Chapter So Deductions from the Gross Estate To compute the net estate of the deceased, there are certain items that can be deducted from the value of the gross estate under the Tax Code. RR 12-2018 in relation to sections 86(A) and 86(B) of the Tax Code as amended under TRAIN Law, allows deductions from the gross estate to arrive at the taxable estate which is used as a basis in determining the applicable estate tax due, Deductions from the gross estate are classified as ordinary and special deductions (RR 12-2018) as summarized below: Beginning January 1, 2018 or upon the effectivity of the TRAIN Law, the allowable deductions from the gross estate are summarized as follows: AA eee mn Oceans ett Nn ela AeA LS Ee) Citizen and Resident Decedents Nonresident Alien Decedents’ |. ORDINARY DEDUCTIONS: I. ORDINARY DEDUCTIONS: | 1, Expenses, Losses, Indebtedness, 1. Proportional Deductions for Losses, |~ Taxes, etc. (LiTe) Indebtedness, Taxes, claims against | a. Losses insolvent persons (LITe): | b. ° Indebtedness/Claims against the estate Gross Estate Phils. x LiTe word c. Taxes Gross Estate world | d. Claims against insolvent person een 2, Transfer for Public Use 2. Transfer for Public Use | 3, Vanishing Deduction 3. Vanishing Deduction I. SPECIAL DEDUCTIONS Il, SPECIAL DEDUCTIONS | 1, Standard Deduction (P5M) * Standard Deduction of P500,000 | 2. Family Home (max. P10M) 3. RA4917 I. - SHARE OF THE SURVIVING II SHARE OF THE SURVIVING SPOUSE (for married decedents) SPOUSE (for married decedents) 85q Du tions from the Gross | at ay perder S ORDINARY DEDUCTIONS A. LiTe (Losses, Indebtedness, Taxes, etc.) 1. Losses For purposes of estate taxation, deductible losses ffror, +, 7 gross estate shall pertain to “casualty losses Casualty losses include, storms, shipwreck or other casualties, «, from robbery, theft or embezzlement. The amount deductible is tr. value of the property lost. Requisites for Deductibility: a) Arising exclusively from: "acts of God such as fire, storm, shipwreck and othe, similar casualty "acts of man such as robbery, theft, embezzlement b) Not compensated by insurance or otherwise ¢) Not claimed as a deduction in an income tax return of the estate subject to income tax Incurred during the settlement of the estate. Settlement period Pertains to the period prescribed by law to file and pay the } estate tax, which is, under the TRAIN Law, one (1) year from date of death or the extension (to file) thereof which is not More than 30 days after the lapse of the one-year period. q) ILLUSTRATION 1: Among the properties included in the gross estate of the decedent at the time of his death was a newly developed resort in Siargao valued at 20,000,000. George is the sole heir to the property. During the settlement of the estate ‘and before the last day of filing the estate tax return, a super typhoon hit Siargao destroying entirely the newly developed resort. It was determined that the fair value of the Property after the incident was reduced to 500,000. Question 1; What amount should be included as part of the decedent's gross estate? “Answer: P20,000,000 (FMV at the time of death) | Question 2: What amount should be included as part of the allowable deductions from | the gross estate? + Answer: P19,500,000 The diference on the far market value before and ater incurring the lossDeductions from the Guess Estate Question 3; What amount should be included as part of the allowable deductions from the gross estate assuming the property was insured for P25,000,000 Answer: PO Since the loss was fully compensated by insurance, no deduction shall be claimed against the gross estate of the decedent. Question 4: What amount should be included as deductible loss assuming that the incident happened beyond the settlement period of one (1) year, and the property was not insured. Answer: RO. Only losses incurred during the settlement period (within 1 year after death) are allowed as deduction from the gross estate. Question 5: What amount should be included in the gross estate of the decedent assuming the incident happened one (1) day before the death of the decedent? Answer: RO. Question 6: In relation to question #5, what amount should be included as deduction from the gross estate of the decedent? “Answer: RO. 2. Indebtedness or Claims against the Estate (including mortgage payable) “Claims” is generally construed to mean debts or demands of @ pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. The liability represents a personal obligation of the deceased existing at the time of his death, contracted in good faith (during his lifetime) for adequate and full consideration in money or money's worth. Claims against the estate (CAE) or indebtedness in respect of property may arise out of the following sources: = Contract = Tort * Operation of Law REQUISITES FOR DEDUCTIBILITY (RR 12-2018): a. The liability represents personal obligation of the deceased existing at the time of his death; b. The liability was contracted in good faith and for adequate and full consideration in money or money's worth; c. The liability must be a debt or claim which is valid in law and enforceable in court; 87oN” ay dD (actions frm the Y} ~ ondoned by the creditor G d. The death must nothave been c 7 action to collect from the decedent must not have bee’ prescribed. lat UIREMENTS: Sie eeceee and liabilities of the decedent at th time of his death are allowed as deduction from gross eState. Provided, however, that the following requirements/documents ate complied with/submitted: !n case of simple loan (including advances): a) The debt instrument must be duly notarized at the time the indebtedness was incurred, such as Promissory note or Contract of loan, except for loans granted by financiaj institutions where notarization is not part of the business Practice/policy of the financial institution-lender. b) Duly notarized Certification from thé creditor as to the unpaid balance of the debt, including interest as of the time of death. If the creditor is a corporation, the sworn certification should be signed by the President, or Vice President, or other principal officer of the corporation. If the creditor is a Partnership, the sworn certification should be signed by any of the general partners. If the creditor is a bank or other financial institutions, the Certification shall be signed by If the creditor is an individual, the sworn certification should be signed by him. In any of these cases, the one who should certify must not be a relative of the borrower within the fourth civil degree, either by consanguinity or affini ; except when the Fequirement below is complied with: When the lender, or the President/Vice-President or Principal officer of the creditor-corporation, or the general partner of the creditor. partnership is a relative of the debtor in the degree mentioned above, a 88| ae Dedacticns from the Gress Estate tedness must be copy of the promissory note or other evidence of indeb D 4 ihin fifteen days filed with RDO having jurisdiction over the borrower wi from execution thereof. c) In accordance with the requirements as prescribed in existing or prevailing internal revenue issuances, proof of financial capacity of the creditor to lend the amount at the time the loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. In case the creditor is individual who is no longer required to file an income tax return with the Bureau, a duly notarized Declaration by the creditor of his capacity to lend at the time when the loan was granted without prejudice to verification that may be made by the BIR to substantiate such declaration of the creditor. If the creditor is a non-resident, the executor/administrator or any of the legal heirs must submit a duly notarized declaration of his capacity to lend at the time when the loan was granted, authenticated or certified to as such by the tax authority of the country where the non-resident creditor is a resident. d) A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within three (3) years prior to the death of the decedent. If the unpaid obligation arose from purchase of goods or services. a) Pertinent documents evidencing the purchase of goods or service, such as sales invoice/delivery receipt (for sale of goods), or contract for the services agreed to be rendered (for sale of service), as duly acknowledged, executed and signed by decedent-debtor and creditor, and statement of account given by the creditor as duly received by the decedent-debtor. Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. b) 89d Oo” A Pe L Dadactions fom the Gress Ey lat itor i vation, the sworn Certificati vis a corporation, M f on should Rae by the President, or Vice President, o, other principal officer of the corporation. If the creditor is a partnership, the sworn certification should be signed by any of the general partners. If the creditor is a bank or other financial institutions, the ificati i branch manger of the Certification shall be signed by the bank/financial institution which monitors and manages the loan of the decedent-debtor. If the creditor is a sole proprietorship, the sworn certification should be signed by the owner of the business. In any of these cases, the one who should certify must not be a relative of the borrower within the fourth civil degree, either by consanguinity or affinity, except when the requirement below is complied with: When the lender, or the President/Vice-President or principal officer of the creditor-corporation, or the general partner of the creditor- partnership is a relative of the debtor in the degree mentioned above, a Copy of the promissory note or other evidence of indebtedness must be filed with RDO having jurisdiction over the borrower within fifteen days from execution thereof. Certified true copy of the latest audited balance sheet of the creditor with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor, Moreover, a certified true copy of the updated latest subsidiary ledgers/records of the debt of the debtor-decedent (certified by the creditor, i.e. certified by the officers in the Preceding Paragraphs) should likewise be submitted, Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing the claims against the estate, and the Court Order approving the said claims, if already issued, in addition to the documents mentioned in the Preceding Paragraphs. 90a Deductions jum the Gross stale | ILLUSTRATION 2: |) | Aresident decedent died on Novem from ABC Manufacturing Corporati during his lifetime. ber 1, 2020. Ho availed of a 500,000 salary loan ion (his employer) by issuing a promissory note ee Wall the requisites in ordor to be allowad as a deduction as claims against t! e estate were prosent, what amount may be deducted from the gross estate” “Answer: P500,0000 yon) Cuestion 2: If the obligation has prescribed as at the time of his death, what amount may be deducted from the gross estate? “+ Answer: PO. Question 3: If the loan document (promissory note) was not duly notarized, what amount may be deducted from the gross estate pertaining to the claim? “Answer: PO If the indebtedness arises from a debt instrument (Le. loan document), it must be notarized to be deductible, except for loans granted by financial institutions, where Notarization is not part of the business policy ofthe financial institution-lender. Question 4: If the loan document (promissory note) was not duly notarized as the | same is not normally required by ABC Corporation in granting salary loans to its | officers and employees, what amount may be deducted from the gross estate | pertaining to the claim? “Answer: PO The exception on notarizalion of loan documents is applicable only for loans granted by financial institutions. In the case provided, the creditor (ABC Corporation) is not a financial institution. | Question 5 | Ifthe loan was contracted three (3) years ago and the executor cannot determine how the loan proceeds were disposed of, what amount may be deducted from the gross estate pertaining to the claim? “Answer: RO RR 2-2003/RR 12-2018 provides that if the loan was contracted within three (3) years before the death of the decedent, a statement under oath (by the ‘executor/administrator) must be executed and must be attached therewith a ‘statement showing the disposition of the proceeds of the loan. UNPAID MORTGAGEs OR INDEBTEDNESS ON PROPERTY These are deductions allowed when a decedent leaves property encumbered by a mortgage or indebtedness contracted in good faith and for adequate. and full consideration. To be allowed as a deduction, his gross estate must include the fair market value of the Property encumbered. The amount allowed as a deduction would be the 91Deductions from the Gross Estate outstanding debt or mortgage. In case unpaid mortgage payable is bein, claimed by the estate, verification must be made as to who was the beneficiary of the loan proceeds. If the loan is found to be merely an accommodation loan where the loan proceeds went to another person, the value of the unpaid loan must be included as a receivable of the estate. if there is a legal impediment to recognize the same as receivable of the estate, said unpaid obligation/mortgage payable shall not be allowed as a deduction from the gross estate. In all instances, the mortgaged property, to the extent of the decedent's interest therein, should always form part of the gross estate. | ILLUSTRATION 3: | CASE A: A resident decedent left the following upon his death: Cash in bank (from various peso accounts) P8,000,000 Cash in bank (from various FCDU accounts) 9,600,000 Real properties, Philippines 10,000,000 10,000,000 | eal properties abroad The real properties located in the Philippines and other countries were mortgaged for | 8,000,000. | Determine the following: 1. Gross estate of the decedent | 2. Deductions for “unpaid mortgages” | Answers: 4. 37,600,000 Cash in bank (peso accounts) 8,000,000 | Cash in bank (FCDU accounts) 9,600,000 Real properties Philippines 10,000,000 | Real properties abroad ____ 10,000,000 Gross Estate 237,600,000 | 2. P8,000,000 | CASE B: | Pedro died in 2020. The following claims against Pedro's estate were claimed by his | heirs as deductions from his gross estate. | Notes payable (notarized) 500,000 ¥Notes payable (not notarized) 200,000 | Unpaid property taxes before his death 300,000 | Unpaid property taxes on his estate (after death) 100,000 | XUnpaid judicial expenses 80,000 Unpaid funeral expenses 75,000 | Unpaid mortgage on his properties before death : 50,000 50,000 es questioned by decedent while still alive Debts from gambling loss 92ie Deductions fom the Gross Estate | ~ \ wn dolt How much is the correct amount of deduction as ‘claims against the estate”? aa | “+ Answer:-P850,000 Computed as follows: si Notes payable (notarized) 500,000 Unpaid Property taxes before death 300,000 | Unpaid ‘Mortgage before death 50,000 Claim against the estate —P850,000_ * Even prior to TRAIN Law, unpaid funeral and judicial expenses are not classified as “claim against the estate’, They are deductible separately as funeral and judicial expenses. However, upon effectivity of the TRAIN Law, funeral, judicial and medical expenses are no longer deductible from the gross estate. Claims against the estate should Pertain only to valid claims as of the | date of death. Claims arising affer death are not allowed as deductions from gross estate. Receivables from gambling (wagering gains) before death are inclusions from the decedent's gross estate, however, debts from wagering or gambling losses are not allowed as deductions from the gross estate.. 3. Taxes These are unpaid taxes that accrued prior to the death of the decedent. However, the following are not allowed as a deduction: * Income tax on income received after death = Property taxes accrued after death = Estate tax ILLUSTRATION 4: Which among the following should be allowed as deduction from the Gross Estate of a Filipino decedent who died on March 30, 2020? ITEM PARTICULARS 1 Unpaid donor's tax on donations made during the previous year 2 Unpaid donor's tax on donations made during current year 3 Unpaid income tax on decedent's income for 2019 4 Unpaid income tax on decedent's income from January to March. 2020 y§) Unpaid income tax attributable to the estate's income from April to. December 31, 2020 6 Unpaid business tax for 2019 taxable year. - 7 Unpaid business tax from January to March 2020 (8 Unpaid business tax on the decedent's estate from April to | “December 31, 2020 | 93L De itn prom the Gross Estate 0 March 2020 Unpaid municipal taxes from January to March 2 10 Unpaid municipal taxes on the decedent's estate (business) from April to December 31, 2020 tto 11 Unpaid import duties on importations made from January March 2020 12 Tax assessmentideficiencies prior to death “Answer: Items 1, 2, 3, 4,6, 7, 9, 11 and 12 4. Other deductions such as Claims against an insolvent person Claims against the estate are “receivables due or owing from persons who are not financially capable of meeting their obligations”. Hence, these are claims by the decedent during his lifetime that are not collectible. An insolvent is a person whose properties are not sufficient to satisfy, whether fully or partially, his debt(s). REQUISITES FOR DEDUCTIBILITY | | For purposes of estate taxation, a judicial declaration of insolvency is not required but a) The incapacity of the debtor to pay his obligation should be proven. b) The full amount owed by the insolvent must first be included in the decedent's gross estate and the amount uncollectible shall be allowed as a deduction. c) If the insolvent could only pay partial amount, the full amount owed shall be included in the gross estate, and the amount uncollectible shall be allowed as a deduction. Case A: Juan ‘is indebted to Pedro for P'1,000,000. For the past ten (10) years, the credit standing and reputation of Juan is outstanding. However, during 2018, the relationship of Juan and Pedro was tainted by a Personal disagreement. Consequently, Pedro was unable to collect the amount of P1,000,000 due from Juan. Juan intentionally ignored Several collection/demand letters from Pedro, In 2019, Pedro died. Question 1: ‘Should the P1,000,000 collectible from Juan be included in the 000, , gross estate of Pedro? % Yes. The PIM isa valid and. enforceable claim of Pedro as of the date Nhe death. |Deductions prom the Gross tate Question 2: Should the P1,000,000 collectible from Juan be deducted in Pedro's gross estate? No. Only uncollectbie cai ims against insolvent persons are deductible from the gross estate. In the case provided, Juan is obviously not an insolvent person for estate tax purposes. Case B: Assume the same data in Case A, except that during 2019, Juan experienced financial difficulty and his assets are no longer sufficient to settle his liabilities. Consequently, Juan was only able to pay P500,000 to Pedro in 2019. In the same year, Juan asked a competent court for a judicial declaration that he is insolvent, The court is yet to decide on Juan's petition. In 2020, Pedro died, Question 1: Should the remaining amount of P500,000 collectible from Juan be included in the gross estate of Pedro? & Yes Question 2: Should the unpaid amount of P500,000 collectible from Juan be deducted in Pedro's gross estate? Yes. Judicial declaration of insolvency is not required to consider a person insolvent. Itis sufficient that the person's insolvency is proven. Case C: ‘ Pedro died’in 2020. At the time of his death, he has a collectible sum of 21,000,000 from a debtor who was subsequently declared by a court as insolvent for having total liabilities of P4,000,000 against his total properties valued at 800,000 only. | Question 1: ~ | How much should be included in the gross estate of Pedro? Answer:-P1,000,000. | | Question 2: How much may be claimed as deduction from the gross estate of Pedro? “Answer: 800,000 computed as follows Amount of Claim 1,000,000 Collectible‘ x P800,000 _(200,000) Uncollectible portion 800,000 OR: Amount of Claim 1,000,000 Collectible: P800/P4,000 x P1M (200,000) Uncollectible portion _ — 800,000 95Deductions from the Gross Estate B. Transfer for Public Use Dispositions in a last will and testament or transfers to take effect after the death in favor of the government of the Philippines or any political subdivision thereof (e.g. barangay, province, city/municipality) for exclusively public purposes. Before a transfer for public use is allowed as a deduction from the gross estate, same amount shall be included first in the computation of the gross estate. Legacies to the Philippine Red Cross (PRC) Under RA 10072 (An Act Recognizing the Philippine Red Cross as an independent, autonomous, nongovernmental organization auxiliary to the authorities of the Republic of the Philippines in the Humanitarian Field to be known as “The Philippine Red Cross Act of 2009’), ail donations, legacies and gifs made legacies to the PRC to support its purposes and Sbjectives shall be exempt from donor's tax and shall be deductible from the gross income of the donor for income tax purposes or from the computation of the donor-decedent’s net estate as a “transfer for public use” for estate tax purposes. C. Vanishing Deductions (Property previously taxed) This deduction is also referred to as a deduction for “property previously taxed”. It is an amount allowed to reduce the taxable estate of a decedent where the property received by him from a prior decedent or donor by: (1)gift or by (2)bequest, device or inheritance, has been the object of previous transfer taxation. Hence vanishing deduction is allowed as a deduction from the gross estate to minimize the effect of or as a remedy against double taxation. REQUISITES FOR DEDUCTIBILITY: 4. Death — the present decedent died within 5 years from the date of death of the prior decedent or date of gift. 2. Identity of property — the property with respect to which deduction is sought can be identified as the one received from the prior decedent, or from the donor, or as the property acquired in exchange for the original property so received. 3. Location — the property on which vanishing deduction is being claimed must be located in the Philippines. 4. Inclusion of the property — the property must have formed part of the gross estate situated in the Philippines of the prior decedent or have been included in the total amount of the gifts of the donor made within five (5) years prior to the present decedent's death. 96Deductions from the Gress Estate 5. Previous taxation of the Property — the estate tax on the prior: succession or the donor's tax on the gift must have been finally determined and paid by the prior decedent or by the donor as the case maybe and 6. No previous vanishing deduction on the property - no such deduction on the Property, or the property given in exchange therefore, was allowed in determining the value of the net estate of the prior decedent. VANISHING DEDUCTION RATES: Period from receipt to decedent's death Rate Within one year 100% peut Beyond one year to 2 years 80% : Beyond 2 years to 3 years 60% Beyond 3 years to 4 years 40% Beyond 4 years to 5 years 20% PRO-FORMA COMPUTATION OF VANISHING DEDUCTION: VALUE TO TAKE (The lower amount between the value of the property in the gross estate of the prior decedent or value of the gift and value of the same property in the gross estate of the present decedent.) LESS: MORTGAGE PAID (1st deduction) ‘i (Paid by the present decedent from the mortgage assumed when the property was inherited or received as donation) INITIAL BASIS Less: Proportional deduction (24 deduction) computed as: Initial basis “Grossestate x “LIT + Transfer for Public Use FINAL BASIS x Vanishing deduction % VANISHING DEDUCTION “* Under the Tax Code, as amended under the TRAIN Law, the multiplier to the ratio of Initial Basis over the Gross Estate is the total of LiTe, plus Transfer for Public Use. Expenses (Funeral and Judicial expenses) are no longer allowed as deductions from the gross estate ofa decedent upon the effectivity of RA10963 (TRAIN Law). Hence, these expenses shall be excluded in the ‘computation in case the decedent died in 2018 onwards. Special deductions shall kewise be ignored for purposes of computing the vanishing deduction. 7> Deductions row the Gress Estat, ILLUSTRATION 6: tb ty CASEA biel aan Pedro received a car as a gift from Juan on January 4, 2016. The value of the car at “S""" the time it was donated to Pedro was P1,000,000. However, Pedro assumed a 200,000 mortgage on the car. The corresponding donor's tax was paid by Juan, Pedro paid a total of P100,000 on the mortgage in 2016 and 2017. On Nov~1, 2018, Pedro died. His gross estate at the time of his death amounted to 5,000,000 including the car received from Pedro valued at P700,000. The following deductions were also claimed by his beneficiaries Funeral expenses. 250,000 * Losses 100,000 Unpaid mortgage (including the mortgage on the car) 200,000 Unpaid taxes before death 100,000 Unpaid taxes after death 25,000 Unpaid medical expenses 300,000 | Donation mortis causa to Quezon City for public purpose 500,000 Question 1; How much is the allowable vanishing deduction? | > Answer: 295,200 computed as: | Value to take (lower amount) 700,000 | 4 Deduction (100,000) | Initial basis 600,000 Less: 2 deduction (600/5,000 x (P900,000*)) (108,000)- Final Basis 492, \ rate (within 3 years) 60% | Vanishing deduction ~P295,200- | Funeral expenses (no longer allowed) - | Losses 100,000 | Unpaid mortgage 200,000 Unpaid taxes before death 400,000 | Transfer for Public Use 500,000 | (Donation mortis causa to Quezon City) | TOTAL ** 900,000 | Question 2: Assume the corresponding donor's tax was not paid by Juan upon perfection of the donation, how much is the allowable vanishing deduction? Answer: PO Vanishing deduction is @ mode of “tax rele” from multiple imposition of indirect taxes. This Is the reason why payment of donor's tax or estate tax from the grantor is a requisite before vanishing deduction is allowed. Hence, i he donor's tax was not paid at the time of the perfection of the donation, vanishing deduction isnot allowed due to the absence of ‘indirect double taxation’ 98Deductions jem the Gress Estate +; Question 3: Assume the Corresponding donor's tax was paid by Juan upon perfection he donation. Assume further that the donati ti | much is the allowable vanishing deduotent? nation was made on January 1, 2010. How > Answer: PO The donation was Pedro's death n was made more than five (5) years prior to CASE B: In 2019, Pedro died, leaving a property worth P1,000,00 which he inherited 4% years ago from Juan. The property's fair market value at the time of Juan’s death was 800,000 An unpaid mortgage of P100,000 was also assumed by Pedro which “remained unpaid at the time of his death. Other properties in Pedro's gross estate had fair market value of P3,000,000. The losses, taxes and transfer for public purpose amounted to P800,000 including 100,000 medical expenses and family home of 400,000 1 gouew 100> 4 Question 1: What is the correct amount of vanishing deduction? + Answer: P144,000 computed as follows: Value to take 800,000 4 Deduction _ - Initial basis 800,000 Less: 2 deduction [800/4,000** x (P400,000 **)} (80,000) Final Basis 720,000 x rate 20% Vanishing deduction __P144,000 | Correct amount of GE ** | FVof the property inherited upon Pedro's death P1,000,000 Other properties in Pedro's estate 3,000,000 __ | Total GE | uteas provided in the problem *** 800,000 | Less: Medial expenses (should not be part of LiTe) (100,000) Family home (should not be part of LITe) (400,000) | ‘Add: Unpaid mortgage 100,000 | (Not yet included in the P800,000) - _ ComectLiTe ___P400,000%"_ 99Os Deductions prom the Gross € state SPECIAL DEDUCTIONS A. Standard deduction The law allows a standard deduction without qualification, condition nor requisite whatsoever. This amount shall be allowed as an additiona) Geduction without need of substantiation. The full amount shall be / allowed as deduction for the benefit of the decedent. Allowable amount under the TRAIN Law: by if the decedent is a citizen or resident — P5,000,000 = Ifthe decedent is a nonresident alien — P500,000 This is the only special deduction allowed to a nonresident alien decedent. The other special deductions (family home and Ra 4917) can be claimed only by citizen and resident decedents. B. Family Home The amount of family home aliowabie - ly as a deduction would be whichever is Fanily Home lower of P10,000,000 or the fair market ~ value at the time of the decedent's death The dwelling house, including of the family home and the land on which it the land on which it is stands (P1,000,000 prior to the effectivity of situated, where the husband ~—_ 40963, otherwise known as TRAIN Law). and wife, or a head of the The family home is deemed constituted fea and members of tet on the house and lot from the time itis by the Barangay Captain of actually occupied as a family residence the locality. and is considered as such for as long as any of its beneficiaries actually resides therein. (Arts. 152 and 153, Family Code) Actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned in such cases as the temporary absence from the constituted family home due to travel or studies or work abroad. In other words, the family home is generally characterized by permanency, that is, the place to which, whenever absent for business or pleasure, one still intends to return. The family home must be part of the properties of the absolute community or of the conjugal partnership, or of the exclusive properties of either spouse: depending upon the classification of the property (family home) and the property relations prevailing on the properties of the husband and 100Dedactions frm the Gress Estate wife. It may also be constituted by an unmarried head of a family on his or her own Property Unmarried Head of a Family ‘An unmarried or legally man or woman with one or both parents or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon him or her for their chief support, where such brothers or sisters or children are not more than twenty one (21) years of age, unmarried and not gainfully employed or where such children, brothers or sisters. regardless of age are incapable of self- support because of mental or physical defect, or any of the beneficiaries mentioned in Article 154 of the Family Code who is living in the family home and dependent upon the head of the family for legal support. The beneficiaries of a family home are * The husband and wife, or the head ofa family; and * Their parents, ascendants, descendants including legally adopted children, brothers and sisters, whether the relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support. Limitation For purposes of availing of a family home deduction to the extent allowable, a person may constitute only one (1) family home. REQUISITES FOR DEDUCTIBILITY 1. The decedent was married or if single, was a head of the family 2. Along with the decedent, any of the beneficiaries (as listed " above) must be dwelling in the family home. 3. The family home as well as the land on which it stands must be owned by the decedent. Therefore, the fair market value of the family home should have been included in the computation of the decedent's gross estate. 4. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the family home is situated. 5. The total value of the family home must be included as part of the gross estate of the decedent; and 6. Allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or 101& Deductions hom the Gr ‘ale or the extent of the decedent's unity or exclusive property), .g 10,000,000, as amended. included in the gross estate, interest (whether conjugal/comm whichever is lower, but not exceedin: ILLUSTRATION 7 - Determine the allowable deduction for Family Home (FH) from the following _ independent cases: | Case A: FH valued at 15,000,000. Decedent was single. | Case B: FH valued at 15,000,000. Decedent was head of the “Answer: PO. family. Answer: P10,000,000. Case C: FH valued at 5,000,000. Decedent was head of the family. Answer: P5,000,000 Case D: FH valued at P15,000,000 (exclusive). Decedent was married. Answer: P10,000,000 Case E: FH valued at 15,000,000 (conjugal). Decedent was married. Answer: P7,500,000. For married decedents, the FMV of the family home should be divided by two (2) if the ‘same is conjugal or community property. Case F: FH valued at 15,000,000 of which, 10,000,000 is allocated to the land (exclusive), 5,000,000 to the house (conjugal). Decedent is married ‘Answer: 210,000,000 Land (exclusive) P10,000,000 House (conjugal) P5,000,000/2 2,500,000 Total P12,500,000 £2 Maximum deductible amount is P 10,000,000. Case G: The fair market value of the family home which is partly exclusive and partly common follows: Family lot (exclusive) P5,000,000 Family house (common) 9,000,000 “Answer: P9,500,000 Land (exclusive) 5,000,000 House (common) P9,000,000/2 4,500,000 Tota 8,800,000 102Deductions prom the Gross Estate C. Amounts received by heirs under RA 4917 Any amount received by heir(s) from the decedent's employer as @ consequence of the death of the decedent-employee in accordance with R.A. No. 4917 (An Act Providing that Retirement Benefits of Employees of Private Firms shall ‘not be subject to Attachment, Levy, Execution or Any Tax Whatsoever), provided such amount is included as part of the gross estate of the decedent NET SHARE OF THE SURVIVING SPOUSE The amount deductible under this category is the net share of the surviving spouse in the conjugal partnership property. The net share is equivalent to % or 50% of the conjugal property after deducting the obligations chargeable (ordinary deductions only) to such property. The share of the surviving spouse must be removed to ensure that only the decedent's interest in the estate is taxed. Deductions som the Gross Estate 07 G Nonresident Aber The value of the net estate of a decedent who is a non-resident alien in the Philippines shall be determined by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines the following items of deductions (Section 7, RR2-2003): Ordinary Deductions | | = — LiTe(proportional deduction’*) Pxx’ i **Total LITe x (GE Phils./GE world) | = Transfer for Public Use | Special Deduction "Standard deduction 500,000 | = Vanishing deduction | | Share of the surviving spouse «= _ Ifthe decedent is married a x 103. {> a actions pom the Gross Estate ILLUSTRATION 8: iti 4, Mr. Krung, a resident of Seoul, South Korea and a Korean citizen died on July 4, 2018 leaving the following properties: p4,500,000 Condominium unit in Makati 7'000,000 | Family Home in Seoul, Korea 2. 750,000 | Rest House in Australia poss , 500,000 dewelries received as gift dated August 25, 2017 4,000,000 Gar in Makati The heirs of Mr. Krung claimed the following deductions: 300,000 | Funeral expenses 790,000 Claims against the estate 200,000 | Claim against insolvent person 700,000 Judicial expenses 700,000 Medical expenses ; £00,000 | Family Home 300,000 | Standard Deductions 200, Required: Determine the net taxable net estate. Answer: P5,1 30,769 Solution: GROSS ESTATE Condominium unit in Makati Jewelries Car in Makati Claims agaifst insolvent person _ Total gross estate - Philippines P6; ALLOWABLE DEDUCTIONS Ordinary Deductions: | LiTe = (P6.5M/P16.25M™ x P1,000,000"*) (400,000)"** Vanishing Deductions (469,231) Special Deductions = Standard Deduction (500,000) TAXABLE NET ESTATE : ~ P5,130,769 P4,500,000 500,000 4,000,000 100 000" Q_ *Funeral and judicial expenses are no longer allowed TI Law. a GE** = include claim against insolvent een ea ee P1M*** = Claim against the estate and claim against insolvent person. te Hg Ge Tacha steeat shall only be the proportional amount of GE . rorid. decedent is a nonresident alien Q ae bce) Of P500,000 is already allowed as deduction from the gross - nonresident alien decedents under TRAIN Law. 104Deductions rom the Gross Estate Computation of Vanishing Deduction Value to take coor aay Less: Mortgage paid — Initial basis $10,000 Less: Proportional deduction (600/6,500 x P400,000) __ £0,769) | Final Basis 469,231 | x Vanishing deduction rate (within 1 year) 100% Vanishing deduction __P 469,231 ESTATE TAX RETURN PREPARATION Mr. Bu Ang, Single and a non-resident alien, died of a heart attack in 2020, leaving the following properties in favor of his heirs: Gross estate within the Philippines P30,000,000 Gross estate outside the Philippines 20,000,000 Funeral Expense 500,000 Judicial and administrative expenses 2,000,000 Claims against the estate 5,000,000 His gross estate includes family home valued at P8,000.000. Required: 1. Compute the correct estate tax due 2. Fill-up the Estate Tax Return Solution: Gross estate, Philippines P30,000,000 Ordinary deduction (3,000,000) ‘Standard deduction (500,000) Taxable net estate P26,500,000 x Estate tax rate 6% Estate Tax Due P1,590,000 NOTE: Additional exercises on Estate Tax Return preparations are shown in the Chapter 4. 105Estate Tax Return re ACH ne Ma a 9005 0 Pe] re 7 Fangaye's Name 721% #es nme, Aner, poi Te eB Ee ER ~~ ? No of Sheetis Attohed |0 13 | Taxcoae arc) | ES 10 { ‘2 Amended Rewirn’ — se — ar 0, 0, 0, 0) 6ROO Cose 0 rw ea Mo 2 Bs. 0 5 L888 Ss '5 Taqpayer Inentifeation Number (TIN) 4,23 94,2 3,6 ta a Lu poppet iy ESTATE OF] AING) .j8,U) 111 pittt Ss U,BiD) BiRi GV. K At AL [PRescence of Devesent atthe time of death aa [ao U MALLING) 1S.T) THELRRLAL 1P) Uy Ry ‘9 Non-Resident Alien? [ la Zz C, L pyysitt (BE SSN Saat ahaa 4G: Gu G L 114 mart! i ae Tao fitoo0, 1 | eee 1019107, 718,988 #2 Tremiaes [gama hi mg an g@ gmail cM prt tiititiis PES, Clie fle [uawvssety] | ip dL POT ee near see giant i wae nrecemrpyetner Teme o | SESERSES ES 6 8 oa ems cee | Part i Yotal Tax Payable, 1216 §)9 @ 400 0 [ISNETAMARLEESTATE pene era 2 1 [raesee Tareas ~ - : [jg o® [ESTATE TAX DUE ser sstaece n> — L111 819,01 0,00 A019 | (Hiss TaCesPames = = : {9A Foreg Este Tas Pad 7 [7 ee Ta Pas ean Pes Fie, ts san Avercea eam so _ URTw Ponte mrss 90 [Fi Lass Peto acne papery tab be pan rb Ta Pak oraee SNS [ast Feabe bu LLpitiiiit bit BAS ZB beret L L Bc Coraronse i Bo rewPwais reese] yy | | "DETOTAL PAMOUNT PAYABLE tiem Sonate an 20) haar enc re = l=) 1 1) 5 910) 9 0,0 0,0) i iv ped sacar va ae fone iby ie Sidener me pemein petos de aes rant hemne oe Sete weaers ne eee toe Menta pr eet nee ee (Some ted one ae Pan ha 212A Na 1? rg led aes Ashes arearbove sh Soe Pome eee a | ANG ,GUMALI NG aaa oa a deme nenesenan saree aca Part H= Detais of Pant Details of Payment [Ometenigos | Qumber qasoonny —T ‘Anourt wemomomme! | ti titi tiiitiiii iii yyy 1 26 Conc poritorri iti tit i 27 Tw Data one vosistititiiitiiiiiy [Ba Owers [pect retire tii ily etter tM fdebrdaash a ‘cow Toes ay SWOTE: The GIR Gita Pray Poey Ht BR web (ere 907 106—— ‘BR Fom No Deductions a, 1 the Gross Estate Fariesiars [Bra Paoete Fars | a LB teeionaar] 801 "i ae | = HN eS SS Siar ——_fariiiiis —_] 130100 0 0,0 ¢PROBLEMS P3.1. (LOSSES) follows: Various types of losses incurred by @ cecacenteee A death, P1,000,009 * Loss due to typhoon, a day before the deceden decedent's dea * Loss due to shipwreck, two (2) months after the de weet P500,000. 's * Robbery loss, eight (8) months after the decedent's death, P2,000,000. * Swindling loss incurred 2 months before death, 800,000 * Gambling losses before death, P2,250,000 REQUIRED: Mc Question #1: How much is the deductible “losses” from the gross estate of the decedent? Question #2: How much is the deductible “losses” from the gross estate of the decedent assuming the robbery loss was incurred 1 % years after the decedent's death? P3.2. (CLAIMS AGAINST THE ESTATE / INDEBTEDNESS, CAIP,etc.) The heirs of a resident citizen decedent with a total gross estate of P15,000,000 provided the following data: + Receivable from Juan, a debtor de ! P500,000 ~* Amount collectible from Juan 400,000 4+” Unpaid taxes on the estate before death 150,000 * _ Unpaid taxes on the estate after death 50,000 -* Unpaid mortgage on the estate 200,000 "Funeral expenses (paid) 182,000 "Unpaid funeral expenses 37,500 " Medical expenses 82,000 " Judicial expenses 100,000 ~-* Unpaid loans arising from debt instruments (notarized) 125,000 «Unpaid loans arising from debt instruments (not 75,000 notarized). The debt instrument was issued by a financial institution not requiring notarizations for debt instruments issued * Unpaid loans arisin Notarized). The debt financial institution no\ instruments issued =~ Casualty loss 9 from debt instruments (not 100,000 instrument was issued by a non- t requiring notarizations for debt 65,000 108 eee poh) r 5 . a, p y- Chapter Exercises ~ Deductions from the Gross Estate REQUIRED: Determine the total amount of allowable deduction from gross estate of the d i | from gross lecedent including applicable special 3.3. (CLAIMS AGAINST INSOLVENT PERSONS - CAIP) ivabl CaseA Case B Case C Case D Receivable from a P500,000 500,000 500,000 P500,000 Oni debtor i Amount collectible 400,000 Debtor's total assets 400,000 1,200,000 1,200,000 Debtor's total liabilities 1,200,000 800,000 800,000 excl. tax 1 Unpaid taxes cory Yt 800,000 i Allowable deductions- ‘ CAIP P3.4. (CLAIMS AGAINST INSOLVENT PERSONS) . The following data were taken from the estate of Pedro: ‘gv = Claims against Juan (insolvent), P100,000, fully uncollectible. 3)* = Claims against Manuel (insolvent), P200,000, 50% collectible. = Claims against a person who absconded, P300,000. REQUIRED: Based on the data provided, determine the allowable deduction from Pedro’s gross estate. P3.5. (CLAIMS AGAINST INSOLVENT PERSONS) The gross estate of Juan includes P200,000 receivables which is duly notarized from debtor (Pedro) whose records show: Assets Liabilities Pedro's liabilities composed of the following: = Due to the BIR for unpaid taxes, P200,000 * Due to Juan, P200,000 } , = Due to other creditors, P400,000 P400,000 Ave 800,000 REQUIRED: Determine the amount of allowable deduction from Juan's gross estate in relation to its receivable from Pedro. 109Kt bedud ((¢7, 60 v ayertia! a's oye P3.6. (VANISHING DEDUCTION) \ , Juan, a Filipino residing in Davao died on gross estate of P4,500,000 ing a par ‘ P1,125,000, which he inherited fom hie father wl ; 2017; that the land was previously taxed with a fair value of P937,500 4, estate tax purposes in the estate of his father; thal the land was subjecteg to a mortgage of P468,750 at the time it was inherited by the p "19) decedent, which amount was deducted from the net estate of the that the present decedent paid P187,500 of the mortgage indebt Ohypter ho died on October» véses ~ Deq{qclios fon the Gross Coty, December 10, 2020, leaving , cel of land valu and that the total deductions claimed for expenses, 1085e8, tC indliuri, the unpaid mortgage of P281,250 was P562,500. vy P3.7. (STANDARD DEDUCTION) Determine Co independent cases: CASE cou 14.99 the allowable standard deduction PARTICULARS REQUIRED: Determine the correct amount of vanishing deduction, if any the following Decedent is single and a resident citizen of the Philippines Decedent is a head of the family and a resident citizen of the Philippines Decedent is a resident alien Decedent is a non-resident alien, reciprocity clause under the tax code is applicable Decedent is a non-resident alien, reciprocity clause under the tax code is not applicable sas thd didu choy P3.8. (FAMILY HOME) Determine the deductible family home in 2018 from the following independent cases: CASE: A ____ Particulars _ Decedent is single =a Decedent is a head of a family Decedent is married. The family home is the exclusive property of the surviving spouse Decedent is married. The family home is the exclusive property of the decedent Decedent is married. The family home is classified as conjugal property Decedent is married. Fifty percent (50%) of the family home is classified as 110 a £=£«. _ Family Home P10,0000,000 5,000,000 8,000,000 10,000,000 12,000,000 10,000,000Chapter Eversives Deductions from the Gross Estate / conjugal property, the remainder is the exclusive property of the decedent COMPREHENSIVE PROBLEM P3.9. The administrator of a decedent's estate (head of the family) provided the following data: Property: Domestic shares of 2,000 shares inherited 6 years ago P8,000,000 House and lot, family home, located in Davao, inherited 2,000,000 2 years ago at a value of P1,500,000 Jewelry items, in the Philippines at the time of death 400,000 Jewelry items kept in a vault abroad 200,000 Bank deposit in a Philippine branch of a U.S. bank 5,000,000 Interest from bank deposit after decedent's death 25,000 Expenses and other charges: Funeral expenses, abroad 80,000 Funeral expenses, Philippines 200,000 Judicial expenses, abroad 100,000 Judicial expenses, Philippines 50,000 Claims against the estate with the notarized debt 120,000 instrument issued in the Philippines, Donation to the Philippine government as provided in his 250,000 will REQUIRED: Determine the net taxable estate assuming: 1. The decedent was a Filipino citizen but a resident of Australia 2. The decedent was not a Filipino citizen but a resident of Davao City P3.10. A resident decedent, head of family, died leaving the following properties and obligations: Cash in bank, 50%, donated mortis causa to Nat'l Govt;50-% to Q.C. gov't P 300,0000 House and lot in Makati, Family Home 1,500,0000 Other real properties 15,000,000 Farm lot 825,000 Claim against an insolvent debtor 225,000 Transfer in contemplation of death (gratuitous) 1,250,000 Transfer passing under special power of 75,000 114CM APOEE Oe f -< a, / appointment Deductions claimed: 575 Funeral expenses ers Judicial expenses | 509 Donation mortis causa to Quezon City government "50.00 ; 000 Unpaid mortgage on the farm lot Medical expenses (included in the funeral expense incurred within the 1 year period with receipts) 225,009 The farm lot was inherited 5 % years ago by the decedent before hj, death with a value then of P575,000 and a mortgage indebtedness of P150,000. REQUIRED: Determine the following: 1. The taxable net estate 2. The taxable net estate assuming the farm lot was inherited five (5) years ago. P3.11. Juan died leaving a gross estate of P12,800,000 including a land inherited from his uncle 3 % years before his death and a car donated to him seven (7) years before his death. The following data pertain to the two properties: Unpaid Mortgage FMV upon receipt FMV upon death Land P100,000 P1,800,000 P1,250,000 Car 50,000 300,000 400,000 The decedent was able to pay % of the unpaid mortgage on the land before his death. Other deductions claimed are as follows: Expenses, losses, _ indebtedness, taxes P 1,200,000 (excluding the unpaid mortgages above but including actual funeral expenses of P300,000 and medical expenses of P600,000) Standard Deductions 1,500,000 Transfer to the Govt, included above | 300,000 Death Benefits from Employer under RA 4917 200,000 Family home (included above) 2,000,000 REQUIRED: Determine the net following: 1. Vanishing deductions 2. The net taxable estateChapter E roises - Deductions from the Gross Estate TRUE OR FALSE 1, Deductions from gross estate are highly disfavored in law; he who claims deductions must be able to justify his claim or right. 2. Asa rule, a deduction is allowed from the gross estate if it is proven that ins estate of the decedent is entitled to such deduction as provided by law. 3. Asa rule, deductions from the gross estate are presumed to be conjugal deductions, unless specifically identified as exclusive. 4. No deduction is allowed on the property which is not included in the decedent's gross estate. 5. Obligations contracted by a person during his lifetime are terminated upon his death. 6. All claims against the insolvent person are deductible from the decedent's gross estate. 7. Ina claim against insolvent person, the insolvency of the debtor must be proven and not merely alleged. 8. It could be that the amount to be included as part of the gross estate in a claim against insolvent person is less than the full amount owed. 9. So that unpaid mortgage may be deducted from the gross estate, the fair market value of the mortgage property must form part of the gross estate in full. 10. For unpaid taxes to be deductible from gross estate, such must have accrued at the time or before the decedent's death. 11. Unpaid income taxes incurred before the decedent's death is deductible from the gross estate. 12. Brokerage fees for selling property of the estate are part of the deductible expenses. 13. Casualty loss is deductible from gross estate if such loss was incurred during the settlement of the estate. 14. Casualty losses could be claimed as deduction from the gross income and from the gross estate. 15. Vanishing deduction is allowed for property received from donation if part of the gross estate. 16. In computing for vanishing deduction, the value to be taken is the lesser amount of the value of the property at the date of the previous transfer or the value of the property at the date of death of the decedent. 17. Vanishing deduction is being allowed to lessen the impact of successive taxation of the same property within a very short period due to the death of the decedent-transferor. 18. The benefit of vanishing deduction may only be applied once. 19, The maximum amount of deductible family home from the gross estate after the effectivity of TRAIN Law is P10,000,000. 113Z lutions fon the Gross Extaty cedent, the maximum amount cS estate after the effectivity : | Chatter fa eLCUNES / ification of the less of the classification oes * envctbi standard deduction from the g) of TRAIN Law is 5,000,000 MULTIPLE CHOICE. ? i ing statements is true? ; / ; CEE ome estate are highly aeevares SO he who claims deductions must a ae eae fa oe be ense ho . Receipts or invoices or other e' : ° really incurred, if applicable, must duly support deductions against the gross estate. c. Both “a” and "b” d. Neither ‘a” nor “b” 1 a. 2. Which is false? a. The estate tax is computed based on the net estate or taxable estate. b. The net estate is determined by subtracting from the gross estate the deductions authorized by law. j c. Both “a” and “b” d. Neither “a” nor “b” | ORDINARY DEDUCTIONS LITe — Indebtedness/Claims against the. Estate 3. Which among the following statements is Correct? I. An obligation that had prescribed already during the lifetime of } the decedent, or that was unenforceable against him when still alive, will not be claim against his estate when he shall be dead. ! Il. If a monetary claim against the decedent did not arise out of a debt instrument, the requirement on a notarized debt instrument does not apply. . a. Ionly ¢. Both I and IT b. Ionly @ Neither I nor 11 4. The following.statements pertain to indebtedness for estate tax purposes. Which is false? I. When a person leaves property encumbered bya Mortgage or indebtedness, his gross estate must include the fair market value of the property, undiminished by the mortgage or indebtedness, II. Include in the computation for the gross estate only the equity of the decedent on the property. > 114 bn