Succession & Estate Tax PDF

MODULE 2: The Concept of Succession & Estate Tax  Concept of Succession & Estate Tax SUCCESSION 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...

MODULE 2: The Concept of Succession & Estate Tax  Concept of Succession & Estate Tax SUCCESSION 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 either by his will or by operation of law. (Article 774 of the Civil Code) The inheritance includes all the property, rights and obligations of a person which are not extinguished by his death (Article 776 of the Civil Code) The rights to the succession are transmitted from the moment of the death of the decedent (Article 777 of the Civil Code). The decedent is a deceased or dead person. TXTN2 – MODULE I  Concept of Succession & Estate Tax TYPES OF SUCCESSION 1. Testate or Testamentary Succession 2. Legal or Intestate Succession 3. Mixed Succession TXTN2 – MODULE I  Concept of Succession & Estate Tax 1. TESTATE OR 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. (Article 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”. A person who died with a written will is called a “testator”. TXTN2 – MODULE I  Concept of Succession & Estate Tax 2. LEGAL OR 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. TXTN2 – MODULE I  Concept of Succession & Estate Tax 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 this estate, to take effect after his death (Art 783, Civil Code). It is a document whereby a person, called the “testator”, disposed of his or her properties or “estate” to take effect upon his or her death. It 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 instrumentality of an agent or attorney. (Article 784, Civil Code) TXTN2 – MODULE I  Concept of Succession & Estate Tax TYPES OF WILL 1. Notarial Will 2. Holographic Will 3. Codicil TXTN2 – MODULE I  Concept of Succession & Estate Tax 1. Notarial or Ordinary or Attested Will Is one which is executed in accordance with the formalities prescribed by Art 804 to 808 of New Civil Code. Requisites for a Valid Notarial Will a. It must be in writing and executed in a language or dialect known to the testator. b. It must be subscribed at the end thereof by the testator himself or by the testator’s name written by some other person in his presence and by his express direction c. It must be attested and subscribed by three or more credible witnessed in the presence of the testator and of one another TXTN2 – MODULE I  Concept of Succession & Estate Tax The following are disqualified from being witnesses to a will (Art 821 CC): 1. Any person not domiciled in the Philippines 2. Those who have been convicted of falsification of a document, perjury, or false testimony. In the absence of bad faith, forgery, or fraud, or undue and improper pressure and influence, defects and imperfections in the form of attestation or in the language used therein shall be render the will invalid if it is proved that the will was in fact executed and attested in substantial compliance with all the requirements of the law. TXTN2 – MODULE I  Concept of Succession & Estate Tax 2. Holographic Will a written will which must be entirely written, dated and signed by the hand of the testator himself. It subject to no other form and it may be made in or out of the Philippines and need not be witnessed (Art 811 CC). In case of any insertion, cancellation, erasure, or alteration in a holographic will, the testator must authenticate the same by his full signature. In the probate of holographic will, it shall be necessary that at least one witness who knows the handwriting and signature of the testator explicitly declare that the will and signature are in the handwriting of the testator. TXTN2 – MODULE I  Concept of Succession & Estate Tax 3. Codicil A supplement or addition to a will, made after the execution of a will and annexed to be taken as part thereof, by which any disposition made in the original will is explained, added to or altered. In order that a codicil may be effective, it shall be executed as in the case of a will (Arts 825 and 826 CC) TXTN2 – MODULE I  Concept of Succession & Estate Tax Revocation of wills and testamentary dispositions A will may be revoked by the testator at any time before his death, any waiver or restriction of this right is void (art 828 CC). A revocation done outside the Philippines, by a person who does not have his domicile in the Philippines, is valid when it is done according to the law of the place where the will was made, or according to the law of the place in which the testator had his domicile at the time and it the revocation takes place the Philippines when It is accordance with the provisions of the new civil code TXTN2 – MODULE I  Concept of Succession & Estate Tax Modes of revoking a will: 1. By implication of law 2. By some will, codicil, or either writing executed as provided in case of wills 3. By burning, tearing, cancelling or obliterating the will with the intention of revoking it, by the testator himself, or by some other person in his presence, and by his express direction. If burned, torn, cancelled, or obliterated by some other person, without the express direction of the testator, the will may still be established, and the estate distributed in accordance therewith, if its contents, and due execution, and the fact of its unauthorized destruction, cancellation, or obliteration are established according to the Rules of Court TXTN2 – MODULE I  Concept of Succession & Estate Tax CAUSES OF LEGAL SUCCESSION OR INTESTACY 1. If a person dies without a will, or with a void will, or one which has subsequently lost its validity. 2. When the will does not institute an heir. 3. Partial institution of heir. Consequently, intestacy takes place as to the undisposed portion. 4. Other causes of legal succession or intestacy: a. When the heir instituted is not capable of succeeding b. Non-fulfillment of the suspensive condition attached to the institution of heir. c. Preterition – omission in the testator’s will of one, some or all of the compulsory heirs in the direct line which has the effect of annulling the institution of heir d. Fulfillment of resolutory condition. A resolutory condition refers to a condition whereby, upon fulfillment terminates an already enforceable obligation. e. Expiration of term or period of institution. f. Non-compliance or impossibility of compliance with the will. g. Repudiation of the instituted heir. TXTN2 – MODULE I ILLUSTRATION 1 (VOID WILL) Juan Dela Cruz devised in his “will” one of his parcels of land located in Valle Verde Subdivision to one of his daughters, Maria Dela Cruz. Juan can neither write nor read “Chinese Mandarin” but it was the language used in his last will and testament. In such a case, the will shall be considered void. As a rule, the last will and testament shall be executed in a language or dialect known to the testator to be considered valid. TXTN2 – MODULE I ILLUSTRATION 2 (WILL WHICH SUBSEQUENTLY LOST ITS VALIDITY On the eve of November 2, 2021, a day after executing his last will and testament, the testator accidentally obliterated the same. The testator was not able to prepare a new will before his death. There is no more last will and testament to speak of. An intestate or legal succession exists. At the time of the decedent’s death, his estate shall be disposed of by operations of law. TXTN2 – MODULE I ILLUSTRATION 3 (WILL DOES NOT INSTITUTE AN HEIR) Pedro D. Magiba executed a last will and testament on November 1, 2021, devising a parcel of land located in Batangas to one of his daughters. However, Pedro failed to indicate an heir in his will. The devisee was simply described as follows: “I AM DEVISING MY PARCEL OF LAND IN BATANGAS CITY TO MY CLOSEST FAVORITE DAUGHTER” PEDRO D. MAGIBA (SIGNED) NOVEMBER 1, 2021 Assume further that Pedro has five (5) children: No heir was identified in the will. As a result, there is no valid will because of the absence of an instituted heir. TXTN2 – MODULE I  Concept of Succession & Estate Tax NATURE OF SUCCESSION Succession is a gratuitous transmission of property from a deceased person in favor of his successors. Succession involves only the net properties of the decedent. The heirs will inherit what remains of the decedent’s property after satisfying the decedent’s indebtedness and obligations including the estate tax. The heirs shall not inherit the debt of the decedent. TXTN2 – MODULE I  Concept of Succession & Estate Tax ELEMENTS OF SUCCESSION 1. Decedent – the general term applied to the person whose property is transmitted through succession, whether or not he left a will. If he left a will, he is also called the testator. (Art 775 CC) 2. Estate – includes the property, rights and obligations of the decedent not extinguished by his death. This is also referred to as the “inheritance” of the decedent. 3. Heirs – a person called to the succession either by the provision of a will or by operation of law. (Art 782, Civil Code) TXTN2 – MODULE I  Concept of Succession & Estate Tax WHO ARE THE HEIRS? Heirs under intestate succession In intestate succession, the heirs shall be the following in descending order of priority: 1. Compulsory heirs 2. Relative up to fifth degree of consanguinity 3. Republic of the Philippines The law identified certain persons which it designated as “compulsory heirs”. These are the persons who will inherit the estate by default. Only by their absence shall the estate be partitioned to other relatives. In the absence of relatives, the estate will go to the government. TXTN2 – MODULE I  Concept of Succession & Estate Tax TYPES OF COMPULSORY HEIRS 1. Primary heirs: Those who have precedence over and exclude other compulsory heirs (i.e. Legitimate children and their descendants) 2. Secondary heirs: Those who have succeed only in the absence of the primary compulsory heirs (i.e. Legitimate/Illegitimate parents and ascendants) 3. Concurring heirs: Those who succeed together with the primary or secondary compulsory heirs (i.e. The surviving spouse and illegitimate children and descendants) TXTN2 – MODULE I  Concept of Succession & Estate Tax DEFINITION OF TERMS 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. Illegitimate parents are adopting parents to an adopted child. 5. Surviving spouse is the widow or widower of the decedent. 6. Illegitimate descendants are illegitimate children. Note: Under the Revised Family Code, adoptive parents can now qualify as secondary heirs sharing 50:50 with biological parents. TXTN2 – MODULE I  Concept of Succession & Estate Tax 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. TXTN2 – MODULE I  Concept of Succession & Estate Tax COLLATERAL RELATIVES Consanguinity The relation of persons descending from the same stock or common ancestors. These persons are known as blood relatives, and are said to be related by blood or consanguinity. It my be lineal or collateral Lineal Consanguinity Which may be descending or ascending Is that which subsists between persons of whom one is descended in a direct line from the other Collateral Consanguinity Is that which subsists between persons who have the same ancestors, but who not descend or ascend one from the other. Proximity of relationship is determined by the number of generations. Each generation forms a degree. TXTN2 – MODULE I  Concept of Succession & Estate Tax In the absence of compulsory heirs, the following shall inherit in the following order of priority: 1. Collateral relatives up to the fifth degree of consanguinity 2. The Philippine government TXTN2 – MODULE I  Concept of Succession & Estate Tax 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) 3. Republic of the Philippines TXTN2 – MODULE I  Concept of Succession & Estate Tax DETERMINING BLOOD RELATIONSHIP COMPULSORY HEIRS: 1. PRIMARY HEIRS Descending Lineal Consanguinity (from the decedent) A1 & A2 – Children of the decedent N1 & P1 – Grandchildren of the decedent O1 – great grandchildren of the decedent 2. SECONDARY HEIRS: Ascending Lineal Consanguinity (from the decedent) B1 & SP – Parents of the decedent L1 & SP – Grandparents of the decedent M1 & SP – Great grandparents of the decedent 3. CONCURRING HEIRS: Spouse – Surviving Spouse RELATIVE UPTO 5TH DEGREE OF COLLATERAL CONSANGUINITY: 1. COLLATERAL CONSANGUINITY C1 & C2 – Siblings of the decedent E1 & D1 – nephew/niece of the decedent G1 & F1 – grandchildren from nephew/niece of the decedent B2 – Uncle/Aunt of the decedent I1 – 1st cousin of the decedent J1 – nephew/niece from 1st cousin of the decedent TXTN2 – MODULE I ILLUSTRATION 4 Mr. X died. He was survived by his wife and four children. Mr. X has two brothers and one surviving parent. The compulsory heirs are: a. Mrs. X (wife) b. The four children The surviving parent (secondary heirs) of Mr. X will not inherit because there are descendants (four children). TXTN2 – MODULE I ILLUSTRATION 5 Ms. X died single and without child. Ms. X’s parents, three brothers, and two sisters were her surviving relatives. The compulsory heirs are Ms. X’s parents. The collateral relatives (brothers and sisters) cannot inherit since there are compulsory heirs. TXTN2 – MODULE I ILLUSTRATION 6 Mr. Y died a bachelor. He had no child. His parents were all dead long before his death. He only had a brother and a sister, a first cousin, and a second cousin. Since there is no compulsory heir, the brother and sister in the collateral line shall inherit. Without them, the first cousin shall inherit. Assuming further that only the second cousin is living, the government shall inherit the estate. Succession in the collateral line cannot extend to the second cousin because he/she is beyond the fifth degree of consanguinity. TXTN2 – MODULE I  Concept of Succession & Estate Tax BASIC INTESTATE PARTITION PROCEDURES 1. The decedent and the surviving spouse shall first share in their common properties. The common properties net of expenses and obligations chargeable to the common properties of the spouses is divided between the decedent and the surviving spouse. 2. Determination of the decedent’s net interest. The decedent’s net interest comprising of the following is computed: a. Exclusive property of the decedent b. Share of the decedent in the net common properties TXTN2 – MODULE I  Concept of Succession & Estate Tax BASIC INTESTATE PARTITION PROCEDURES 3. Partition of the decedent’s net interest to the heirs: a. Surviving spouse b. Legitimate children c. Illegitimate children The surviving spouse and each of the children have one share each. Each illegitimate child is entitled to a half share. TXTN2 – MODULE I ILLUSTRATION 7 Mr. Richie Rich, a widower, died leaving P45,000,000 estate for his two legitimate children, Harold and Alex, and two illegitimate children, Elon and John. The estate shall be partitioned as follows: Heirs Share Partition Inheritance Harold (legitimate) 1.00 1/3 x P45,000,000 P 15,000,000.00 Alex (legitimate) 1.00 1/3 x P45,000,000 15,000,000.00 Elon (illegitimate) 0.50 0.5/3 x P45,000,000 7,500,000.00 John (illegitimate) 0.50 0.5/3 x P45,000,000 7,500,000.00 Total 3.00 P 45,000,000.00 TXTN2 – MODULE I ILLUSTRATION 8 Don Uyong died leaving behind his widow, Mrs. Uyong, his legitimate children, Max & Rey, and illegitimate children, Joan, Sylvia and Eunice, as heirs. Mr. & Mrs. Uyong had the following properties: Exclusive properties of Don Uyong 18,000,000.00 Exclusive properties of Mrs. Uyong 18,000,000.00 Net common properties 36,000,000.00 TXTN2 – MODULE I ILLUSTRATION 8 The net estate of the decedent shall be computed as follows: Exclusive properties of Don Uyong P 18,000,000.00 Share in net common properties (P36M/2) 18,000,000.00 Distributable estate P 36,000,000.00 TXTN2 – MODULE I ILLUSTRATION 8 The estate shall be partitioned as follows: Heirs Share Partition Inheritance Mrs. Uyong (spouse) 1.00 1/4.5 x P36,000,000 P 8,000,000.00 Max (legitimate) 1.00 1/4.5 x P36,000,000 8,000,000.00 Rey (legitimate) 1.00 1/4.5 x P36,000,000 8,000,000.00 Joan (illegitimate) 0.50 0.5/4.5 x P36,000,000 4,000,000.00 Sylvia (illegitimate) 0.50 0.5/4.5 x P36,000,000 4,000,000.00 Eunice (illegitimate) 0.50 0.5/4.5 x P36,000,000 4,000,000.00 Total 4.50 P 36,000,000.00 TXTN2 – MODULE I ILLUSTRATION 8 The total properties of the surviving spouse after the partition shall be: Exclusive properties of Mrs. Uyong P 18,000,000.00 Share in net common properties (P36M/2) 18,000,000.00 Share in the distributable estate 8,000,000.00 Total properties P 44,000,000.00 TXTN2 – MODULE I  Concept of Succession & Estate Tax HEIRS UNDER TESTAMENTARY DISPOSITION In testamentary succession, the heirs shall be the following: 1. Compulsory heirs 2. Other persons specified by the decedent in his will TXTN2 – MODULE I  Concept of Succession & Estate Tax 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 (Art 886, Civil Code). The excess properties of the decedent is called “free portion”. By means of a last will and testament, a testator can designate the free portion of his estate for additional heirs irrespective of their relationship to him but he cannot exclude or disinherit compulsory heirs without a valid basis under the law. TXTN2 – MODULE I  Concept of Succession & Estate Tax DISINHERITANCE AND REPUDIATION A decedent can actually disinherit an heir on certain grounds. Similarly, heirs may repudiate their share in the inheritance of the decedent. The determination of the estate tax does not require prior identification of the heirs. Once a person is dead, the estate of the decedent is simply determined and reduce by deductions allowed by law. Then, the estate tax is computed out of the net estate. Neither does the validity or invalidity of the decedent’s will not the absence of an heir affect estate taxation. In fact, the estate tax is due even if the decedent does not have relatives who will inherit the property. 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 tax, had been deducted. TXTN2 – MODULE I  Concept of Succession & Estate Tax DISINHERITANCE A testamentary disposition by which a compulsory heir is deprived of, or excluded from inheritance to which he has a right. Disinheritance is not applicable to voluntary heirs. REQUISITES OF DISINHERITANCE 1. Effected only through a valid will 2. For a cause expressly stated by law 3. Cause must be stated in the will itself 4. Cause must be certain and true 5. Unconditional 6. Total (there is no partial disinheritance) 7. The heir disinherited must be designated in such a manner that there can be no doubt as to his identity TXTN2 – MODULE I  Concept of Succession & Estate Tax Right of Representation It a right created by fiction of law where the representative is raised to the place and degree of the person represented, and acquires the rights which the latter would have if he were living or could have inherited. Representation may arise either because of: 1. Death 2. Incapacity 3. Disinheritance The representative(s) shall not inherit more than what the person they represent would inherit, if he were living or could inherit (Art 974). TXTN2 – MODULE I  Concept of Succession & Estate Tax The law further provides that “representation” is not available to: 1. As to compulsory heirs: In case of repudiation, the one who repudiates his inheritance cannot be represented. Their own heirs inherit in their own right. 2. As to voluntary heirs 3. Voluntary heirs, legatees and devisees who a. Predecease the testator; or b. Renounce the inheritance cannot be represented by their own heirs, with respect to their supposed inheritance Right of representation takes place only in favor of children of brothers or sisters, whether full or half blood and only if they concur with at least one uncle or aunt. This rule applies only when the decedent does not have descendants. Nephews and nieces already alive when the aunt or uncle died can inherit by representing their predeceased parents. If the nephews and nieces illegitimate, then they are prohibited by Article 992 of the new civil code from inheriting from the relatives of their father or mother like their uncles or aunts, or even from their grandparents. Grandnephews and grandnieces in the collateral line cannot inherit by right of representation. TXTN2 – MODULE I  Concept of Succession & Estate Tax OTHER PERSONS IN SUCCESSION 1. Legatee – a person whom gifts of personal property is given by virtue of a will 2. Devisee – a person whom gifts of real property is given by virtue of a will 3. Executors – a person named by the decedent who shall carry out the provisions of his will 4. Administrators – a person appointed by the court to manage the distribution of the estate of the decedent. TXTN2 – MODULE I  Concept of Succession & Estate Tax ESTATE TAXATION pertains to the taxation of the gratuitous transfer of properties of the decedent to the heirs upon the decedent’s death. Governed by the law in force at the time of the decedent’s death. The estate tax accrues as of the decedent’s death and the accrual of 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 privilege to transmit the estate vests instantly upon death. Hence, Between January 1, 1998 to Decedent who died December 31, 2017 On or after January 1, 2018 Shall be governed by The NIRC The TRAIN Law TXTN2 – MODULE I  Concept of Succession & Estate Tax NATURE OF ESTATE TAX: 1. Excise tax – estate tax is not a tax on the property but on the privilege to transfer property through death 2. Revenue or General tax – estate tax is intended as a revenue or fiscal measure 3. Ad valorem tax – estate tax is dependent upon the value of the estate 4. National tax – estate tax is imposed by the national government 5. Proportional tax – estate tax is imposed as 6% on the net estate 6. One-time tax – estate tax applies to a person only once in a lifetime TXTN2 – MODULE I  Concept of Succession & Estate Tax CLASSIFICATION OF DECEDENTS FOR TAXATION PURPOSES 1. Resident or Citizen Decedents – taxable on properties located within or outside the Philippines. 2. Non-resident Alien Decedents – taxable only on properties located in the Philippines, except intangible personal property when the reciprocity rule applies TXTN2 – MODULE I  Concept of Succession & Estate Tax THE ESTATE TAX MODEL Gross estate P xxx,xxx Less: Deductions from gross estate xxx,xxx Net taxable estate P xxx,xxx TXTN2 – MODULE I  Concept of Succession & Estate Tax The “gross estate” pertains to the totality of the properties owned by the decedent at the point of his death. There are two concepts to be discussed under gross estate: a. Exclusions in gross estate – those properties or transfers excluded by law from estate taxation b. Inclusions in gross estate – those properties which are to be included as part of the taxable gross estate TXTN2 – MODULE I  Concept of Succession & Estate Tax “Deductions” generally pertain to reductions in the inheritance of the heirs such as obligations of the decedent, losses of property during administration, but also include exemptions from the estate tax under the law. “Net taxable estate” is the net properties of the decedent after all pertinent deductions allowable by law that is subject to tax. Note that the net taxable estate is not equivalent to the hereditary estate before estate tax because of exclusions, exemption rules and deduction criteria imposed by the law. TXTN2 – MODULE I