Estate Tax: Gross Estate

February 24 & 26, 2020

Pamantasan ng Lungsod ng Muntinlupa
Overview and Objectives
1. Concept of gross estate.
2. The procedures in determining gross estate.
3. The list of exempt transfers.
4. The list of taxable transfers.
5. The treatment of mortis causa transfers made for
insufficient consideration.
6. The rules of valuation of gross estate.
What is Gross Estate?
Gross estate consists of all properties of the
decedent, tangible or intangible, real or personal, and
whenever situated at the point of death.
• A non-resident alien decedent, gross estate
includes only properties situated in the Philippines.
Except Intangible property subject to reciprocity rule
applies.
Illustration:
A decedent died leaving the following property:
Location
Philippines Abroad Total
Real property P 2,000,000 P 3,000,000 P 5,000,000
Tangible personal property 1,000,000 500,000 1,500,000
Intangible personal property 800,000 1,200,000 2,000,000
Total P 3,800,000 P 4,700,000 P 8,500,000
Gross Estate: If the decedent is a:
1. Resident citizen, non-resident citizen or resident alien – P 8,500,000
2. Non-resident alien without reciprocity – P 3,800,00
3. Non-resident alien with reciprocity – P 3,000,00
Procedures in establishing Gross Estate
1. Inventory count of existing properties at the
point of death.
2.Adjustment for exempt transfers and taxable
transfers.
Inventory of Properties
To establish of the amount of the gross estate, an
inventory of the properties of the decedent at their fair
value at the point of death.
Illustration
A decedent died on June 30, 2019. An inventory was not
immediately prepared because of the funeral of the decedent.
An inventory count of his properties was drawn only on July
15, 2019.
On July 15, there were properties which had a total fair value
of P 5,000,000. P 100,000 of this represents income earned
after death while P 400,000 represents income earned before
death.
A total of P 500,000 was paid for funeral expenses and judicial
expenses of the estate. A total of P 200,000 obligations of the
decedent was paid since his death.
 The gross estate shall be recomputed as:

Properties as of July 15, 2019 P 5,000,000

Less: Increase in properties since death 100,000
Add: Decrease in properties since death
( P 500,000 + P 200,000) 700,000
Properties existing at the date of death (Gross Estate) P 5,600,000
The gross estate shall be recomputed as:
Cont.
1. Properties representing income earned before death properly
form part of the gross estate of the decedent because these
were present at the point of death.
2. Properties representing income accruing after death must be
excluded since these were not yet present at the point of
death.
3. Expenses or obligations which were paid since death must
be added back since these were present at the point of
death.
The Gross Estate formula:
Inventory of properties at the point of death P XXX,XXX
Less: Exempt transfers
Properties not owned P XXX,XXX
Properties owned but excluded by law XXX,XXX XXX,XXX
Inventory of taxable present properties P XXX,XXX
Add: Taxable transfers XXX,XXX
Gross Estate P XXX,XXX
Exempt Transfers: Transfer of Properties not
owned by the decedent.
• Once cannot transfer properties he or she does
not own.
• Properties not owned by the decedent are not
part of his/her donation mortis-causa.
• Excluded in the gross estate.
Exempt Transfers: Transfer legally excluded

• Properties that are owned by the decedent at

the point of death.
• Exempted by law from estate taxation.

**Exclusions from gross estate

Transfer of properties not owned by the
decedent.
1. Merger of the usufruct in the owner of the naked title.
2. The transmission or delivery of the inheritance or legacy by
the fiduciary heir or legatee to the fideicommissary.
3. The transmission from the first heir, legatee, or donee, in
favor of another beneficiary, in accordance with the desire of the
predecessor.
4. Proceeds of irrevocable life insurance policy payable to
beneficiary other than the estate, executor or administrator.
5. Properties held in trust by the decedent.
6. Separate properties of the surviving spouse of the decedent
7. Transfer by way of a bona fide sales.
1. Merger of usufruct in the owner of the
naked title.
Illustration:
Mr. A died in June 2011. In his will, he devised an
agricultural land to B who shall use the property over 10
years and thereafter, to C. Subsequently, B died
resulting in the transmission of the property to C.
The transfer of the devise from B to C is referred to in
law as the “merger of the usufruct in the owner
naked title.”
2. Transmission or delivery of the inheritance
or legacy by the fiduciary heir or legatee to
the fideicommissary.
Illustration:
Mr. A died leaving an inheritance consisting of several real
estates to his favorite grandson, C from his favorite son. B.
Because C was a minor, Mr. A appointed B, as fiduciary of
the inheritance. Before transferring the property to C, B
died.
The delivery of the inheritance upon the death of B, to C
shall not be included in the gross estate of B because the
transfer does not involve a transfer of ownership from B to
C.
B is only a trustee.
3. Transmission from the first heir, legatee or
done in favor of another beneficiary, in
accordance with the desire of the predecessor.
Illustration:
In his will, Mr. A devised a piece of land to B as the first
heir and thereafter to C as the second heir. B subsequently
died transmitting the property to C in accordance with Mr.
A’s will.
The transfer from B to C is referred to as transfer under a
special power of appointment. The same is not B’s
donation mortis causa.
4. Proceeds of irrevocable life insurance
policy payable to beneficiary other than the
estate, executor or administrator.
 The proceeds of life insurance policies which are
irrevocably designated by the decedent to the
beneficiary are no longer owned by the decedent at the
point of his/her death.
If revocably designated the proceeds are included in
gross estate.
If without designation whether revocable or
irrevocable it is presumed revocable.
4. Proceeds of irrevocable life insurance policy
payable to beneficiary other than the estate,
executor or administrator.
Cont.
Estate, executor administrator as beneficiary
If the beneficiary designated is the estate, executor or
administrator, the proceeds of life insurance is included
in the gross estate.
4. Proceeds of irrevocable life insurance policy payable to
beneficiary other than the estate, executor or
administrator.
Illustration:
Mr. Tubod died. His heirs collected the following proceeds in life insurance
policies:
AXA, revocably designated to wife P 800,000
Manulife, irrevocably designated to daughter 600,000
Sunlife, revocably designated to Mr. Tubod’s estate 700,000
PhilAm, irrevocably designated to Mr. Tubod’s executor 400,000
The proceeds of insurance policies to be included in gross estate shall be:
AXA, revocably designated to wife P 800,000
Sunlife, revocably designated to Mr. Tubod’s estate 700,000
PhilAm, irrevocably designated to Mr. Tubod’s executor 400,000
Total P 1,900,000
5. Properties held in trust by the decedent.

Properties held in trust by the decedent ay the

point of his death are not owned by him. These
are excluded in gross because these will not form
part of the decedent’s donation mortis causa.
5. Properties held in trust by the decedent.
Illustration:
The following properties were identified upon the death of Mr. Ubaldo:
Car, registered in the name of his brother P 800,000
Merchandise, consigned to Mr. Ubaldo 200,000
House and lot 2,400,000
Motorcycle, borrowed from a friend 150,000
Boarding house, held as trustee 4,000,000
Taxicab 1,000,000
Taxicab franchise 600,000
Clothes, books, equipment, and other personal property 400,000
5. Properties held in trust by the decedent.
Cont..
The gross estate of the decedent shall consist of the following:
House and lot P 2,400,000
Taxicab 1,000,000
Taxicab franchise 600,000
Clothes, books, equipment, and
other personal property 400,000
Gross estate 4,400,000
**Gross estate shall not include properties held in trust by the
decedent including other properties he does not own.
6. Separate properties of the surviving
spouse.
• Common properties are owned jointly by the
spouses.
• Exclusive properties are solely owned by either of
them.
Husband’s capital. Exclusive properties of
husband.
Wife’s paraphernal. Exclusive properties of wife.
6. Separate properties of the surviving
spouse.
Illustration: An inventory of the properties at the point of
death of Mr. Cabill revealed the following:
Exclusive properties of Mr. Cabili P 2,400,000
Exclusive properties of Mrs. Cabili 4,000,000
Common properties of Mr. and Mrs. Cabili 8,000,000
Total properties of the spouse P 14,400,000
6. Separate properties of the surviving
spouse.
Illustration: An inventory of the properties at the point of
death of Mr. Cabill revealed the following:
The Gross estate of Mr. Cabilli shall be:
Exclusive properties of Mr. Cabili P 2,400,000
Common properties of Mr. and Mrs. Cabili 8,000,000
Total properties of the spouse P 10,400,000
Note: The common properties are jointly owned by the
spouses. The share of the surviving spouse in the net
common properties is not and item for exclusion but an
item of deduction.
7. Transfer by way of bona fide sales.

• Transfers by way of bona fide sales are onerous

transactions rather than gratuitous transactions;
hence, they are not subject to estate tax.
Legal exclusions
1. Proceeds of group insurance taken out by a company for its employees.
2. Proceeds of GSIS policy or benefits from GSIS.
3. Accrual from SSS.
4. United States Veterans Administration (USVA) benefits R.A 136.
5. War damage payments.
6. All bequest, devises, legacies of transfers to social welfare, cultural, and
charitable institutions, no part of net income of which inures to the benefit
of any individual; provided, however, that not more than 30% of the said
bequest, devises, legacies or transfers shall be used by such
institutions for administration purposes.
7. Acquisitions and/or transfers expressly declared as non-taxable by law.
8. Bank deposits withdrawn from the decedent account during the settlement of
the estate.
These properties must be removed from the gross estate of the
decedent.
Note on bequests, device, or legacies to social
welfare, cultural, and charitable institutions.
Illustration:
A decedent had the following properties:
Family home P 5,000,000
Truck 1,200,000
Cash 200,000
Commercial land 800,000
Other properties 600,000
In his will, the decedent designated the cash to be given to a public
elementary school. The commercial land was also devised to a
non-profit charitable institution restricted to be used for program
expenses of the latter.
Note on bequests, device, or legacies to social
welfare, cultural, and charitable institutions.
The gross estate shall be computed as follows:
Family home P 5,000,000
Truck 1,200,000
Cash 200,000
Other properties 600,000
Gross estate P 7,000,000
Note:
1. Only bequests, devises, or descent to social welfare, cultural and charitable
institutions are exempt.
2. Transfers to the government and its instrumentalities are not items of
exclusion but items of deduction. They are included in the gross estate
and then separately presented as deductions from gross estate in the
estate tax return.
Properties withdrawn from the decedent’s
bank account.
• Under NIRC, withdrawal from the bank accounts is prohibited
except withdrawal of up to P 20,000 of the funeral expenses of
the decedent.
• TRAIN Law RA10963 allows unlimited withdrawal from the
decedent’s bank account but requires bank with knowledge
of the decedent’s death to withhold 6% final withholding
tax upon withdrawal if made within one year from the
decedent’s death (RRB-2019).
• 6% is Final tax and non-creditable.
• Excluded in the gross-estate.
 Properties withdrawn from the decedent’s
bank account.
Illustration: The following withdrawals were made from the bank account of
the decedent who died July 8, 2019:
July 7, 2019 P 200,000 For payment of medical expenses
July 9, 2019 300,000 For payment of funeral expenses
July 10, 2020 500,000 For payment of claims against the estate
Ending balance P 4,000,000
The amount of P 300,000 shall be excluded in gross estate. The amount
to be reported in gross estate shall be P 3,500,000.
TAXABLE TRANSFERS
• Taxable transfers are mortis causa transfers of
properties in the guise and form of inter-vivos
transfers. (Inclusions in the gross estate.)
• Types of Taxable Transfers.
1. Transfer in contemplation of death.
2. Revocable transfers, including conditional transfers.
3. Property passing under general power of
appointment.
TAXABLE TRANSFERS
• 1. Transfer in contemplation of death. Donations made by
the decedent during his lifetime which are motivated by the
thought of death (treated by law as donation mortis-
causa).
a. Transfers of property to take effect in possession or enjoyment
at or after death.
b. Transfer of property with retention of the right of possession
or enjoyment or right over income of the property until death.
c. Transfer of property with retention of the right to designate,
alone or in conjunction with any person, the person who shall
enjoy the property or the income there from.
TAXABLE TRANSFERS
• 2. Revocable transfers. It involve transfers of
possession over property during the lifetime of
the decedent, but not transfer of ownership over
said property. (the decedent’s owns the property at the
point of death, included as part of his gross estate.)
• Ownership transfers only when the transferor waives
the right to revoke the transfer.
TAXABLE TRANSFERS
• Illustration: In January 2017, Mr. Bala transferred a
car with fair value of P 1,200,000 to Mr. Subas. The car
shall be revocable by Mr. Bala until July 30, 2020. Mr.
Bala died on May 30, 2020 when the car had a fair
value of P 1,100,000.
Note: The car shall be included in the gross estate of
Mr.. Bala at its fair value of P 1,100,000
Otherwise, the transfer shall be subject to donor’s tax
when the right to revoke expired prior to Mr. Bala’s
death.
TAXABLE TRANSFERS
• 3. Transfer under general power of appointment.
Properties subject to general power of appointment by
the decedent shall be included in the gross estate of
the decedent.
• It enables the holder of such power to do with the property
anything which he could do as if the property were his own.
TAXABLE TRANSFERS
Illustration: Don Kulot died. In his will, he gave
Mama Sange a house and lot with the right to
designate the property to whomever heir she wants.
Mama Sang eventually died and appointed Bebe as
heir to the property.

Mama Sang had a general power over the property. The same
shall be included in her gross estate. If Mama Sang had
limited power, the same shall not be included in her gross
estate.
End of discussion