“Death and Taxes” is an idiomatic expression that means that something is certain to happen or that it is unavoidable. It is a reference to Benjamin Franklin’s proverbial phrase “In this world nothing can be said to be certain, except death and taxes.” Unfortunately, we live in a world where we are still obligated to pay taxes in the event of our death, but because we won’t be here physically, our family or friends who will benefit from the properties we will leave behind shall embrace this obligation for us to take our rest peacefully.
There are some advantages in knowing your estate taxes. Death is unavoidable, and it may linger unexpectedly even among our loved ones in our household, so it is critical to be prepared for what events may occur even after death. Knowing about estate taxes will help you and your family prepare for the financial obligations that will arise when either they or you receive assets following your or your family’s death. After all, nothing lasts forever. It will assist you in developing an effective transfer strategy, which will result in lower estate taxes.
Read Also: Few Things to Know About Transfer Tax
What are Estate Taxes?
Estate tax, as defined by the Bureau of Internal Revenue (BIR), is a tax on the deceased person’s right to transfer his or her estate to his or her lawful heirs and beneficiaries at the time of death, as well as on certain transfers made by law as equivalent to testamentary disposition. It is not a property tax. It is a tax levied on the right to transfer property upon the death of the owner. The Estate Tax is based on the laws in effect at the time of death, regardless of the beneficiary’s delay in actual possession or enjoyment of the estate.
Elements of Estate Taxation:
1. Decedent – is the general term for the person whose property is being transmitted by descent, whether or not he left a will. Additionally, He shall be known as a testator if he creates a will (Art. 775 NCC).
The executor is the person named in the decedent’s will to carry out the provisions of the will. He also has a fiduciary duty to look after the decedent’s estate before it is distributed to the heirs.
If the executor refuses to accept the appointment, fails to qualify under the law, or the last will and testament does not appoint one, the court appoints an administrator to perform the same duties.
2. Inheritance (Estate) – All of a person’s property, rights, and obligations that are not extinguished by death, as well as all that has accrued to them since the opening of succession. Personal rights are not transferable because they are extinguished by death (Art. 776 NCC).
3. Successors – An heir or successor is a person who is named to the succession by a will or by operation of law (Art. 782 NCC). Devisees and legatees are people who receive gifts of real and personal property as a result of a will.
How to Compute for Estate Taxes?
To compute Estate Taxes it is important to know the decedent’s gross estate. This includes all of his or her properties, whether real or personal, tangible or intangible, and wherever they are located. In addition, this includes transfers in contemplation of death, transfers for insufficient consideration, revocable transfers, properties passing under a general power of appointment, and proceeds of life insurance.
In addition, the BIR defines intangible personal property as:
- In the Philippines, franchises are used.
- Philippine stocks, bonds, or obligations
- Shares, obligations, or bonds issued by a foreign corporation with at least 85 percent of its operations in the Philippines.
- Shares, obligations, or bonds issued by a foreign corporation that has established a presence in the Philippines.
- Shares or rights in any Philippine-based partnership, business, or industry
Following that, did you know that the Philippine Tax Code allows for certain allowable deductions from gross estate? Since they are chosen by legislators, these allowable deductions are considered non-taxable. Deductions are allowed depending on whether the decedent was a Filipino citizen or resident or a non-resident alien. For the purposes of this article, according to Consolidated Revenue Regulations on Estate Tax and Donor’s Tax Incorporating the Amendments Introduced by TRAIN Law (RR 12-2018) the following are the allowable deductions for a Filipino citizen:
- Standard Deduction – A deduction of five million pesos (P5,000,000) will be allowed without the need for substantiation.
- Claims Against the Estate – Claims against the estate or indebtedness in respect of property may arise out of: Contract, Tort, and Operation of Law
- Claims of the deceased against insolvent persons – Claims of the deceased against insolvent people, as defined by R.A. 10142, where the value of the decedent’s interest is included in the gross estate value.
- Unpaid Mortgages, Taxes and Casualty losses
- Property Previously Taxed – These deductions shall be permitted only where a donor’s tax or estate tax has been finally determined and paid by or on behalf of such donor or the estate of such prior decedent.
- Transfer for Public Use – The sum of all bequests, legacies, devises, or transfers made to or for the benefit of the Government of the Philippines for public purposes.
- The Family Home – The Family Home is the dwelling house and lot where the husband, wife, or head of the family, and family members live. Unmarried Head of a Family is a man or woman who is unmarried or legally separated and lives with parents, siblings, and/or children who rely on him or her for primary support.
- Amount received by heirs under Republic Act No. 4917 – Any amount received by the heirs from the decedent’s employer as a result of the decedent-death employee’s is deductible. As long as the amount of the Separation Benefit is included in the Decedent’s gross estate.
- Net Share of Surviving Spouse in the Conjugal Partnership or Community – The Share of the surviving spouse must be removed to ensure that only the decedent’s interest in the estate is taxed.
Finally, after deducting all allowable deductions from the gross estate, we arrive at the net estate, which is multiplied by the 6-percentage-point tax rate to arrive at the taxable amount to pay the estate tax; see below for an illustration of how to compute estate taxes. Prior to the enactment of the Tax Reform for Acceleration and Inclusion (TRAIN) law on January 1, 2018, the Tax Code of 1997, in relation to Revenue Regulations (RR) 2-2003, imposes a 5-to-20-percentage-point estate tax based on the net estate. The estate tax rate is set at 6% under the TRAIN law. However, the new rate will only apply to deaths that occur on or after January 1, 2018.
Gross Estate – Allowable Deductions = Net Estate
Net Estate x 6% (Tax rate for Estate Tax) = Taxable Amount
How to Pay for Estate Taxes?
The estate tax return must be filed under oath after the estate tax has been calculated. The executor, administrator, or heirs are in charge of filing the estate tax return. Estate tax returns with a gross value greater than five million pesos (P5,000,000.00) must be accompanied by a statement signed and certified by a Certified Public Accountant. It is also important to note that the due date on filing and payment of the return/tax shall depend on the applicable law at the time of the decedent’s death. For this article current laws applicable for Estate Taxes shall be mentioned.
The Estate Tax Return (BIR Form 1801) must be filed within one (1) year of the death of the decedent. The form must be filed with any Authorized Agent Bank (AAB) of the Revenue District Office (RDO) with jurisdiction over the decedent’s place of domicile at the time of death. If the decedent had no legal residence in the Philippines, the return must be filed with the Commissioner’s Office (RDO No. 39, South Quezon City). Payments may also be made thru the e-payment channels of AABs thru either their online facility, credit/debit/prepaid cards, and mobile payments.
Is it Legal to Pay Estate Taxes in Installments?
Yes. According to BIR’s official website, If the estate’s available cash is insufficient to pay the total estate tax due, payment by installment shall be permitted within two (2) years of the statutory payment date, without civil penalty or interest, if approved by the concerned BIR Official. After two years of nonpayment, the entire tax due becomes due, demandable, and subject to applicable penalties and interest.
What are the Mandatory Requirements?
The list below are mandatory requirements to be prepared for the executor to apply and file for Estate Tax of the decedent.
- Estate Tax Return Form (BIR Form 1801)
- Certified true copy of Death Certificate
- Taxpayer Identification Number (TIN) of the deceased and their heir
- Affidavit of Self Adjudication, Deed of Extra-Judicial Settlement of Estate, Court Order, or Sworn Declaration of All Properties of the Estate
- Certified copy of the schedule of partition and the order of the court approving the same within thirty (30) days after the promulgation of such order, in case of judicial settlement
- Proof of Claimed Tax Credit (if applicable)
- Certified Public Accountant (CPA) Statement on the itemized assets of the deceased
- Certification of the Barangay Captain for the claimed Family Home
- Duly Notarized Promissory Note for “Claims Against the Estate” arising from Contract of Loan
- Accounting of the proceeds of loan contracted within three (3) years prior to death of the deceased
- Proof of the claimed Property Previously Taxed
- Proof of the claimed Transfer for Public Use
- Copy of Tax Debit Memo used as payment (if applicable)
What is Estate Tax Amnesty?
Republic Act (RA) 11569, signed into law on June 30, 2021, extended the period for availing of estate tax amnesty for two years, from June 15, 2021 per RA 11213 or the Tax Amnesty Act of 2019, to June 14, 2023.
Due to government-imposed lockdowns and safety restrictions brought on by the Covid-19 pandemic, it became difficult for people to pay their tax obligations. Hence, the estate tax amnesty program offers relief to those who have unresolved tax liabilities for decedents who died on or before December 31, 2017. Those who avail themselves within the prescribed period will pay either the reduced estate tax amnesty rate of 6%, down from 20%, of the decedent’s total net taxable estate, or the minimum amnesty tax of P 5,000, if there is a negative net estate.
What are the Penalties for Failure to Pay Estate Taxes?
The failure to file and pay tax returns are two of the most common violations committed by the taxpaying public. Whether the noncompliance is a simple omission or a deliberate attempt to commit fraud, our tax code penalizes such violations. Failure to file any return would result in a penalty of 25% of the tax due, payable in addition to the principal amount due, according to Section 248 of the Philippine tax code. If, on top of the original amount due, the taxpayer is found guilty of willful neglect to file returns or willfully filing a false or fraudulent return, he or she must pay a penalty equal to 50 percent of the amount of tax required to be remitted.
For willfully failing to file tax returns, Section 255 imposes a compromise penalty of not less than P10,000 and imprisonment for not less than one year but not more than ten years. In addition, 12 percent annual interest will be charged until the assessment is paid in full.
Disclaimer: The application of this article to any actual or specific tax or legal issue is highly recommended to be handled by a professional in this field of study. This article is intended for general public knowledge information only and should not be easily interpreted as a tax or legal take on any specific matter.