Chapter-9-TAXATION-OF-ESTATES-AND-TRUSTS.pptx

Taxation of Estates and trusts

• Estate (inheritance)
 Refers to all the property, rights and obligations
of a person.
• Heir
 Is the person called to the succession either by
the provision of a will or by operation of law.
• Trust
 Arrangement created by will or an arrangement
under which title is passed to another for
conservation or investment.

SUCCESSION
Is a mode of acquisition by virtue 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 by will or by operation of law.
INTRODUCTION TO SUCCESSION & ESTATE
TAX

1. Testamentary Sucession
is that which results from the designation of an heir, made in a
will executed in the form prescribed by law.
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.
3. Mixed Succession
Transmission of the decedent properties shall be partly by
virtue of a written will and partly by operation of law.
TYPES OF SUCCESSION

Will. A will is an act whereby a person is
permitted, with the formalities prescribed by law,
to control to a certain degree the
disposition of the estate, to take effect after his
death.
A will is an expression of the decedent’s desire
as to how his properties will be distributed after
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 persons, or accomplished through the
instrumentality of an agent or attorney.

1. Holographic will -
A will which is entirely written, dated, and signed by the hand of
the testator himself.
2. Notarial will
A notarized wil signed by the decedent and witnesses
3. Codicil
a supplement or addition to a will, made after the execution of a
will and annexed to be taken a a part thereof, by which disposition
made in the original will is explained, added to, or altered.
Every willl must be acknowledged before a notary public by
the testator and the witnesses. A holographic will need not be
witnessed. A codicil needs to be executed as in the case of a
wil to be valid.
Type of Will

1. Decedent – the person whose property is
transmitted through succession, whether or not
he left a will.
2. Heir – the person called to the succession
either by the provision of a will or by operation
of law
3. Estate – refers to all the property, rights and
obligations of a person which are not
extinguished by is death.
Elements of Succession

ALICIA DIED LEAVING A FIVE HECTARE
COCONUT LAND TO HIS SON, BOBOY.
IDENTIFY THE THREE (3) ELEMENTS OF
SUCCESSION.
Example
1. DECEDENT (ALICIA)
2. ESTATE (COCONUT LAND)
3. HEIR (BOBOY)

The law identified certain persons which it designated
as “compulsory heirs”.
Types of compulsory heirs
1. Primary heirs :
1.a. Legitimate children and their direct
descendants.
2. Secondary heirs:
2.a. Legitimate/illegitimate parents and
ascendants
3. Concurring heirs:
3.a. The surviving spouse and illegitimate
descendants.
WHO ARE HEIRS?

1. Legitimate children are those born out of a legal marriage.
2. Direct descendants refer to children or, in their absence,
grandchildren.
3. Legitimate parents refer to biological parents.
4. Illigitimate parents are adopting parents to an adopted child.
5. The surviving spouse is the widow or widower of the decedent.
6. Illegitimate descendants are illegitimate children.
Under the Revised Family Code, adoptive parents can now qualify as
secondary heirs sharing 50:50 with biological parents.
The secondary compulsory heirs shall inherit only in default of the
primary heirs. Normally, only the primary heirs and concurring heirs
share in the hereditary estate. In the absence of primary heirs, the
secondary heirs and concurring heirs shall share in the hereditary
estate.
Definition of terms

In the absence of compulsory heirs, the following shall
inherit in the following order of priority:
1. Collateral relatives up to 5th degree of
consanguinity.
2. The Philippine government.
Priority is given to collatera relatives in the closest
degree.
Summary of Rules:
1. Concurring heirs and
a. Descendants, or in their default.
b. Ascendants
2. Relatives in the collateral line up to fifth (5th) degree.

1. Legatee. An heir to particular personal
property given by virtue of a will.
2. Devisee. An heir to a particular real property
which is effected party by will and partly by
operation of law.
KINDS OF SUCCESSORS IN A TESTAMENTARY
SUCCESSION

1. Executor
is the person nominated by a testator to carry
out the directions and requests in his will and
to dispose of his property according to his
testamentary provisions after his death.
2. Administrator
is the person appointed by the court, in
accordance with the governing statute, to
administer and settle intestate estate and such
testate estate as no competent executor
designated by the testator.
PERSONS AUTHORIZED TO MANAGE THE
ESTATE

ESTATE TAX
- is a tax on the right of the deceased person to
transmit his/her estate to his/her lawful heirs which
are made by law as equivalent to testamentary
disposition
- is levied upon the transfer of the net estate of a
decedent to his heirs
- it is an excise tax because it is imposed on the
exercise of the right to transfer ownership over the
property.
- it is not a tax on the property transferred
- the estate tax accrues at the moment of death of the
decedent

1. Properties that are still owned by decedent at
the time of his death, to the extent of his equity
or interest in such property, whether as
exclusive owner, conjugal or community
property owner of common owner.
2. Assets or properties owned by decedent
during his lifetime but were no longer owned
by him at the time of his death, because these
properties have been transferred during his
lifetime by way of taxable transfer as follows:
PROPERTIES INCLUDED IN THE DECEDENT’S
ESTATE

a) Transfer in contemplation of death
b) Revocable transfers
c) Property passing under the general power of appointment
d) Transfer for insufficient consideration
3. DECEDENT’S INTEREST – includes up to the extent of the decedent’s
interest therein in the properties at the time of his death. It shall include the
following:
a) Dividends declared by a corporation before the death of stockholder although
paid after death, if the decedent was living on the record dat.
b) Partnership profits even if paid after death of partner
c) Proceeds of life insurance policy payable to a revocable beneficiary
d) Right of usufruct if transferable to the heirs.

• This means that it is the thought of death, as a
controlling motive, which includes the
disposition of the property for the purpose of
avoiding estate tax.
• The main reason behind this provision is to
reach ingenious schemes to evade the estate
tax liability, by the use of other forms of
conveyances rather than by succession or
transfer mortis causa.
A. TRANSFER IN CONTEMPLATION OF
DEATH.

a) Age and health of the decedent at the time of the gift,
especially where he was aware of a serious illness
b) Length of time between the gift and the date of death: 1)
short interval suggest the conclusion that the thought of
death was in the decedent’s mind; 2) long interval suggests
the opposite
c) Concurrent making of a will or making a will within a short
time after the transfer. Thus, there is a transfer in
contemplation of death when: 1) the decedent transferred
the possession or enjoyment of his property to another, but
this transfer was intended to take effect only upon his death;
2) the decedent transferred title to the property but retained
for his lifetime the right to possess or enjoy the property or
the income therefrom, or the rights to designate whom shall
possess or enjoy the same.
EXAMPLES OF CIRCUMSTANCES WHICH MAY
BE TAKEN INTO CONSIDERATION WHETER
THE TRANSFER WAS MADE IN
CONTEMPLATION OF DEATH.

When the doctor informed Concha that she is
suffering from terminal cancer, she decided to
donate her house and lot worth P1,000,000 to her
friend, Migay.
1. Is this a transfer in contemplation of death?
Yes, because the thought of death induced Concha
to donate her property. Considering that the
transfer was made in contemplation of death, it is
subject to estate tax and not donor’s tax.
Illustration 1

2. How about if the house and lot were sold at its
actual value of P1,000,000 and after the sale,
Concha spent the entire amount before her
death?
There is no transfer in contemplation of
death subject to estate tax because there was a
bona fide sale for an adequate and full consideration
in money or money’s worth. Moreover, the proceeds
from the sale of property is not included as part of
the gross estate because the amount has been fully
spent before her death.

3. How about if after selling the house and lot, Concha
dies without being able to spend the money, will the
amount form part of her gross estate?
Yes, it is included in the gross estate as part of
“deceased’s interest.”
4. If shortly before she died, she lent the entire amount to
her friend Boy Ngato, who issued a promissory note.
Will the receivable note form part of her gross estate?
Yes, the value of the note receivable shall be included in
her gross estate(whether Boy Ngato is insolvent or not),
but under “decedent’s interest.”

This contemplates a situation where the
decedent transfers the enjoyment of his property
to another, subject to his right to revoke the
transfer at will, with or without notifying the
transferee, anytime before he dies.
B. REVOCABLE TRANSFERS

• Trustor or grantor
 Is the person who establishes a trust.
• Trustee
 Whom is reposed as regards property for the
benefit of another person.
• Beneficiary
 Is the person for whose benefit the trust has
been created
• Fiduciary
 All persons or corporations that occupy positions
of peculiar confidence towards others.

Taxation of Estates
• Taxable only if they are under judicial
settlement.
• Are Taxed, thus the source of taxable income,
the tax base and tax rate are the same.
• Personal exemption of only 20,000 pesos is
allowed to be deducted.
• Taxed only for its income from the death of the
decedent.
• If not under judicial settlement it is taxed as
mere co-ownerships or general professional
partnerships

Illustration:
Naruto died May 5, 2011 leaving the following:
Gross estate (under judicial settlement) P 2,750,000
Income Earned in 2011 400,000
Expenses incurred in 2011 75,000
Amount distributed to beneficiaries:
Naruto, single with 1 dependent child 125,000
Sasuke, Married 125,000
Sasuke is employed with the government. During
the year, her total compensation income was
P150,000.

A. Estate of Naruto:
Gross Income P 400,000
Less: Deductions P 75,000
Expenses
Distribution to beneficiaries:
To Naruto P125, 000
To Sasuke 125,000 250,000 325,000
Net income 75,000
Less: Exemption 20,000
Taxable income 55,000
Tax on P 30,000 P 2,500
25,000 x 15% 3,750
Income Tax 6,250

B. Beneficiary - Naruto
Gross receipts P 125, 000
Less: Optional standard deduction(125,000x40%) 50, 000
Net Income 75, 000
Less: Personal exemption
Basic personal P 50,000
Additional exemption 25,000 75, 000
Taxable income
B. Beneficiary - Sasuke
Compensation Income P 150,000
Add: Income received from estate of Naruto 125,000
Gross Income 275,000
Less: Basic personal 50,000
Taxable income 225,000
Tax on P 140,000 22,500
85,000 x 25% 21,250
Income Tax 43,750

Taxation of Trust
Irrevocable Trust
- must be Irrevocable both as to corpus and
income.
Revocable Trust
- is one where at any time the power to revest in
the grantor title to any part of the corpus of the
trust vested.
- render the trustor not the trust itself, subject to
the payment of the income tax.

Imposition of tax
A. Income accumulated in trust for the benefit of
unborn or unascertained person or persons with
contingent interest and income accumulated or
held for future distribution under the terms of the
will or trust;
B. Income which is to be distributed currently by the
fiduciary to the beneficiaries and income
collected by a guardian of an infant;
C. Income received by estates of deceased
persons during the period of administration or
settlement of the states; and
D. Income which, in the discretion of fiduciary, may
be either distributed to the beneficiaries or
accumulated.

Illustration:
Sakuragi created an irrevocable trust in favor of
his two minor children. The trust stipulates that
50% of the net income should be distributed
yearly to the children, share and share alike, the
balance to accumulate for eventual distribution to
the children at age 25. The income for 2011 was P
1 million.
1. How will the Income of the trust be taxable?
2. Will your answer be the same if the trust
established by Sakuragi is revocable?

Taxable income of estates and
trusts
Allowable deductions:
1. The amount of the net income of the estates
and trust for the taxable year.
2. The amount of the income collected by a
guardian of an infant.
3. The amount of the income received by estates
during the period of administration or
settlement.
4. The amount of the income of the trust.

Example:
Fin created a trust naming his minor child, Jake as
the beneficiary. He transfers to the trust an
apartment house with a yearly income of
P120,000. Expenses of the trust amounted to
P20,000 and distribution to the beneficiary was
P50,000.

Answer:
A. Trust
Rent Income P120,000
Deductions:
Trust Expenses P20,000
Distribution to beneficiary 50,000 70,000
Income before personal exemption 50,000
Less: Personal exemption 20,000
Taxable Income 30,000
B. Beneficiary
Income received from trust P50,000
Less: Deductions(10%x50,000) 5,000
Taxable Income before personal exemption 45,000
Taxable Income

Consolidation of income of two
or more trusts
- The taxable income of all trusts
shall be consolidated and the tax
computed on such consolidated
income.
- Such proportion of tax shall be
assessed and collected from each
trustee.

Example:
Sasuke created two trusts for her daughter Alice
and appointed Naruto and Spiderman as trustees
for Trust 1 and Trust 2, respectively. During the
year, the gross income of Trust 1 was P 120,000
and deduction of P 20,000, while Trust 2 had a
gross income of P100,000 and a deduction of
P30,000.

Answer:
1. Tax due from the two trusts under trust consolidation
Gross Income Expenses Net income
Naruto P120,000 P20,000 P100,000
Spiderman 100,000 30,000 70,000
Total 170,000
Taxable Income 150,000
Tax on P140,000 P 22,500
10,000x25% 2,500
Income Tax 25,000
2. Share of each trust on the tax payable by the consolidated trust
Naruto (100,000/170,000) x 25,000 = 14, 705.88
Spiderman ( 70,000/170,000) x 25,000 = 10,294.12

Chapter-9-TAXATION-OF-ESTATES-AND-TRUSTS.pptx

More Related Content

Similar to Chapter-9-TAXATION-OF-ESTATES-AND-TRUSTS.pptx (20)

Recently uploaded (20)

Chapter-9-TAXATION-OF-ESTATES-AND-TRUSTS.pptx