NET ESTATE AND ESTATE TAXATION

Basic Formula: Gross Estate Deductions = Net Estate Net Estate x Estate Tax Rate = Estate Tax

DEDUCTIONS
A. Funeral Expenses The allowable deduction is the amount actually incurred or 5% of the Gross Estate whichever is lower, but in no case can it exceed P 200,000. Example: A Gross estate 1. Actual expenses 2. 5% of gross estate 3. Maximum allowed deduction Deduction is P 2,500,000 100,000 125,000 200,000 B 3,500,000 185,000 175,000 200,000 C 4,500,000 250,000 225,000 200,000

100,000

175,000

200,000

B. Judicial Expenses Includes attorneys fees, accountants fees, court fees, appraisers fees, fees of executor or administrator, etc. C. Claims against the Estate An obligation contracted by the decedent while he was still alive, but wasnt able to pay such obligation during his lifetime. The creditor is allowed to claim the amount from the estate, and such amount becomes a deduction from gross income.

D. Unpaid Mortgages An encumbrance (burden) on the property that was left unpaid by the Percentage 1oo% 80% 60% 40% 20% decedent. E. Casualty Losses Losses incurred by reason of: 1. Fires, storms, shipwrecks, or other casualties or; 2. Robbery, theft or embezzlement. It is a requirement that the loss was not compensated by any insurance policy. Otherwise, it would be unfair for the government if the estate can recover twice. F. Vanishing Deductions/Property Previously Taxed or PPT This is allowed to lessen the impact of successive taxation of the same property within a very short period (5 years) due to the death of the decedent-transferee (second or present decedent). Transfer for more than: One year Two years Three years Four years But not more than: One year Two years Three years Four years Five years

Table for Vanishing Deduction Percentage

How to find the Vanishing deduction: 1. Find the initial basis: Value of Property Mortgage Debt = initial basis 2. Find the second deduction: Initial basis Expenses = Second Deduction Gross Estate 3. Find the Final Basis and the Vanishing Deduction

Initial Basis second deduction = Final Basis Final basis x percentage of vanishing deduction = Vanishing Deduction Sample Problem: Mr. E died in February 2009 leaving behind a property worth P 3,000,000. This was inherited by his son D. D died on July 2011, with a gross estate of P 7,000,000. The Funeral Expenses incurred were 150,000 and medical expenses of 90,000. The mortgage debt was 20,000. Total expenses: *150,000 + 90,000 = 240,000 1. Initial basis: 3,000,000 20,000 = 2,980,000. 2. Second Deduction: (2,980,000/7,000,000) x 240,000* = 102,171.43 3. Final Basis and VD 2,980,000 102,171.43 = 2,877,828.6 2,877,828.6 x 60%* = 1,726,697.2 VD *We used 60% because the transfer was for more than 2 years but not more than 3 years ( Mr. E died Feb 2009, D died July 2011) G. Family Home Limit is P 1,000,000; Total value of Family Home must be included in the Gross Estate

H. Standard Deduction Only available to the following: 1. Resident Citizen Decedents; 2. Non-resident Citizen Decedents;

3. Resident Aliens. Fixed Standard Deduction = P 1,000,000. I. Medical Expenses Must be incurred within 1 year prior to the death of the decedent; Must be substantiated with receipts; Limit is only P 500,000; ESTATE TAX Table for Estate Tax Rates If net estate But not over is over P 200,000 P 200,000 500,000 500,000 2,000,000 2,000,000 5,000,000 5,000,000 10,000,000 10,000,000 And over Basic Formula: Tax shall be Exempt 0 15,000 135,000 465,000 1,215,000 Plus 5% 8% 11% 15% 20% Of the excess over P 200,000 500,000 2,000,000 5,000,000 10,000,000

Gross Estate - Deductions = Net Estate Net Estate x Estate Tax Rate = Estate Tax Sample problems: A died leaving behind the following properties. Landholdings worth P 2,000,000, a family home worth 700,000, and cash worth 2,000,000. The funeral expenses incurred by his family was 275,000. Medical expenses of 565,000 were likewise incurred. How much is the: 1. Net Estate; 2. Estate Tax.

Solution: Funeral Expense: Actually incurred 275,000 5% of Gross Est 235,000 Max allowed 200,000 Deduction is 200,000 Gross Estate: P 2,000,000 (landholdings) 2,000,000 (cash) 700,000 (family home) P 4,700,000 Gross Estate P 4,700,000. Less: Standard Ded 1,000,000 Funeral Exp 200,000 Medical Exp 500,000 Family Home 700,000 Total Deductions: 2,400,000 Net Estate 2,300,000 Estate Tax: On the first 2,000,000 tax is 135,000 Plus 11%* x 300,000* 33,000 Estate Tax is P 168,000 * we used 11% because basing on the chart, net estate of 2,300,000 is over 2,000,000 but not over 5,000,000. * 300,000 is the excess of 2,300,000 over 2,000,000. Sample problem with Vanishing deduction: X died in January 2007 leaving behind a car worth 1,000,000. This was inherited by Y who also died in August 2011. Y left an estate of 5,000,000 (inclusive of the car from X). His family incurred funeral expenses of 200,000, and medical expenses of 450,000. Compute for:

1. Vanishing deduction; 2. Net Estate; 3. Estate Tax. 1. Vanishing deduction a. Initial Basis: 1,000,000 0 = 1,000,000. (no mortgage debt) b. Second Deduction (1,000,000/5,000,000) x 650,000 = 130,000 c. Final Basis and VD 1,000,000 130,000 = 870,000 870,000 x 60% = 522,000. 2. Net Estate: Gross Estate: P 5,000,000 Less: Standard Deduction 1,000,000 Funeral Expenses 200,000 Medical Expenses 450,000 Total Deductions 1,650,000 Net Estate 3,350,000

3. Estate Tax: On the first 2,000,000 tax is Plus 11% x 1,350,000 Total Estate Tax 135,000 148,500 P 283,500

Good Luck