Jessa B. Regalario Ms. TabernillaV-BSA

F. Schedule and Computation of the Tax Estate tax imposed on net estate.

The estate tax is based on the net estate, considered as a unit, and it is determined by subtracting from the gross estate the allowable deductions, including the P 200,000 exemption authorized by law, regardless of who the decedent is and who the heirs are. The other specific exemptions are simply not taken into account in the computation of the gross estate.

There is no basis for the tax if the value of the gross estate does not exceed the total amount of the authorized deductions.

Schedule of rates for estate taxSection 84 of the Tax Code provides that there shall be levied, assessed, and

collected and paid upon the transfer of the net estate of every decedent, whether a resident or non-resident of the Philippines, a tax based on the value of such net estate as computed in accordance with the following schedule:

If the net estate is:

Over But Not Over The tax Shall Be Plus Of Excess Over - P 200,000 Exempt - -

P 200,000 500,000 0 5% P 200,000 500,000 2,000,000 P 15,000 8% 500,0002,000,000 5,000,000 135,000 11% 2,000,0005,000,000 10,000,000 465,000 15% 5,000,000 10,000,000 And Over 1,215,000 20% 10,000,000

The former rates before amendment by R.A No. 7499 which took effect on July 28, 1992 were graduated upwards from 3% to 60% and applied to each tax bracket into which the value of the net estate was divided.

The rate were increased by R.A No. 7499 partly by reason of the integration of the estate and inheritance taxes into a single tax, the estate tax. The exemption was increased from P 5,000.00 to P 10,000.00 by reason also of the abolition of the inheritance tax. The former rates were considered confiscatory.

R.A No. 8424 reduced the rates of 12%, 21%, and 35% to 11%, 15% and 20% respectively.

Procedure for computing net estate and estate tax due. The steps are:(1) Get the gross estate;(2) Subtract from the gross estate the allowable deductions to get the net estate;(3) Deduct the ½ net share of the surviving spouse from properties which are

conjugal (or community) and the family home allowance;(4) Deduct the P 200,000 exemption as allowed by law to get the taxable net

estate subject to tax; and (5) Apply the tax rates to the amount of the taxable net estate to get the estate

tax.Thus, we have the following outline:

Gross EstateLess: Allowable deductions

________________________________________= Estate after deductions

Less: 1/2 net share of surviving spouse On conjugal or community property

(If applicable)Family home allowance (if applicable)

________________________________________= Net estate of decedent

Less: P 200,000 exemption________________________________________= Taxable net estate

Multiplied by: Tax rates in Sec. 84________________________________________= Amount of estate tax due.

Note: If the net estate is less that P 500,000, the P 200,000 exemption must be deducted to get the taxable net estate. In the schedule, it is already deducted where the (taxable) net estate is P 500,000 or above. Thus, using the schedule, if the net etate is P 400,000, the tax is P 10,000 (5% of P 200,000); if P 600,000, the tax is P 23,000: P 15,000

Tax Credit for estatee taxes paid to a foreign country.(1) In general – The tax imposed by the Tax code shall be credited with the

amounts of any estate tax imposed by the authority of a foreign country.

(2) Limitations on credit. – The amount of the credit taken under the Tax Code shall be subject to each of the following limitations:

(a) For estate taxes paid to one foreign country. – The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent’s net estate situated within such country taxable under the Tax Code bears to his entire net estate;

The tax credit limit is determined as follows:

Decedent’s net estatesituated in foreign country x Phil estate tax = Tax credit limitEntire net estate

(b) For estate taxes paid to two or more foreign countries. – The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent’s net estate situated outside the Philippines taxable under the Tax Code bears to his entire net estate.

The tax credit limit is determined as follows:

Decedent’s net estatesituated outside the Phil. x Phil estate tax = Tax credit limitEntire net estate

Under limitation (a), the allowable tax credit is the lower amount between the tax credit limit and the estate tax paid to the foreign country. Limitation (b) is in addition to limitation (a). Where estate taxes have been paid to more than one country, the allowable tax credit is the lower amount between the tax credit limit computed under (a) and that computed under (b).

ILLUSTRATIVE PROBLEM:

X, a resident citizen, died leaving properties. Assume the following data:

Location of net estate Value Foreign estate tax paidPhilippines P 6,000,000 -----Y Country 4,000,000 P 500,000Total P 10,000,000 P 500,000

REQUIRED:Compute the amount of tax credit to which X is entitled and the Philippines

estate tax due.

SOLUTION:Phil. Estate tax

On P 100,000............................................................P 1,545,000Less: Tax credit:

P 4,000,000 x P 1,545,000 = P 618,000 P 10,000,000

Tax credit allowable (lowerAmount)...........................................................................500,000

Tax due................................................................................P 1,045,000

Note: If the amount paid by X to Y country as estate taz is P 700,000, the credit will be P 618,000 and the tax due is (P 1,545,000 – P 618,000) P 927,000.

IIX, a resident alien, died leaving properties. Assume the following data:

Location of net estate Value Foreign estate tax paid

Philippines P 1,000,000 ---Y Country 6,000,000 P 1,000,000Z Country 3,000,000 460,000Total P 10,000,000 P 1,460,000

REQUIRED:Compute the amount of credit to which X is entitled and the Philippine

estate tax due.

SOLUTION:Phil. Estate tax

On P 10,000,000..........................................P 1,545,000Tax credit allowable:

Limitation (a)Y Country

P 6,000,000_ x P 1,545,000 = P 927,000P10,000,000

Tax credit alowable (lower amount).... P 927,000Z Country

P 3,000,000_ x P 1,545,000 = P 463,500P 10,000,000

Tax credit allowable (lower amount) ... 460,000___Total .......................................................P 1,387,000

Limitation (b)P 9,000,000 x P 1,545,000 = P 1,390,500P10,000,000

Tax credit allowable (lower amount) .. P 1,387,000

G. BASIC CONCEPTS OF SUCCESSION

Definition and nature of successionThe Civil Code defines succession as a mode of acquisition by virttue of which

the property, rights and obligations to the extent of the value of the inheritance, of a person are transmitted through his death to another or others either by his will or by operation of law.

It is a derivative mode of transmission and acquisition of property because it presupposes previous ownership on the part of the decedent.

Elements of successionThere are three elements, viz.:(1) Decedent. – The person whose property is transmitted through succession,

whether or not he left a will. If he left a will, he is also called testator.(2) Successor. – The person to whom the property or property rights will pass;

and(3) Inheritance or estate. – The subject matter of the succession.

Kinds of successorsThey are of three kinds, viz:(1) Heir. – The person called to the succession either by the provision of a will or

by operation of law. He succeeds to the rights and obligations of the decedent from the moment and by the mere fact of the latter’s death;

(2) Devisee. – A person to whom a gift of real property (devise) is given by virtue of a will. (Ibid); and

(3) Legatee. – A person to whom a gift of personal property (legacy) is given by virtue of a will. (Ibid.)

A devisee or legatee succeeds to the specific thing devised or bequeathed by the testator. On the other hand, the heir succeeds to the residue of the hereditary estate after all the debts, devises, and legacies have been paid.

Capacity to succeedThe general rule is that a person has capacity to succeed unless disqualified by

law. (Art. 1024, Ibid.)In order to be capacitated to inherit, a person must be living at the time of death

of the decedent, except in case of representation when it is proper. (infra) But a child already conceived at such time is capable of succeeding provided it be born later under the conditions prescribed by law. (Art. 1025, Arts. 41, 1027, 1032, Ibid.)

Acceptance and repudiation of inheritance(1) The acceptance or repudiation of an inheritance is a purely voluntary and free

act. (Art. 1041, Ibid.) Its effects retract to the moment of the death of the decedent. (Art. 1042) Under the law, no one can be compelled to accept an inheritance against his will.

(2) Any one having the free disposal of his property may accept or repudiate an inheritance. (Art. 1044, Ibid.) The repudiation must be made in a public or authentic instrument or by petition presented to the court having jurisdiction over the testamentary or intestate proceedings. (Art. 1051, Ibid.)

What inheritance includes.The inheritance includes all the property, rights and obligations of a person which

are not extinguished by his death. (Art. 776, Ibid) However, the heirs are not liable for the obligation of the decedent beyond the value of the asserts they have inherited since they are chargeable to the estate. (Art. 1311, par. 2, Ibid.)

It is to be remembered that the Tax Code includes as part of the gross estate inter vivos transfers which are treated as substitutes for testamentary dispositions. Thus, the concept of the estate under succession law (Civil Code) may in some cases be at variance with the estate under tax law.

Kinds of succession.Succession may be:(1) Testamentary. – That which results from the designation of an heir, made in a

will executed in the form prescribed by law. (Art. 779)(2) Intestate. – That which takes place when a person dies without a will or with a

void will or one which has subsequently lost its validity, or if no one succeeds under his will (see Art. 960, Ibid); and

(3) Mixed. – That effected partly by will and partly by operation of law. (Art. 780)

Definition and nature of a will.(1) Our Civil Code defines a will as an act whereby a person is permitted, with

the formalities prescribed by law, to control to a certain degree the disposition of his estate to take effect after his death. (Art. 783.)

(2) The making of a will (not the mechanical act of drafting it) is regarded as a strictly personal act which cannot be left to the discretion of a third person nor delegated to an agent or attorney-in-fact. (see Art. 784, Ibid.)

Time of succession.The rights to the succession are deemed transmitted from the moment of the

death of the decedent. (Art. 777, Ibid.)This means that the heirs become the owners of the property of the deceased

from such time notwithstanding that possession may have been deferred. Hence, they are time of death but also those which have accrued since the opening of the succession. (Art. 781.)

Who may make a will.Any person not expressly prohibited by law may make a will (Art. 796, Ibid.)

provided he is not under 18 years of age (Art. 797, Ibid.) and is of sound mind. (Art. 798, Ibid.)

To be of sound mind, it is sufficient that the testatorws able at the time of making the will to know the nature of the estate to be disposed of, the proper objects of his bounty, and the character of the testamentary act. (Art. 799, Ibid) Incidentally, the law presumes that every person is of sound mind in the absence of proof to the contrary. (Art. 800, Ibid.)

Executors and administrators.All matter relating to the appointment, powers and duties of executors and

administrators and the administration of estates of deceased persons are governed by the Rules of Court. (Art. 1058, Ibid.; Rules 74-91, Rules of Court.)

(1) An executor is a person or trust company named in the will by the testator to carry out its provisions. (see Art. 1060, Civil Code.)

(2) An administrator is a person or trust company appointed by the court to administer and distribute the estate of the decedent if there is no will or if no executor is named in the will or if the named executor does not act. (Ibid.; Sec 6, Rule 78, Rules of Court.)

Restrictions on freedom to dispose of property by will.At least two restrictions my be mentioned, and they are:(1) The estate of the decedent is liable for all legal obligations incurred by him;

and(2) He cannot dispose of the legal portion reserved to his heirs by force of law

except in cases expressly specified by law. (Art. 904, Civil Code.The first takes precedence over the second. In case the estate is insolvent, the

obligations must be paid in the order provided by law. (Santos vs. Maramag, 27 Phil. 209.)

Definition of legitime.Legitime is that part of the testator’s property which he cannot dispose of

because the law has reserved it for certain heirs who are, therefore, called compulsory heirs. (see Art. 886, Civil Code.)

The part of the inheritance in excess of the legitime is referred to as the free portion which the testator may dispose of freely.

Compulsory heirs entitled to legitime.The compulsary heirs (also called forced heirs) for whom legitime is reserved by

law are:(1) Legitimate children and descendants, with respect to their legitimate parents

and ascendants;(2) In default of the foregoing, legitimate parents and ascendants, with respect to

their legitimate children and descendants;(3) The widow or widower (surviving spouse);(4) Acknowledged natural children and natural children by legal fiction; and(5) Illegitimate children other than those mentioned in No. 4, e.g. adulterous

children.Those mentioned in Nos. 3, 4, and 5 are not excluded even if there are legitimate children and descendants, or legitimate parents and ascendants; neither do they exclude each other. In other words, they participate in the inheritance as concurrent heirs in all cases but their shares are taken from the free portion of the estate. But if there are legitimate children and descendants, the legitimate parents and ascendants are excluded. (see Art. 887, Ibid.)

Legitimes of compulsary heirs.For obvious reason, this work can touch here only the broad outlines of the rules

governing the apportionment of the legitime.(1) Legitime children alone – 1/2 of the estate, the other half is free portion,

subject to the rights of the surviving spouse and the illegitimate children. (Art. 888, Ibid.)

(2) Legitimate parents or ascendants alone – same as in No. 1. (see Arts. 891, Ibid.)

(3) Surviving spouse:(a) alone – 1/2 of the estate, the other half is free portion (Art. 900, Ibid.)

(b) with one legitimate child or descendant of the deceased – 1/2 to the child or descendant, 1/4 to the spouse, and the remaining 1/4 is free portion. (Art. 892, Ibid.)

(c) with two or more legitimate children of descendant of the deceased – 1/2 to the children or descendant which shall be divided equally among them and the spouse gets a share equal to the share of each child or descendant, the rest being free portion. (Ibid.)

(d) with legitimate parents or ascendants of the deceased – 1/2 to the parents or ascendants, 1/4 to the spouse, the free portion being 1/4. (Art. 893, Ibid.)

(e) with illigitimate children – 1/3 to the children, 1/3 to the spouse, and the other 1/3 is free portion. ( Art. 894, Ibid.)

(4) There are many other possible situations but in every case, the surviving spouse is always entitled to his or her legitime which varies according to the number and classes of the other surviving compulsary heirs. (see Arts. 897-900, Ibid.) The same thing may be said with respect to the illegitimate children. (Arts. 895-896, 901-903, Ibid.)

Testamentary dispositions that impair or diminish the legitimate of the compulsary heirs shall be reduced on petition of the same insofar as they may be inofficious or excessive. (Art. 907, Ibid.)

Order of intestate succession. In default of testamentary heirs, the law determines who are to succeed to the inheritance of the deceased; and they are the relatives of the deceased, both legitimate and illegitimate, the surviving spouse and the State according to a specified order. (Art. 961, Ibid.) Intestate succession pertains, in the first place, to the descending direct line.(Art. 978, Ibid.) The nearer relative of the deceased excludes the farther relative except when there is a right representation. (Art. 962, infra)

Briefly, the order is as follows:(1) Legitimate children and descendants;(2) Legitimate parents and ascendants;(3) Illegitimate children and descendants;(4) The surviving spouse without prejudice to the rights of brothers and sisters,

nephews and nieces, should there be any;(5) Collateral relatives within the fifth degree; and (6) Lastly, the State. (see Arts. 978-1014, Ibid.)

Legitimate parents and ascendants are excluded by legitimate children and descendants. The State, is excluded by any class of heirs above it. Illegitimate children and descendants and the surviving spouse always inherit. Each class of heirs inherits the entire estate in the absence of all other classes. Again, the surviving spouse and the illegitimate are always entitled to their legitimate as surviving heirs. In the descending or ascending line, inheritance may extend beyond the fifth degree.

Right of representation.

(1) Representation defined. – It is a right created by fiction of law, by virtue of which the representation is raised to the place and the degree of the person

represented and acquires the rights which the latter would have if he were living or could have inherited. (Art. 970, Ibid.)

(2) Person succeeded. – The representative is called to the succession by the law and not by the person represented. He does not succeed the person represented but the one whom latter would have succeeded. (Art. 971, Ibid.)

(3) When right arises. – The right of representation arises in cases of the predecease of the person represented (see Art. 981), his disinheritance in testamentary succession (see Art. 923, Ibid.), or his incapacity. (see Art. 1035) Heirs who repudiate their inheritance may not be represented.

(4) Direct descending line. – The right of representation takes place in the direct descending line, but never in the ascending. (Art. 972.) By way of illustration, suppose X has two children, A and B. B has three children C, D and E. X dies intestate. A and B inherit from X in their own right per capita (per head). If B dies before X, the inheritance of X will be divided in two equal parts: 1/2 to A, and the other haft to C, D and E in representation of B, to be divided equally among them.

(5) Collateral line. – In the collateral line, the right of representation takes place only in favor of the children of brothers and sisters, whether they be of the full or half blood. (Ibid.) When children (nephews or nieces) of one or more brothers and sisters of the deceased survive with their uncles or aunts (brothers or sisters of the deceased), the former inherit by representatio. But if they alone survive, they inherit in equal portions. (Art. 975, Ibid.)

Shares in hereditary estate in case of intestate succession.The following may be mentioned:

(1) Legitimate children alone – entire estate to be divided in equal shares. (Art. 980, Ibid.)

(2) Legitimate parents alone – entire estate to be divided in equal shares; should only the father or mother survive, he or she succeeds to the entire estate. (Art. 986, Ibid.)

(3) Illegitimate children alone – entire estate to be divided equally. (see Art. 988, Ibid.)

(4) Surviving spouse alone – entire estate. (Art. 995, Ibid.)(5) Collateral relatives (e.g. brothers and sisters only, or first cousins only) –

entire estate to be divided equally; brothers and sisters of the full blood are entitled to a share double that of the brothers and sisters of the half blood. (see Arts. 1003, 1004, 1006, 1009, Ibid.)

(6) State – The entire estate, if the only relatives are those beyond the fifth degree of relationship. (Arts. 1010, 1011, Ibid.)

(7) Illegitimate children and legitimate parents – 1/2 to the former and 1/2 to the latter. (Art. 991, Ibid.)

(8) One legitimate child and surviving spouse – 1/2 to the former and 1/2 to the latter. (see Art. 996, Ibid.)

(9) Two or more legitimate children and surviving spouse – entire estate shall be divided equally. (see Ibid.)

(10) Legitimate parents, or illegitimate children, or nephews or nieces and surviving spouse – 1/2 to the former and 1/2 to the latter. (see Arts. 994, 997, 998, Ibid., as to other possible combinations, see Arts. 982-984, 987, 991, 993, 994, 998-1001, 1007, 1008, Ibid.)