TAX102 TAX 102 Estate Tax PDF

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Page 1TAXATION TABAG / SIATAX—ESTATE TAX MAY 2021 CPALE REVIEWLEARNING OBJECTIVES Define transfer taxes. Describe the nature or characteristics transfer taxes. Determine the composition of the gross estate. Discuss the different types of marriage settlement or property relationship between spouses. ...

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REVIEWEE HANDOUTS TAXATION TAX.102—ESTATE TAX

TABAG / SIA MAY 2021 CPALE REVIEW

LEARNING OBJECTIVES 1. 2. 3. 4.

Define transfer taxes. Describe the nature or characteristics transfer taxes. Determine the composition of the gross estate. Discuss the different types of marriage settlement or property relationship between spouses.

5. Determine the allowable deductions from the gross estate. 6. Compute estate tax credit 7. Compute the estate tax due.

REVIEW NOTES INTRODUCTION TO ESTATE TAX A.

Transfer Taxes - are taxes imposed upon the gratuitous disposition of private properties or rights. Gratuitous transfer is one that neither imposes burden nor requires consideration from transferee or recipient. The transfer of ownership is free because of the absence of financial consideration.

B. Types of Transfer Taxes

1. Estate Tax – Tax imposed on gratuitous transfer or donation that takes effect at the time of death of the donor (also known as “donation mortis causa”). 2. Donor’s Tax – Tax imposed on gratuitous transfer or donation that takes effect during the lifetime of both the donor and the done (also known as “donation inter vivos”). C. Nature of Estate Tax – It is a tax on the right to transfer

property at death (succession) and on certain transfers which are made by law the equivalent of testamentary disposition and is measured by the value of the property. v It is an excise tax, the object of which is the shifting of economic benefits and enjoyment of property from the dead to the living. v It accrues as of the death of the decedent, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary. v The taxpayer in the estate taxation is the estate of the decedent represented by the administrator, executor or legal heirs.

D. Concept of 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 will or by operation of law (Art. 774, Civil Code of the Philippines). v Will- an act whereby a person is permitted with the formalities prescribed by law, to control to a certain degree the disposition of his estate, to take effect after his death (Art. 783, CCP) from the moment of the death of the decedent, the rights to the succession are transmitted, and the possession of the hereditary property is deemed transmitted to the heir (Art. 777, CCP). v Kinds of Wills: 1. Notarial or Ordinary or Attested Will – is one which is executed in accordance with the formalities prescribed by Art. 804 to 808 of the New Civil Code. It is a will that is created for the testator by a third party, usually his lawyer, follows proper form, signed and dated in front of the required number of witnesses (3 or more witnesses) and acknowledged by the presence of a notary public. 2. Holographic Will–is a written will which must be entirely written, dated and signed by the hand of the testator himself, without the necessity of any witness. This kind of will does not need formalities because many people can recognize his handwriting and it can be verified by a penmanship expert. 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 any disposition made in the original will is explained, added to or altered.

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TAXATION | TAX.102—ESTATE TAX

E.

intestate succession. However, intestate heirs include, brothers and sisters, collateral relatives within the fifth civil degree, and the state.

Elements of Succession a. Decedent - the person whose property is transmitted through succession, whether or not he left a will (Art. 775, CCP).

v Administrator is a person appointed by the court, in accordance with the governing statute, to administer and settle intestate estate and such testate estate as no competent executor was designated by the testator.

b. Heir - the person called to the succession either by the provision of a will or by operation of law (Art. 782, CCP). 3) c. Estate - refers to all the property, rights and obligations of a person which are not extinguished by his death (Art. 776, CCP). F.

1)

Kinds of Succession

G. FORMAT OF COMPUTATION

1) SINGLE DECEDENT

Testamentary - succession which results from the designation of an heir, made in a will executed in the form prescribed by law (Art. 779, CCP). v While the decedent may dispose of his properties in a last will and testament, he must, however, reserve compulsory or forced heirs. v Kinds of successors succession

Mixed - transmission of properties, which is effected partly by will and partly by operation of law.

in

a

Gross Estate Ordinary Deductions Special Deductions Net Taxable Estate Multiply by: Estate Tax % Estate Tax Due Less: Tax Credit Estate Tax Payable

Pxxx (xxx) (xxx) Pxxx 6% Pxxx (xxx) Pxxx

testamentary 2) MARRIED DECEDENT

1. Legatee, an heir to a particular personal property given by virtue of a will. 2. Devisee, an heir to a particular real property given by virtue of a will. v Executor is the person nominated by a testator to carry out the directions and request in his will and to dispose of his property according to his testamentary provisions after his death. v Compulsory or Forced Heirs: 1. legitimate children and descendants 2. In default of the foregoing, legitimate parents or ascendants 3. Widow or widower; and 4. Illegitimate children v Under testamentary succession, the mass of properties left by the decedent may be classified into: 1. Legitime is the portion of the testator’s property which could not be disposed of freely because the law has reserved it for the compulsory heirs. (Art. 886, CCP). 2. Free portion is that part of the whole estate which the testator could dispose of freely through written will irrespective of his relationship to the recipient. 2)

Legal or Intestate - transmission of properties where there is no will, or if there is a will, the same is void or lost its validity, or nobody succeeds in the will.

v In intestate succession, the entire estate of the decedent is distributed to the heirs. The compulsory heirs in testamentary succession are also heirs in

Gross Estate Less: Ordinary Deductions Less: Share of Surviving Spouse (Net Common Estate**/2)

Exclusive Pxxx (xxx)

Common Pxxx (xxx)

Total Pxxx (xxx)

Pxxx

Pxxx**

Pxxx

(xxx)

Special Deductions

(xxx)

Net Taxable Estate Multiply by: Estate Tax % Estate Tax Due Less: Tax Credit Estate Tax Payable

Pxxx 6% Pxxx (xxx) Pxxx

Page 2

TAXATION | TAX.102—ESTATE TAX GROSS ESTATE A. Gross Estate Defined – consists of all properties and interests in properties of the decedent at the time of his death as well as properties transferred during lifetime (only in form), but in substance was only transferred at the time death.

Example: • Dividends declared before his death but received after death. • Partnership profit which have accrued before his death • Usufructuary rights, etc.

B. Classification of Decedent 1) Citizen or Resident (RC/NRC/RA) 2) Non-resident Alien (NRA) i. With reciprocity ii. Without reciprocity C. Reciprocity Clause – No tax shall be imposed with respect to intangible personal properties of a NRA situated in the Philippines: 1) When the foreign country, where such NRA is a resident and citizen, does not impose transfer tax with respect to intangible personal properties of Filipino citizens not residing in that country; or 2) When the foreign country imposes transfer taxes, but grants similar exemption with respect to intangible personal properties of Filipino citizens not residing in that country. D. Intangible Properties considered Located in the Philippines: 1) Franchise which must be exercised in the Philippines; 2) Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines; 3) Shares obligations or bonds issued by any foreign corporation, at least 85% of the business of which is located in the Philippines; 4) Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations, or bonds have acquired a business situs (used in the furtherance of its business in the Philippines) in the Philippines; 5) Shares or rights in partnership, business or industry established in the Philippines. E. Components of the Gross Estate 1) Properties existing at the time of death such as: a. Real Property b. Tangible Personal Property c. Intangible Personal Property 2) Decedent’s Interest – Refers to the extent of equity or ownership participation of the decedent on any property physically existing and present in the gross estate, whether or not in his possession, control or dominion. It also refers to the value of any interest in property owned or possessed by the decedent at the time of his death (interest having value or capable of being valued, transferred)

3) Properties transferred gratuitously during lifetime, but in substance, transferred upon death: (CRRIG) a. Transfer in contemplation of death – the thought of death must be the impelling cause of the transfer. EXCEPTION (NOT IN CONTEMPLATION OF DEATH): 1. To relieve the donor from the burden of management. 2. To save income or property taxes. 3. To settle family litigated and un-litigated disputes. 4. To provide independent income for dependents. 5. To see the children enjoy the property while the donor is still alive. 6. To protect the family from the hazards of business operations. 7. To reward services rendered. b. Transfer with retention or reservation of certain right – allows the transferor to continue enjoying, possessing or controlling the property (beneficial ownership) because only the naked title has been transferred. c. Revocable transfer – decedent transfers the enjoyment of his property to another, subject to his right to revoke the transfer at will, with or without notifying the transferee, any time before he dies. d. Property passing under general power of appointment e. Transfers for insufficient consideration – sale of property below fair market value (FMV) under the cases in letter a to d above. v Amount included in gross estate: FMV at the time of death Less: Selling Price Included in Gross Estate

PXXX (XXX) PXXX

4) Proceeds from life insurance – the following are included in the gross estate: a. Whether REVOCABLE or IRREVOCABLE, when the beneficiary is the : i. Estate of the deceased ii. His executor; or iii. Administrator b. When the beneficiary is a third person, only if REVOCABLE.

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TAXATION | TAX.102—ESTATE TAX

3) Under Section 87, NIRC F. Valuation of Gross Estate – the items comprising the gross estate shall be valued at the time of death or date nearest such date.

a. The merger of the usufruct (right to use) in the owner of the naked title (without right to use). b. The transmission or delivery of the inheritance or legacy of the fiduciary heir or legatee to the fideicommissary. c. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the will of the predecessor. d. All bequests, devices, legacies or transfers to social welfare, cultural and charitable institutions, provided: • No part of the net income of said institutions inure to the benefit of any individual; • Not more than 30% of such transfers shall be used for administration purposes.

1) Usufruct – based on latest Basic Mortality Table to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner. 2) Real Property – the higher amount between: a. Fair Market Value b. Zonal Value 3) Personal Properties – Fair market value 4) Shares of stock a. Traded in the Local Stock Exchange (LSE) – mean between the highest and lowest quotations, at a date nearest the date of death, if none is available at the date of death itself (RR 22003/RR 12-2018).

4) Under Special Laws a. Proceeds of life insurance and benefits received by members of the GSIS (RA728). b. Benefits received by members from the SSS by reason of death (RA1792). c. Amounts received from Philippine and United States governments for war damages. d. Amounts received from United States Veterans Administration. e. Benefits received from the Philippines and US government for damages suffered during World War II (RA227). f. Retirement benefits of officials/employees of a private firm (RA4917). g. Payments from the Philippines of US government to the legal heirs of deceased of World War II Veterans and deceased civilian for supplies/services furnished to the US and Philippine Army (RA136). h. Personal Equity and Retirement Account (PERA) asset of the decedent-contributor (Section 14, RA 9505)

b. Not traded in the local stock exchange: i. Common (ordinary) shares – Book value ii. Preferred (preference) shares – Par Value c. Units of participation in any association, recreation or amusement club (such as golf, polo, or similar clubs) – bid price nearest the date of death published in any newspaper or publication of general circulation. G. Exemptions and Exclusions from Gross Estate 1) Under Section 85 and 86, NIRC a. Capital or exclusive property of the surviving spouse b. Properties outside the Philippines of a nonresident alien decedent c. Intangible personal property in the Philippines of a non-resident alien when the rule of Reciprocity applies.

GROSS ESTATE BASED ON CITIZENSHIP & RESIDENCE

Real Property Decedent

Tangible Personal Property

Intangible Personal Property

w/in

w/out

w/in

w/out

w/in

w/out

or

√

√

√

√

√

√

NRA w/o reciprocity

√

X

√

X

√

X

NRA w/ reciprocity

√

X

√

X

X

X

Citizen Resident

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TAXATION | TAX.102—ESTATE TAX PROPERTY RELATIONSHIP BETWEEN SPOUSES

d. he share of either spouse in the hidden treasure which the law awards to the finder or owner of the property where the treasure is found;

A. COMPONENTS OF GROSS ESTATE OF A MARRIED DECEDENT Exclusive Properties of the Decedent Add: Common Properties (100%) Gross Estate

e. Those acquired through occupation such as fishing or hunting;

Pxxx xxx Pxxx

f.

NOTE: Exclusive properties of the surviving spouse are excluded in computing gross estate.

g. Those acquired by chance, such as winnings from gambling or betting. However, losses therefrom shall be borne exclusively by the loser-spouse.

B. PROPERTY RELATIONSHIP BETWEEN SPOUSES 1) Conjugal Partnership of Gains (CPOG)

Livestock existing upon dissolution of the partnership in excess of the number of each kind brought to the marriage by either spouse; and

2. Absolute Community of Property (ACOP)

v Exclusive Properties: a. That which is brought to the marriage as his or her own; b. That which each acquires during marriage by gratuitous title; c. That which is acquired by right of redemption, by barter or by exchange with property belonging to any one of the spouses; and

v Community Properties: a. All properties owned by the spouses at the time of celebration of the marriage; or b. Acquired thereafter v Exclusive Properties: a. Property acquired during marriage by gratuitous title by spouse, and the fruits as well as the income thereof. EXCEPTION: unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property.

d. That which is purchased with exclusive money of the wife or of the husband. v Conjugal Properties: a. Those acquired by onerous title during marriage at the expense of the common fund, whether the acquisition be for the partnership, or for only one of the spouses; b. Those obtained from labor, industry, work or profession of either or both spouses; c. The fruits, natural or industrial, or civil, due or received during marriage from common property, as well as the net fruits from the exclusive property of each spouse;

b. Property for personal and exclusive use of either spouse. EXCEPTION: jewelry community property. c.

shall

2. 3. 4.

Property Property inherited or received as donation during marriage Property acquired during marriage (other than inheritance or donation) Property acquired from labor, industry, work or profession of spouses Fruits or income due or derived during the marriage coming from common property

CPOG Exclusive

ACOP Exclusive

Conjugal

Community

Conjugal

Community

Conjugal

Community

CPOG Exclusive Conjugal

ACOP Community Exclusive

D. Difference between CPOG and ACOP

1. 2.

Property Property before marriage or brought to the marriage Fruits or income due or derived during the marriage coming from exclusive property

part

of

the

Property acquired before the marriage by either spouse who has legitimate descendants by the former marriage, and the fruits as well as the income, if any of such property.

C. Similarities between CPOG and ACOP

1.

form

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TAXATION | TAX.102—ESTATE TAX

E. RULES IN DETERMINING RELATIONSHIP

THE

PROPERTY

The system of property relationship is applicable only to married persons. It is used to distinguish a conjugal or community property from an exclusive property. Under Art. 74 of the New Family Code (as amended), the property relationship between husband and wife shall be governed in the following order: 1) By marriage settlements executed before the marriage. 2) By the provisions of law 3) By the local custom. Types of Property Relations (Art. 75 NFC) The future spouses may, in the marriage settlements, agree upon the following systems of property relationship: (1) Absolute community of Property (ACoP) (2) Conjugal partnership of gains (CPG) (3) Complete separation of property, or (4) Any other regime. If NO agreement on marriage settlement Date of Marriage Before August 3, 1988 On or After August 3, 1988

Regime CPOG ACOP

2. The insolvency established.

of

the

debtor

must

be

c. Claims Against the Estate v Requisites: 1. Personal debt of the decedent existing at the time of his death; 2. Contracted in good faith; 3. Must be valid in law and enforceable in court; 4. Must not have been condoned by the creditors; 5. Must not have prescribed; 6. Debt instrument must be notarized; 7. If the loan was contracted 3 years before death, submit statement showing the disposition of the proceeds. d. Unpaid Mortgage

v Deductions are items which the law on estate tax allows to be subtracted from the value of the gross estate in order to arrive at the net taxable estate.

e. Unpaid Taxes v Requisite – the tax must have accrued before the death of the decedent.

CLASSIFICATION OF DEDUCTIONS 1) Ordinary deductions 2) Special Deductions 3) Share of the surviving spouse

III.

v Requisite...