Effects of the Different Property Regimes in the

Computation of the Estate Tax Due

Someone asked: Atty. Terence, I just wanted to ask, what if there was a prenup agreement? How do you divide the
properties and compute the estate tax due? Will a prenup supersede the law of a community property with regard to
estate tax?

Answer: A prenuptial agreement, otherwise known legally as a marriage settlement, is a contract entered into by the
parties intending to get married, which must be executed by them prior to the wedding, otherwise, the same shall be
void. The primary purpose of a marriage settlement is to determine the property regime of the parties to the future
marriage other than that provided for by law by default.

Estate tax, also known as inheritance tax, is a tax on the right of a deceased person to transmit his estate to his lawful
heirs and beneficiaries. Contrary to popular belief, it is not a tax on property but on the right to transmit property at
death, and is measured by the value of the property.

Now that we know what estate tax is, we should then consider the different kinds of property regimes that a married
couple can enter into in order for us to properly compute the value of their respective gross estates and ultimately, their
net taxable estates.

For marriages celebrated after or on the effectivity date of the Family Code, which is on August 3, 1988, in the absence
of a valid marriage settlement, the default property regime of absolute community of property (ACP) shall govern. In a
regime of ACP, the community property shall consist of all the property owned by the spouses at the time of the
celebration of the marriage or acquired thereafter. However, the following are excluded therefrom: (1) Property
acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any,
unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property;
(2) Property for personal and exclusive use of either spouse; however, jewelry shall form part of the community
property; and (3) Property acquired before the marriage by either spouse who has legitimate descendants by a former
marriage, and the fruits as well as the income, if any, of such property.

On the other hand, for marriages celebrated before the effectivity of the Family Code, the default property regime of
conjugal partnership of gains (CPG) provided for under the Civil Code, the effectivity of which began on August 30,
1950, shall prevail. The same is true in case the future spouses agree in the marriage settlements that the regime of
conjugal partnership of gains shall govern their property relations during the marriage. In a regime of CPG, the husband
and wife place in a common fund the proceeds, products, fruits and income from their separate properties and those
acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage of the
partnership, the net gains or benefits obtained by either of both spouses shall be divided equally between them, unless
otherwise agreed in the marriage settlements. Hence, the following shall be the exclusive property of each spouse: (1)
That which is brought to the marriage as his or her own; (2) That which each acquires during the marriage by gratuitous
title; (3) That which is acquired by right of redemption, by barter or exchange with property belonging to only one of
the spouses; and (4) That which is purchased with exclusive money of the wife or of the husband.

Lastly, in a regime of complete separation of property (CSP), each spouse retains ownership of his or her own properties
including the fruits thereof. In short, whats yours is yours and whats mine is mine. Article 134 of the Family Code
provides that in the absence of an express declaration in the marriage settlements, the separation of property between
spouses during the marriage shall not take place except by judicial order. Such judicial separation of property may
either be voluntary or for sufficient cause.

So, after determining the share of each spouse from the mass of the community or conjugal property, we can now
compute for their respective individual gross estates. Section 85 of the National Internal Revenue Code provides that
the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all
property, real or personal, tangible or intangible, wherever situated; Provided however, that in the case of the non-
resident 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.

Having determined their respective individual gross estates, we can now proceed to computing their net taxable estates
taking into consideration the applicable exclusions and deductions provided for by law.