Death, Real Estate, and Estate Tax

by Atty. Cherry Vi Saldua Castillo | Filed under: - 52 Comments


In times of death, we still need to pay estate tax...
In times of death, we still need to pay estate tax…

The topic of death is usually avoided, except when we remember our dearly departed on All Saints’ and All Souls’ Day. But with death, estate taxes must be settled, and this will be the main focus of my discussion in this blogpost.

On ordinary days, most try to avoid talking about death, maybe out of fear. It only becomes acceptable to talk about it when we’re jolted by the death of a close friend or relative. We must accept, though, that we will all die – it is just a matter of time, and even during times of death, we still need to pay taxes…


In times of death, we still need to pay taxes

When someone passes away, loved ones left behind are usually overwhelmed with emotions and are unable to do anything. I know this from experience.

But, there are certain things that need to be done, like making arrangements for the embalming, the wake, the casket, the interment or cremation, the burial plot (incidentally, there are a lot of foreclosed memorial lots for sale inside our database) and the gravestone, among others.

And of course, someone has to take care of the estate tax.

Note: For the rest of this article, we will use the terms “decedent” or “deceased person” to refer to the person who died.

What is Estate Tax?

Estate tax is imposed on the transfer of the net 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.


What to do when someone has died

Estate tax-wise, these are the things that need to be done:

  1. File a Notice of Death with the Bureau of Internal Revenue within two months after the date of death. This is applicable when the gross value of the estate exceeds P20,000.00. This should be filed by the executor or administrator of the estate, or any of the legal heirs. It shall be filed with the RDO where the decedent was domiciled at the time of his death. There is no specific format.
  2. Get a Tax Identification Number (TIN) for the Estate of the deceased person by using BIR Form No. 1901.  Use this TIN when filing the Estate Tax Return (BIR Form No. 1801).
  3. Prepare the list of assets and liabilities of the decedent. Get the fair market values of the properties at the time of death.
  4. Prepare the supporting documents for the assets and liabilities, as well as the deductions you are going to take. You will need these for the estate tax computation and as attachments to the Estate Tax Return.
    1. Certified true copy of the Death Certificate
    2. 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, 1998
    3. Any of the following:
      • Deed of Extra-Judicial Settlement of the Estate, if the estate is settled extra judicially (sample forms may be found here and here).
      • Court Orders/Decision, if the estate is settled judicially;
      • Affidavit of Self-Adjudication (sample here) and Sworn Declaration of all properties of the Estate
      • A certified true copy of the schedule of partition of the estate and the order of the court approving the same, if applicable.
    4. Certified true copy(ies) of the Transfer/Original/Condominium Certificate of Title(s) of real property(ies) (front and back pages), if applicable
    5. Certified true copy of the latest Tax Declaration of real properties at the time of death, if applicable
    6. “Certificate of No Improvement” issued by the Assessor’s Office declared properties have no declared improvement or Sworn Declaration/Affidavit of No Improvement by at least one (1) of the transferees
    7. Certificate of Deposit/Investment/Indebtedness owned by the decedent and the surviving spouse, if applicable
    8. Photocopy of Certificate of Registration of vehicles and other proofs showing the correct value of the same, if applicable
    9. Photo copy of certificate of stocks, if applicable
    10. Proof of valuation of shares of stocks at the time of death, if applicable
      • For listed stocks – newspaper clippings or certification from the Stock Exchange
      • For unlisted stocks – latest audited Financial Statement of issuing corporation with computation of book value per share
    11. Proof of valuation of other types of personal property, if applicable
    12. Proof of claimed tax credit, if applicable
    13. 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 applicable
    14. Certification of Barangay Captain for claimed Family Home
    15. Duly notarized Promissory Note for “Claims against the Estate” arising from Contract of Loan
    16. Accounting of the proceeds of loan contracted within three (3) years prior to death of the decedent
    17. Proof of the claimed “Property Previously Taxed”
    18. Proof of claimed “Transfer for Public Use”
    19. Copy of Tax Debit Memo used as payment, if applicable
  5. Compute the net estate and estate tax.
  6. File the Estate Tax Return and pay the estate taxes.
  7. Follow the procedure for transferring real properties to the name of the heirs (this will be discussed in a separate post).
  8. Follow the procedure for cancellation of the TIN of the decedent as discussed in Section 12 of Revenue Regulations No. 7-2012. Use BIR Form No. 1905 for the cancellation of TIN.

Gross Estate

Gross 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 higher between the BIR zonal valuation and FMV per tax declaration (I paraphrased this).

Please also note that also included in the computation of the gross estate are interest or share in a property, transfers in contemplation of death, and revocable transfers.

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


Deductions from gross estate

  1. 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 proceedings

c. 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 loan

d. Claims of the deceased against insolvent persons

e. Unpaid mortgages, etc.

  1. Property Previously Taxed (Vanishing deduction)
  2. Transfers for Public Use
    • The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes.
  1. 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 decedent’s family home as certified by the barangay captain of the locality.
  1. Standard Deduction – P1 million (no substantiation needed)
  1. Medical Expenses
    • Medical expenses incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts
    • Maximum: P500,000.00
  1. Amount received by heirs under RA 4917 (retirement benefits of employees of private firms)
  2. 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

What are the Estate Tax rates?

The estate tax rates depend on the date of death. 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

Estate Tax Philippines Table 1: For decedents who died on January 1, 1998 and onwards

 

If the decedent died between July 28, 1992 to December 31, 1997, the following are the applicable estate tax rates based on the net estate amount:

Over

But not Over

The Tax
Shall be

Plus

Of the Excess Over

P 200,00.00

0%

P200,000.00

500,000.00

5%

P 200,000.00

500,000.00

2,000,000.00

P 15,000.00

8%

500,000.00

2,000,000.00

5,000,000.00

135,000.00

12%

2,000,000.00

5,000,000.00

10,000,000.00

495,000.00

21%

5,000,000.00

10,000,000.00

1,545,000.00

35%

10,000,000.00

Estate Tax Philippines Table 2: For decedents who died between July 28, 1992 to December 31, 1997

 

If the decedent died between January 1, 1973 and July 27, 1992, the following are the applicable estate tax rates based on the net estate amount:

Over

But not Over

The Tax
Shall be

Plus

Of the Excess Over

P 10,00.00

Exempt

P 10,000.00

50,000.00

3%

P 10,000.00

50,000.00

75,000.00

P 1,200.00

4%

50,000.00

750,000.00

100,000.00

2,200.00

5%

75,000.00

100,000.00

150,000.00

3,450.00

10%

100,000.00

150,000.00

200,000.00

8,450.00

15%

150,000.00

200,000.00

300,000.00

15,950.00

20%

200,000.00

300,000.00

400,000.00

35,950.00

25%

300,000.00

400,000.00

500,000.00

60,950.00

30%

400,000.00

500,000.00

625,000.00

90,950.00

35%

500,000.00

625,000.00

750,000.00

134,700.00

40%

625,000.00

750,000.00

875,000.00

184,700.00

45%

750,000.00

875,000.00

1,000,000.00

240,950.00

50%

875,000.00

1,000,000.00

2,000,000.00

303,450.00

53%

1,000,000.00

2,000,000.00

3,000,000.00

833,450.00

56%

2,000,000.00

3,000,000.00

1,393,450.00

60%

3,000,000.00

Estate Tax Philippines Table 3: For decedents who died between January 1, 1973 and July 27, 1992

 

If the decedent died between September 15, 1950 to December 31, 1972, the following are the applicable estate tax rates based on the net estate amount:

From

To

ESTATE

INHERITANCE

5,000.00

0

5,000.00

Exempt

Exempt

7,000.00

5,000.00

12,000.00

1.0%

2&

18,000.00

12,000.00

30,000.00

2.0%

4%

20,000.00

30,000.00

50,000.00

2.5%

6%

30,000.00

50,000.00

70,000.00

3.0%

8%

Estate Tax Philippines Table 4: For decedents who died between September 15, 1950 to December 31, 1972

 


Sample computations

Please refer to BIR Revenue Regulations No. 2-2003 for sample computations.

When is an Estate Tax return required to be filed?

  • When the gross value of the estate exceeds P200,000 (though exempt from tax); or
  • Regardless of the gross value of the estate, where the said estate 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 as a condition precedent for the transfer or ownership thereof in the name of the transferee

When to file and pay

  • Within six (6) months from the decedent’s death;
  • Unless an extension of time is requested in cases where the payment of the tax will result in undue hardship on the heirs
    • Not to exceed 5 years  in case the estate is settled through the courts;
    • Not to exceed 2 years in case the estate is settled extrajudicially.

Penalties for late payment

The penalties shall include 25% surcharge and 20% interest per year (Under Secs. 248 and 249, respectively). If fraud is involved, the surcharge shall be 50%. You may also pay compromise penalties in lieu of imprisonment, which can be viewed at the BIR’s website through the following link: Schedule of compromise penalties.


BIR Form to be used

  • —BIR Form No. 1801 (Estate Tax Return)

Where to file

  • The Authorized Agent Bank (AAB), Revenue District Officer (RDO) or duly authorized Treasurer of the city or municipality where the decedent was domiciled at the time of his death; or
  • If there be no legal residence in the Philippines, with the Office of the Commissioner.

How to Get A BIR Certificate Authorizing Registration (CAR)

The Registry of Deeds will not allow you to transfer the title of real properties of a deceased person if there is no BIR CAR. Please make sure that you have the documents as enumerated in the Checklist of Documentary Requirements (CDR) for Estate Tax, which can be found in Annex A-6 and A-6.1 of Revenue Memorandum Order (RMO) No. 15-03 (see pages 7 to 9).

To help you determine the computation for the estate tax due, you may refer to the ONETT (One-Time Transaction) Computation Sheet, in Annex B-3 (pages 16 and 17) also of RMO No. 15-03. Please also check the sample computations in BIR RR No. 2-2003 and BIR Form No. 1801.

Further reading

For better understanding of estate taxes, I urge you to read the following:

  1. Overview on Estate Tax
  2. Sections 84 to 97 of the 1997 Philippine Tax Code
  3. Revenue Regulations 2-03 (Estate Tax and Donor’s Tax Regulations)
  4. Estate Tax Return (BIR Form No. 1801, front and back pages)

~~~

Thank you for reading and I hope this helps you. Should you have questions, please read the estate tax-related documents I mentioned in my post, just follow the links provided.

Related post: Donor’s Tax as an estate planning tool

~~~

Atty. Cherry Vi M. Saldua-Castillo – CPA, REB, REA

PRC Real Estate Broker License No. 3187
PRC Real Estate Appraiser License No. 6918
PRC CPA License No. 102054
Roll of Attorneys No. 55239
2013 Internal Education Head, REBAP-LMP
2015 REBAP National Legal Counsel

Text by Jay Castillo and Cherry Castillo. Copyright © 2015 All rights reserved.

Full disclosure: Nothing to disclose.



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