Donation As An Estate Planning Tool (A

Discussion on Donors Tax)

Last updated on April 4, 2016 by Cherry Vi Saldua Castillo | Filed Under: Donor's Tax, Real
Estate Taxes
The donation of properties can be used as a tool for estate planning. One just needs to be
aware that donations are subject to donors tax. Read this to find out how much donors
tax you need to pay when donating a property as part of estate planning.

Real property, just like any other material possession, may not be brought to the afterlife. You
need to transfer property sooner or later. Usually, however, the transfer of property prior to death
is a taboo subject so many end up dealing with property transfer problems only after a person
has died. It is always good to be prepared since we will all surely die there is simply no
escaping it, so might as well prepare for the inevitable.

Why donate your properties prior to death?

Donation may be considered as an estate planning tool because you are able to
transfer your properties prior to death little by little every year and therefore you can
take advantage of the graduated donors tax rates. If you have a lot of properties at the
time of death, the estate tax* would be higher because the total amount of the
properties will probably fall under a higher tax range

*If you want to learn more about estate tax (the tax that needs to be paid after death)
read this: Death, Real Estate, and Estate Tax

On another note, it is usually the case that the family spends a lot for medical care prior
to death, and because of this, the familys cash reserves are depleted. If the family is
not liquid and they need to pay the estate tax within six months from the time of death,
many times the family is forced to sell their properties below market value because they
are under time pressure. It is during these pressure points that many investors are able
to buy good properties at a good price. I dont want to view it as taking advantage of the
misfortune of others rather, I want to think of it as the investors helping the family
solve their cash problem. If no one bought the property, the family would be in a worse
situation.

Another problem that may arise upon death is that the children or heirs will be fighting
each other for their rightful share of the deceaseds property. I dont think any parent
would want their loved ones to be fighting over money or property. If the properties are
already distributed as agreed upon by all parties prior to death, then this problem may
be alleviated.

Lastly, I believe that a person who already thought in advance of the transfer of
properties prior to death, and actually had no more significant properties to transfer
upon death, would be at peace upon death because he/she did not leave problems to
his/her family. Dealing with grief is hard enough, it would be difficult to deal with the
nitty-gritty taxes and what-not during a most stressful time.

Of course, there are downsides to donation too Who shall control the properties? Who
gets the fruits/rental income? etc etc These may be answered by trusts and other
legal documents. But for now, lets deal with straightforward donation.

What is Donors Tax?

Donors tax is imposed on tax on the transfer by any person, resident or non-resident, of
a property by gift. For an overview on donors tax, please check the BIR website. The
legal basis for donors tax may be found in Sec. 98 to Sec. 104 of the National Internal
Revenue Code (NIRC) (aka the Tax Code). Check also the Donors and Estate Tax
Regulations (BIR Revenue Regulations No. 2-2003) and Revenue Memorandum Order
(RMO) No. 1-98.

What is the tax base?

The donors tax base shall be the total value of the net gifts during the taxable year. The
value of the net gifts shall be based on the fair market value (FMV) of the gifts at the
time of donation.

In case of real property, the taxable base is the fair market value as determined by the
Commissioner of Internal Revenue (Zonal Value) or fair market value as shown in the
latest schedule of values fixed by the provincial and city assessor (MV per Tax
Declaration), whichever is higher. (Sec. 88 and 102, NIRC as amended). If there is no
zonal value, the taxable base is the fair market value that appears in the tax declaration
at the time of the gift.

The term net gift, for purposes of donors tax, pertains to the net economic benefit
which the done gets from the transfer. Thus, if a property encumbered with a mortgage
is transferred as a gift, but the donee is required to pay the mortgage, then the net gift
is computed by deducting the amount of mortgage assumed by the donee from the fair
market value of the property given as a gift.
If you donate on different dates within a year, a donors tax return shall be filed for each
date of donation, and the donors tax base shall be based on the accumulated
donations for the current calendar year (January 1 to December 31). Thus, the more
gifts you make within a calendar year, the higher the probability that the donors tax will
fall on a higher tax bracket. Note though, that donors tax previously paid on previous
donations shall be deducted from the donors tax payable. The good news here is that
you will get a fresh start for each year, and effectively, you can donate P100,000 in cash
or in kind at zero donors tax.

You may even donate cash which the donee can use to purchase property, so the
property can be in the name of the donee. For example, a parent can donate cash for
installment payments of property so that the property may be declared in their childs
name, since the child cannot purchase directly without a source of income.

Please note that in case of donation to relatives (not strangers), only one return shall be
filed for several gifts/donations by the donor (the one giving the donation) to the different
donees (those receiving the donation) on the same date. If the gift/donation involves
conjugal or community property, each spouse shall file a separate return for their
respective shares in the said property.

Deemed Gift

If you purchased a property below its fair market value (FMV), the difference between
the FMV and the selling price shall be deemed a gift of the seller, subject to donors tax.
This is also called a transfer for less than adequate consideration.

Exemptions from Donors Tax

1. Dowries or gifts made on account of marriage and before its celebration or within
one year thereafter by parents to each of their legitimate, recognized natural, or
adopted children to the extent of the first Ten thousand pesos (P10,000);
2. Gifts made to or for the use of the National Government or any entity created by any
of its agencies which is not conducted for profit, or to any political subdivision of the
said Government; and
3. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited non-government organization, trust or philanthropic
organization or research institution or organization, provided, however, That not more
than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes.
Based on the BIR website, the following are likewise exempt from donors tax:

1. Encumbrances on the property donated if assumed by the donee in the deed of

donation
2. Donations made to the following entities as exempted under special laws:
Aquaculture Department of the Southeast Asian Fisheries Development Center of
the Philippines
Development Academy of the Philippines
Integrated Bar of the Philippines
International Rice Research Institute
National Social Action Council
Ramon Magsaysay Foundation
Philippine Inventors Commission
Philippine American Cultural Foundation
Task Force on Human Settlement on the donation of equipment, materials and
services
What are the Donors Tax rates?

The donors tax rate will be based on the law prevailing at the time of donation.

For donations made on January 1, 1998 up to the present, if the donee is a stranger,
thedonors tax rate is thirty percent (30%).

A stranger is a person who is not a brother, sister (whether by whole or half-blood),

spouse, ancestor and lineal descendant, or a relative by consanguinity in the collateral
line within the fourth degree of relationship. This just means you are related by blood,
and you count the degree by going up first to the person who connects you then go
down.

For example, your first cousin is within the fourth degree. You go up to your dad (1
degree), then up to your lolo (1 degree), then go down to your uncle who is your
dads brother (1 degree), then down to your first cousin (1 degree), so 4 degrees in all.

Note that a child who is legally adopted is not considered a stranger. Donations
between corporations or from an individual to a corporation shall be considered as
donations to a stranger.

If the donee is not a stranger, the donors tax rate, based on the net gifts, are as follows:
 Over But not over The tax shall Plus Of the excess
be over

0 100,000 Exempt

100,000 200,000 0 2% 100,000

200,000 500,000 2,000 4% 200,000

500,000 1,000,000 14,000 6% 500,000

1,000,000 3,000,000 44,000 8% 1,000,000

3,000,000 5,000,000 204,000 10% 3,000,000

5,000,000 10,000,000 404,000 12% 5,000,000

10,000,000 1,004,000 15% 10,000,000

Who should pay

The donor or the transferor for less than adequate consideration

When to pay

Within thirty (30) days after the date the gift is made. If more than one gift or donation is
made within one year, a separate return should be filed for each gift/donation within
thirty (30) days after the date the gift is made.

BIR Form to be used

BIR Form No. 1800 (Donors Tax Return)

Please note that under RR No. 6-2014, the e-BIR forms should be used.

Where to file and pay/ Filing procedure

Prepare three copies of the donors tax return (two copies shall be for the BIR and one
copy shall be for the taxpayer) and file them with any Authorized Agent Bank (AAB) of
the Revenue District Office (RDO) having jurisdiction over the place of the domicile of
the donor (that is, where the donor lives) at the time of the transfer.

In places where there are no AAB, the return will be filed directly with the Revenue
Collection Officer or duly Authorized City or Municipal Treasurer where the donor was
domiciled at the time of the transfer. If the donor has no legal residence in the
Philippines, file the return with Revenue District No. 39 South Quezon City.

In the case of gifts made by a non-resident alien (that is, not a Filipino citizen), the
return may be filed with Revenue District No. 39 South Quezon City, or with the
Philippine Embassy or Consulate in the country where donor is domiciled at the time of
the transfer.

Penalties for late payment

Same as other taxes, 25% surcharge plus 20% interest per year (under Secs. 248 and
249 of the Tax Code, respectively). If there is fraud, the surcharge shall be 50%. You
may also pay compromise penalties in lieu of imprisonment as discussed in Revenue
Memorandum Order (RMO) No. 7-2015 (the schedule of compromise penalties is in
Annex A).

Documentary requirements

Based on the BIR website, the following requirements must be submitted before the Tax
Clearance Certificate/Certificate Authorizing Registration (that is, the document required
for the title to be transferred) can be released:
1. Deed of Donation

2. Sworn Statement of the relationship of the donor to the donee

3. Proof of tax credit, if applicable

4. Certified true copy(ies) of the Original/Transfer/Condominium Certificate of Title (front

and back ) of lot and/or improvement donated, if applicable

5. Certified true copy(ies) of the latest Tax Declaration (front and back pages) of lot and/or
improvement, if applicable

6. Certificate of No Improvement issued by the Assessors office where the properties

have no declared improvement, if applicable

7. Proof of valuation of shares of stocks at the time of donation, if applicable

For listed stocks newspaper clippings or certification issued by the Stock Exchange
as to the par value per share

For unlisted stocks latest audited Financial Statements of the issuing corporation
with computation of the book value per share

8. Proof of valuation of other types of personal properties, if applicable

9. Proof of claimed deductions, if applicable

10 Copy of Tax Debit Memo used as payment, if applicable

.

Additional requirements may be requested for presentation during audit of the tax case
depending upon existing audit procedures.

Sample Computation

Please read BIR Revenue Regulations No. 2-2003 for a sample computation.
Documentation of the donation

Consult a lawyer with regard to the format of the Deed of Donation, and make sure that
the donation is properly accepted and notarized during the lifetime of the donor.

Sample Deeds of Donation can be found here and here.

How to Get A BIR Certificate Authorizing Registration (CAR)

The Registry of Deeds will not allow you to transfer the title of real properties of a
deceased person if there is no BIR CAR. Please make sure that you have the
documents as enumerated in the Checklist of Documentary Requirements (CDR) for
Donors Tax, which can be found in Annex A-5 of Revenue Memorandum Order (RMO)
No. 15-03 (see page 6).

To help you determine the computation for the estate tax due, you may refer to
theONETT (One-Time Transaction) Computation Sheet, in Annex B-2 (page 15) also of
RMO No. 15-03. Please also check the sample computations in BIR RR No. 2-2003 and
BIR Form No. 1800.

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