Exemptions and Exclusions from the Gross Estate

The following shall be excluded from the gross estate of a decedent:

A.      Under Sections 85 and 86, NIRC

1.       Capital or exclusive property of the surviving spouse

2.       Properties outside the Philippines of a non-resident alien decedent

3.       Intangible personal property on the Philippines of a non-resident alien under the Reciprocity Law

B.      Under Sec. 87, NIRC

    

   1.   The merger of 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 fideicommisary; 

3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and

4.        All bequest devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual:  Provided, however, that not more than thirty percent (30%) of the said bequest, devises, legacies or transfers shall be used by such institutions for administration purposes.

The government agency empowered to determine the exemption is the BIR.  To enable it to exercise such power, the value of transfer to social welfare, cultural and charitable institutions should be included in the gross estate first, then,  an equal amount, may be taken up as a deduction.

While the Tax Code includes item 4 above in the exempt acquisitions and transmissions, it is actually considered a deduction from the gross estate because it is required to include it in the gross estate first before deducting the same.  Failure to include the property transferred to social welfare, cultural or charitable institutions will impair the power of the BIR to assess taxes properly.  This rule is not applicable to items 1, 2 and 3.

Items 1, 2, 3 above are excluded in the gross estate of the decedent to prevent indirect double taxation.  Such transfers, unlike in item 4, were already previously tax.  Exemption of item 4 is based on public policy.

A fiduciary heir (first heir) is called to the succession with an obligation clearly imposed upon him to preserve the property and transmit it to the second heir.  A fideicommissary (second heir) is a person to whom the property is transmitted by the first heir.  Pending transmission of property, the fiduciary is entitled to all the rights of a usufructuary, although the fideicommissary is entitled to all the rights of a naked owner.

Elements of a fideicommissary substitution:

a)       The substitution must not go beyond one degree from the heir originally instituted (i.e. father to son).

b)      The fiduciary or first heir and the fideicommissary and the second heir must be both living at the time of the testator’s death

C.       Under Special Laws

1.       Proceeds of life insurance and benefits received by members of the GSIS (RA728).

2.       Benefits received by members from the SSS by reason of death (RA1792).

3.       Amounts received from Philippine and United States governments for war damages.

4.       Amounts received from United States Veterans Administration.

5.       Benefits received from the Philippines and US government for damages suffered during World War II (RA227).

6.       Retirement benefits of officials/employees of a private firm (RA4917).

7.       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).

8.       Life Insurance proceeds on life insurance policy taken out by the decedent himself, upon his own life, where the beneficiary is a third person and is irrevocably designated.

9.       Life Insurance proceeds on Insurance policy (group insurance) taken out by his employer on the employee’s life, whoever the beneficiary maybe, whether the designation as beneficiary is revocable or irrevocable.