Estate tax under TRAIN

Since Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN), became operative at the start of this year, Filipinos have had to adjust not just to new rules governing personal income tax and excise taxes on such everyday products as automobiles and sweetened beverages, but also to the ones concerning estate tax.

“The estate tax prior to TRAIN was based on a graduated scale,” Reyes Tacandong & Co. (RT&Co.), one of the premier professional services firms in the country, told BusinessWorld in an e-mail.

“A net estate of not more than P200,000 was exempt from the estate tax. The lowest estate tax rate was 5% for a net estate bracket of P200,000 to P500,000. The highest rate was 20%, which was imposed on the net estate bracket of P10 million and above,” it added.

But The National Revenue Code of the Philippines, also known as the Tax Reform Act of 1997, provided for a number of deductions. Among them were actual funeral expenses, or an amount equal to 5% of the gross estate, or whichever of the two amounts was lower, as long as it did not exceed P200,000; judicial expenses of the testamentary or intestate proceedings; and medical expenses incurred by the decedent within a year prior to his or her death that did not exceed P500,000.

The deduction for a decedent’s family home was equivalent to the current fair market value of the said property. But the law made an exception: if the fair value went beyond P1 million, only the excess would be subject to estate tax. There was a so-called “Standard Deduction” as well, which was fixed at P1 million.

The law also required that a notice of death be filed and that estate tax returns exceeding P2 million should be supported with a statement duly certified by a public accountant.

According to the Department of Finance (DoF), TRAIN was meant to simplify estate tax (as well as donor’s tax) by lowering and harmonizing them, “so it does not matter if the person passed away, donated a property, or simply wants to transfer a property,” it noted on its Web site.“ This will result in loss revenues but the key here is to make the land market more efficient so that the land will go to its best use.”

Following TRAIN’s implementation, computing estate tax is no longer based on a graduated scale. “The estate tax under TRAIN has been reduced to a single rate of 6% based on the net estate,” RT&Co. said.

And this should be welcome to heirs. “The reduction in the estate tax rate benefits the heirs. When the rate was high, heirs were discouraged from paying the estate tax and thus distributing the estate. We all know of many cases of land that could not be developed because the title was still in the name of grandparents who have passed away many years; the estate tax liability was just too huge to be settled,” the professional services firm said.

However, several deductions were removed. “With respect to items that may be deducted from the gross estate to arrive at the net taxable estate, the following are no longer deductible from the gross estate: actual funeral expenses, judicial expenses of the testamentary or intestate proceedings, medical expenses,” RT&Co. said.

Others were retained but amended. RT&Co. noted that thresholds for several deductible items were increased. “The Standard Deduction (that need not be substantiated) was increased from P1 million to P5 million,” the firm said. “The deduction for ‘Family Home,’ which previously was set at the current fair market value of the decedent’s family home but not to exceed P1 million was increased to not to exceed P10 million.” The statement certified by a public accountant is now only needed when estate tax returns exceed P5 million, more than double the previous amount. And filing a notice of death is no longer necessary.

The firm also pointed out changes in how estate tax can be paid. “In case the estate does not have sufficient cash to pay for the estate tax, the new rules allow either cash installments over a period of two years from date of filing of the return or partial disposition of the assets of the estate and application of the proceeds to the estate tax due,” it said.

It continued, “The withdrawal of the decedent’s bank deposit within one year from death is now allowed but the bank is required to withhold 6% of the amount to be withdrawn as tax.”

Firms like RT&Co. have also been affected by the changes. “Due to the reduction in the estate tax rate, it is no longer as crucial to do estate planning. We are, therefore, shifting to more of asset planning and management. The objective now is to plan on how best to utilize assets and distribute to family members with the end goal of achieving tax efficiency. Planning is driven by what is most advantageous for the family business and asset preservation,” the firm said.

Still, RT&Co. believes lowering the estate tax is “a big step” toward an equitable estate tax system. And it has a recommendation on how the new system can still be enhanced. “What could be further improved is the administration of the tax — make the process to get the estate tax clearance or certificate authorizing registration easier, shorter, and less prone to contention, for example,” it said.