TAXATION Gross Estate PDF

Preview

Summary

Warning: TT: undefined function: 32 Warning: TT: undefined function: 32MODULES 14 & 15GROSS ESTATEGROSS ESTATEGross estate consists of all properties of the decedent tangible or intangible, real or personal and wherever situated at the point of death.In the case of a non-resident alien deced...

Description

MODULES 14 & 15 GROSS ESTATE GROSS ESTATE Gross estate consists of all properties of the decedent tangible or intangible, real or personal and wherever situated at the point of death. In the case of a non-resident alien decedent, gross estate includes only properties situated in the Philippines except intangible personal property when the reciprocity rule applies. Decedent 1) Citizen 2) Resident Alien 3) Non-resident Alien

Real Property Within ✔ ✔ ✔

Without ✔ ✔ ✖

Tangible Personal Property Within Without ✔ ✔ ✔ ✔ ✔ ✖

Intangible Personal Property Within Without ✔ ✔ ✔ ✔ ✔ ✖ ✖ (if there is reciprocity)

Intangible personal property means incorporeal property which do not have any physical form, but represents rights and privileges. Examples include bank deposits, trademarks, shares of stock, patents, copyrights, bonds notes, interest in a partnership, etc. Intangible Asset 1) Receivable (promissory note) 2) Bank deposit 3) Other intangible properties: a) Franchises, patents, copyrights, trademarks b) Investment in partnership c) Shares of stock (including corporate bonds) (1) Domestic corporation (2) Foreign corporation Except: i. If ≥ 85% of business is in the Philippines ii. If shares have acquired a business situs in the Philippines

Situs Residence of the debtor Location of the bank Where property is used or exercised Where partnership is established Within the Philippines Without the Philippines Within the Philippines Within the Philippines

PROPERTIES INCLUDED IN THE GROSS ESTATE OF A DECEDENT -

Includes all properties, rights, and interests which the decedent owns at the time of his death;

1) Properties owned by the decedent and physically present in his estate at the time of death; 2) Interest (whether legal or beneficial) in property owned or possessed by the decedent at the time of death (Ex. usufructuary rights, leasehold rights); 3) Taxable transfers – made during lifetime, but are in the nature of testamentary dispositions (mortis causa in substance). Though he has transferred the property during his lifetime, he remains in control of the property, and the transfer is intended to take effect only at or after his death. a) Transfers in Contemplation of Death - Transfer is impelled by the thought of death. - These transfer inter-vivos are usually made by the decedent in a stage of terminal illness or under belief of an imminent death. Analogous to testamentary disposition, transfers in contemplation of death are treated by the tax law as donation mortis causa subject to estate tax not, to donor’s tax. Ex. Donation mortis causa – donation which takes effect upon the death of the donor, and therefore partakes of the nature of a testamentary disposition. 1) No transfer of title or ownership to the done; 2) The donor retains ownership (either legal or beneficial) and remains in full control of the property during his lifetime; 3) The transfer is revocable by donor at will during his lifetime; and 4) The transfer is void if the done dies first. b) Revocable transfers; Revocable transfers involve transfers of possession over property during lifetime of the decedent, but not transfer of ownership over said property. At the point of death, the decedent owns the property hence, it must be included as part of his gross estate since the same is part of his donation mortis causa. The transferor reserves the power to alter, amend, revoke, or terminate the enjoyment of the property by the transferee, or where such power is relinquished in contemplation of the decedent’s death. -

Whether or not such power is exercised during lifetime. If not exercised during lifetime, it is considered exercised at the time of death.

c) Transfer with retention or reservation of certain rights over the income or enjoyment of the property transferred; -

Transferor reserves his right to the income of the property until his death. Transferor reserves his right to the possession or enjoyment of the property until his death. Illustration Mr. Ozamis transferred an agricultural land in favor of his son. He however, reserved for himself the enjoyment of a quarter of the land until his death, The land was worth P2,000,000. The P500,000 (i.e.P2,000,000 x ¼ ) portion of the land which was reserved by Mr. Ozamis for himself until his death shall be included in his gross estate.

d) Property passing under a general power of appointment (“GPA”); -

-

The decedent is the donee. The (appointed) property comes from a donor (of the power) with a GPA for the donee (of the power). The donee is authorized to dispose of the property by exercising his power of appointment in designating any person who shall possess or enjoy the property and/or its income. A GPA makes the appointed property, for all purposes, the property of the donee of the power of appointment.

Illustration Don Kulot died. In his will, he gave Mama Sang a house and lot with the right to designate the property to whomever heir she wants. Mama Sang eventually died and appointed Bebe as heir to the property. Mama Sang had a general power over the property. The same shall be included in her gross estate. If Mama Sang had limited power, like it was specifically written in the will of Don Kulot that the house and lot should be given to Toto, the same shall not be included in Mama Sang’s gross estate.

e) Transfer for insufficient consideration. In all the taxable transfers above, if the transfer is a bona fide sale for adequate and full consideration in money or money’s worth, no value (of the property transferred) shall be included in the gross estate.

However: 1) If the transfer is not a bona fide sale for an adequate and full consideration in money or money’s worth, there shall be included in the gross estate the excess of the FMV of the property at the time of death over the value of the consideration received by the decedent; Included in gross estate = FMV of property at time of death – Consideration received 2) If transfer is fictitious, the total value of the property at time of death shall be included in the gross estate of the decedent.

f) Proceeds of Life Insurance Proceeds of life insurance taken out by the decedent upon his own life shall be included in his gross estate when: 1) His estate, his executor or administrator is the beneficiary; whether or not the designation of the beneficiary is revocable; or 2) The beneficiary is any other person, but the decedent retains the power to revoke the designation. Note: When designation of the beneficiary is not clear, it is presumed to be revocable. Proceeds of life insurance are not included in gross estate when: 1) Beneficiary is other than the estate, his executor or administrator, and the designation is irrevocable; 2) Proceeds of a group insurance policy; 3) Benefits from the GSIS, SSS, (accruing by reason of death).

4) Claims Against Insolvent Persons - Receivables due from persons who are insolvent - Shall be included in the gross estate at its full amount - Bad debt deduction is taken for the uncollectible portion

5) Conjugal/community properties, if decedent was married. - The decedent’s gross estate will include both his exclusive properties and the conjugal/communities properties of his marriage.

Note: Proceeds of life insurance are: a) Conjugal or community property if the money used to pay the premiums comes from the conjugal or community funds; b) Exclusive property of the decedent, if the money used to pay the premiums comes from the decedent’s exclusive properties; c) Partly conjugal or community property and partly exclusive property of the decedent if the premiums were paid partly from the conjugal funds and partly from the exclusive funds of the decedent.

EXEMPT TRANSFERS Transfers of properties not owned by the decedent 1. Merger of the usufruct in the owner of the naked title 2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary 3. The transmission from the first heir, legatee, or donee in favor of another beneficiary in accordance with the desire of the predecessor 4. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate, executor or administrator 5. Properties held in trust by the decedent 6. Separate properties of the surviving spouse of the decedent 7. Transfer by way of bona fide sales

1. Merger of the usufruct in the owner of the naked title Illustration Mr. A died in June 2011. In his will, he devised an agricultural land to B who shall use the property over 10 years and thereafter to Q Subsequently B died resulting in the transmission of the property to C. Predecessor

Current decedent

A

B

C

Usufructuary

Owner of naked title

The transfer of the devise from B to C is referred to in law as the “merger of the usufruct in the owner of the naked title.”

The transfer from the usufructuary, 8, to the real owner, C, upon the death of B does not constitute a donation mortis causa as it is a mere return of the property to the real owner, Hence, it is excluded from gross estate. Note that the transfer from Mr. A, the predecessor, of the usufruct to B and the naked title to C involves transfer of ownership. It is a donation mortis causa of Mr. A subject to estate tax.

2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary Illustration Mr. A died leaving an inheritance consisting of several real estates to his favorite grandson C from his favorite son B. Because C was a minor Mr. A appointed B, as fiduciary of the inheritance. Before transferring the property to C, B died. Predecessor

Current decedent

A

B

C

Fiduciary heir

Fideicommissary heir

The delivery of the inheritance upon the death of B (fiduciary heir), to C (fideicommissary) shall not be included in the gross estate of B because the transfer does not involve a transfer of ownership from B to C. B is merely a trustee. The delivery is a mere return o/ the property to the real owner, C.

3. The transmission from the first heir, legatee, or donee in favor of another beneficiary in accordance with the desire of the predecessor In his will Mr. A devised a piece of land to B as the first heir and thereafter to C as the second heir. B subsequently died transmitting the property to C in accordance with Mr. A’s will. Predecessor

Current decedent

A

B

C

1st heir

2nd heir

The transfer from B to C is referred to as transfer under a special power of appointment. The same is not B's donation mortis causa. The transfer from B to C is merely an implementation of the transfer which was originally mandated by predecessor A.

The same rule applies even if B were given the power, solely or in conjunction with others, to appoint the second heir to the property from a list drawn by predecessor A. In all previous illustrations, assuming B transferred the property during his lifetime to C the same shall not be subject to donor's tax because there is no gratuitous transfer of ownership.

4. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate, executor or administrator The proceeds of life insurance policies which are irrevocably designated by the decedent to the beneficiary are no longer owned by the decedent at the point of his/her death. They are owned by the beneficiary designated by the decedent Hence these shall not be included in gross estate.

5. Properties held in trust by the decedent

6. Separate properties of the surviving spouse of the decedent Spouses have their separate properties and common properties. Common properties are owned jointly by the spouses while separate or exclusive properties are solely owned by either of them. The separate or exclusive properties of the husband are referred to as “husband’s capital” while that of the wife is referred to as “wife’s paraphernal” The wife’s paraphernal shall not be included in the gross estate of the husband upon his death since these will not form part of his donation mortis causa. Similarly, the husband's capital shall not be included in the gross estate of the wife upon her death on the same basis. The gross estate of a married decedent includes the separate properties of the decedent and their common properties with the surviving spouse.

7. Transfer by way of bona fide sales Transfers by way of bona fide sales are onerous transactions rather than gratuitous transactions; hence they are not subject to estate tax. Moreover, ownership over properties sold normally passes on to the buyer immediately at the point of sale.

Other exemptions from the estate tax: (a) 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 not more than 30% of the said bequests, devices, legacies, or transfers shall be used by such institutions for administration purposes (Sec. 87, NIRC) (b) Proceeds of life insurance and benefits received by members of the Government Service Insurance System (“GSIS”). (P.D. No. 1146); (c) Benefits received by members from the Social Security System by reason of death (R.A. No. 1161, as amended); (d) Amounts received from the Philippine and Unites States governments for war damages (R.A. 227); (e) Amounts received from the United States Veterans Administration (R.A. No. 360); (f) Retirement benefits of employees of private firms from private pension plans approved by the BIR; (g) Intangible personal property located in the Philippines of a non-resident alien decedent under the principle of reciprocity (Sec. 104, NIRC); and Personal Equity and Retirement Account (“PERA”) assets shall not be considered assets of the Contributor for purposes of estate tax (R.A. No. 9505). Furthermore, Qualified PERA Distributions received by the Contributor, or in case of the death of the Contributor, received by his heirs or beneficiaries, whether in a lump sum or pension for a definite period or lifetime pension, shall not be subject to estate tax (Sec. 10, Rev. Regs. No. 17-2011) (h) Bank deposits withdrawn from the decedent account during the settlement of the estate.

VALUATION OF THE GROSS ESTATE -

Properties shall be valued at the time of death of the decedent

Property Usufruct, use, habitation, annuity

Valuation Value shall be based on the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table approved by the Department of Finance

Real Property

FMV which is the higher of the zonal value or the assessor’s value

Personal Property

Generally, FMV at the time of death of the decedent

Stocks listed in the stock exchange

Average of the lowest and highest quotes on the valuation date (date of death) or day nearest to the valuation date

Stocks not listed in any local exchange

For common shares: Book value on the valuation date (date of death), or on the date nearest the valuation date For preferred shares: par value

Notes; accounts receivable Units of participation in any association, recreation, or amusement club

FMV is the discounted amount of the unpaid principal plus interest FMV is the bid price nearest the date of death published in any newspaper or publication of general circulation

PROPERTIES OF SPOUSES -

The extent of the gross estate of the decedent shall depend upon the property relations between the decedent and his/her spouse.

Property Regimes: 1) Absolute Community of Property (”ACP”); 2) Conjugal Partnership of Gains (“CPG”); 3) Separation of Property The spouses may, in a pre-nuptial agreement (marriage settlement), agree upon the regime that shall govern their property relations. However, in the absence of a marriage settlement, the property relations shall be governed by: a) The CPG for those married before August 3, 1988; or b) The ACP for those married on or after August 3, 1988.

What is the CPG? Exclusive Property of Husband 1) Property owned before marriage; 2) Property acquired during the marriage by gratuitous title (by inheritance or donation); 3) Property acquired with the exclusive money of the husband, or exchanged for exclusive property of the husband. 4) Property designated as exclusive in a marriage settlement. Husband

Exclusive Property of Wife 1) Property owned before marriage; 2) Property acquired during the marriage by gratuitous title (by inheritance or donation); 3) Property acquired with the exclusive money of the wife, or exchanged for exclusive property of the wife. 4) Property designated as exclusive in a marriage settlement. Wife

Conjugal Properties 1) Properties acquired by onerous title using the common funds (even if the property is only for one of the spouses); 2) Properties obtained from the labor or work of the spouses during marriage; 3) Properties acquired by chance such as winnings from gambling or betting. (However, losses therefrom shall be borne exclusively by the loser-spouse). 4) Fruits (natural or civil) and income of the conjugal properties; 5) Fruits (natural or civil), and income of the exclusive properties of each spouse;

What is the ACP? Exclusive Property of Husband

Exclusive Property of Wife

1) Property acquired during the marriage by gratuitous title (by inheritance of donation) UNLESS the donor or testator expressly provides that the property shall form part of the community property; 2) Fruits and income of exclusive properties; 3) Properties for the personal or exclusive use of the husband except jewelry; 4) Property acquired before marriage by the husband who has legitimate descendants from a previous marriage. 5) Property designated as exclusive in a marriage settlement.

1) Property acquired during the marriage by gratuitous title (by inheritance of donation) UNLESS the donor or testator expressly provides that the property shall form part of the community property; 2) Fruits and income of exclusive properties; 3) Properties for the personal or exclusive use of the husband except jewelry; 4) Property acquired before marriage by the husband who has legitimate descendants from a previous marriage. 5) Property designated as exclusive in a marriage settlement.

Wife

Husband

Conjugal Properties 1) ALL properties owned by the spouses at the time of the marriage (except (4) above). 2) ALL properties acquired thereafter. 3) Fruits and income of the community properties

Reference: 1. Banggawan, Business and Transfer Taxation, 2019 Ed., Pasay: Real Excellence Publishing...