Transfer Taxes NIRC Title III: Estate and Donors Taxes Sec 84. Estate Tax Sec 98.

Donors Tax History: Before, the excise upon the privilege to transfer tax was already in effect. There was another transfer tax; it was a tax on the privilege to receive property by gratuitous title. Youll learn in Sec 32 B (3) that gift or donation to the recipient will not be considered income. As far as the Donee is concerned, for income tax purposes, that something that is received is not income that is taxable. There is no liability in the part of the Donee. But as far as the Donor is concerned, there is liability for another Internal Revenue tax which is covered by Title III, that is Donors tax. But I said earlier, before, our law had imposed a transfer tax also on the privilege. But not on the privilege to transfer, but to receive income by way of gift as one kind of transmission. So, under the present law, the Donee is not liable for income tax, and at the same time there is no more liability for a transfer tax. The Donees tax was abolished by virtue of PD 69. There is a counterpart also in Estate, in transfer taxation involving succession, or the transfer of properties which take place upon the death of a person. The counterpart for Donees tax is Inheritance tax. So you already had four taxes imposed upon the privilege to transfer and receive a property by way of gratuitous title. Not anymore in the present law. The Tax Code only imposes Estate and Donors taxes.

Common Element of the Transfer Taxes: Transmission usually takes place without valuable consideration. However, if there be consideration involved, the transfer taxes may still be applied under certain circumstances. a brief discussion of the civil code first New Civil Code Art 712 of NCC, there you are presented with different modes of transferring property. Among the modes, only two of these are subject matter of tax in Title III transmission of property by Succession and another one by Donation. The other mode of transfer, or mode of acquisition of property, is by virtue of certain contracts, Tradition. Please recall what you have learned in civil code. It is not the contract that is the one that is considered the mode of transferring ownership, rather it is tradition, or delivery itself. Such as in the sale of property. In a contract of sale involving property, an obligation arises from such contract. On the part of the Seller, it is to transfer ownership and to deliver the property which is the thing or subject matter of the sale. The perfection of the contract is one event that is separate and distinct from tradition or delivery that causes the transmission of ownership. The delivery here, or tradition that is considered as one of the modes of transferring ownership, is the same time an obligation that is borne by the Seller. Take note that these are different events: perfection of the contract out of which certain obligations arise, and the consummation which involves the tradition/delivery of the thing itself.
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The delivery of the thing is another feature of Donation. The intention is to give property as an act of liberality. Usually there is no consideration.

CGT does not apply to Donation. Under Sec 24 D (1) [Capital Gains from Sale of Real Property], where we have discussed the tax consequence leading to the application of the final tax of 6%, so long as the real property that is sold or disposed of is held by the seller as capital asset, the tax prescribed by law for individuals is 6% capital gains tax. Take note that the law speaks of sale, exchange, or barter or other modes of disposition. We should not include in the catch all phrase the disposition by way of donation. If there is pure donation of real property located in the Philippines held as capital asset in the hands of the donor, then the only consequence is that there is no more liability for capital gains tax; the liability would therefore be a transfer tax. Not a tax on income, but tax on the transfer of the property by way of donation. Lets consider the taxpayers first. On Estate Taxation, where the transmission takes place upon the death of the Decedent. Who may be liable for the payment of Estate taxes? The Estate that is left by the Decedent is liable. The Estate is also a juridical person. It is the one that is identified by law as the person liable. Although the Estate is represented by the Executor, Administrator, or the Heir of the Decedent. The Estate could be liable for tax on income. (Resident Citizen) Person died Year 2000 Year 2012 Estate is settled <----earned income through------------------->|<------------settlement-------------->| rentals, services rendered because of EE, shares of stocks, bank deposits Properties shall be transmitted through succession Income tax liability falls on EstateIncome Tax Income tax liability falls on person in whose favor property is transmitted When a person dies, these properties left by the Decedent will be transferred by way of Succession. The transfer tax applies upon the transmission of property by way of Succession. There is one very significant that happens when the Decedent dies: taxwise, its the application of the transfer tax. What will be transferred at death? Only those properties that the Decedent has existing interests.

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Thus, any property to which the Decedent has no existing interest as of the time of his death will not therefore be inherited or be transferred by way of Succession. Consequently, there will be no liability for taxation in respect of those properties over which he has no existing interest. What will happen on incomes that are earned during the period of settlement of Estate? The incomes would still be taxable. But who would be liable for tax on those incomes? In the meantime that the Estate is still undergoing settlement, it would be the Estate, as represented by the E/A/H of the Decedent. until such time that the Estate ceases to exist, liability would fall on the Estate. When Estate is settled and income is still earned, lets say Heir 1 got the apart ment; Heir 2 got the shares of stocks; Then any income earned from the respective properties will be the liability of the persons in whose favor those properties are transmitted, or disposed of. Sec 84 [Rates of Estate Tax] imposes a tax upon the transmission of Net Estate. 5% to 20% What is Net Estate? Computed as: Gross Estate Deductions -----------------------Net Estate x rate of 5% to 20% NE is the tax base in Sec 84. Net implies there are deductions recognized by the law which may be claimed as against the Gross Estate. If NE = 200,000, then tax rate is 0%. If NE > 10Million, then tax rate is 20% over and above a fixed amount of the first 10M Example: NE = 20M 1,215,000 Fixed amount if >10M + 2,000,000 20% of 10M ------------------3,215,000 tax due to the State What is Gross Estate? Sec 85 [Gross Estate], The gross estate for purposes of estate taxation of Filipino citizens, whether residents or nonresidents and resident alien includes the value at the time of his death of all his real property, wherever situated, personal property, whether tangible, intangible or mixed, wherever situated, to the extent of the interest existing therein of the decedent at the time of his death.

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Schemes to reduce Estate Tax: 1. Dispose of properties during lifetime Capital Gains Tax of 6% vs. Estate tax of 5% to 20% 2. Donate property during lifetime. Donors tax max of 15% vs. Estate tax max of 20% Sec 99 [Rates of Tax Payable by Donor] Sec 99(A) 2% to 15% Donors tax Sec 99(B) 30% Donors tax for Strangers. Donation to a Stranger. When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. Who is a stranger ? Sec 99(B) A stranger is a person who is not a: a. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or b. Relative by consanguinity in the collateral line within the fourth degree of relationship. Domondon: All relatives by affinity, irrespective of the degree, are considered as strangers. Sec 85 (B) [Transfer in contemplation of death]. If the decedent during his lifetime sold the apartment and donated the shares of stocks, but retained enjoyment and possession of these properties until his death, he really never intended to relinquish all his interest in his properties during his lifetime. These transfers are made in contemplation of his death. He possesses, enjoys, uses, and receives income from the properties; and retains possession and ownership (complete control) until death. Sec 85 (B) states factors that would constitute transfers in contemplation of death: 1. The possession or enjoyment of, or the right to the income from the property 2. The right to designate the person who shall possess or enjoy the property or receive income therefrom.

For transfers in contemplation of death or mortis causa, it should be included in the Gross Estate, thereby applying Estate tax. For transfers inter vivos, apply Donors tax.

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By way of Succession, a real property is inherited by child, If Net Estate = 1M, then 15,000 Fixed amount for first 500 + 40,000 8% of 500,000 ----------------------55,000 tax liability By way of Donation, If Decedent donates 1M real property to his child, If Net Gift = 1M, then 14,000 Fixed amount for first 500,000 + 30,000 6% of 500,000 ----------------------44,000 tax liability Comparing, 55,000 Estate tax vs. 44,000 Donors tax, there is a difference of 11,000. Comparing the Deductions Resident Citizen Sec 86 (A) Non Resident Citizen Sec 86 (B) 1. Expenses, Losses, Indebtedness, and Taxes 1. Expenses, Losses, i. Actual Funeral Expenses Indebtedness, and Taxes 5% of GE or 200,000 whichever is higher 2. Property Previously Taxed + ii. Judicial Expenses 3. Transfers for Public Use + iii. Claims against Estate iv. Claims against Insolvent Persons 2. Property Previously Taxed (estate/donors tax paid) 100%, if transferred within 1 year; 80%, 1-2yrs; 60%, 2-3yrs; 40%, 3-4 yrs; 20%, 4-5yrs 3. Transfers for Public Use (donation to government) + have no ceiling 4*. Family Home 1,000,000 * are special types of 5*. Standard Deduction 1,000,000 deductions. 6*. Medical Expenses 500,000 7*. RA 4917 Benefits

Sec 34 (L) Standard Deduction Optional; 40% of Gross Sales or Gross Receipts

Sec 86 (A) Standard Deduction Not optional; Automatic; Fixed at 1,000,000 (thus, if Estate is 1M, then NE=0)

Gift Splitting. (for donation only within relatives) Computation on Donors tax is calendar basis. Net gift as computed will be the tax base for the Gift Tax. As the Net gift increases, so thus the tax rate. 100,000 Net Gift is exempted. Thus to donate 200,000, then give 100,000 on December 31, and another 100,000 on January 1.

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2009 Bar Problem: Johnny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming in the trust instrument Santino, Johnny's 10-year old son, as the sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to P720,000.00. The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment. a. What advice will you give the trustee? Explain. (3%) I will advice the trustee that she has nothing to pay in annual income taxes because the trusts taxable income is zero. This is so because the amount of income to be distributed annually to the beneficiary is a deduction from the gross income of the trust, but must be reported as income of the beneficiary. Sec 61(A) b. Will your advice be the same if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaches the age of majority? Why or why not? (3%) No. The trustee has to pay the income tax on the trusts net income determined annually if the income is to be required to be accumulated. Once a taxable trust is established, its net income is either taxable to the trust, represented by the trustee, or to the beneficiary depending on the provision for distribution of income following the one-layer taxation scheme. Sec 61(A)

Example: There was a trustor who transferred his properties to a trust. In that trust, he named the fiduciary/trustee and the beneficiary. Properties were transferred to a trust to be held in benefit of minor beneficiary. The condition was for the property to be transferred only when the beneficiary was to attain the age of majority. Bar question was the tax treatment on the incomes from the properties. a. Whether the trustee will be required to file returns and pay taxes on the incomes earned from the property forming the trust if the instruction was for the incomes to be distributed to the beneficiary every year? Restated, will the trustee be required to pay taxes on the incomes earned from the properties and therefore file returns? The persons here are: Trustor, Trustee, Beneficiary and Trust itself which comprises the properties of the creator/grantor of the trust. The trust earns income. Should such income be taxable? Yes. First scenario: Suppose all of the incomes will be given to the beneficiary. Second question: Suppose the trustee is instructed to accumulate all earnings to be given only upon the termination of the trust, or beneficiary becomes 18 y/o. Sec 60 66 [Estates and Trusts], the Trust will really be liable for income tax only when it is created irrevocably. If revocable, yung income puwedeng pumasok sa Trustor because it is still subject to the power of revocation. Granting irrevocable, where the amount of income anyway is paid to the beneficiary, there is also a tax significance on that. Sec 61 [Taxable Income] on deductions, which are in favor of Estates and
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Trusts, the amounts distributed to the heirs or beneficiaries are considered deductions against Net Income. For example, incomes earned from the apartment will be the liability of the Juan, but after his death, it shall be the liability of the Estate. After settlement, it shall be the liability of the Heir. Any income paid to an Heir, will be a deduction in the Net Income of the Estate. If everything is paid to heirs, the amount may completely set-off the net income of the Estate, leaving nothing to tax. Ganyan din sa Trust. The amount paid to the beneficiaries is treated under Sec 61 as deduction, so if everything is paid to the beneficiary, then the Net Income that is computed less the Deduction will lead to Zero Net Taxable Income. Thus, there is no tax to be paid if there is no Net Income left. The amount that is distributed to the recipient will be considered as gross income. But the Trust itself will not be liable for a tax. Suppose that Trust is irrevocable. Suppose Trustor died. Will such Gross Estate comprise also the property transferred to a Trust, still being held in Trust, still anyway the beneficiary has not yet attained the age of majority? No. Who has ownership over the property? Not the Trustor-Decedent. Thus, it is another way to remove property from attachment or from the reach of the creditors. If it was a revocable transfer, and the properties are still in the possession of the TrustorDecedent, and there was, in his lifetime, executed a Deed of Trust, will you include the property in Gross Estate? Yes, because Gross Estate includes property transferred by way of trust or otherwise in contemplation of death. Under Sec 85 (B), in including a property transferred in contemplation of death, admits of exception. That is, when there is consideration that is sufficient to make the whole transaction a bona fide sale. (except in case of a bona fide sale for an adequate and full consideration in money or moneys worth) Sec 85 (G) [Transfers for Insufficient Consideration]. If consideration paid for the transfer which is made in contemplation of death is not sufficient, will the property be included in the Gross Estate? Yes, but only to the extent of the difference between the market value of the property at the time of death and the consideration that was paid during the lifetime. It is not the entire value of the property that is reported as Gross Estate, only the difference stated above.

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For the rule in Sec 85 (G) to apply, such that what is included in the Gross Estate is the difference between the market value of the property at the time of death and the consideration that was paid during the lifetime, the transfer is: In contemplation of death, or A revocable transfer, or Transfer involving property passing under general power of appointment. So, if shares of stocks worth 1M was sold for 500,000, it would be a transfer for insufficient consideration. But will you include the difference of 500,000 in the Gross Estate? Not right away when there is no indication that the transfer was in contemplation of death. Example: Juan sold to Maria shares of stocks worth 1M for 500,000 only. Juan later on died. Is the difference includible in Gross Estate? Not under Sec 85 (G) in relation to Sec 85 (B) because there was no indication that the transfer was in contemplation of death. But if it was said that Juan despite the sale is to retain enjoyment of the fruits (dividends) until his death, the transfer there can be considered as made in contemplation of death, and apply Sec 85 (G). If a transfer is for insufficient consideration, but not in contemplation of death, what is the tax consequence? With respect to the difference, it is as if the seller in fact made a donation. When something is given by way of gift, there is a liability for transfer tax. If the sale here is to take effect immediately -- i.e. not mortis cause in effect, not in contemplation of death -- there will be deemed a gift made but only as to the difference of market value and consideration, and such gift made is subject to Donors tax, subject to Sec 100 [Transfer for Less Than Adequate and Full Consideration]. Sec 98 applies to direct and indirect gift (as in this case). Different tax consequences: If Sec 85 (G), Estate Taxation only to the difference of market value of property as of the time of death and the consideration paid. If Sec 100, Donor Taxation only to the difference of market value of the property as of the time of sale and the consideration paid. Exception: if the transfer involved is real property located in the Philippines held as capital asset, and the sale is for less than an adequate consideration, any difference will not be liable for gift tax. Anyway, the 6% capital gains tax is applied in the higher value (usually the zonal value). Sec 24 (D)

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