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What is Estate Tax?Estate taxis imposed on the transfer of thenet estate,which is the difference between the gross estate (as defined under Section 85 of the Tax Code) and allowable deductions (under Section 86) of the decedent. Estate tax rates are graduated and depend on the net estate amount.

Net Estate= Gross Estate Deductions

Real property may not be transferred from the decedent to his or her heirs without the filing of the estate tax return and payment of the estate tax. Non-payment of estate tax is common and this brings about many problems when the properties need to be transferred to the names of buyers.

Gross EstateGross estate is the value at the time of death of all property, real or personal, tangible or intangible, wherever situated. In the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.

The value of the properties shall be based on their fair market value (FMV) as of the time of death.

If the property is a real property, the FMV shall be the highest between the zonal valuation and fair market value.

The proceeds of life insurance are included in the gross estate (unless the beneficiary is designated as irrevocable).

Deductions from Gross Estate1. Expenses, Losses, Indebtedness, and Taxes (ELIT)a. Funeral expenses Lowest among:

Actual funeral expenses; 5% of the gross estate; and P200, 000.00.b. Judicial expenses of the testamentary and intestate proceedingsc. Claims against the estate At the time the indebtedness was incurred, the instrument was duly notarized; and If the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan2. Property Previously Taxed (Vanishing deduction)3. Transfers for Public Use4. Family Home Fair Market Value of the Family Home or P1 million, whichever is lower. As a condition for the exemption or deduction, said family home must have been the decedents family home as certified by the barangay captain of the locality.5. Standard Deduction6. Medical Expenses Medical expenses incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts Maximum: P500,000.007. Amount received by heirs under RA 4917 (retirement benefits of employees of private firms)8. Share in the Conjugal Property

(The net share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property)

Estate Tax RatesThe estate tax rates depend on the date of death. For the purpose of this project we will only cover the rates for those who died on January 1, 1998 and onwards, the following are the estate tax rates based on the net estate:

OverBut not overThe tax shall bePlusOf the excess over

0200,000Exempt

200,000500,00005%200,000

500,0002,000,00015,0008%500,000

2,000,0005,000,000135,00011%2,000,000

5,000,00010,000,000465,00015%5,000,000

10,000,000And Over1,215,00020%10,000,000

5 RULES IN FILING ESTATE TAXES

When to file Estate Tax ReturnThe return must be filed within six (6) months from the death of the decedent. In meritorious cases, the Commissioner has authority to grant a reasonable extension not exceeding thirty (30) days for filing the return.

Where to file Estate Tax ReturnThe return must be filed with the BIR district office or its representative having jurisdiction over the place of domicile of the decedent at the time of his death. If the decedent has no legal residence in the Philippines, the return shall be filed with the Office of the Commissioner (Revenue District Office No. 39, South Quezon City).

Who shall file the Estate Tax ReturnThis return must be filed in triplicate by the executor, or administrator, or any of the legal heirs of the decedent, whether resident or non-resident of the Philippines. If there is no executor or administrator appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent.Basically, a return is required to be filed in all cases of transfers where estate tax is due. However, where no estate tax is due, a return is still required where the gross value of the estate exceeds two hundred thousand (P200,000) pesos; or where regardless of the gross value of the estate, it consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the BIR is required (i.e. bank deposits) as a condition precedent for the transfer of ownership thereof in the name of the transferee; or

When and Where to Pay Estate TaxUpon filing the return, the estate tax due is to be paid to the BIR authorized Agent Bank (AAB) where the return is filed. In places where there are no AABs, payment shall be made directly to the Revenue Collection Officer or duly Authorized City or Municipal Treasurer. In certain cases, where the government finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, it may allow extension of time for the payment of such tax or any part thereof not to exceed five (5) years, in case the estate is settled through the courts, or two (2) years in case the estate is settled extra judicially.What documents to submitThe following requirements are to be submitted upon field or office audit of the tax case before the Tax Clearance Certificate/Certificate Authorizing Registration can be released. However, for expediency it would be best to already attach the applicable documents upon filing of the return.1. Certified true copy of the Death Certificate2. Notice of Death duly received by the BIR, if gross estate exceeds P20,000 for deaths occurring on or after Jan. 1, 1998; or if the gross estate exceeds P3,000 for deaths occurring prior to January 1, 19983. Any of the following:4. Deed of Extra-Judicial Settlement of the Estate, if the estate is settled extra judicially (sample forms may be found here and here).5. Court Orders/Decision, if the estate is settled judicially;6. Affidavit of Self-Adjudication (sample here) and Sworn Declaration of all properties of the Estate7. A certified true copy of the schedule of partition of the estate and the order of the court approving the same, if applicable.8. Certified true copy(ies) of the Transfer/Original/Condominium Certificate of Title(s) of real property(ies) (front and back pages), if applicable9. Certified true copy of the latest Tax Declaration of real properties at the time of death, if applicable10. Certificate of No Improvement issued by the Assessors Office declared properties have no declared improvement or Sworn Declaration/Affidavit of No Improvement by at least one (1) of the transferees11. Certificate of Deposit/Investment/Indebtedness owned by the decedent and the surviving spouse, if applicable12. Photocopy of Certificate of Registration of vehicles and other proofs showing the correct value of the same, if applicable13. Photo copy of certificate of stocks, if applicable14. Proof of valuation of shares of stocks at the time of death, if applicable15. For listed stocks newspaper clippings or certification from the Stock Exchange16. For unlisted stocks latest audited Financial Statement of issuing corporation with computation of book value per share17. Proof of valuation of other types of personal property, if applicable18. Proof of claimed tax credit, if applicable19. CPA Statement on the itemized assets of the decedent, itemized deductions from gross estate and the amount due if the gross value of the estate exceeds two million pesos, if applicable20. Certification of Barangay Captain for claimed Family Home21. Duly notarized Promissory Note for Claims against the Estate arising from Contract of Loan22. Accounting of the proceeds of loan contracted within three (3) years prior to death of the decedent23. Proof of the claimed Property Previously Taxed24. Proof of claimed Transfer for Public Use25. Copy of Tax Debit Memo used as payment, if applicableCase ProblemOn January 7, 2014, Mrs. Lalaina Aguirre and her family is celebrating her birthday when her husband succumb to his long struggle of diabetes and died at their family home condominium in Grass Residence, Quezon City. Because of her husband untimely death, and the fact that shes old and cant support herself living in a high maintenance condominium she decided to sell the conjugal property that is the condominium. However the municipal of Quezon City wouldnt approved the selling of the property because the decedent Mr. John Kent Aguirre didnt leave any will and that Mrs. Aguirre isnt the sole heir of the property. Also, Tyler, 20, son of Mr. John Kent Aguirre from Ms. Korina Mendoza before Mrs. Lalaina Aguirre contest his share from the property. The Aguirre decided to seek the help of a Makati-based law firm, Cho Khai Meng to settle the problem at hand.Upon initial examination, Cho Khai Meng valued the property at 5 Million at the time of Mr. Aguirres death. Mrs. Aguirre also told the following expenses: Funeral expenses P170,000 and Medical expenses P550,000.To solve the problem, Cho Khai Meng recommended that the Aguirre draw up a deed of extra-judicial settlement from decedents conjugal estate. Have it notarized, and then have the notice published in a newspaper of general circulation once a week for three weeks. After they paid the estate tax, they can now proceed in presenting the deed, the notarized affidavit of publication and the official receipts, to the Register of Deeds so that new titles can be issued to the heirs. In which both Mrs. Lalaina Aguirre and Tyler Aguirre receives of the estate. The consultancy expenses of extraducial treatment of the problem costs P320,000.Question: Based on the facts given, how much is the estate tax?Suggested Answer:Gross Estate (Condominium)P 5,000,000.00

Less: Ordinary Deductions

Funeral ExpensesActual 170,0005% Limit 250,000Maximum 200,000

(170,000.00)

Judicial Expenses(320,000.00)

Community Estate4,510,000.00

Special Deductions

Medical ExpensesActual 550,000Maximum 500,000(500,000.00)

Standard Deduction(1,000,000.00)

Family HomeActual of 5M, 2.5MMaximum 1M(1,000,000.00)

Net Taxable EstateP 2,010,000.00

Estate Tax On 2M Excess of 10,000 @ 11%135,0001,100P 136,100

ReferencesBIR Philippines. (n.d.). Retrieved February 14, 2015 from http://www.bir.gov.ph/index.php/tax-information/estate-tax.htmlPinoy Lawyer. (n.d.). Retrieved February 14, 2015 from http://www.pinoylawyer.org/t17288-extrajudicial-settlementCherry Castillo (n.d.). Retrieved February 14, 2015 from http://www.foreclosurephilippines.com/death-real-estate-and-estate-tax/Legal Advice (n.d.). Retrieved February 14, 2015 from http://freelegaladvicephilippines.blogspot.com/2011/04/five-5-rules-you-should-know-about.html