Donation As An Estate Planning Tool (A Discussion on Donor’s Tax)

Last Updated on April 4, 2016 by Atty. Cherry Vi Saldua Castillo | Filed under: - 65 Comments


The donation of properties can be used as a tool for estate planning. One just needs to be aware that donations are subject to donor’s tax. Read this to find out how much donor’s tax you need to pay when donating a property as part of estate planning.

Real property, just like any other material possession, may not be brought to the afterlife. You need to transfer property sooner or later. Usually, however, the transfer of property prior to death is a taboo subject so many end up dealing with property transfer problems only after a person has died. It is always good to be prepared since we will all surely die – there is simply no escaping it, so might as well prepare for the inevitable.

donations can be used for estate planning but are subject to donor's tax
Donation of properties are subject to donor’s tax

Why donate your properties prior to death?

Donation may be considered as an estate planning tool because you are able to transfer your properties prior to death little by little every year and therefore you can take advantage of the graduated donor’s tax rates. If you have a lot of properties at the time of death, the estate tax* would be higher because the total amount of the properties will probably fall under a higher tax range

*If you want to learn more about estate tax (the tax that needs to be paid after death) read this: Death, Real Estate, and Estate Tax

On another note, it is usually the case that the family spends a lot for medical care prior to death, and because of this, the family’s cash reserves are depleted. If the family is not liquid and they need to pay the estate tax within six months from the time of death, many times the family is forced to sell their properties below market value because they are under time pressure. It is during these pressure points that many investors are able to buy good properties at a good price. I don’t want to view it as taking advantage of the misfortune of others – rather, I want to think of it as the investors helping the family solve their cash problem. If no one bought the property, the family would be in a worse situation.

Another problem that may arise upon death is that the children or heirs will be fighting each other for their “rightful” share of the deceased’s property. I don’t think any parent would want their loved ones to be fighting over money or property. If the properties are already distributed as agreed upon by all parties prior to death, then this problem may be alleviated.

Lastly, I believe that a person who already thought in advance of the transfer of properties prior to death, and actually had no more significant properties to transfer upon death, would be at peace upon death because he/she did not leave problems to his/her family. Dealing with grief is hard enough, it would be difficult to deal with the nitty-gritty taxes and what-not during a most stressful time.

Of course, there are downsides to donation too – Who shall control the properties? Who gets the fruits/rental income? etc… etc… These may be answered by trusts and other legal documents. But for now, let’s deal with straightforward donation.

What is Donor’s Tax?

Donor’s tax is imposed on tax on the transfer by any person, resident or non-resident, of a property by gift. For an overview on donor’s tax, please check the BIR website. The legal basis for donor’s tax may be found in Sec. 98 to Sec. 104 of the National Internal Revenue Code (NIRC) (aka the Tax Code). Check also the Donor’s and Estate Tax Regulations (BIR Revenue Regulations No. 2-2003) and Revenue Memorandum Order (RMO) No. 1-98.


What is the tax base?

The donor’s tax base shall be the total value of the net gifts during the taxable year. The value of the net gifts shall be based on the fair market value (FMV) of the gifts at the time of donation.

In case of real property, the taxable base is the fair market value as determined by the Commissioner of Internal Revenue (Zonal Value) or fair market value as shown in the latest schedule of values fixed by the provincial and city assessor (MV per Tax Declaration), whichever is higher. (Sec. 88 and 102, NIRC as amended). If there is no zonal value, the taxable base is the fair market value that appears in the tax declaration at the time of the gift.

The term “net gift”, for purposes of donor’s tax, pertains to the net economic benefit which the done gets from the transfer. Thus, if a property encumbered with a mortgage is transferred as a gift, but the  donee is required to pay the mortgage, then the net gift is computed by deducting the amount of mortgage assumed by the donee from the fair market value of the property given as a gift.

If you donate on different dates within a year, a donor’s tax return shall be filed for each date of donation, and the donor’s tax base shall be based on the accumulated donations for the current calendar year (January 1 to December 31). Thus, the more gifts you make within a calendar year, the higher the probability that the donor’s tax will fall on a higher tax bracket. Note though, that donor’s tax previously paid on previous donations shall be deducted from the donor’s tax payable. The good news here is that you will get a fresh start for each year, and effectively, you can donate P100,000 in cash or in kind at zero donor’s tax.

You may even donate cash which the donee can use to purchase property, so the property can be in the name of the donee. For example, a parent can donate cash for installment payments of property so that the property may be declared in their child’s name, since the child cannot purchase directly without a source of income.

Please note that in case of donation to relatives (not strangers), only one return shall be filed for several gifts/donations by the donor (the one giving the donation) to the different donees (those receiving the donation) on the same date. If the gift/donation involves conjugal or community property, each spouse shall file a separate return for their respective shares in the said property.

Deemed Gift

If you purchased a property below its fair market value (FMV), the difference between the FMV and the selling price shall be deemed a gift of the seller, subject to donor’s tax. This is also called a transfer for less than adequate consideration.


Exemptions from Donor’s Tax

  1. Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos (P10,000);
  2. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government; and
  3. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization or research institution or organization, provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes.

Based on the BIR website, the following are likewise exempt from donor’s tax:

  1. Encumbrances on the property donated if assumed by the donee in the deed of donation
  2. Donations made to the following entities as exempted under special laws:
  • Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines
  • Development Academy of the Philippines
  • Integrated Bar of the Philippines
  • International Rice Research Institute
  • National Social Action Council
  • Ramon Magsaysay Foundation
  • Philippine Inventor’s Commission
  • Philippine American Cultural Foundation
  • Task Force on Human Settlement on the donation of equipment, materials and services

What are the Donor’s Tax rates?

The donor’s tax rate will be based on the law prevailing at the time of donation.

For donations made on January 1, 1998 up to the present, if the donee is a stranger, the donor’s tax rate is thirty percent (30%).

A stranger is a person who is not a brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant, or a relative by consanguinity in the collateral line within the fourth degree of relationship. This just means you are related by blood, and you count the degree by going up first to the person who “connects” you then go down.

For example, your first cousin is within the fourth degree. You go “up” to your dad (1 degree), then “up” to your lolo (1 degree), then go “down” to your uncle who is your dad’s brother (1 degree), then “down” to your first cousin (1 degree), so 4 degrees in all.

Note that a child who is legally adopted is not considered a stranger. Donations between corporations or from an individual to a corporation shall be considered as donations to a stranger.

If the donee is not a stranger, the donor’s tax rate, based on the net gifts, are as follows:

Over

But not over

The tax shall be

Plus

Of the excess over

0

100,000

Exempt

100,000

200,000

0

2%

100,000

200,000

500,000

2,000

4%

200,000

500,000

1,000,000

14,000

6%

500,000

1,000,000

3,000,000

44,000

8%

1,000,000

3,000,000

5,000,000

204,000

10%

3,000,000

5,000,000

10,000,000

404,000

12%

5,000,000

10,000,000

1,004,000

15%

10,000,000

 


Who should pay

The donor or the transferor for less than adequate consideration

When to pay

Within thirty (30) days after the date the gift is made. If more than one gift or donation is made within one year, a separate return should be filed for each gift/donation within thirty (30) days after the date the gift is made.


BIR Form to be used

BIR Form No. 1800 (Donor’s Tax Return)

Please note that under RR No. 6-2014, the e-BIR forms should be used.

Where to file and pay/ Filing procedure

Prepare three copies of the donor’s tax return (two copies shall be for the BIR and one copy shall be for the taxpayer) and file them with any Authorized Agent Bank (AAB) of the Revenue District Office (RDO) having jurisdiction over the place of the domicile of the donor (that is, where the donor lives) at the time of the transfer.

In places where there are no AAB, the return will be filed directly with the Revenue Collection Officer or duly Authorized City or Municipal Treasurer where the donor was domiciled at the time of the transfer. If the donor has no legal residence in the Philippines, file the return with Revenue District No. 39 – South Quezon City.

In the case of gifts made by a non-resident alien (that is, not a Filipino citizen), the return may be filed with Revenue District No. 39 – South Quezon City, or with the Philippine Embassy or Consulate in the country where donor is domiciled at the time of the transfer.


Penalties for late payment

Same as other taxes, 25% surcharge plus 20% interest per year (under Secs. 248 and 249 of the Tax Code, respectively). If there is fraud, the surcharge shall be 50%. You may also pay compromise penalties in lieu of imprisonment as discussed in Revenue Memorandum Order (RMO) No. 7-2015 (the schedule of compromise penalties is in Annex A).

Documentary requirements

Based on the BIR website, the following requirements must be submitted before the Tax Clearance Certificate/Certificate Authorizing Registration (that is, the document required for the title to be transferred) can be released:

1.Deed of Donation
2.Sworn Statement of the relationship of the donor to the donee
3.Proof of tax credit, if applicable
4.Certified true copy(ies) of the Original/Transfer/Condominium Certificate of Title (front and back ) of lot and/or improvement donated, if applicable
5.Certified true copy(ies) of the latest Tax Declaration (front and back pages) of lot and/or improvement, if applicable
6.“Certificate of No Improvement” issued by the Assessor’s office where the properties have no declared improvement, if applicable
7.Proof of valuation of shares of stocks at the time of donation, if applicable
For listed stocks – newspaper clippings or certification issued by the Stock Exchange as to the par value per share
For unlisted stocks – latest audited Financial Statements of the issuing corporation with computation of the book value per share
8.Proof of valuation of other types of personal properties, if applicable
9.Proof of claimed deductions, if applicable
10.Copy of Tax Debit Memo used as payment, if applicable

Additional requirements may be requested for presentation during audit of the tax case depending upon existing audit procedures.

Sample Computation

Please read BIR Revenue Regulations No. 2-2003 for a sample computation.

Documentation of the donation

Consult a lawyer with regard to the format of the Deed of Donation, and make sure that the donation is properly accepted and notarized during the lifetime of the donor.

Sample Deeds of Donation can be found here and here.

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 Donor’s Tax, which can be found in Annex A-5 of Revenue Memorandum Order (RMO) No. 15-03 (see page 6).

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-2 (page 15) also of RMO No. 15-03. Please also check the sample computations in BIR RR No. 2-2003 and BIR Form No. 1800.

~~~

To our success and financial freedom!

Cherry Vi M. Saldua-Castillo

Real Estate Broker and Appraiser, Lawyer, and CPA
PRC Real Estate Broker License No. 3187

PRC Real Estate Appraiser License No. 6918

PRC CPA License No. 0102054
Roll of Attorneys No. 55239

Text by Jay Castillo and Cherry Castillo. Copyright © 2013 and onwards All rights reserved.

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