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Chapter 12 -The Concept of Succession and Estate Tax

3. Mixed Succession
Tr~nsmis~ion of the decedent properties shall be partly by virtue of a
wntten will and partly by operation of law. .

Will
A will. is an act whereby a person is permitted, with the formalities
prescnbed by law, to control to a certain degree the disposition of this
estate, to take effect after his death (Art. 783, Ibid).

A will is an expression of the decedent's desire as to how his properties will


be distributed after his or her death.

The making of a will is a strictly personal act; it cannot be left in whole or in


part of the discretion of a third person, or accomplished through the
Chapter 12 -The Concept of Succession and Estate Tax instrumentality of an agent or attorney. (Art 784, Ibid.)

Types of will
CHAPTER 12 1. Holographic will - a will which is entirely written, dated, and signed by
THE CONCEPT OF SUCCESSION & ESTATE TAX the hand of the testator himself
2. Notarial will - a notarized will signed by the decedent and witnesses
3. Codicil - a supplement or addition to a will, made after the execution of
Chapter Overview and Objectives
a will .and ann.e~ed to. b~ taken as a part thereof, by which disposition
This chapter discusses only the basic rules of succession and provides an I
made m the ongmal will is explained, added to, or altered (Art 825, Ibid.)
introduction to estate tax.
Every. will must be acknowledged before a notary public by the testator and
After this chapter, readers are expected to understand:
the witnesses. A holographic will need not be witnessed. A codicil needs to
1. The concept of succession be executed as in the case of a will to be valid.
2. The types and elements of succession
3. The nature of estate tax
4. The types of decedents and their taxation rules NATURE OF SUCCESSION
5. The model of estate taxation ~uccession is ~ gratuitous transmission of property from a deceased person
m fa~or of hIS successors. It is a donation caused by death (i.e. donation
mortis causa).
SUCCESSION
"Succession" is a mode of acquisition by virtue of which the property, rights ~uccession involves only the net properties of the decedent. The heirs will
and obligations to the extent of the value of the inheritance, of a person are mherit ,,;h~t remains of the decedent's property after satisfying the
decedent s mdebtedness and obligations including the estate tax. The heirs
transmitted through his death to another or others either by his will or by
shall not inherit the debt of the decedent.
operation oflaw (Art 774, Civil Code).
ELEMENTS OF SUCCESSION
The inheritance includes all the property, rights and obligations of a person
which are not extinguished by his death (Art. 776, Ibid.). 1. Decede.nt - the general term applied to the person whose property is
transmitted through succession, whether or not he left a will. If he left a
The rights to the succession are transmitted from the moment of the death will, he is also called the testator (Art. 775, Ibid.).
of the decedent (Art. 777, Ibid.). The decedent is a deceased or dead person.
377
TYPES OF SUCCESSION
1. Testamentary Succession
Testamentary succession is that which results from the designation of an
heir, made in a will executed in the form prescribed by law. (Art. 779,
Civil Code)

A person can specify the recipient of his properties upon death. This
designation must be made through a written document called last will '
and testament. A person who died with a will is said to be "testate."

2. Intestate Succession
When a decedent dies without a will or with an invalid one, the
distribution of the estate shall be in accordance with the default
provision of the Civil Code on succession.

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Chapter 12 -The Concept of Succession and Estate Tax Chapter 12 -The Concept of Successionand Estate Tax

2. Estate - the property, rights and obligations of the decedent not Illustration
extinguished by his death. This is also referred to as the "inheritance" of
the decedent. t
3. Heirs - a person called to the succession either by the provision of a will
or by operation oflaw (Art 782, Ibid.). 2nd Priority

Who are the heirs?


The law identified certain persons which it designated as "compulsory heirs."
Spouse (AI)
Types of compulsory heirs
1. Primary heirs: Legitimate children and their direct descendants
2. Secondary heirs: Legitimate/illegitimate parents and ascendants
3. Concurring heirs: The surviving spouse and illegitimate descendants 1st Priority

Definition of terms CS A3
1. Legitimate children are those born out of a legal marriage.
2. Direct descendants refer to children or, in their absence, grandchildren. 3rd Priority ~
3. Legitimate parents refer to biological parents.
4. Illegitimate parents are adopting parents to an adopted child. Model:
A2
A1 -- Grandchildren
6. Illegitimate
5. The stlrvivingdescendants arewidow
spouse is the illegitimate children.
or widower of the decedent. Children C2- [i.e.,brothers and sisters)
2nd degree relatives
A3 - Greatgrandchildren C3- 3rd degree relatives
Note: Underthe RevisedFamilyCode,adoptiveparents can now qualifyas secondaryheirs B1- Parents (uncle,aunt, niece, nephew)
sharing50:50 with biologicalparents. B2- Grandparents C4- 4th degree relatives
B3- Greatgrandparents (1st cousins,1st cousins of grandparents)
The secondary compulsory heirs shall inherit only in default of the primary
Priority Levels:
heirs. Normally; only the primary heirs and concurring heirs share in the
hereditary estate. In the absence of primary heirs, the secondary heirs and 1st Priority - A = From A1 onwards in descending order of priority
concurring heirs shall share in the hereditary estate. 2nd Priority - B = From B1 onwards in descending order of priority
3rd Priority - C = From C2 to C5 in descending order of priority
4th Priority - Philippine government
In the absence of compulsory heirs, the following shall inherit in the
following order of priority: Note:
1. A1 includesboth legitimateand illegitimatechildren.
1. Collateral relatives up to the fifth degree of consanguinity 2. Secondcousinsare in the 6th degreein the coliateralline;hence,they cannotinherit.
2. The Philippine government
Illustration 1
Priority is given to collateral relatives in the closest degree. Mr. X died. He was survived by his wife and four children. Mr. X has two
brothers and one surviving parent.
Summary of Rules:
1. Concurring heirs and The compulsory heirs are:
a. Descendants, or in their default, a. Mrs.X
b. Ascendants b. The four children
2. Relatives in the collateral line up to fifth (5th) degree
The surviving parent (secondary heirs) of Mr. X will not inherit because there are
3. Republic of the Philippines descendants [i.e.,four children).

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Chapter 12 -The Concept of Succession and Estate Tax
Chapter 12 -The Concept of Succession and Estate Tax
the decedent's will nor the absence of an heir affect estate taxation. In fact
Illustration 2 the estate tax is due even if the decedent does not have relatives who will
Ms. X died single and without a child. Ms. X's parents, three brothers, and two
inherit the property.
sisters were her surviving relatives.

The compulsory heirs are Ms. X's parents. The coll~teral relatives (brothers and Furthermore, the determination of the share of each heir in the distributable
estate is done only after all charges to the hereditary estate, including estate
sisters) cannot inherit since there are compulsory heirs.
tax, had been deducted.
Illustration 3 .
Mr. Y died a bachelor. He had no child. His parents were all dead long bef?re hts Other persons in succession
death. He only had a brother and a sister, a first cousin, and a second cousm, 1. Legatee - a person whom gifts of personal property is given by virtue of
a will
Since there is no compulsory heir, the brother and sister in the collateral line shall 2. Devisee - a person whom gifts of real property is given by virtue of a will
inherit. Without them, the first cousin shall inherit. 3. Executors - a person named by the decedent who shall carry out the
provisions of his will
Assuming further that the first cousin is also dead, the government shall inher.it 4. Administrators - a person appointed by the court to manage the
the estate. Succession in the collateral line cannot extend to the second COUSin distribution of the estate of the decedent
because he/she is beyond the fifth degree of consanguinity.
ESTATE TAXATION
Legitime . Estate taxation pertains to the taxation of the gratuitous transfer of
Legitime is that part of the testator's pro?e~ which he cannot dispose of
because the law has reserved it for certam heirs who are, therefore, called properties of the decedent to the heirs upon the decedent's death.
compulsory heirs (Art. 886, Ibid).
Estate taxation is governed by the law in force at the time of the decedent's
In testamentary disposition, the decedent can n~me a ~erso~ .as an heir death. The estate tax accrues as of the decedent's death and the accrual of
whether related or not to him as long he does not VIOlate hIS legitime. the tax is distinct from the obligation to pay the same. Upon the death of the
decedent, succession takes place and the right of the State to tax the
In intestate disposition, the heirs shall be determined based on the privilege to transmit the estate vests instantly upon death.
provision of the Civil Code. In such case, the con:;-pulso~ heirs or, in their
absence, collateral heirs shall inherit the decedent s heredttary estate. NATUREOFESTATE TAX:
1. Excise tax- estate tax is not a tax on the property but on the privilege to
transfer property through death
Disinheritance and Repudiation
A decedent can actually disinherit an heir on certain grounds. Similarly, 2. Revenue or general tax - estate tax is intended as a revenue or fiscal
heirs may repudiate their share in the inheritance ofthe decedent. measure
3. Ad valorem tax - estate tax is dependent upon the value of the estate
These topics, together with the determination of shares of each heir in .the 4. National tax - estate tax is imposed by the national government
hereditary estate, are matters oflaw which are irrelevant ~o estate taxatl~[J. 5. Progressive tax- estate tax is determined based on a tax table of
Hence, these topics will not be emphasized in our discusSl~n. Readers With progressive rates
particular interest in these matters are advised to consult TItle IV of Book III
Classification of Decedents for Taxation Purposes
of the Civil Code.
1. Resident or Citizen Decedents- taxable on properties located within or
The determination of the e~tate tax does not require prior identi~ca~on if outside the Philippines
the heirs. Once a person IS dead, the estate of the decedent IS slmp~. 2. Non-resident Alien Decedents- taxable only on properties located in
determined and reduced by deductio~s allowed by law ..T~.en, ~e es~a~e ~t the Philippines, except intangible personal property when the
is computed out of the net estate. Neither does the validity or Lnvahd~ty reciprocity rule applies

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Chapter 12 -The Concept of Succession and Estate Tax
Chapter 12 -The Concept of Succession and Estate Tax
THE ESTATE TAX MODEL
CHAPTER 12: SELF-TEST EXERCISES
Gross estate p xxx.xxx Discussion Questions
Less: Deductions from gross estate xxx.xxx 1. What is succession?
Net taxable estate p XXX.xxx 2. What is inheritance?
3. ~~um~rate ~nd discuss each of the types of succession
"Gross Estate" pertains to the totality of the properties owned by the 4. at ISa will? Discuss briefly. ..
decedent at the point of his death. 5. ~~~~e~~te and hexplaineach of the elements of succession.
6. y IScuss t e types of compulsory hel d .
There are two concepts to be discussed under gross estate: 7. What is a legitime? errs an their order of sUccession.
a. Exclusions in gross estate - those properties or transfers excluded by law 8. What is estate taxation?
from estate taxation 9. Enumerate and explain the nature of estate tax.
b. Inclusions in gross estate - those properties which are to be included as 10. What are the two classifications of deced 7. .
11. Illustrate the estate tax model. ents. DISCUStSheir estate taxation.
part of the taxable gross estate

The concept of gross estate will be extensively discussed in chapters 13-A True or False 1
and 13-B. 1. Succession is a mode of ac isiti
2. Inheritance refers to the qurs: IOnof.prop~rty similar to donation.
"Deductions" generally pertain to reduction in the inheritance of the heirs 3. The right to succession ~;o:r:~;m~~~~h ;IlI be transmitted to the heirs.
such as expenses of the death, obligations of the decedent, and losses of decedent. rom the moment of death of the
property since the decedent's death, but they also include exemptions from 4. A decedent witt 1 11
The . .. 1a ast wi and testament is said to be intestate
the estate tax under the law. Deductions from gross estate will be 5. SUcceSSIOnover properties of add t ..
extensively discussed in Chapter 14. covers only a portion of his estate-is II edce.en . who p~epared a will but
6. A perso h I ca. e mtxed SUcceSSlOll
A ... n w 0 p~epar~da will is referred to as the executor ..
"Net taxable estate" is the net properties of the decedent after all pertinent 7. person w~o died WIth a will is sefid to be testate
deductions allowable by law. This is the amount subject to estate tax. Note 8. The successIOn by oper ti fl . .
9. The will may be prep adlObn h ahwIScalled intestate succession.
that the net taxable estate is not equivalent to the hereditary estate before
. are y t e eirs of the decedent
estate tax because of exclusion or exemption rules and deduction limits 10. The will may be prepared after the death of the decedcm,
imposed by law.
True or False 2
The determination of estate tax, including other pertinent tax reportorial ' 1. A debt can be inherited by heirs.
requirements, will be extensively discussed in Chapter 15. ~. ~nly te~tamentary dispositions are subject to estate tax
. uccesslOns whether testamentar . ..
tax. y, Intestate, or mIxed are subject to estate

i,~~;hd:~::te:t;l~ :~~c;::~:~~:~n:~:e~t ar~ referred to as the heirs.


wants as heir. ' ece ent can name any person which he
6. In testamentary disposition the heir
decedent. ' s must always be relatives of the
7. The secondary compulsory heirs shall . h. .
heirs. In ent only In default of concurring
8, The concurring heirs shaH inherit .
their ~efalllt, the sec~ndary heirs. together WIth the primary heirs, or in
9. In .default of concul'ring I I.
degree shall lnherlt, . ieirs, re atives in the collateral line up to the 5th
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Chapter 12 -The Concept of Succession and Estate Tax Chapter 12 -The Concept of Successionand Estate Tax

10. In default of compulsory heirs, the government shall inherit the estate of 9. It is the property, rights and obli .
his death. gations of the decedent not extinguished by
the decedent.
a. Estate c. Codicil
Multiple Choice - Theory 1 b. Estate tax
d. Legitime
1. IT is a mode of gratuitous acquisition of property out of the generosity of a 10. They are the successors in interest of the d d
person a. Heirs . ece ent.
a. Succession c.Loan c. Devisees
b . Estate d . Legatees
b. Donation d. None of these
11.
2. It is a mode of gratuitous acquisition of property by the death of a decedent It is Had.onee of a real property in a last will and testament
a. Donation c. Inheritance
a. err c. Legatee .
b . Devisee d. Successor
b. Succession d. Testate

3. The donor in a donation mortis causa is 12. ~~ is~e~~nee of personal properLtyin a last will and testament.
a. dead. c. either living or dead. c. egatee
b . Devisee d. Successor
b. living. d. in a coma.
13. Who is not a compulsory heir?
4. Which is not a form of succession?
a. An adopted child
a. Testamentary
b. Children of a deceased child
b. Compulsory
c. The surviving spouse
c. Intestate d. A brother
d. Mixed
14. Who will.i~herit among the following?
S. It is succession in the absence of a will. a. A legitimate child
a. Testamentary c. Mixed b. Parents
b. Intestate d. None of these c. Grandchildren
d. First cousin
6. It is succession by will and operation oflaw.
a. Testamentary c. Mixed 15. Which of the following heirs will not inherit?
b. Intestate d. None of these
a. Illegitimate child .
b. Surviving Spouse
7. It is written document which sets forth how the decedent's property will be c. Nephew
distributed after death. d. Legitimate child
a. Will
b. Testamentary disposition Multiple Choice - Theory 2
c. Intestate disposition
d. Mixed 1.
:-hich will n?t inherit from the following group?
b. Grandchild from a deceased son of the decedent
8. Which is not an element of succession? . A daughter of the decedent
a. Decedent c. Gra.nds~~ from a living daughter of the decedent
b. Estate tax d. An Illegitimate child of the decedent
c. Estate
d. Heirs 2. Who may not inherit under an intestate succession?
a. Grandparents c. First cousin .
b. Grandchildren d. Best friends

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Chapter 12 -The Concept of Succession and Estate Tax Chapter 12 -The Concept of Successionand Estate Tax

3. Who will be disinherited from the following? Which is correct?


a. Widow a. Statement 1 c. Both statements
b. Legitimate children b. Statement 2 d. Neither statement
c. Illegitimate children
d. Parents 11, Statement 1:No estate tax is due if the net taxable estate is negative.
Statement 2: Once there is death, the estate tax is always payable.
4. Who shall inherit from the following group?
a. Legitimate child Which is incorrect?
b. Parents a. Statement 1 c. Both statements
c. Grandparents b. Statement 2
d. Neither statement
d. Brothers and sisters
12. Statement 1:A resident citizen is taxable on his estate wherever situated.
S. Who shall inherit from the following potential heirs? Statement 2: A non-resident citizen is taxable only on his estate situated in
a. 1st cousins the Philippines.
b. Brothers and sisters
c. Niece and nephews Which is correct?
d. 2nd cousins a. Statement 1
c. Both statements
b. Statement 2
d. Neither statement
. ted by t h e court to manage the distribution of the
This is a person appom
6.
estate. 13. Statement 1: A resident alien is taxable only on his estate situated in the
a. Administrator c. Guardian Philippines.
b. Executor d. Trustee Statement 2: A non-resident alien is taxable only on his estate situated in
the Philippines.
7. ThI.S I.Sa person h a ndpicked by the dec.edent to implement his will.
Administrator c. Guardian Which is correct?
ab.. Executor d. Trustee a. Statement 1
c. Both statements
b. Statement 2
d. Neither statement
8. There are several estate tax 1aws.m. the dhistodry t7of estate taxation in the
l' t particular ece en . 14. The reciprocity exemption on intangible personal properties situated in the
Philippines. Which app I~S 0 a h the properties of the decedent are
a. The estate tax law in effect w en Philippines is applicable only to a
a. Non-resident citizen
being accumulated. date of the decedent's death
b. Non-resident alien
b. The estate tax law III efff;ct attthtehedate the last will and testament was
c. The estate tax law in elect a c. Resident alien
d. All of these
d. rheepaersetadte tax law m
. effect upon d etermination of the legal heirs
15, Which is correct?
9. Which is correct regarding estate tax? a. Estate tax is determined per piece of property transferred to the heir.
a. A privilege tax b. Estate tax is collected by the local government.
b. A national tax c. Estate tax is a property tax.
c. A final tax d. Estate tax is an excise tax.
d. A fiscal tax 'd
. pal'
. til and unless the estate tax IS I'
10. Statement 1: Succession. WIllnOb\ef~~:nU~\nhe absence of relatives who mJ,
Statement 2: Estate tax ISpaya e
inherit the estate.
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Chapter 13-A-Estate Tax: Gross Estate
Chapter 13-A-Estate Tax: Gross Estate

CHAPTER 13-A Gross Estate:


ESTATE TAX: GROSS ESTATE If the decedent is a:
a. Resident citizen, non-resident citizen or resident alien _ p 8,500,000
b. Non-resident alien without reciprocity _ P 3,800,000
Chapter Overview and Obje~~~~~~ _ c. Non-resident alien with reciprocity _ P 3,000,000
------------------------------------- ted to comprehend:
After this chapter, readers are expec
1. The concept of gross estat~. ross estate PROCEDURES IN ESTABLISHING GROSS ESTATE
2. The procedures in determmmg g
1. Inventory count of existing properties at the point of death
3 The list of exempt transfers
2. Adjustments for exempt transfers and taxable transfers
. The list of taxable transfers. made for insufficient
45. The treatment of mor t IS causa transfers Inventory of Properties
consideration ,
6. The rules of valuation of gross estate To establish the amount of the gross estate, an inventory of the properties of
esetabldiesh
th c ede.nt and their fair values at the point of death shall first be

GROSS ESTATE . fthe decedent, tangible or intangible,


Gross estate consists of all prope~le~e~ at the point of death. Date of death
real or personal, and wherever SI ua

. d dent gross estate includes only


In the case of a non-residen_t. ah~n eC~ePt intangible personal property Inventory COunt
properties situated in the
Phl.hppmes ex If the list of properties existing at the point of death is known, the list is
when the reciprocity rule apphes. simply drawn directly.

Summary of rules on gross e state


I I Residents or NRA without NRA with However, if the inventory is prepared as of a later date after the decedent's
Citizens reciprocity reciproc!!,y_ death, the inventory must be worked back to establish the list of properties
present at the point of death.
Propertv location ~ Within Abl"Qug Within Outside Within 0Jmi4!
Real properties ./ ./ ./ x ./ x IlJustration
Personal properties
- Tangible ./ ./ ./ x ./ x
-
A decedent died on June 30, 2015. An inventory was not immediately prepared
because of the funeral of the decedent. An inventory count of his properties Was
- Intangible ./ ./ ./ x x x drawn only on July 15, 2015 .

Illustration . rty:
A decedent died leaving the following prope . On July 15, there were properties which had a total fair value of P5,000,000.
PlOO,OOO of this represents income earned after death while P400,OOO
represents income earned before death.
Location
Philippines Abroad Total
A total of PSOO,OOO was paid for funeral expenses and judicial expenses of the
Real property P 2,000,000 P 3,000,000 p 5,000,000
estate. A total of P200,000 obligations of the decedent was paid since his death.
Tangible personal property 1,000,000 500,000 1,500,000
Intangible personal property 800.000 1.200,000 2,OOO,OOQ
Total P 3.800,000 P 4.700.000 P a.SOO.oon

388
389
Chapter 1a-A-Estate Tax: Gross Estate
Chapter 13-A-Estate Tax: Gross Estate
EXEMPTTRANSFERS
The gross estate shall be recomputed as: 1. Transfers of properties not owned by the decedent-
p 5,000,000 One cannot transfer properties he or she does not own. Properties not
100,000
Properties as of July 15, ~015. ce death owned by the decedent are not part of his/her donation mortis causa.
700.000
Less' Incl'eas.e in propertles Sl~ death(P500K;. P200K) These properties must be excluded in gross estate even if they transfer
. 'I P operties smce ) ,~ S,60Q.QO.ll
Add: Decreas~ ~ , r , d' te of death(Gross Estate to other persons at the potnt of death.
Properties eXisting at the .a
l ~ I'm part of the gross 2. Transfers 'eganyexcluded-
Note. . earned before death proper y 0
There are properties that are owned by the decedent at the point of
1. propel1:ife:teh~s~~:~~~~:~:~:~hese w~Tepreseudt~~I:~;i:: O::~~~~d since these
estate 0 . come accruing after ea
death. These properties naturally form part of hisjher donation mortis
. epl'esentlng 1TII causa to the heirs, but are exempted by the law from estate taxation.
2. Propertl~S r . nt at the point of death.. . til ust be added baele since
were not yet pi ese. which were paid stnce dea m Hence, these are exduded from gross estate.
3. Expenses or obligattl:tOntl~epoint of death.
these were presen a
Transfer of properties not owned by the decedent
ADJUSTMENTS TO THE INV~NTORY oint of death shall be adjusted for 1. Merger 0/ the usufruct in the owner of the naked title
. list of propertIes at the p
The tnventory 2. The transmission or' delivery of the inheritance or legacy by the
the following: fiduciary heir or legatee to the fideicommissary
Exempt transfers - consist of: d f death but are not owned by the 3. The transmission from the first heir, legatee, or donee in favor of
1. Properties existing at the ate 0 another beneficiary, in accordance with the desire of the predecessor
a. decedent h d dent but are excluded by law from 4. Proceeds Of irrevocable lIfe insurance policy payable to beneficiary
Properties owned by t e ece other than the estate .executor 01' administrator
b. S. Properties held in trust by the decedent
estate tax
to These are removed 6. Separate properties of tile surviving spouse of the decedent
"exclusions in gross estate. 7. Transfer by way o/bonafide sales
These are referred t? as f h decedent's properties.
from the inventory list 0 t e .
rtf es which are absent at the pomt The merger of usufruct in the owner of the naked title
consistO of prope 1 f d th
2. Taxable trans :Jei rs - h decedent at the point 0 ea . Illustration
of death but are owned by t e Mr. A died ill [une 2011. In his will, he devised an agricultural land to B who
ferred to as inclusions in gross estate. These shall use the property over 10 years and thereafter, to C. Subsequently, B died
Taxable transfers are also \~ t fthe decedent's properties. resulting in the transmission of the property to C.
are added to the inventory IS a

PI~I_ss_o_r C_'I_lr_r""enl~U_d_ei1_t ~ C
THE GROSS ESTATE FORMULA:
P xxx,XXX (Usufructuary) (Owner of naked title)
Inventory of properties at the point of death
The transfer of the devise from B to C is referred to in law as the 'merger ofthe
Less: Exempt transfers P xxx,xxx
Properties not owned xxx,:XXX USufruct in the owner of the naked title."
xxx,xxx
. d but excluded by law p XXX,XXX
PropertIes owne . The transfer from the usufructuary, B, to the real OWt:1el~ C, upon the death of B
Inventory of taxable present propertles xxxXXX does not constitute a donation mortis causa as it is a mere return of the property
Add: Taxable transfers p xxx.XXX
to the real owner. Hence, it is excludedfrom gross estate. .
GROSSESTATE
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390
Chapter 13-A-Estate Tax: Gross Estate
Chapter 13-A-Estate Tax: GrosS Estate
I~ a~l previous illustrations, assumin B tra
Note that the transfer from Mr. A, the predecessor, of the usufruct to B and the hfetl~e to C, the same shall not be SU~ject tnsierre~ ,the property during his
naked title to C involves transfer of ownership. It is a donation mortis causa of Mr. gratuitous transfer of ownership. 0 ( onor s tax because there is no

A subject to estate tax.


ot er than the estate, executor or ad mt.m,sptorarIC
Prhoceeds of irrevocable llfre I. nsurance
The transmission or delivery of the inheritance or legacy by the toYr payable to beneficiary
fiduciary heir or legatee to the fideicommissary
The proceeds of life insurance policies whi .
~~e/:ecedent to any beneficiary are owned ~ a~: rt~Cab/Y designated by
Illustration IS ex death. Hence, the proceed . I Y. e ecedent at the point of
Mr. A died leaving an inheritance consisting of several real estates to his favorite s are me uded 10 gross estate.
grandson, C. Because C was a minor, Mr. A appointed B, an older brother of C, as
fiduciary 0fthe inheritance. Before transferring the property to C, B died. The proceeds of life Insurance policies whic ...
th~ deced~ntto the beneficiary are .. 01.. h are Irrevocably designated by
pomt of Ws/her death They. . I') anger owned by. the decedent at th
ddt. . are owned by the benef .
ece ent, Hence, these. shall ncot b e m
"1e uded III
.
e
. t cia ry designated by the
pre~_ss_o-r ----c_u~r~ro~ce-d-e-n-t--------~ c gross e s ta te. -

(Fiduciary heir) (Fideicommissary) However, if the beneficiary is th . .


pro~eed~ of life insurance is jnc~u~!~tie} executor. or admlnistrator, the
designation of the benefic' bees n gross estate regardless of th
The delive/y of the inl1eritance upon the dea~h of B (fiduciary heir), to c tensl
ex.ensions of"the interest ofiary ecause these b
the decedent enerficiarles are c e
cranes are considered
(fideicommiSSary) shall not be included in the gross estate of B because the
transfer does not involve Q transfer o{ownership from B to C. B is merely a trustee,
The deliVery is a mere return of the property to the real owner, C. Summary of Rules:Proceeds of Life Insut xmce
Beneficiary
The transmission from the first heir, legatee, or donee in favor of
another beneficiary, in accordance with the desire of the predecessor
Designation of beneficiary Estate, administrator I 1
or executor Other parties
Revocable Include Include
IIlnluhsitsraw
tioilnl, Mr. A devised a piece of land to B as the first heir and thereafter to C Irrevocable Include Exclude
as the second heir. B subsequently died transmitting the property to C in
Illustration
accordance with Mr. A's will. pMorl.iT
ciuebs:od died. His heirs collected thee ffollowm
. g proceeds of life insurance

P'lJ_ss-o-r------c-u~rre::,.l!Jce-d-e-n-t _.... -:;>~ C AXAr,~vo~ablYdesignated to wife P 800,000


'~~n~uf~felr.revbocablY?esignated to daughter 600,000
(1st heir) (2nd heir) .. .revoca ly designated to Mr Tubod; .. 700,000
PMAm, irrev.o. cabl y. d esi.gnated to M
'. r. Tubeds'sesteaxteecutor 400,000
The transfer from B to C is referred to as transfer under a special powe8r oJ
appointment The same is not B's donation mortis causa. The transfer from "t AKhAe proceeds of insurance policies to be' me'Iu d e d 111 gross estate shall be'
T
is merely an implementation of the transfer which was originally mandated bY
S " revocably designated to wife "
predecessor A. Puhn hfe ret bl .
'. yb desi snated
IilAm.re' vocan 9-' to
. Mr ,os
Tub d' estate 800
70 ,DOD
P
The same rule appUes even if' B were given the power, solely or in conjunction wi' Total .urevoca ly designated to Mr. Tubed's executor 40Q
0,,000
others, to appoint the second heir to the property from a list drawn by predecessor P 1.900,000

A.
393
392
Chapter 13-A-Estate Tax: Gross Estate

Chapter 13-A-Estate Tax: Gross Estate


The separate or exclusive properties of the husband are referred to as
. bly desianated are included in "husband's capital" while that of the wife is referred to as "wife's
Note: f insurance po 1"teres tl 1at are revoca b
paraphernal."
1. Only the proceeds a . . . t ator the llroceeds are
tc r or "ldmllllS rr r b
grosS es t a te. f . ry is the estate, execu o .' f \ b neficiary as revoca Ie
? However, if the bene ICla. 1 ' t regard of the designatIOn 0 t te e The wife's paraphernal shall n0t be included in the gross estate of the
_. included in grosS estate Wit lOU
husband upon his death since these will not form part of his donation mortis
or irrevocable.
causa. Similarly, the husband's capital shall not be included in the gross
. t by the decedent estate of the wife upon her death on the same basis.
Properties held m trus . t of his death are not
h d . dent at the pom 'n
Properties held in trust by t ~ d:~e in gross estate becau~e these wt not The gross estate of a married decedent includes the separate properties of
owned by him. These ar~ ~c ~ti~n mortis causa to the heirs. the decedent and their common properties with the surviving spouse.
form part of the decedent s on
Illustration
mustratio~ . ere identified upon the death of Mr. Ubaldo:
The followmg propertIes w p 800,000 An inventory of the properties at the point of death of Mr. Cabili revealed the
following:
. d i the name of his brother 200000
Car registere m ld '
' handise consigned to Mr. Uba 0 2,400,000 Exclusive properties of Mr. Cabili P 2.400,000
Mere r 000
House and lot . d 150, Exclusive properties of Mrs. Cabili 4,000,000
Motorcycle, borrowed from a fnen 4,000,000 Common properties of Mr. and Mrs. Cabili 8.000.QOO
ding house, held as trustee 1,000,000 Total properties of the spouses 14..400.000
Boar 600000
T~C~ ,
Taxicab franchise d tner personal belongings The gross estate of Mr. Cabili shall be:
Clothes, books, equipment, an 0 400,000
Exclusive properties of Mr. Cabili P 2,400,000
d nt shall consist of the following: Common properties of Mr. and Mrs. Cabili 8.000,000
The gross estate of the dece e P 2,400,000 Gross estate Pl0.400,OOO
House and lot 1,000,000 Note:
Taxicab 600,000 1. The boundary between exclusive and common properties of the spouses is a question of
Taxicab franc hI' se . . gs _ _.4!0.0
=.-0~00- property relations whIch wiU be dlscussed in the following chapter.
d ther personal belongm 2. The common properties are [otntly owned by the spouses. The share of the surviving
Clothes, books, eqUIpment an 0 p 4.400.000
spouse in the net common propertles is not an item of exclusion but an item of deduction.
Gross Estate . b the decedent including Hence, it is. tnitlaily included iii the gross estate then later removed as an item of
ties held m trust y d df m deduction from the gross estate.
Gross estate shall not include prope~ the following shall be exclu e ro
other properties he does not own. ence.
Transfer by way of bona fide sales
gross estate. p 800,000
C egistered in the name of his brother 200,000 Transfers by way of bona fide sales are onerous transactions rather than
:;~~handise, consigned to Mr. ~baldo 150,000 gratuitous transactions; hence, they are not subject to estate tax. Moreover,
Motorcycle, borrowed from a fnend 4,000.000 ownership over properties sold normally passes on to the buyer
Boarding house, held as trustee p 5,150,000 immediately at the point of sale.
Total exclusions in gross estate
Hence, properties transfer-red by way of bona fide sale or for an adequate
. . l'Vl'ngspouse
erties of the surv.
1"0 . Consideration are excluded in gross estate because the decedent no longer
Separate P P .
.t 'operties an d common l)ropertles.
r
.','
, -lusl\ OWns rhein at the date ofhls/her death.
Spouses have the'ir sep~~a e Phi tI: e spouses while separate or exc
. , re owned Jomtly Y 1
propertle~ a. . . d by either of them. 395
properties are sol.ely owne . 394
Chapter 13-A-Estate Tax: Gross Estate Chapter 13-A-Estate Tax: Gross Estate

Legal exclusions If the transfer qualifies for exclusion th .


The following are the list of properties owned by the decedent at the point est~te and deduction. It must be not~d t~ s:~e IS ?ot r~flected in both gross
of death which naturally forms part of the hereditary estate but are sue transfer under the Tax Code and in th ere IS no Item of deduction for
exempted from estate tax by law: e estate tax return.
Despite this bequests d . hi
1. Proceeds of group insurance taken out by a company for its d ecedent for' administrative
, eVIses or lega .
cres w Ich are restricted by th
employees di expenses of the d e
accre ited or non-accredited) shall b . I . onee Institution (whether
2. Proceed of GSISpolicy or benefits from GSIS e InC uded In gross estate.
3. Accruals from SSS Illustration
4. United States Veterans Administration (USVA) benefits - RA 136
A decedent had the following properties:
5. War damage payments
6. All bequests, devises, legacies or transfers to social welfare, cultural Family home
and charitable institutions, no part of net income of which inures to Truck P 5,000,000
the benefit of any individual; provided, however" that not more than Cash 1,200,000
30% of the said bequest, devises, legacies or transfers shall be used Commercial land 200,000
by such institutions for administration purposes Other properties 800,000
7. Acquisitions and/or transfers expressly declared as non-taxable by 600,000
law In his will, the decedent d .
h I eSIgnated the cash t b .
~c ~o '. The commercial land was also ~ e given to a public elementary
tnstitunon restricted to be df devised to a non-profit cha it bl
These properties must be removed from the gross estate of the decedent. use or program expenses of the latter. rt a e

The gross estate shall be computed as:


Note on property acquisitions using exempt benefits
Properties acquired using GSIS benefits, SSS accruals, USVA benefits, Family home
proceeds of group insurance and war damage payments are still exempt so Truck p 5,000,000
long as the heirs or administrators can prove that the properties were Cash 1,200,000
acquired using these exempt properties. Other properties 200,000
Gross estate 600.012Q.
Note: .P 7.000.000
Note on bequests, device, or legacies to social welfare, cultural, and
charitable institutions 1. ?nly bequests, devises or descent to .
The conditional exclusion applies if the donee institution uses not more than Institutions are exempt SOCIal welfare, cultural and h . bl
2. Tra ~. c arrta e
30% of the bequest, device, or legacies for administration purposes. . ns ers to the government and its in ..
Items of dedUction. They are included ttrumentahtIes are not items of exclusion but
The 30% conditional exclusion is deemed satisfied if the donee is an as deductions from gross estate ill the esntagtrostsestate and then separately presented
e ax return.
accredited non-profit donee institution. If the donee is a qualified non-profit
donee institution, the same is excluded in gross estate. TAXABLE TRANSFERS
Taxable transf .
It must be noted that one of the primary requirements for the accreditation fo . ers are morn, causa transf f ..
of donee institutions is that their income does not inure to the benefit of allt rm of mter-vivos transfers. ers 0 prOpertIes In the guise and
private individual and that the level of their administration expenses dQcS
not exceed 30% of their total expenses. iy"pes
of TaxabJe'Transfers
2~ RTranSferin contemplation of death
Transfers to these institutions are initially included in the inventory Jist of evocable transfer . 1 d
taxable properties, but are removed from the list if the donee is verified asa 3. Property passin . sldnc u ing conditional transfers
gun er general power of appointment
qualified donee institution.
396
397
Chapter 13-A-Estate Tax: Gross Estate
Chapter 13-A-Estate Tax: Gross Estate
Illustration 2: Conditional donation
Transfers in contemplation of death Mrs. Mulondo transferred a house and lot to hi .
These are donations made by the decedent during his lifetime which are ownership is conditional upon Masiu' . ~s son, Masiu. The transfer of
motivated by the thought of his death. These transfer inter-vivos are Exam. On June 15, 2015, Mrs. Mulondos l:~~mag
the October 2015 CPA Board
usually made by the decedent in a stage of terminal illness or under belief of
an imminent death. Analogous to testamentary disposition, transfers in The house and lot shall be included in the r
value on June 15, 2015 since she still ow dgthOSSestate of Mrs. Mulondo at its fair
contemplation of death are treated by the tax law as donation mortis causa ne e property at her death.
subject to estate tax not, to donor's tax. Assuming Masiu passed the October 2015 CPA Board
death, the transfer shall be subject to donor'
on October 2015.
=:
before Mrs. Mulondo's
s tax at the [air value of the property
Transfer in contemplation of death may include:
a. Transfers of property to take effect in possession or enjoyment at Ot Assuming further that Mrs Mulondo . d ..
transfer becomes a transf~r inter-viV:.a:~. ~h~ con~ltlOn before her death; the
after death
b. Transfer of property with retention of the right of possession or instances, the house and lot shall no I ~c . IS /ubJe~t to donor's tax. In both
Mulondo upon her death onger e inc uded In the gross estate of Mrs.
enjoyment or right over income of the property until death
c. Transfer of property with retention of the right to designate, alone or in
conjunction with any person, the person who shall enjoy the property or Transfer with retention of certain rights
the income there from If properties are transferred by the decedent' .
the possession or enjoyment .of or right to . pnor to hIS death but retains
same shall be included in grdss estate t m~ome from, the property, the
Revocable transfers interest therein. 0 t e extent of the decedent's
Revocable transfers involve transfers of possession over property during
the lifetime of the decedent, but not transfer of ownership over said
property. At the point of death, the decedent owns the property; hence, it Illustration
must be included as part of his gross estate since the same is part of his Mr. Ozamis transferred an agricultural land in favor of hi
reserved for himself the enjoyment f n avor of hIS son. He, however,
donation mortis causa. land was worth P2,OOO,000. 0 a quarter of the land until his death. The

In revocable transfers, ownership transfers only when the transferor waives The P500,OOO (i.e. P2,OOO,OOOx 34) portion of th I d hi
the right to revoke the transfer. If the transferor dies without waiving his Ozamis for himself until his death shall be includ eed ~Innh'w
IS griocshs wea
stsatree.served by Mr.
right of revocation, he owns the property at the point of his death. Hence, it
should be included in his gross estate. Transf~r under general power of appointment
Properties subject to a gene al ". f' .
be included in the gross es~te ~~;erdO a~pomtment by the decedent shall
Illustration 1: Revocable donation power enables the holder of such ~w:~e ent T~e presence of the general
In January 2012, Mr. Bala transferred a car with a fair value of P1,200,000 to Mr.
Subas. The car shall be revocable by Mr. Bala until July 3D, 2015. Mr. Bala died which he could do as if the proper; were ~~ ~::.lth the property anything
on May 30, 2015 when the car had a fair value of P1,100,000.
Illustration
The car shall be included in the gross estate of Mr. Bala at its fair value of Don Kulotthe
died. In his will he gave Mama
designate property to wh hei Sang a house and lot WIth
. the right to
PUOO,OOO. and appointed Bebe as heir too~:V;;op:I;;~e wants. Mama Sang eventually died
The transfer shall be subject to donor's tax when the right to revoke expired priVi
to Mr. Bola's death or when Mr. Bala waived the right to revoke before his death. Mama Sang had a general power over the ro Th .
her gross estate If Mama Sang h d li : perty. e same shall be Included in
In this case, the property shall not be included in gross estate. in her gross est;te. a imite power, the same shall not be included

399
398
Chapter 13-A-Estate Tax: Gross Estate Chapter 13-A-Estate Tax: Gross Estate

COMPOSITION OF GROSS ESTATE 2. Mr. A made a revocable donation involving a residential Iot to his brother E.
Mr. E paid P 400,000 when the lot was worth Pl,OOO,OOOT.he lot was
1. Properties, movable or immovable, tangible or intangible currently valued at P2M zonal value upon Mr. A's death.
2. Decedent's interest on properties
3. Proceeds of life insurance: The gross estate shall be computed as:
a. designated as revocable to any heir
b. regardless of designation, if the beneficiary is the estate, Inventory of present properties 'P17,900,OOO
administrator or executor Less:
4. Taxable transfers Properties not owned
Building, held as usufructuary P 4,000,000
Agricultural land, under special power 3,000,000
INTEGRATIVE ILLUSTATIONS
Total P 7,000,000
Properties exempted by law
Integrative Illustration 1 .
A resident decedent died with the following properties at the point of death: GSISbenefits 500,000 7.500,000
Taxable present properties PI0,400,000
Cash in bank account P ,000,000 Add: Taxable transfers (P2M - P400K) 1.600,000
Receivables from friends and relatives 200,000 Gross estate P12,OOQ..QQO
Borrowed car from a friend 120,000
House and lot 2,000,000 Integrative Illustration 3
Motorcycle, registered in the name of his youngest son 80.000 An inventory of Mr. D's properties was taken two years after his death. He had
Total P 4.400,000 the following properties during the inventory-taking:

The gross estate shall be computed as: Cash (40% from income of properties after death) P 4,000,000
P 4,400,000 Car (bought for P1.2M a week before Mr. D's death) 800,000
Inventory of present properties House and lot (worth P8M on Mr. D's death) 10,000,000
Less: Not owned Business interest (worth P6M on Mr. D's death) 7,QOQ,QOO
Borrowed car P 120,000
80.000 200.000 Total P21.800,000
Motorcycle
Gross estate P 4,200.000
The following possible deductions can be claimed by the estate:
Integrative Illustration 2 Funeral and judicial expenses paid P 1,100,000
Mr. A, a citizen decedent, died leaving the following properties: Wreck of a fishing boat, one year after Mr. D's death 800,000
Cash proceeds of life insurance designated to Obligations of Mr. D paid from his properties 1,500,000
a brother as revocable beneficiary P 1,000,000
4,000,000 The gross estate at the point of death shall be established as:
Building, properties held as usufructuary
Cash and cars, earned from building 2,400,000
3,000,000 Inventory of property P21,800,000
Agricultural land
House and lot, from Mr. A's industry 7,000,000 Add: Decreases in properties since death
Benefits from GSIS 500.000 Funeral and judicial expense P 1,100,000
Total properties P17.900,000 Wreck of a fishing boat 800,000
Obligations paid after death 1,500,000
Additional information: Decrease in value of car (Pl.2M - P.8M) 400,000 3.800,000
1. The agricultural land was designated by Mr. A's father in his will to be Total P25,600,000
transferred to D, Mr. A's son, upon Mr. A's death.

400 401
Chapter 13-A-Estate Tax: Gross Estate Chapter 13-A-Estate Tax: Gross Estate

Total P2S,600,000 Illustration


Less: Increases in properties since death Mrs. Geogracia died leaving a house and lot as part of her estate. The property
Cash income of properties (P4M x 40%) P 1,600,000 which was encumbered by a Pl,OOO,OOO mortgage had the following fair values:
Increase in value of house and lot - Zonal value per BIR website = P3,000,000
(PI0M - P8M) 2,000,000 Assessed value = P2,000,000
Increase in business interest Independent appraisal value = P4,000,000
(P7M - P6M) 1.000.000 4.600.000
P21.000.000 The house and lot shall be included in gross estate at P3,000,000 not P4,000,000.
Gross Estate
The independent appraisal is not used. Also, the mortgage shall not be offset
against the value of the property.
VALUATION OF THE GROSS ESTATE
Properties subject to estate tax shall be appraised at their fair value at the
Shares of stocks
point of death. Conceptually, "fair value" refers to the amount at which two
The fair market value of stocks shall depend on whether the stocks are
willing independent buyers and sellers could transact an exchange.
listed or unlisted in the stock exchanges.
Valuation rules Preferred shares are valued at par value.
1. The fair value of the property as of the time of death shall be the value
Unlisted common shares shall be valued at their book value using the
to include in gross estate.
Adjusted NetAsset Method(RR6-2013)
2. Fair value rules set by law or revenue regulations must be followed.
3. In default of such fair value rules, reference may be made to fair value Previously, under RR2-2003 and RR6-2008, the book value of the stocks
rules under generally accepted accounting principles. was used without adjustment for fair values of properties of the investee.
4. Encumbrances on the property or decrease in value thereof after death
For shares which are listed in the stock exchange, the fair market value
shall be ignored.
shall be the closing price on the date of death or the trading price at a
date nearest to the date of death, if none is available on the date of death
The following sections discuss fair value rules for the following assets:
itself.
1. Real properties
2. Shares of stocks Previously, the rule under RR2-2003 was the average of the high and low
3. Usufruct and annuities trading price of the stock at the date of donation.
4. Other properties
5. Taxable transfers Illustration
Mr. Yakal died leaving 10,000 of the stocks of Subang Corporation in his estate.
Real properties Each stock of Subang had a par value of PSO per share. Subang also reported a
Under the NIRC, the appraisal value of real property shall be whichever is Pl00 book value per share in its latest published financial statement. The assets
higher of: of Subang Corporation approximate their respective fair values.
a. The value as determined by the Commissioner of Internal Revenue
(zonal value), or The Subang stocks were selling P120 per share at the date of death of Mr. Yaka!.
b. The value fixed by the Provincial or City Assessor (assessed value). Since the shares are traded, the stocks shall be valued at their fair value of P120
per share at the date of death. The stocks shall be included in the gross estate of
If there is no zonal value, the taxable base shall be the fair market value that Mr. Yakal at Pl,200,000, computed as (P120 x 10,000).
appears in the latest tax declaration.
Assuming the stocks were not traded in an active market, the fair value shall be
If there is an improvement, the value of the improvement shall be the based on the book value. In this case, the stocks shall be valued in the gross estate
construction cost per building permit or the fair value that appears in the at Pl,OOO,OO(O PI00 x 10,000). There is no need to adjust the net asset because the
latest tax declaration. assets are reflective of their fair values.

402 403
Chapter 13-A-Estate Tax: Gross Estate Chapter 13-A-Estate Tax: Gross Estate

Determination of the book value of non-listed stocks Hence,

Under the Adjusted Net Asset Method, all assets and liab~liti~s of the I?veste.e Book value Assessed Zonal Appraisal Hi,qhest
LandA P2,000,000 2,500,000 5,000,000 6,000,000 P 6.000,000
corporation shall be adjusted to fair market val~es. The indicated equity (fair
value of net assets) is used for purposes of valuation of the shares of stocks. LandB 2,000,000 2,200,000 4,000,000 3,500,000 4,000,000
Building A 1,000,000 2,400,000 - , 3,000,000 3,000,000
Only for the purpose of the Adjusted Net Asse~ Method, the value of real property Building B 500,000 2,000,000 - 1,950,000 2,000,000
shall be appraised at the highest ofthe followmg: Total P5,500.000 P15 000 OOJ!
a. Zonal value
b. Assessed value The net asset and the book value per share shall be computed as follows:
c. Market value as determined by independent appraiser
Cash P 1,000,000
Illustration: Adjusted Net Asset Method Investments 1,300,000
Mrs. Consuelo died leaving 2,400 shares of stocks of GT Corporation, a closely- Land and buildings 15,000,000
held corporation, as part of her estate. Equipment 600.000
Total assets P 17,900,000
The abridged balance sheet of GT Corporation is shown below together with the Less: Liability 3,500,000
fair value of its assets and liabilities: Net Assets P 14,400,000
Divide by: Outstanding shares 10.00D-
Book value Fair value Book value per share P1,440/share
Cash P 1,000,000 P 1,000,000
Investments 1,500,000 1,300,000 The stocks shall be included in Mrs. Consuelo's gross estate at P3,456,000,
Land and buildings 5,500,000 See table computed as Pl,440/share x 2,400 shares.
Equipment 500.000 600,000
Total assets P 8.500,000 Usufruct and annuities
A decedent may transfer usufructuary right to income over property or
Liabilities P3,500,000 3,500,000 right to receive amounts of annuities to his/her heirs. The fair value of such
Equity(10,OOOoutstanding shares) 5.000.000 usufruct or annuities must be included in gross estate.
Total liabilities and equity P 8.500.000

The land and buildings are composed of the following: To determine the value of the right to usufruct, use, or habitation, as well as
that of annuity, there shall be taken into account the probable life of the
Fair values beneficiary in accordance with the latest basic standard mortality table, to
Independent be approved by the Secretary of Finance, upon recommendation of the
Book value Assessed Zonal Aooraisal Insurance Commissioner.
LandA P 2,000,000 2,500,000 5,000,000 6,000,000
LandB 2,000,000 2,200,000 4,000,000 3,500,000 Illustration 1: Annuity contract
Building A 1,000,000 2,400,000 - 3,000,000 Mr. Mairugin, 60 years old, sold his company under a condition that the acquirer
shall pay his 35-year-old wife and their child P300,OOOyearly support payment
Buildin_gB_ 500,000 2,000,000 - 1,950,000
for30 years. Mr. Mairugin died after the fifth payment was made by the acquirer.
Each item of properties shall be adjusted to their fair values which shall be the Assuming that the appropriate discount rate is 12%, the annuity shall be
highest of the three market values. included in the gross estate of Mr. Mairugin at the present value of the 25
remaining future payments to be received under the contract.

404 405

~-
\
Chapter 13-A-Estate Tax: Gross Estate
Chapter 13-A-Estate Tax: Gross Estate

3. The subsequent transf~r of the property from the heir upon his death to Marcus [i.e,
The present value of an annuity is mathematically computed as follows: merger of the usufruct III the owner of the naked title) is exempt from transfer tax.

Value of annuity = (1 - (1 +i)-n) x Annuity payments Other properties


For properties which the law or revenue regulations has not fixed valuation
Where: rules, valuation shall take into consideration fair value rules under generally
i = interest rate or discount rate per period = 12% accepted accounting principles '(GAAP). -
n = number of periods = 30years - 5 years = 25 years
Additional Guidelines in Determining Fair Values
Value of annuity = (1 - (1 + 12%)-25)x P 300,000
For newly pur~hased pro~erty, the fair value may be its purchase price. If
12% not newly acquired, the fair value shall be its second-hand value.
For pawned properties, the fair value may be reestablished by grossing-up
Value of annuity = 7.843139 x P300,000 the pawn value by the loan-to-value ratio.
= P 2,352.941.73
For p~operty fixed in monetary terms such as a loan or receivable, the fair
The annuity contract shall be included in the gross estate of Mr. Mairugin at its value IS ~he amount fixed in the contract including accrued income thereto.
For foreign currencies, the fair value shall be its Peso value translated at the
value ofP 2,352,941.73. prevailing exchange rate at the date of death.
Note: To compute for the annuity factor, press the following in your scientific calculator: [(1 -
(1 + .12) xy - 25) + .12] = Illustration 1: Used properties
Mr. Bantay died leaving a used car as part of his estate. Mr. Bantay bought the
Illustration 2: Usufruct car at P400,000. Brand new units of the same car model sell at P500,000. The
Don Midas transferred to Aurelius and his heirs usufructuary right over a car sells at P250,000 if sold as is at the point of death.
P50,000,000 property for 10 years. After 10 years, the property shall be given to
Marcus who was designated as the owner of the naked title. Aurelius died just The used car shall be included in the gross estate at P250,OOO.
after the end of the sixth year of the usufruct.
Illustration 2: Pawned jewelry
The property earns Pl,OOO,OOOannual income. Assume that the applicable
At th~ point of death, Mr. X has a piece of jewelry which was pawned with
discount rate is 12%. Munting Pawnshop for P90,000. Munting Pawnshop maintains a 60% loan-to-
Upon the death of Aurelius, the usufruct will be transferred to his heirs for the appraisal value.
four years (10 yrs. - 6 yrs.) remaining unexpired term ofthe usufruct.
The fair value shall be computed as P90,OOOj60%= P150,OOOT.he P150,OOOfair
The fair value of the usufruct to be included in the gross estate of Aurelius shall va_lueshall be includ~d in the gross estate. The P90,OOOloan shall not be offset
be the present value of the annual income on the property for 4 years: WIth the value of the Jewelry but should be presented as an item of deduction from
gross estate.
Value of usufruct = (1 - (1 + 12%)-4) x P 1,000,000
12% Illustration 3: Loans receivables
On June 30, 2015, Mr. Bombay died with the following outstanding receivables:
Value of usufruct = 3.037349 x P1,000,000 ~ 50,000 non-interest bearing loan to Mr. A, given April 1, 2015 and is due
= P 3,037,349 III 3 months

Note: P 30.0,000 loan, bearing 10% interest to Mrs. B, given January 1, 2015 and is
1. The transfer of the property from Aurelius to his heir for the remainder of the due III one year
usufruct is Dot a merger ofthe. usufruct to the owner of the naked title.
2. Assuming 0011 Mi'das granted Aurelius' heir a life usufruct, the fair value of ~he
A P 20,000 non-interest bearing loanto Mr. C, due Marc;h"30;"z015 but still
unpaid I ,
usufruct to be included in the gross estate of Aurelius shall be determined by takmg
into consideration the life expectancy ofthe heir.
407
~ I
406
)
.,.>
Chapter 13-A-Estate Tax: Gross Estate
Chapter 13-A-Estate Tax: Gross Estate

The foregoing loans shall be included in gross estate as: CHAPTER 13: SELF-TEST EXERCISES

Loan to Mr. A P 50,000 Discussion Questions


Loan to Mrs. B 300,000 1. What is gross estate? Distinguish the extent of gross estate of each type of
Accrued interest on loan to Mrs. B at the date of death 15,000 decedent taxpayer.
Overdue loan to Mr. C 20.000 2. Discuss and illustrate the computational procedures of gross estate.
Amount to include in gross estate p 385.000 3. Enumerate the list of property transfers which are not owned by the
decedent.
Note:
1. Interest receivables accrued on the loan to Mrs. B from January 1, 2015 to the date of 4. Enumerate the list of property transfers which are properly includible in
death, on June30, 2015. This is computed as P 300,000 x ,10% x 6 ~onths / 12 months, gross estate but which are excluded by law.
2, Overdue claims, even if due from insolvent persons, are mcluded in gross estate. In estate 5. Enumerate the list of taxable transfers.
taxation, claims proven to be worthless are still included in gross estate then separately
6. Discuss the treatment of mortis causa transfer made for insufficient
presented as deductions.
consideration.
7. Discuss the valuation rules for real property, stocks, usufruct and annuity
Taxable transfers and other properties.
Taxable transfers made without consideration are included in gross estate
at the fair value of the transferred property at the date of death.
True or False 1
1. The list of properties of the decedent existing at the point of death must be
Taxable transfers made for a consideration are valued as: Fair value at the
established in determining gross estate.
date of death less consideration paid at the date of transfer. 2. Gross estate consists of all real properties and tangible personal properties
wherever situated, at the point of death.
Illustration 3. The gross estate of a non-resident citizen includes tangible properties
Before her death, Mrs. Power made the following mortis causa transfers during wherever situated.
her lifetime: 4. The gross estate of a non-resident alien includes only tangible properties
At the date of transfer Fair value
Fair value Consideration, at death situated in the Philippines.
5. The gross estate of a resident alien includes only real properties wherever
To Alexander P 300,000 POP 200,000 situated.
To Bee Jay 200,000 195,000 300,000 6. The list of properties of the decedent must be counted at the date of death.
To Cedric 100,000 40,000 120,000 7. Properties owned by the decedent which are exempted by law are initially
To Donnie 150,000 80,000 70,000 included in gross estate, but are removed by way of deduction from gross
estate.
The amount of taxable transfers to be included in gross estate shall be: 8. Properties not owned by the decedent may be included in gross estate.
9. Taxable transfers consist of properties passed to other persons before
FVat death Consideration death but are still owned by the decedent at the point of death.
To Alexander P 200,000 -P 0 P 200,000 10. The motives of the donation shall be the basis of its taxation.
To Bee Jay 11. Properties are valued at the higher of the fair value and acquisition cost.
To Cedric 120,000 40,000 80,000 12. Newly-acquired properties are valued at acquisition cost.
To Donnie 70,000 80,000 13. Where the law or regulations do not prescribe for fair value rlJ:les~-faivralue
P 28Q,QQQ rules of generally accepted accounting principles m'!}'be sought. '
Note: . . .. b fid ales not 14. Listed stocks are valued at their par value. ',l I
1. The transfer to Bee Jay is for an adequate consideration. This IS ona I e S 15. Non-listed common stocks are valued at their b o~
subject to estate tax but to income tax at the date of sale. . f r
2. The transfer to Donnie decreased in fair value below the consideration. This trans e
is simply ignored.

408 409
~
-
Chapter 13-A-Estate Tax: Gross Estate Chapter 13-A-Estate Tax: Gross Estate

True or False 2 Multiple Choice - Theory: Part 1


1. Transfers inter-vivos made before death are included in gross estate.
2. Income earned after death is included in gross estate. 1. The gross estate of resident or citizen decedents does not include
3. Income earned before death is included in gross estate. a. Properties located abroad
4. The payment for obligations and expenses after death is added back to the b. Properties located in the Philippines
amount of gross estate.
c. Intangible personal property located abroad',
5. Taxable transfers are included in gross estate.
6. Properties held by the decedent as a trustee must be included in gross d. Properties not owned
estate.
7. Properties held by the decedent which must be transmitted to an heir in 2. Gross estate means
accordance with the desire of a predecessor are excluded from gross estate. a. Properties, whether or not owned by the decedent, existing at the point
8. The proceeds of an irrevocable life insurance is included in gross estate. of death
b. Properties owned by the decedent at the point of death
9. Properties held by the decedent as a fiduciary heir are included in gross
c. Present properties in the possession of the decedent at the point of
estate.
10. The proceeds of life insurance which is revocably designated must be death
included in gross estate. d. Any of these
11. The proceeds of life insurance is included in gross estate if the beneficiary is
the estate, the executor or administrator. 3. As a rule, all.decedents are taxable on world estate, except
12. The separate properties of the surviving spouse are excluded from gross a. non-resident alien.
estate. b. non-resident citizen.
13. Transfers made for adequate considerations are excluded from gross estate. c. resident alien.
14. The merger of the usufruct in the owner of the naked title is a transfer d. non-residents.
excluded from gross estate.
15. The gross estate includes only the separate properties of the decedent. 4. As a rule, t?e gross estate of non-resident alien decedents includes
16. The proceeds of group insurance is included in gross estate. a. Intangible personal properties located abroad
17. The proceeds of GSISpolicy and SSSbenefits are included in gross estate. b. Real properties located abroad
18. Benefits from the USVAare exempt from estate tax. c. Intan.gible personal properties located in the Philippines
19. Donations mortis causa to accredited non-profit institutions are exclusions d. Tangible personal properties located abroad
in gross estate.
20. Transfers in contemplation of death are included in gross estate. 5. Which has reciprocity exemption?
21. If the fair value of the property transferred mortis causa for an inadequate a. Resident alien
consideration declines below the amount of the consideration at the date of b. Non-resident alien
death, no amount is included in gross estate. c. Non-resident citizen
22. Revocable transfers and conditional transfers are included in gross estate at d. All of these
the fair value of the property at the date of their transfer to the transferees.
6. Which property is covered by the reciprocity exemption?
23. Properties passing under special power of appointment are included in
gross estate. a. Intangible personal property abroad
24. The gross estate is valued at the point of death. b. Intangible personal property in the Philippines
25. If a consideration is paid by the transferee in a taxable transfer, the amount c. Tangible personal property abroad
to include in gross estate shall be the excess of the fair value of the property d. Tangible personal property in the Philippines
at the date of death over the consideration given.
7. Wh.ich o~these properties may be excluded from gross estate by reason of
reciprocity?
a. Cash c. Paintings
b. Car d. Land
410 411
Chapter 13-A-Estate Tax: Gross Estate Chapter 13-A-Estate Tax: Gross Estate

8. Which is not deducted from the inventory list of properties in arriving at c. Properties transferred under conditional donations wherein the donee
the gross estate? has not yet fulfilled the terms of donation at the date of death of the
a. Properties held as a trustee decedent
b. Properties held as a fiduciary heir d. All of these
c. Properties held under a general power of appointment
d. Properties held under a special power of appointment 14. The proceeds of life insurance designated by the decedent to his /her child
is included in gross estate .
9. If inventory-taking of properties is conducted after the death of the a. if the designation is revocable.
decedent, which is deducted from the inventory list? b. if the designation is irrevocable.
a. Income accruing after death c. without regard to the designation as revocable or irrevocable.
b. Expenses paid after death d. in all circumstances.
c. Income accruing before death
d. Expenses paid before death 15. The proceeds of life insurance designated by the decedent to his/her estate
is included in gross estate
10. Which is not added to the inventory list of properties in computing gross a. if the designation is revocable.
estate? b. if the designation is irrevocable.
a. Transfer in contemplation of death c. without regard to the designation as revocable or irrevocable.
b. Revocable transfers d. in all circumstances.
c. Transfers under general power of appointment
d. Merger of the usufruct in the owner of the naked title 16. The proceeds of life insurance designated by the decedent to his wife is
excluded in gross estate
11. Which is a correct statement? a. if the designation is revocable.
a. The merger of the usufruct in the owner of the naked title is a b. if the designation is irrevocable.
transmission subject to estate tax. c. without regard to the designation as revocable or irrevocable.
b. The transfer from the first heir to the second heir in accordance with d. under no circumstances.
the wishes of a predecessor is a taxable transfer subject to estate tax.
c. The proceeds of life insurance taken by the decedent for 17. The proceeds of life insurance designated by the decedent to his/her
himself/herself is always included in gross estate if the beneficiary is executor is excluded in gross estate
the estate, executor or administrator. a. if the designation is revocable.
d. The trustor need not include a property transferred in a revocable trust b. if the designation is irrevocable. /
in his gross estate. c. without regard to the designation as revocable or irrevocable. I
d. under no circumstances. - \~
12. Which of these transfers is subject to estate tax?
a. Transfer of properties for a full consideration 18. Which is an inclusion in gross estate?
b. Transfer of the inheritance from the fiduciary heir to the a. Separate properties of the surviving spouse '"
fideicommissary b. Common properties of the spouses
c. Transfer of the property held in trust by a trustee to the beneficiary c. Separate properties of the heirs
d. Transfer mortis causa for less than full and adequate consideration d. Properties acquired from group insurance

19. Which is not included in gross estate?


13. Which of these properties is subject to estate tax?
a. Revocable transfers
a. Properties which were initially transferred in revocable trusts but were
revoked by the decedent before his/her death b. Transfers in contemplation of death
b. Properties transferred under revocable trust which the decedent failed c. Transfer under special power of appointment
d. All of these
to revoke at the time of his/her death

412 413
Chapter 13-A-Estate Tax: Gross Estate
Chapter 13-A-Estate Tax: Gross Estate

Which is correct?
20. Which is not included in the gross estate of the husband? a. Statement 1 c. Both statements
a. Capital properties b. Statement 2 d. Neither statement
b. Common properties
c. Paraphernal properties
d. All of these Multiple Choice - Theory: Part 2
21. Which is not included in the gross estate of the wife? 1. Mr. A devised in his will a piece of land to Mrs. B. Mrs. B shall enjoy
a. Capital properties usufructuary right over the property and shall pass the sa z.to Mr. C upon
b. Common properties her death. ,.,/
c. Paraphernal properties ./
d. None of these Who shall include the property in his or her gross estate upon death?
a. Mr. A c. Mr. C
22. Which of the following donations in the last will and testament is excluded b. Mrs. B d. Mr. A and Mr. C
in gross estate of the decedent?
a. Donation to a favorite child 2. Mrs. A appointed Ms. B as fiduciary heir overan
b. Donation to an ex-girlfriend B shall turn over to Mr. C upon Ms. B's death. (
c. Donation to a charitable institution
d. Donation to the government Which is incorrect? I
a. The land must be included in Mrs. A's gross estate upon her death.
23. Which proceeds of insurance is included in gross ~state of the decedent? , b. The land must be excluded in Ms. B's gross estate upon her death.
a. Proceeds of life insurance irrevocably designated to the decedent s c. The land must be excluded in Mr. C's gross estate upon his death.
child d. None of these
b. Proceeds of group insurance
c. Proceeds of property insurance 3. Mr. A designated his wife as the revocable beneficiary of the proceeds of his
d. All of these life insurance.

24. Which is not an exclusion in gross estate? Which is correct?


a. Accruals from SSS a. The proceeds must be included in the gross estate of Mr. A
b. GSISbenefits b. The proceeds must be excluded in the gross estate of Mrs. A upon her
c. War damage payments death.
d. Private retirement benefits c. The proceeds must be treated as donation subject to donor's tax.
d. The proceeds must be excluded in the gross estate of Mr. A.
25. Which of the following bequests to a social welfare or charitable institution
is subject to estate tax? 4. Mr. A designated Mr. K, the executor of his estate, as his irrevocable
a. Bequests to be used for administrative purposes expenses of the beneficiary to the proceeds of his life insurance.
b. Bequests restricted by the decedent for program
institution Which is correct?
c. Bequests to accredited non-profit institutions a. The proceeds of the life insurance policy shall be included in the gross
d. All of these estate of Mr. A.
b. The proceeds of the life insurance policy shall be excluded in the gross
26. Statement 1: For taxable transfers, the value to include in gross estate shall
estate of Mr. A.
be the fair value of the property at the point of death. .'
c. The proceeds of life insurance is a donation subject to donor's tax.
Statement 2: For taxable transfers made for an insufficient co~slderatlO~ d. The proceeds is exempt from both donor's tax and estate tax.
the total fair value of the property at the point of death shall be mcluded
gross estate.
414 415
Chapter 13-A-Estate Tax: Gross Estate
Chapter 13-A-Estate Tax: Gross Estate

5. Which of the following is excluded in the gross estate of Mr. X?


11. Which may be exempt from estate tax?
a. Separate property of Mr. X
a. Proceeds of building fire insurance
b. Common property of Mr. and Mrs. X
b. Proceeds of car insurance
c. Separate property of Mrs. X
c. Proceeds of crop insurance
d. Band C d. Proceeds of life insurance
6. Mr. A made an irrevocable donation in trust in favor of Mr. C. Mr. C died two
12. Which is not included in gross estate?
years after receiving the donation.
a. Decedent interest to properties
b. Taxable transfers
Which is correct?
c. Proceeds of life in~urance irrevocab~_g_esignated_tQt.h_e estate
a. The property shall be included in the gross estate of Mr. C. d. Income of properties of the decedent after death '\
b. The property shall be included in the gross estate of Mr. A.
c. The property shall be excluded in the gross estate of Mr. C. 13. The decedent owns an agr~Cultur~th the fOlJ~Winjvalues:
d. None of these
Zonal value P "2,000,000)
7. What is a best way to minimize estate tax exposure? Assessed value 1,5.00,000
a. Invest your money in a corporation Independent
Offer price of appraised value
a willing buyer 3,200,00'0
4,000,000
b. Donate the properties to relatives before death
c. Understate your gross estate and do not pay estate tax
d. Invest property in life insurance and make the designation of the The agricultural land shall be included in gross estate at
beneficiary as irrevocable a. P 1,500,000 c. P 3,200,000
b. P 2,000,000 d. P 4,000,000
8. Which of these transfer mortis causa will more likely to be included in gross
estate of the decedent?
14. The decedent owns 200,000 shares of Saint Peter Corporation, a listed
company.
Fair value at transfer Selling price at transfer Fair value at death
a. P 100,000 P 150,000 P 200,000
b. P 150,000 P 150,000 P 300,000 Date of death Date ofinterment
Book value per share P 23.50
c. P 200,000 P 150,000 P 140,000 p 23.55
d. P 300,000 Closing price P48.20
P 200,000 P 280,000 P49.50
Average trading price P 48.00 P49.60
9. Which is excluded in gross estate?
a. Fringe benefits The 200,000 shares shall be included in gross estate at
a. P 4,700,000 c. P 9,600,000
b. De minimis benefits
b. P 9,640,000 d. P 9,900,000
c. GSISbenefits
d. . Philhealth benefits
15. The decedent had $2,000 in his possession at his death on November 2
1014. He was buried on November 12, 2014. '
10. Which of the following properties is excluded from gross estate even if
present at the point of death? The following were the exchange rates:
a. Revocable transfer
b. Conditional transfer November 2, 2014
P 42.50: $1
c. Transfer by bona fide sale November 2 to November 12, 2014 average rate P43.25: $1
d. Proceeds of group insurance November 12, 2014
P 42.75: $1

416
417
Chapter 13-A-Estate Tax: Gross Estate
Chapter 13-A-Estate Tax: Gross Estate

At what amount shall the $2,000 be included in the gross estate of the A~ . investme?t in the estate of Mr. Masipag also earned P50,000 in
decedent? dividends which the heirs reserved for payment of his estate tax
a. P 86,500 c. P 85,000 What is the gross estate? .'
b. P 85,500 d. P a. P 12,900,000
b. P 12,850,000
c.P12,500,ODO .
d. P12,000,000
Multiple-Choice - Problems: Part 1
1. Mrs. Dely Cado died on November 1, 2014. An inventory of her properties 5. A decedent died in Octo~er 2012. His proID~t~ an aggreg~te fair value
was conducted for estate tax purposes on January 1, 2015. On that date, she of P12,000,000 at that time, His heirs failed to pay his estate dx In M h
had properties with an aggregate fair value of P7,000,000. This amoun] 2014, his heirs prepared a list of the decedent's propbrties which ~ow h:~ a
includes P300,000 income received by the estate since her death and is net value of P13,500,000 and which excluded a car wortl P1S0c(000 t I .
January 2014. I ISO en III
of P600,000 expenses used during her funeral.
What is the gross estate?
What is the amount of gross estate? a. PO c. P13,500,000
a. P 7,900,000 c. P 7,000,000 b. P 12,000,000 d. P15,000,000
b. P 7,300,000 d. P 6,700,000
6. A resident decedent died leaving the following properties:
2. Mr. Tio died leaving the following properties: An orchard, held as usufructuary P 1,200,000
Purchase cost Fair value A motorcycle, borrowed from a friend 80,000
Car, registered in his name P 800,000 P 400,000 Cash, proceeds of his bank loan 500,000
2,000,000 5,000,000 A ranch, acquired for P1,000,000 in 1990 2,500,000
Family home
Cattles 600,000
Other properties 400,000 350,000
House and lot 800,000
Compute the gross estate.
Compute the gross estate.
a. P 2,750,000 c. P 5,750,000
a. P 2,400,000 c. P 4,400,000
b. P 3,200,000 d. P 6,200,000
b. P 3,900,000 d. P 5,680,000
3. Mr. Bacleito had the following properties with their respective fair values in
his possession at the date of his death:
7. A citizen decedent died leaving the following:
Agricultural land, held in trust P 200,000
300,000 Properties, inherited from his father P 1,200,000
Car, registered in the name of his brother
80,000 Properties, donated by brother 800,000
Motorcycle
900,000 Cash, from his salary savings 400,000
Residential lot
Other personal properties 70,000 Cash, income of properties before death 200,000
Receivables, income of properties after death 100,000
Compute the gross estate. What is the gross estate?
a. P 950,000 c. P 1,250,000 a. P 600,000 c. P 2,600,000
b. P 1,050,000 d. P 1,550,000 b. P 700,000 d. P 2,700,000
4. The heirs of Mr. Masigasig identified a total P12,000,000 in properties
existing at the date of his death. A total of P500,000 was used during his 8. A resident Japanese decedent died with the following properties:
wake up to his interment. His heirs also used P400,000 to payoff A house and lot in Japan 2,000,000
obligations of Mr. Masipag. Bank deposit, in the Philippines 800,000
A car in the Philippines A 1,000,000
residential lot in the USA 1,500,000
418 419
Chapter 13-A-Estate Tax: Gross Estate
Chapter 13-A-Estate Tax: Gross Estate
What is the amount to include in gross estate?
Compute the amount to be included in gross estate.
a. P
o c. P 2,000,000
a. P
b. P 6,000,000
c. P 26,000,000
d. P 38,000,000
I
9.
b. P 1,800,000 d. P 5,300,000

A non-resident alien decedent died leaving the following:


13. In the immediately preceding problem, what is the amount to include in
gross estate assuming that the reciprocity condition applies? '--
)
P 8,000,000 a. PO c. P 26,000,000
A building in Korea
2,000,000 b. P 6,000,000 d. P 38,000,000
A car in Hongkong
4,000,000
Shares of stocks in Malaysia
800,000 14. A non-resident alien decedent had the following interests at the point of
Cash in Philippine banks .
Investment in bonds of domestic corporatlOns 400,000 death:

Compute the gross estate. Interest in a business partnership organized abroad P 300,000
a. PO c. P 1,200,000 Shares in a foreign corporation 75% of the business
b. P 800,000 d. P 11,200,000 of which is situated in the Philippines 400,000
Shares of a foreign corporation traded in the
10. A Korean citizen residing in the Philippines died in the Philippines: Philippine Stock Exchange 800,000
P12,OOO,OOO Claims from resident debtors 1,200,000
An agricultural land in Korea
4,000,000
A house and lot in Korea
2,000,000 Compute the amount of properties considered situated in the Philippines.
A condominium unit in the Philippines
3,000,000 a. P 800,000 c. P 2,000,000
A business interest in the Philippines
1,200,000 b. Pl,200,000 d. P 2,400,000
Car in the Philippines 1,800,000
Cash in Japanese banks
15. MI'. Masipag died leaving a commercial land as part of his estate; The land
What is the amount to include in gross estate? was purchased in 2010 at an acquisltion price of Pl1,OOO,OOO.An
a. P 0 c. P 6,200,000 interested buyer tendered a P1S,OOQ,OOO-offetro buy the property. The
b. P3,200,OOO d. P 24,000,000 land bad an independent appraisal of P16,OOO,OOO, assessed value of
Ptz,OOO,OOO and a zonal value of P14,OOO,OOO.
11. A Filipino citizen died while residing in the USA. He had the following
properties at the date of his death: What is the amount to be included in gross estate?
P 2,000,000 a. P 11,000,000 c. P 14,000,000
Shares of domestic corporations
5,000,000 b. P 12,000,000 d. P 15,000,000
Cash in USbanks
3,000,000
Carin the US 4,000,000 16. Mr. Imbestor died with significant stock holdings as follows:
House and lot in the Philippines
What is the amount to include in gross estate? 1,000 Globe preferred stocks with Pl,OOOpar value per share
a. P
b. P 4,000,000
c. P 6,000,000
d. P 14,000,000


40,000 San Miguel common shares with par value of PIOO per share
80,000 stocks .of Carmen Corporation with par value of PSOper share
12. A Mexican citizen died in TOkyo,Japan. He had the following properties: PSE closing price
P12,OOO,000 Book values at date of death
House and lot in Mexico
18,000,000 Globe preferred P 1,000 P 1,000
House and lot in Japan
2,000,000 San Misuel common shares 250 300
Car in Japan 4,000,000
Shares of stock in a domestic corporation Carmen common shares 45 -
2,000,000
Interest in a Philippine-based business
421
420
Chapter 13-A-Estate Tax: Gross Estate
Chapter 13A-EstateTax: Gross Estate

What is the total amount to include in gross estate? 20. Mr. Canute was hospitalized on April 8, 2014 and died on April 12, 2014. He
a. P 13,600,000 c. P 16,600,000 was buried on April 21, 2014. Mr. Canuto had $124,000 prior to
b. P 15,000,000 d. P 17,000,000 hospitalization. $24,000 was spent for his hospitahzanoih~hile $10,000
was used for his funeral. '
17. A decedent died with the following properties:
The following were the exchange rates between the peso and the dollar:
Purchase cost
Newly purchased jeepney P 1,200,000 April B, 2014 April 12. 2014 April 21,2Q14
,
An old model Ford Expedition 1,500,000 Peso-Dollar
Land, mortgaged to a bank for Pl,OOO,OOO 3,000,000 exchange rate P 42.30 P 42.50 P 42.45
500 grams pure gold S50,000
Compute the amount to be included in gross estate.
The Ford Expedition was refurbished by the decedent making it readily a. P 4,245,000 c. P 5,270,000
saleable at Pl,SOO,OOOin the second-hand market. The land had a zonal b. P 4,250,000 d. P 5,695,000
value of P4,000,000 and an assessed value of P2,500,000. The Bangko
Sentral ng Pilipinas (BSP) was buying gold at Pl,SOO per gram at the date of Multiple-Choice - Problems: Part 2
death of the decedent. 1. Ms. Ma. Katie Pero died bankrupt. She had the following properties and
obligations at the date of her death:
Compute the total amount to be included in gross estate.
a. P 6,550,000 c. P 7,150,000 Cash P 200,000
b. P 6,900,000 d. P 7,900,000 Agricultural land 3,000,000
18. Family home 2,000,000
partnership.
Mr. MargaritaHedied
owned 40%
while of theascapital
serving and profits
the managing of theinpartnership.
partner a business Debts and obligations S,OOO,OOO
The partnershtp bad a total capitalization of P10,OOO,OOQ, exclusive of Compute the gross estate.
accrued profits of Pl,OOO,OOD. Partnership income was subject to 30% a. (P2,800,000) c. P 5,000,000
b. PO d. P 5,200,000
corporate income tax.

What is the value of the business interest which must be included in the 2. Mrs. Candida died. In his last will and testament, he indicated the following:
gross estate of Mr. Margarito? House and lot, to his adopted son and only heir P 5,000,000
a. P 2S0,000 c. P 4,2S0,000 Land, to a public school 1,000,000
b. P 400,000 d. P 4,400,000 Cash, to ABS-CBNFoundation 500,000
The legacy to ABS-CBNFoundation was intended for Bantay Bata 163, a
19. A decedent owns 25,000 stocks in a closely-held corporation which had the non-profit social welfare program of ABS-CBNFoundation.
following equity structure at the date of death of the decedent:
Compute the gross estate.
Common stocks (1,000,000 outstanding shares) P 5,000,000 c. P 5,000,000 c. P6,000,000
Additional paid-in capital 2,000,000 d. P 5,500,000 d. P6,500,000
Retained earnings 1.000.Qilll
Total shareholder's equity P 8.000,000 3. The heirs of a decedent received the following insurance proceeds upon the
decedent's death:
What is the value of the stocks to be reported in gross estate?
SQurce Amount
a. PO c. P 175,000 Insurance A - designated to wife as revocable beneficiary P 400,000
b. P 125,000 d. P 200,000
Insurance B - designated to son as irrevocable beneficiary 500,000

422 423
Chapter 13-A-Estate Tax: Gross Estate Chapter 13-A-Estate Tax: Gross Estate

Insurance C - group insurance proceeds 200,000 Which is true? \ ---.....,


Insurance D - designated to executor as irrevocable beneficiary 400,000
a. The transfer from Mr. ~urandang to Matito is s\~ject to estate tax.
b. The transfer from Mahto to Donna is sUbjecftd estate tax.
Compute the insurance proceeds to be included in gross estate.
c. The transfer from Mr. Curandang to Matito 's'subject to donor's tax.
a. P 200,000 c. P 800,000 d. None of these '\
b. P 400,000 d. P 900,000
8. Mr. Ca?ayo is the chief executive o~ficer of payam~ Power Multilevel
4. In his will, Anton transferred a life usufruct in favor of Cendong and
Ma~ketmg corP.oration (~MMC).Mr. cab~ in a car crash.
thereafter to Bentong, who is the owner of the naked title. Cendonj
eventually died resulting in the transfer of the property to 8 entong. Which must be mcluded m the gross estate of Mr.Ta ayo?
Bentong also died a few years later. a. ~roceeds of life insurance taken by Mr. Cabayo with his eldest son as
Irrevocable beneficiary
Which is correct? b. Proceeds from Mr. Cabayo's car insurance
a. The property shall not be included in the gross estate of Anton. c. P~oceeds of the life insurance over Mr. Cabayo's life taken by PMMC
b. The property shall be included in the gross estate of Cendong. With PMMCas the beneficiary
c. The property shall not be included in the gross estate of Bentong. d. None of these
d. The property shall be included in the gross estate of Anton and
Bentong. 9. Mrs. M~~u Ph~t i~ the beneficiary ora revocable donation consisting of two
commei c~aI bUll~mgs. Mrs. Phet herself was also designated by her father
S. D devised in his will an agricultural land with life usufruct to E and naked as a fiducl.ary helr over a commercia] lot which was to be transferred to her
title to F. All parties eventually died. The land had a value of PI,SOO,OOO
on younger Sister, Mabaet Mrs. Phet died in action as a military servicewoman.
D's death, PI,OOO,OOO on E's death and P2,000,000 on F's death.
Which is correct?
Which is correct? a. The buildings and the commercial lots shall be included in the gross
a. The land shall be valued at PI,OOO,OOO in the gross estate of D.. estate of Mrs. Malou Phet.
b. The land shall be valued at PI,SOO,OOOin the gross estate ofE. b. The two buildings shall be included in the gross estate of Mrs. Malou
c. The land shall be valued at P2,000,000 in the gross estate of F. Phet.
d. None of these c.
Only the commercial lot shall be included in the gross estate of Mrs.
Malou Phet.
6. Mr. X devised in his will a commercial land to be given to Z, his favorite d. The buildings and the commercial lot shall be excluded in the gross
grandchild. Since Z was a minor, Mr. X designated Mrs. Y as the fiduciary estate of Mrs. Malou Phet.
heir who was entrusted the obligation to transfer the property to Z upon
Mrs. Y's death. 10. Mr. Dino Jones died leaving the following properties:

Which is correct? Car, purchased using GSISretirement benefits


a. The transfer of the property from Mr. X shall be subject to donor's tax, P 500,000
Interest in a joint venture business
not to estate tax. 3,000,000
House and lot, separate property of his wife 2,000,0'00
b. The transfer from X to Z is subject to estate tax, not to donor's tax. Proceeds of insurance, revocably designated to wife
c. The transfers from X and Yare not subject to any transfer tax. Total 1.500.DOO
d. The transfer from Y to Z is subject to donor's tax. P 7.000.000
Compute the amount to be included in gross estate.
7. In his will, Mr. Curandang appointed Matito as first heir over a business; a. P 2,000,000 c. P 4,500,000
Matito, however, was bound to transfer the property to either Elsa a b. P 3,500,000 d. P 7,000,000
Donna. In his will, Matito designated Donna as beneficiary of the business.

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425
Chapter 13-A-Estate Tax: Gross Estate Chapter 13-A-Estate Tax: Gross Estate
,
11. An inventory total of the properties of Mrs. Tina Taray and her widower is
The properties had the following fair values at the death of Mr. Willy.
shown below:
Residential lot P
Separate property of Mrs. Taray P 6,000,000 . 3,000 000
Busmess mterest ' r~
Separate properties of Mr. Taray 1,500,000 Car 9,000,000
Value of family business 2,000,000 Total 1.200.0'OD
Other properties owned jointly by Mr. and Mrs. Taray 3.000.000 P13.2oo;odQ
Total P12.50Q,000 Compute the amount to be included in Mr Will ' ', '"
a. P 3,000 000 . Y s gross eSI:f1~e.
Compute the gross estate of Mrs. Taray. b. P 9 000'000 c. P 12,000,000 '
a. P 4,000,000 c. P 6,500,000 , , d. P 13,200,000
b. P 6,00,000 d. P 11,000,000 15. Mr. Y~kusa, a Japanese citizen residing in Tok 0 a
12. On September 30, 2014, Mr. Pogi Nalang died in an accident. A few hours followmg properties in the Philippines: Y , J pan, died with the
later, his wife, Maganda Nalang, died of heart-attack upon learning of Mr.
~~~Oa~~~~~~r~~a~u;!v::i~~dahi:e:iid~nt Filipino friend a~ a revocable
Pogi's death. The spouses had a son who is the only heir to their properties. visit to the Phiilni ppm
. es. g t to revoke the donation on his last
The properties of the spouses on September 30 were: P4,000,000 share investment in listed firms held by a Phili .
broker I ippine stock
Separate properties of Pogi P 3,000,000 P5,000,000 interest in a partnership operating in the Philippines
Separate properties of Maganda 5,000,000
Common properties of the spouses 8,000,000 Filipino non-residents are not subject to estate tax in Japan.
Compute Matikas' gross estate. Compute the gross estate of Mr. Yukusa.
a. P 3,000,000
b. P 7,000,000
c. P 11,000,000
d. P 16,000,000
a. P
b. P 2,000,000
c. P 9,000,000
d. P 11,000,000

13. In the immediately preceding problem, assume further that Mrs. Maganda 16. A decedent invested P2,000,000 in the stoc .
Nalang had the following: purchasing stocks from an investor who sold th kShOf ABC CorporatIOn by
e s ares at P 125 per share.
Share in the net distributive estate of Mr. Nalang
Share in the net conjugal properties with Mr. Nalang
P 2,500,000
3,700,000 ~h~tei:~:
a. P 2,000,000
~~t~: t~ ~ ~:~ ~~!'~nd;:~~~:~~a~:~Ckswere selling P134 per share.
c. P 134,000 000
Compute Mrs. Nalang's gross estate. b. P 2,144,000 d. P 268,000:000
a. P 5,000,000 c. P 8,700,000
b. P 7,500,000 d. P 11,200,000 17. Mr. Mando Rucot Owns 20!M f 1:1 16- -
Corporation, a closely-heJel c~rO)ol'~~o~.OO,OOQ out:ta~ding shares of DEI"
14. Mr. Willy made the following transfers mortis causa during his lifetime: per share ofP120 in its flnancf Itt _ DEF Cerporation had a book value
Transfer to Jaimee - A revocable transfer involving a residential lot MI'.Rucot DEF C . _ .' a s a ement nearest to the date of death of
- . 01 POI anon had severa] assets which exceed th '. f: ..
valued at P2,000,000 at the date of transfer. Willy failed to revoke the by an aggre@lte amount ofP14,OOO,oOO. en au value
same until his death.
Transfer to Mr. Li - A conditional transfer of business interest worth At what amount shall this investment be reflected in th
Rucot? e gross estate of Mr.
P10,000,000 at the date of transfer. Mr. Li failed to meet the conditions
before Mr. Willy's death. a. P26,800,000 c. P 120,000,000
Transfer to Mark - A conditional transfer of a car valued at P1,500,OOO. b. P 53,600,000 d. P 268,000,000
Mark fulfilled the condition before Mr. Willy's death.

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427
Chapter 13-8 - Estate Tax: Gross Estate of Married Decedents
Chapter 13-A-Estate Tax: Gross Estate I
CHAPTER 13-8
18. In 2000, Mr. Cabalde died leaving a will which directed all real e~tate he
owned not to be sold or disposed of for a period of 10 years after hIS death ESTATE TAX: Gross Estate of Married Decedents
and ordered that the property be given to Mrs. Yare after the 10-year
period. In 2000, the estate had a fair market value of P2,OOO,OOO. In 2012,
Chapter Overview and Objectives
the fair market value of said estate increased to PS,OOO,OOO and the Bureau
ofInternal Revenue (BIR) assessed thereon estate tax based on PS,OOO,OOO.
. -_ --- -_ .. -_- -_ ----_ ..-- - -_ _ - - _. _ .,..,.._ .. --_ ..--- -_

After this chapter, readers are expected to:


-- _--_ _ --- ..
.
1. understand the presentation of gross estate of a married decedent
Is the BIR assessment valid? 2. comprehend the various property regimes applicable to spouses
a. Yes. The assessment of the CIRis correct because on matters of
assessment, he has the authority to determine the value to be assessed. 3. master the nature of each property regime
b. No. The assessment of the CIRis incorrect. The assessment Sho1ulhdhhave 4. be able to compute the separate and exclusive properties of the spouses
been based on the fair market value at the time of deat 1 w ic is under absolute community of property and conjugal partnership of
P2,OOO,OOO. gains
c. Yes. The assessment of the CIR is correct because it was based on the
value at the time of assessment.
d. No. The assessment of the CIR is incorrect because estate tax is not
GROSS ESTATE OF ~ARRIED DECEDENTS
subject to any assessment.
The gross estate of a married decedent is composed of:
1. The decedent's exclusive properties
2. The common properties of the spouses

The gross estate of a decedent is reported as follows in the estate tax return:
1----------------------------------------------1
1 Conjugal! 1
1 Exclusive Communal Total 1
1
1 GROSS ESTATE P XXX,XXX P xxxxxx P XXX,XXX 1
: Less: Deductions I
~/r::7'":.;i;~::'m/'r~'>:77:.:.7.!:;r:"::':7~7::::-.~:.~.-:~.'"!:.-::~.~ ,:""".:-::~:.'!'!~"-::~:.::""" ~::'V"~ _':<~'::7 7' r.~
""!'!.:,~.:.0:,7<~.::",~.::~:,.,7:"E::~:;:~~:;~"'m';:0:

Note: For single individuals. the "conjugal/communal" column is left blank.

PROPERTY RELATIONS BETWEEN SPOUSES

For married decedents, the boundary between separate properties and


common properties of the spouses is important in the determination of the
gross estate of the decedent spouse.

What is a separate property or a common property?


What constitutes a separate property or a common property is a question
which will be delineated by the property regime of the spouses.

Under the Family Code, the property relation between the spouses must be
agreed upon by the spouses before their marriage. The same is set in their
"Prenuptial Agreement."

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