Estate Tax: A duty you can’t escape
Benjamin Franklin once said: “In this world, nothing is certain except death and taxes.” That means, you can’t escape paying taxes until you die. When someone dies, and you expect to receive an inheritance, you have the obligation to remit the estate taxes.
Under Philippine tax rules, estate tax is a tax on the privilege of the decedent to transmit his estate at death to his lawful heirs or beneficiaries. Currently, the net estate of every decedent, whether a resident or non-resident of the Philippines, is subject to an estate tax of 6%.
WHAT COMPRISES THE GROSS ESTATE?
The gross estate consists of all properties, wherever situated. However, for non-resident aliens (NRA), only property situated in the Philippines is included, provided that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity.
Allowable deductions to gross estate
The allowable deductions for either citizens or residents under the law are as follows:
a. Standard deduction of P5 million;
b. Claims against the estate;
c. Claims of the deceased against insolvent persons where the value of the decedent’s interest therein is included in the value of the gross estate;
d. Unpaid mortgages, taxes, and casualty losses;
e. Vanishing deduction or the properties previously taxed;
f. Transfers for public use;
g. Deduction of up to P10 million for the family home;
h. Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee in accordance with Republic Act (R.A.) 4917; and
i. Net share of the surviving spouse in the conjugal partnership or community property.
Property relationships:
The property relations between husband and wife shall be governed in the following order:
1. By marriage settlement executed before the marriage (pre-nuptial/ante-nuptial agreement)
2. The regime of absolute community (for marriages on Aug. 3, 1988, and onwards)
3. Conjugal partnership of gains (for marriages before Aug. 3, 1988)
4. By local customs (Art. 74, Family Code)
In the absence of any agreement or marriage settlement executed before the celebration of a marriage, either the conjugal or absolute community of properties shall govern the property ownership of the husband and wife.
Exemptions of certain acquisitions and transmissions
1. The merger of usufruct in the owner of the naked title
2. The transmission from the first heir, legatee or done or in favor of another beneficiary in accordance with the desire of the predecessor
3. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary
4. All bequests, devises, legacies or transfers to social welfare, cultural, and charitable institutions, no part of the net income of which goes to the benefit of any individual;
provided, however, that not more than 30% of the said bequests, devises, legacies, or transfers shall be used by such institutions for administrative purposes
Other exemptions and exclusions from gross estate
1. Bequests to be used actually, directly, and exclusively for educational purposes
2. Proceeds of Life Insurance
a. Beneficiary is irrevocably appointed
b. Under group insurance taken by the employer in favor of the employee
3. Transfer by way of bona fide sales
4. Properties held in trust by the decedent
5. Separate property (capital of husband or paraphernal of wife) of the surviving spouse.
6. Exemptions due to reciprocity
Exemptions from special laws
1. Benefits received from SSS or GSIS
2. Benefits received from the US Veterans Administration
3. War benefits given by the Philippine government and US government due to damages suffered during the war
4. Grants and donations to the Intramuros Administration
5. Personal Equity and Retirement Account (PERA) assets of the contributor
In G.R. No. 262092, a recent Supreme Court decision, the decedent’s sole heir and representative and the estate paid the related estate tax. However, the dollar deposit at the foreign currency deposit unit (FCDU) was erroneously subjected to estate tax. The SC held that the foreign currency deposit accounts are exempt from all taxes, including estate tax under R.A. 6462 as amended by Presidential Decree Nos. 1034 and 1035, otherwise known as the Foreign Currency Deposit Act of the Philippines. The SC ruled that the provisions of the 1997 Tax Code, as amended, which is the general law on national internal revenue taxes cannot impliedly repeal or modify the provisions of the law. R.A.6462 is the special law governing the foreign currency deposit system in the Philippines including the exemption and incentives.
ESTATE TAX AMNESTY
The Estate tax amnesty was initially introduced under R.A. 11213 or the Tax Amnesty Act of 2019. This program helps to ease the financial burden on those with unsettled estate taxes for those who passed on or before May 31, 2022. It covers all the estate including those with donations or sales. The amnesty covers executors, legal heirs or beneficiaries provided a sworn Estate Tax Amnesty Return is filed to settle estate taxes without penalty or interest. The Estate Amnesty Act is approved for another extension until June 14, 2025. To avail of the estate tax amnesty benefits, submit the required documentation for filing including the decedent’s death certificate, tax identification number (TINs), property titles and tax declarations.
In the present day, death rates are high among older people and the risk of death changes. It rises exponentially, including among young professionals. If we are not prepared for the process, we may find it challenging to manage these estate affairs.
With the help of digitalization, the bureau’s enhanced and improved support services, to keep the public knowledgeable of our tax rules, we can find the best way to handle this responsibility. This will allow taxpayers to know where and when to start with regard to taxes.
Maricel P. Katigbak is a senior manager of the Tax Advisory & Compliance Practice Area of P&A Grant Thornton.
Tweet us: @GrantThorntonPH
Like us on Facebook: P&A Grant Thornton
