ESTATE TAX

GROSS ESTATE
Gross estate includes the value, at the time of death of the estate owner, of all
property, real or personal, tangible or intangible, wherever situated.

Current Estate Tax Rate in the Philippines:

The following are includible in the computation for the taxable gross estate:
1. Interest in any Property Whenever a person has interest in any
property, the value of such interest at the time of his death shall form part
of his gross estate. The term interest broadly defined denotes a right to
have the advantage accruing from anything; any right in the nature of
property, but less than title.
2. Transfers in Contemplation of Death - Any interest of estate owner in
a property that is transferred at any time, by trust or otherwise, in
contemplation of death, shall be includible in the computation of the gross
estate.
This means that properties transferred with the thought of impending
death and its consequent tax implications on the property as the primary
considerations would have the effect of the transferred properties being
included in the determination of the gross estate and, thus, subject to
estate tax. Note that, unlike in previous tax laws, there is no longer a
three-year presumption that says that any transfer made within three

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years from the date of transfer to the date of death shall be deemed to
have been made in contemplation of death.
Thus, any transfer can be considered as one motivated by the thought of
death regardless of when death actually occurs if circumstances point to
such conclusion, such as: the age of the decedent at the time the transfers
were made; the health of the estate owner at the time of transfer,
especially where he was aware of his terminal illness; the length of time
between the dates of transfer and death, where the shorter the interval,
the more suggestive of the transfer being done in contemplation of death;
and the amount of property transferred in proportion to the amount of
property retained.
But the Tax Code provides and exception, in case of bona fide sale for an
adequate and full consideration in money or moneys worth. Therefore, the
value of the properties transferred shall not be included in the
computation of the gross estate of the decedent-estate owner.
3. Transfers with Retention of Certain Rights Transfers that contain
conditions that retain in the transferor significant ownership rights are
includible in the determination of the gross estate of the decedenttransferor. Significant powers are retained when the transferee is
incapable of freely enjoying or disposing of his interest in the transferred
property until the transferors death.
When the transfer does not completely convey possession and enjoyment
of a property to the transferee, such transfer is disregarded for purposes of
determining the gross estate of the decedent estate owner.
But the exception in case of bona fide sale for an adequate and full
consideration in money or moneys worth also applies here.
4. Revocable Transfers Any transfer where the enjoyment of such
transferred property is subject to any change (to alter, amend, revoke or
terminate) at the date of death of the transferor is includible in the gross
estate.
Just like in transfers with conditions, there is no complete and absolute
transfer here because the transferor still has the power to alter, amend,
revoke or terminate the transfer at the time of his death. When such
power is retained, the transferor is still effectively exercising significant
ownership rights over the property, which justifies the inclusion of the
latter in the determination of the gross estate.
5. Transfers under General Power of Appointment A power of
appointment refers to a right to designate the person or persons who shall
enjoy or posses certain property. In this instance, although the person
who is given this right is not the owner of the property, he nonetheless is
granted the authority to appoint any person he wishes, including himself,
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to enjoy or possess said property and have full dominion over the same as
though he owned it, by virtue of a general power of appointment. The tax
code basically says that, for purposes of estate taxation, the power to
dispose of property by the exercise of a power of appointment by will or by
deed in certain cases is the equivalent of ownership, hence, properties
passing under such power are includible in the gross estate.
6. Transfer for Insufficient Consideration If a transfer is for a
consideration in money or moneys worth, and such is not a bona fide sale
for an adequate or full consideration, the difference between the fair
market value and the value of consideration received by the transferor
shall be included in the determination of gross estate. This is obviously
intended to plug the loophole of under pricing the property in a sale to
facilitate transfers.
7. Proceeds of Life Insurance Life insurance proceeds are to be included
in the gross estate except when the designation of the beneficiary is
irrevocable.
ALLOWABLE DEDUCTIONS
Allowable deductions from the gross estate in arriving at the taxable net estate
includes:
1. Expenses, Losses, Indebtedness, and Taxes
a. Funeral Expenses whichever is lower between the actual
expenses or an amount equivalent to 5% of the gross estate,
provided that in no case shall the deduction exceed P 200,000.
b. Judicial Expenses includes executors or administrators
renumeration, lawyers and accountant fees, and other fees and
expenses in relation to the preservation of the estate. However, this
does not include cost of litigations due to conflicts in estate
settlement.
c. Claims against the Estate these are unpaid indebtedness of the
estate owner. However, for an indebtedness to be recognized as a
deductible, there has to be a debt instrument duly notarized at the
time the indebtedness was incurred. Also, if the loan was contracted
within three (3) years before the death of the estate owner, the
administrators or executor is required to submit a statement
showing the disposition of the proceeds of the loan.
d. Claim against insolvent persons Unpaid claims of the estate
owner against persons who are insolvent are deductible provided
that the value of the estate owners interest in the claim is included
in the value of the gross estate.

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e. Unpaid Mortgages this is similar to claims against the estate

where any outstanding indebtedness relative to a mortgaged
property is deductible from the gross estate provided that the full
value of the mortgaged property is included in the value of the
gross estate.
f. Unpaid Taxes these involve those that have become payable
prior to the death of the estate owner. It does not include any
income tax upon any income received by the estate after the death
of the estate owner or property taxes not accrued before his death.
g. Losses Also deductible are losses incurred during the settlement
of the estate arising from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement.
i. When such losses are not compensated for by insurance or
otherwise;
ii. If at the time of the filing of the return, such losses have not
been claimed as a deduction for income tax purposes in an
income tax return; and
iii. Provided that such loses were incurred not later than the last
day for the payment of estate tax.
2. Property Previously Taxed (Vanishing Deductions) this deduction is
allowed when a property previously transferred by gratuitous title and
taxed by either estate or donors tax is to be transferred and taxed anew
by virtue of the death of the transferee heir or donee. The allowable
deduction is:
a. One hundred percent (100%) of the value of the estate if the prior
estate owner or donor died within one (1) year prior to the death of
the heir or donee.
b. Eighty percent (80%) of the value of the estate if the prior estate
owner or donor died more than one (1) year but not more than two
(2) years prior to the death of the heir or donee.
c. Sixty percent (60%) of the value of the estate if the prior estate
owner or donor died more than two (2) years but not more than
three (3) years prior to the death of the heir or donee.
d. Forty percent (40%) of the value of the estate if the prior estate
owner or donor died more than three (3) years but not more than
four (4) years prior to the death of the heir or donee.
e. Twenty percent (20%) of the value of the estate if the prior estate
owner or donor died more than four (4) years but not more than five
(5) years prior to the death of the heir or donee.
3. Transfers for Public Use The amount of all bequests, legacies, devises,
or transfers to or for use of the Government of the ROP, or any of its
political subdivisions shall be deductible provided that said property is
exclusively used for public purposes.
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4. The Family Home An amount equivalent to the surrent fair market

value of the decedents family home shall be deductible provided that if
the said current fair market value exceeds one million pesos (P 1,000,000),
the excess shall be subject to estate tax; and provided further that the
family home must have been the decedents family home as certified by
the barangay captain of the locality.
5. Medical Expenses Medical expenses incurred by the decedent within
one (1) year prior to his death which shall be duly substantiated with
receipts shall also be deductible up to a maximum of five hundred
thousand pesos (P500,000)
6. Retirement Benefits The retirement benefits received by officials and
employees of private firms, whether individual or corporate, in accordance
with a reasonable private benefit plan maintained by the employer, shall
be exempt from all taxes (RA 4917). Thus, any amount received by the
heirs from the decedent-employee as a consequence of the death of the
decedent-employee in accordance with RA 4917 shall be deductible
provided that such amount received is included in the gross estate of the
decedent.
7. Share of Surviving Spouse - It refers to the net (1/2) share of the
surviving spouse in the conjugal partnership or community property as
diminished by the obligations properly chargeable to such property.
VALUATION OF THE ESTATE
Under the National Revenue Code, the estate shall be appraised at its Fair
Market Value (FMV) as of the time of death. FMV is defined as the price at
which a seller is willing to sell and a buyer is willing to buy, both being under
no abnormal pressure to buy or sell.
However, the appraised value of real property as of death shall be whichever
is higher of the following:
1. The fair market value as determined by the Commissioner; or
2. The fair market value as shown in the schedule of values of the
provincial and city assessors.
The valuation of the property to be included in the gross estate is thus
necessary in order to compute the estate tax.
The BIR Commissioner is given the authority by the Tax Code to divide the
Philippines into different zones or areas, and shall, upon consultation with
competent appraisers both from private and public sectors, determine the fair
market value of real property located in each zone or area.

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Valuation of Personal Property

1. In general personal property, whether tangible or intangible, shall be
appraised at the its fair market value. It should be noted that what is
regarded as sentimental value is practically disregarded.
2. Shares of Stocks
a. Unlisted common shares (e.g. closely held corporation) are
valued based on their book value while unlisted preferred shares
are valued at par value.
b. Shares listed in stock exchange, the fair market value shall be
the arithmetic mean between the highest and lowest quotation
at a date nearest the date of death, if none is available on the
date of death itself.
3. Goodwill - is not included in valuing the estate.
4. Notes and accounts receivable the amount of the principal and
interest due and unpaid.
5. Valuation of rights or interest in the property valuation of usufruct.
NOTICE OF FILLING OF RETURN
The executor, administrator, or any of the legal heirs, as the case may be
shall give a written notice thereof to the Commissioner of Internal Revenue
within two (2) months after the decedents death. The two (2) months period
does not refer to calendar months; it means 60 days.

Contents of Estate Tax Return (Form 1801)

1. The value of the gross estate of the decedent at the time of his death
2. The deductions allowed from gross estate in determining the net
estate; and
3. Supplemental data as may be necessary to establish the correct taxes
4. Where the gross value of estate exceeds P2,000,000 it must be
supported with a statement, duly certified to by CPA, containing the
following:
a. Itemized assets of the estate of the decedent with their
corresponding gross value at the time of his death,
b. Itemized deductions allowed from the gross estate; and
c. The amount of tax due whether paid or still due and
outstanding.
Important Notes on Estate Tax:
1. Estate tax is payable in CASH There can be no barter or exchanging a
property for payment of taxes.
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2. The estate tax return must be filed and paid within six (6) months from
the date of death of the estate owner. However, payment of tax can be
extended, but only upon petition by the heirs and subsequent findings
and favorable ruling by the bureau that the deadline would impose
undue hardship upon the estate or any of the heirs. However, such
extension cannot exceed 2 years for extra judicial settlement cases and
5 years for cases involving settlement by the courts.
3. Failure to file or pay on time or filing the return with a person of office
other than those authorized will result in a surcharge of 25 %. The
surcharge may run to as high as 50% in case of willful neglect to file
the return or when a false or fraudulent return is filed.
4. For as long as the estate tax becomes due and remains unpaid, an
additional penalty of 20% annually shall be imposed on the unpaid tax
liability.

Samples of Net Taxable Estate Computation

1. Decedent is a married man with surviving spouse:
a. Family home is his exclusive property

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