11 Possible Deductions from your Estate

Tax
In computing estate tax, the amount can sometimes be so outrageous and
irritatingly hefty it can nearly wipe off the total net amount the heirs will be
receiving from the estate of a deceased.

Oh yes, I have definitely encountered widows who wished their husbands have
done some estate planning. It is even worse when people have failed to settle their
estate taxes for the longest time so that penalties and surcharges have gravely and
enormously accrued. This is such a frustrating tax condition because considering
the grief/state the heirs might still be in, the last thing they need is the government
telling them: We are sorry for the death of your loved one, but this is how much
you owe us and you still have to pay us.

Sadly, there is no way getting around it because we have to submit to the power of
the government to tax us, even if we are already 6 feet below the ground. Dont they
say that tax, aside from death, is the only thing that is certain on earth? Talk about
ironies.

That is why as property owner and/or prospective property owner it wont hurt to
know some key information about estate taxation. Apart from estate planning,
(this was already discussed in previous blog) below are some deductions one
should consider or prepare for to write off as deductions from the estate of a
deceased or decedent.
A) If the decedent is a Citizen or a Resident, the following deductions are allowed:

1. Actual funeral expenses or in an amount equal to five percent (5%) of the gross
estate, whichever is lower, but not to exceed Two hundred thousand pesos
(P200,000);

2. Judicial expenses of the testamentary or intestate proceedings;

3. Claims against the estate subject to certain documentary requirements such as i)

duly notarized debt instrument executed at the time of indebtedness; and ii) if the
loan was contracted within three (3) years before the death of the decedent, a
statement showing the disposition of the proceeds of the loan;

4. Claims of the deceased against insolvent persons provided such value is included
in the gross estate;
5. Unpaid mortgages upon, or any indebtedness in respect to, property provided the
value of decedent's interest therein, undiminished by such mortgage or
indebtedness, is included in the value of the gross estate.

6. Property Previously Taxed. this deduction is otherwise called vanishing

deductions and involves a property previously taxed (for either donors or estate
tax) because of the death and/or transfer of prior decedent to the present decedent.
The amount to be deducted, equal to percentage value of the property, depends on
time frame of the death of prior decedent from the death of present decedent. For
example, if prior decedent died within one year to the death of the present
decedent, the deduction is equal to 100% of the value of the property. Such value
to be deducted vanishes by percentage as the time frame of death increases. Below
is the table of percentage value to be deducted:

100% - 1 year from death

80% - More than 1 year from death but not more than 2 years
60% - More than 2 years from death but not more than 3 years
40% - More than 3 years from death but not more than 4 years
20% - More than 4 years from death but not more than 5 years

7. Transfers for Public Use. All amounts given as bequests, legacies, devises or
transfers to or for the use of the Government of the Republic of the Philippines, or
any political subdivision thereof, for exclusively public purposes.

8. Family Home. - An amount equivalent to the current fair market value of the
decedent's family home: Provided, however, That if the said current fair market
value exceeds One million pesos (P1,000,000), the excess shall be subject to estate
tax. This deduction shall be supported by a Certificate by the barangay captain of
the locality.

9. Standard Deduction. - An amount equivalent to One million pesos (P1,000,000).

10. Medical Expenses. - Medical Expenses not exceeding Five Hundred Thousand
Pesos (P500,000) incurred by the decedent within one (1) year prior to his death
which shall be duly substantiated with receipts.

11. Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by
the heirs from the decedent - employee as a consequence of the death of the
decedent-employee in accordance with Republic Act No. 4917: Provided, That
such amount is included in the gross estate of the decedent.

Watch out for my next blog for allowable deductions in case the decedent is a non-
resident of the Philippines.
 DEDUCTIONS FROM THE GROSS ESTATE (Citizen and/or Resident
Decedents)
A. ELITE (Expenses, Losses, Indebtedness, Taxes, etc.)
1. Funeral expenses
Actual Funeral expenses or 5% of the gross estate, whichever is lower, provided it does
exceed P 200,000, shall be allowed as a deduction from the gross estate (common property, if
applicable) of the decedent. To be considered actual, the funeral expenses must be paid out of
the estate, not by somebody or out of contributions from friends and relatives. Supporting
receipts or invoices or other evidence shall also be furnished.

Example of Funeral Expenses:

a) mourning clothes (surviving spouse and unmarried minor children only)
b) expenses of the wake preceding the burial including food and drinks
c) fees for religious rites and ceremonies prior to interment
d) cost of burial plot, tombstone, mausoleum but not their upkeep. In case the deceased owns a
family estate or several burial lots, only the value corresponding to the plot where he is buried
is deductible.
e) Publication and telecommunication charges for death notices
f) interment and/or cremation charges

2. Judicial expenses
Judicial expenses refer to expenses of testamentary or intestate proceedings for the benefit
of the estate, incurred during settlement of the estate supported by receipts or invoices or by a
sworn statement of account issued and signed by the creditor in case of unpaid
amounts. Settlement periodmeans not beyond the last day prescribed by law to file the estate
tax return (6 months from death) or the extension thereof.

Example of Judicial Expenses:

a) Actual judicial or court expenses
b) Attorneys fees
c) Expenses of administration such as, but not limited to
- Inventory taking of assets comprising the gross estate
- Payment of debts of the estate
- Distribution of the estate among the heirs.
- Accountants fees
- Fees of executor/administrator
- Appraisers fees
- Clerks hire
- Cost of preserving and distributing the estate
- Cost of string or maintaining the property of the estate
- Brokerage fees

3. Indebtedness or Claims against the Estate

These are debts or demands of pecuniary nature which could have been enforced against the
deceased in his lifetime and could have been reduced to simple money terms. The liability
represents a personal obligation of the deceased existing at the time of his death. The liability was
contracted in good faith and for adequate and full consideration in money or moneys worth

Requisites in order to be allowed as a deduction:

a. Must be valid in law and enforceable in court against him when he was alive
b. It must not have been condoned by the creditor or the action to collect from the decedent must
not have been prescribed.
c. If with a debt instrument, it must be notarized, except for loans granted by financial
institutions where notarization is not part of the business practice/policy of the financial
institution-lender.
d. If contracted within three (3) years before the death of the decedent, a statement under oath
(by the executor/administrator) must be executed and must be attached therewith a statement
showing the disposition of the proceeds of the loan.

The following Unpaid Expenditures shall not be deductible from the gross estate under this category
a) Funeral expenses
b) Medical expenses

4. Claims against an insolvent person

These are claims that are not collectible. An insolvent is person whose properties are not
sufficient to satisfy, whether fully or partially, his debts. For purposes of estate taxation, a
judicial declaration of insolvency is not required but the incapacity of the debtors to pay their
 obligation should be proven. To be allowed as a deduction from the Gross Estate, the full amount
owed by the insolvent must first be included in the decedents Gross Estate. If the insolvent could
only pay partial, the full amount owed shall be included in the Gross Estate, and the amount
uncollectible shall be allowed as a deduction.

5. Unpaid mortgages or indebtedness on property

This is a deduction allowed when the decedent leaves property encumbered by a mortgage
or indebtedness contracted in good faith and for adequate and full consideration. To be allowed
as a deduction, his gross estate must include the fair market value of the property
encumbered. The amount allowed as a deduction would be the outstanding debt or mortgage.

6. Taxes
These are unpaid taxes that accrued prior to the death of the decedent. However, the
following are not allowed as a deduction:
a) Income tax on income received after death
b) Property taxes accrued after death
c) Estate tax

7. Losses
Include all losses incurred during the settlement of the estate arising from fires, storms,
shipwreck or other casualties, or from robbery, theft or embezzlement. The amount deductible
is the value of the property lost.

Requisites to be allowed as a deduction:

a) arising exclusively from:
a. acts of God: fire, storm, shipwreck and other similar casualty
b. acts of man: robbery, theft, embezzlement
b) not compensated by insurance or otherwise
c) not claimed as a deduction in an income tax return of the estate subject to income tax
d) occurred during the settlement of the estate and
e) occurred before the last day for the payment of estate tax (six months after the death of the
decedent)

B. TRANSFERS FOR PUBLIC USE

* Dispositions in a last will and testament or transfers to take effect after the death in favor of the:
1. government of the Philippines
2. any political subdivision thereof (e.g. barangay, province, city municipality)
* for exclusively public purposes

C. VANISHING DEDUCTION
* Referred to as a deduction for property previously taxed in the Tax Code
* It is an amount allowed to reduce the taxable estate of a decedent where the property:
1. received by him from a prior decedent by gift, bequest, device or inheritance
2. transferred to him by gift
3. Has been the object of previous transfer taxation

* Requisites for deduction:

1. death the present decedent died within 5 years from the date of death of the prior decedent
or date of gift
2. identity of property the property with respect to which deduction is sought can be identified
as the one received from the prior decedent, or from the donor, or as the property acquired in
exchange for the original property so received
3. located in the Philippines the property on which vanishing deduction is being claimed must
be located in the Philippines
4. inclusion of the property the property must have formed part of the gross estate situated in
the Philippines of the prior decedent or have been included in the total amount of the gifts of the
donor made within 5 years prior to the present decedents death
5. previous taxation of the property the estate tax on the prior succession, or the donors tax on
the gift must have been finally determined and paid by the prior decedent or by the donor as the
case maybe and
6. no previous vanishing deduction on the property no such deduction on the property, or the
property given in exchange therefore, was allowed in determining the value of the net estate of
the prior decedent.

Pro-forma computation of vanishing deduction:

Value to take*** Pxx
 Less: Paid mortgage (1st deduction) (xx)
Initial basis xx
Less: Proportionate expenses(2nd deduction):

Initial basis x ELITE plus transfer for

public use
Gross estate (xx)
Final basis xx
x vanishing deduction percentage %
Vanishing Deduction Pxx

***Value to take is the lower amount between the value of the property in the gross estate of
the prior decedent or value of the gift and value of the same property in the gross estate of the
present decedent.

Vanishing deduction rates:

If the period from receipt to decedents death is Rate %
Within one year 100
Beyond one year to 2 years 80
Beyond 2 years to 3 years 60
Beyond 3 years to 4 years 40
Beyond 4 years to 5 years 20

D. Amounts received by heirs under RA 4917

* Any amount received by the heirs from the decedents employer as a consequence of the death of
the decedent-employee in accordance with R.A. No. 4917, provided that the amount of
separation benefit is included as part of the gross estate of the decedent.

E. Standard deduction
* The law allows a standard deduction of P 1,000,000; no qualification, condition nor requisite
whatsoever.
F. Family Home
* Requisites for deduction:
1. the decedent was married or if single, was a head of the family
2. along with the decedent, either of the following persons must be dwelling in the family home:
a. spouse
b. parents or ascendants
c. children or descendants
d. brothers and sisters
3. the family home as well as the land on which it stands must be owned by the
decedent. Therefore, the FMV of the family home should have been included in the computation
of the decedents GE.
4. the Barangay captain of the locality where it is located must certify it as a family home.

* The amount of family home allowable as a deduction would be whichever is lower of:
1. P 1,000,000 or
2. FMV, at the time of the decedents death, of the family home and the land on which it stands

G. Medical expenses
* Requisites for deduction:
1. incurred by the decedent within 1 year prior to his death and
2. substantiated by receipts
* The amount allowed as a deduction would be whichever is lowerof:
1. actual medical expenses incurred by the decedent
2. P 500,000