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 period means 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)      Attorney’s 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.

-  Accountant’s fees

-  Fees of executor/administrator

-  Appraiser’s fees

-  Clerk’s 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 money’s 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 decedent’s 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 decedent’s death

5.       previous taxation of the property – the estate tax on the prior succession, or the donor’s 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 decedent’s 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 decedent’s 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 decedent’s 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 decedent’s 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 lower of:

1.       actual medical expenses incurred by the decedent

2.       P 500,000

H.      Share of Surviving Spouse

Inclusions in Gross Estate

A.      Properties owned by the decedent actually and physically present in his estate at the time of his death such as land, buildings, shares of stock, vehicles, bank deposit, etc.

B.      Decedent’s Interest – Refers to the extent of equity or ownership participation of the decedent on any property physically existing and present in the gross estate, whether or not in his possession, control or dominion.  It also refer to the value of ANY INTEREST IN PROPERTY OWNED OR POSSESSED by the decedent at the time of his death (interest having value or capable of being valued, transferred)

Example:

·         Dividends declared before his death but received after death.

·         Partnership profit which have accrued before his death

·         Usufructuary rights, etc.

C.       Properties NOT PHYSICALLY IN THE ESTATE (these have already been transferred during the lifetime of the decedent but are still subject to payment  of estate tax)

1.       Transfer in contemplation of death

-  It is the thought of death, as a controlling motive which induces the disposition of the property for the purpose of avoiding the tax.

-  Value of properties transferred by the decedent during his lifetime in anticipation of his death

a.        transfer of property in favor of another person, but the transfer was intended to take effect only upon the transferor’s death

b.       transfer by gift intended to take effect at death, or after death, or under which the donor reserved the income or the right to designate the persons who should enjoy the income

Ø  Exception:  there is no transfer in contemplation of death when the transfer of property is a bona fide sale for an adequate and full consideration in money or money’s worth.

-  Included within this concept is donation mortis causa – becomes effective upon the death of the donor

2.       Transfer with retention or reservation of certain rights

-  The decedent have transferred his property during his lifetime, but retained for himself beneficial enjoyment of the thing or the right to receive income from the same.

3.       Revocable Transfers

-  It is a transfer where the terms of enjoyment of the property may be altered, amended, revoked or terminated by the decedent.

-  It is sufficient that the decedent had the power to revoked though he did not exercised the power.

4.       Transfers under a general power of appointment

Power of appointment

-  the right to designate the person or persons who will succeed to the property of the prior decedent.

General power of appointment

-  when it authorizes the donee to appoint any person he pleases.

-  The rule is the gross estate shall include any property passing or transferred under a general power of appointment exercised by the decedent

a)       By will

b)      By deed to take effect in possession or enjoyment at or after his death .

c)       By deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death.

d)      The possession or enjoyment of, or the  right to the income from the property.

e)       The right, either alone, or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom.

The donee of a general power of appointment holds the appointed property with all the attributes of ownership thus, the appointed property shall form part of the gross estate of the donee of the power upon his death. 

·         Transfers with Retention and Reservation of Certain Rights Over the Income or Enjoyment of the Property Transferred Transfers where the donor reserves the right to the income of the property until death;		These transfers do not actually convey full ownership over the property transferred hence the property still remains part of the gross estate of the transferor.
·         Transfers where the donor reserves the right to the possession or enjoyment of the property until death.

Special power of appointment

-  when the donee can appoint only from a restricted or designated class of persons other than himself

(NOTE:  Property transferred under a special power of appointment should be excluded from the gross estate.)

5.       Transfer for insufficient consideration

-  Property transferred by virtue of a bonafide sale for a price less than its fair market value at the time of sale.

-  The excess of the fair market value of the transferred property at the time of death over the value of the consideration received shall be included in the gross estate.

-  Two FMVs to be used:

a.        FMV of the property at the time of sale – to determine whether or not the consideration was full and adequate

b.       FMV of the property at the time of death -  to determine the amount to be included in the gross estate if the consideration received is less than full and adequate a compared to the FMV at the time of sale

6.       Proceeds of life insurance

-  Proceeds of life insurance taken out by the by the decedent on his own life shall be included in the gross estate if the following requisites are present:

1.                   it must be an insurance on the life of the decedent

2.                   the beneficiary must be either of the following:

a.                    his estate

b.                   his executor

c.                    his administrator and

d.                   any third person provided that the designation is not irrevocable

   NOTE:  When the problem is silent, the designation of beneficiary is revocable;  irrevocable designation of beneficiary is never presumed and for it to be valid, must be in writing.

-   Life insurance taken out not by the decedent himself is not part of the gross estate.

Valuation of Gross Estate

VALUATION OF GROSS ESTATE:

1.       In General – the properties comprising the gross estate shall be valued based on their fair market value as of the time of death.

2.       Real Property – FMV determined by the Commissioner or the FMV as shown in the schedule of values fixed by the provincial and city assessors, whichever is higher.

Ø  If there is no zonal value, the taxable base is the fair market value that appears in the latest tax declaration.

Ø  If there is an improvement, the value of improvement is the construction cost per building permit or the fair market value per latest tax declaration.

3.       Shares of stocks:

a.        Unlisted common shares – book value

F  In determining the book value of common shares, appraisal surplus shall not be considered, as well as the assigned to preferred shares, if there are any.

b.       Unlisted preferred shares – par value

c.        Listed shares (in stock exchange) – the FMV shall be the arithmetic mean between the highest and lowest quotation at a date nearest the date of death.

4.       Right to usufruct, use or habitation, and annuity – there shall taken into account the probable life of the beneficiary in accordance with the latest basic standard mortality table.

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.

Gross Estate

Under Section 85 of the Tax Code, the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.  Provided, however, that in case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate situated in the Philippines shall be included in his taxable estate.  Hence, the composition of the estate tax may be summarized as follows:

§  For Resident Citizen, Nonresident Citizen and Resident alien decedents, Gross Estate should include:

1)      Real property wherever situated

2)      Tangible personal property wherever situated

3)      Intangible personal property wherever situated

§  For Nonresident alien decedents, Gross Estate should include:

1)      Real property situated in the Philippines

2)      Tangible personal property situated in the Philippines

3)      Intangible personal property with situs in the Philippines, unless exempted on the basis of reciprocity.

The Reciprocity Rule

Section 104 of the Tax Code provides that “Intangible” Personal Properties with Situs in the Philippines of Non-Resident Alien Decedent shall be Exempt from Taxation if:

§  the decedent at the time of his death was a resident citizen of a foreign country which at the time of his death did not impose an estate tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or

§  the laws of the foreign country of which the decedent was a resident citizen at the time of his death allow a similar exemption from estate taxes of every character, in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.

Intangibles with Situs in the Philippines

The following are Intangible Personal Properties with Situs in the Philippines

2.       Franchise which must be exercised in the Philippines; 3.       Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; 4.       Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines; 5.       Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; and 6.       Shares or rights in any partnership, business or industry established in the Philippines.

v  As a rule, the situs of intangible personal property is the domicile of the owner.  However, such rule is not applicable if the intangible property has situs elsewhere.

Examples of INTANGIBLE personal property for estate tax purposes:

a.	Deposits in banks	e.	Trademark
b.	Investment in shares of stocks	f.	Copyright
c.	Investment in bonds	g.	Patent
d.	Accounts receivable