancy, there must be proof or evidence.

EXECUTOR/ ADMINISTRATOR– Carries out the provisions of the last will and testament that is appointed by the testator. If he does not accept, the court shall appoint.

Articulo MORTIS– testator dies within 3 months of the time of marriage

ESTATE TAXES A tax on the right of transmitting property at the time of death and on the privilege that a person is given control to a certain extent to the disposition of his property to take effect upon death.

Applies to: a) Citizens of the Philippines b) Residents of the Philippines Non-resident aliens with properties in the Philippines Where to file- municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner. GROSS ESTATE A. Gross Estate of Citizen and Resident Decedent 1. Real Property located within and without the Philippines 2 Tangible personal property located within and without the Philippines 3. Intangible personal property located within and without the Philippines B. Gross Estate of a Non-Resident Alien Decedent 1. Real Property located within the Philippines

SUBJECT TO TAX

WITHIN Citizen / Resident Resident Alien Non Resident Alien/ Non Resident Citizen Non Resident Citizen

y y y

WITHOUT y y N

y

Y

Real Property- country where they are situated Tangible Personal Property- country where they are actually located at the time of death of the decedent Intangible Personal Property- considered as intangible personal properties situated in the Philippines: ~ franchise which must be exercised in the Philippines ~ shares, obligations or bonds issued by any corporation organized in the Philippines ~ shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Phils ~ shares, obligations or bonds issued by a foreign corporation if such shares have acquired a business situs in the Phils. ~ Shares or rights in any partnership, business or industry established in the Phils. PROPERTIES INCLUDIBLE IN THE GROSS ESTATE DECEDENT’S INTEREST - shall include all properties, rights and interest which the decedent owns at the time of death. It shall include:

Properties owned by the decedent actually and physically present in his estate at the time of his death such as land, buildings, shares of stock, vehicles, bank deposit, etc

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Business and Transfer Taxes Notes Estate Tax The value of any interest in property owned or possessed by the decedent at the time of his death such as dividends declared before his death but received after his death, partnership profits which have accrued before his death, usufructuary rights, etc. The value of property, right or interest in the property, transferred by the decedent during his lifetime which, under the law, are in the nature of testamentary dispositions such as life insurance proceeds in favor of a revocable beneficiary. TAXABLE TRANSFERS Value of the property or interest in property transferred by the decedent during his lifetime which is in the nature of testamentary disposition: ♪ ♪ ♪ ♪

♪

Transfers in contemplation of death Revocable transfers Property passing under a general power of appointment Transfer with retention or reservation of certain rights over the income or enjoyment of the property transferred Transfer for insufficient consideration

Transfers in Contemplation of Death Impelled by the thought of death, or the motivating factor or controlling motive for the transfer of the property is the thought of death without regard to the state of health of the transferor.

Donation Mortis Causa Takes effect upon the death of the donor. Its characteristics are: ♪ ♪ ♪

there is no conveyance of title or ownership to the donee or transferee the transfer is revocable by the donor at will during his lifetime the transfer shall be void id the donor survives the donee

REVOCABLE TRANSFERS Where the enjoyment of the property transferred may be altered, amended, revoked or terminated by the decedent. The revocability is not affected by the failure of the decedent to exercise the power to revoke during his lifetime. If the notice has not been given, the power to revoke has not

been exercised on of before the date of his death, such notice shall be considered to have been given, or the power exercised on the date of his death. PROPERTY PASSING UNDER A GENERAL POWER OF APPOINTMENT The rule is the gross estate shall include any property passing or transferred under a general power of appointment exercised by the decedent ♪ ♪ ♪

♪ ♪

By will By deed to take effect in possession or enjoyment at or after his death By deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death The possession or enjoyment of, or the right to the income from the property The right, either alone, or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom

The donee of a general power of appointment holds the appointed property with all the attributes of ownership thus, the appointed property shall form part of the gross estate of the donee of the power upon his death. Transfers with Retention and Reservation of Certain Rights Over the Income or Enjoyment of the Property Transferred Transfers where the donor reserves the right to the income of the property until death; or Transfers where the donor reserves the right to the possession or enjoyment of the property until death These transfers do not actually convey full ownership over the property transferred hence the property still remains part of the gross estate of the transferor. TRANFERS FOR INSUFFICIENT CONSIDERATION → If the transfer is a bona fide sale for adequate and full consideration in money or money’s worth, no value shall be included in the gross estate. → If the transfer is not a bona fide sale for an adequate and full consideration in money

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Business and Transfer Taxes Notes Estate Tax or money’s worth, there shall be included in the gross estate only the excess of the fair market value of the property at the time of death over the value of the consideration received by the decedent. → If an inter vivos transfer of the decedent is proven to be fictitious, the total value of the property at the time of death shall be included in the gross estate. Reasons for Taxability of the Transfers It will be seen that in most of these transfers, the property remains substantially that of the transferor during his lifetime notwithstanding the transfer as he still retains either the “Beneficial Ownership” or “Naked Title” to the property. Hence, the transfer is essentially similar in respect to a transmission by testacy or intestacy upon the death of the owner. In order to be exempted from the purview of the taxing provisions, the transfer by inter vivos must be absolute and outright with no strings attached whatsoever by the decedent. PROCEEDS OF LIFE INSURANCE Proceeds of life insurance under policies taken out by the decedent upon his own life shall be included in his gross estate in the following cases: ♪

♪

when the beneficiary is the estate of the deceased, his executor or administrator whether or not the deceased retained the power of revocation when the beneficiary is other than the estate of the deceased, his executor or administrator and the decedent retained the power of revocation

CLAIMS AGAINST INSOLVENT PERSONS Are receivables due or owing from persons who are not financially capable of meeting their obligations. The receivables shall be included in the gross estate at their full amount. CAPITAL OF THE SURVIVING SPOUSE The gross estate of a married decedent shall consist of the following: ♪ ♪

conjugal or community properties exclusive properties

The capital of the surviving spouse shall not be deemed part of the gross estate.

EXEMPT ACQUISITIONS AND TRANSACTIONS FROM PAYMENT OF ESTATE TAXES ♪ the merger of the usufruct in the owner of the naked title ♪ the transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary ♪ the transmission from the first heir, legatee or donee in favor of another beneficiary in accordance with the desire of the predecessor ♪ all bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the income of which inures to the benefit of any individual; Provided, however, that no more than 30% of the said bequests, devices, legacies or transfers shall be used by such institutions for administration purposes.

VALUATION OF THE ESTATE ♪ Valuation Date- time of death ♪ Basis of Valuation- fair market value, which is the price which a property will bring when it is offered for sale by one who desires, but is not obligated to sell and is bought by one who is under not necessity of buying it ♪ Valuation of Usufruct- probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table ♪ Valuation of Real Property 1) FMV as determined by the Commissioner; or 2) FMV as shown in the schedule of values fixed by the Provincial or City Assessors

♪ Valuation of Personal Properties- FMV at the time of the decedent’s death

DEDUCTIONS FROM THE GROSS ESTATE The estate tax is computed based on the net estate. The net estate is determined by subtracting from the gross estate the deductions authorized by law. A)Funeral Expenses The limit is the actual funeral expenses or the amount equal to 5% of the gross estate, whichever is lower, but in no case to exceed P200,000.

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Business and Transfer Taxes Notes Estate Tax Funeral expenses include the expenses for the mourning clothing of the spouse and unmarried minor children, fees and charges for masses, rites, ceremonies incident to the interment, expenses of interment, and the cost of the coffin, burial plot, tombstone, mausoleum or niche. The cost of obituary notices, flowers and expenses of the wake preceding the burial are also part of funeral expenses. Expenses incurred after burial can no longer be deducted. B) Judicial Expenses Refers primarily to court expenses and expenses of administration. The expenses of administration include those actually and necessarily incurred in the administration of the estate.

a) Decedent died within five (5) years from receipt of the property from a prior decedent or donor; b) Property on which vanishing deduction is being claimed must be located in the Philippines; c) Property must have formed part of the taxable estate of the prior decedent, or of the taxable gift of the donor; d) Estate tax on the prior succession or the donor’s tax on the gift must have been finally determined and paid; e) Property on which vanishing deduction is being taken must be identified as the one received from the prior decedent or from the donor, or something acquired in exchange therefore. f) No vanishing deduction on the property was allowable to the estate of the prior decedent G) Family Home A deduction from the gross estat...