Intended Learning Outcomes (ILOs)-4

At the end of the lesson, the students are expected to:

1. Explain the basic concept of succession and its elements.
2. Differentiate between a testamentary and intestate succession.
3. Distinguish the different forms of will.
4. Determine the order of intestate succession.
5. Define and explain the concept of estate tax.
6. Determine the composition of gross estate for decedent resident citizen, non-resident citizen, resident
alien and non-resident alien.
7. Determine the valuation of gross estate and the situs of property.
8. Identify the allowable deductions from gross estate.
9. Explain the treatment of property previously taxed under a vanishing deduction concept.
10. Determine the net taxable estate and the applicable tax rates.

Lesson1: Testamentary and Intestate Succession

Succession is defined under the New Civil Code (NCC) as a mode of acquisition by virtue of which, the
property, rights and obligations to the extent of the value of the inheritance, of a person are transmitted either
by his will or by operations of law. Succession then may be classified as:

1.   Testamentary or testate. The decedent executed a last will as prescribed by law, designating a heir.
2.   Legal or intestate.  Since the decedent did not execute a will or the will executed by him is void.
3.   Mixed. A type of succession which is effected partly by "will" and partly by operation of law.

Lesson2: Kinds of heirs

Heir is a person who inherits or has a right of inheritance in the property of another following the latter's death.
There are kinds of heirs as follows:

1.    Compulsory heirs are those who inherit with or without a will, broken into two:

 Primary compulsory heirs. They are the legitimate  children and descendants, illegitimate

children and widow or widower
 Secondary compulsory heirs . They are those who succeed only in the absence of the
primary compulsory heirs
 Concurring compulsory heirs. They are those who succeed together with the primary or
secondary compulsory heirs. E.g. illegitimate children and descendants and surviving spouse.

2.   Voluntary heirs are those instituted by the testator in his will to succeed to the inheritance of the (free)
portion thereof of which the testator can freely dispose.

3.   Legal or intestate heirs are those who succeed to the estate of the decedents by operation of law.

Lesson3: Classification of taxpayers for estate tax

Section 85 of the Tax Code: states that the value of the gross estate of the decedent must be determined by
including the value at the time of death of all property, real or personal, tangible or intangible wherever
situated. The composition of the estate tax may be summarized on the table below:

DECEDENT GROSS ESTATE

  Citizen  Property (real or personal) wherever situated
 Resident alien  Intangible personal property wherever situated.

 Real property situated in the Philippines

 Tangible  personal property situated in the Philippines
 Non-resident alien
 Intangible personal property with situs in the Philippines,
unless excluded on the basis of reciprocity.

Lesson4: Order of legal and intestate succession

As to the free portion of the estate, it shall be distributed to the following intestate heirs in the order of priority:

1.   Legitimate children
2.   Legitimate parents
3.   Illegitimate children
4.   Spouse
5.   Brothers or sisters
6.   Relatives by consanguinity up to 5th civil degree
7.   The State

Lesson5: Composition and valuation of gross estate

The following rules shall apply in determining the correct valuation of then estate:

GROSS ESTATE VALUATION

 the fair market value (FMV) of property at the time
  1.   In general of death.

 the higher value between the FMV determined by

the Commissioner and the FMV shown by the
   2.   Real property
provincial and city assessors.

 FMV at the time of death

   3.   Personal property

 unlisted common shares (book value per share of

issuing corporation)
 unlisted preference share (par value per share)
   4.   Shares of stocks  listed shares  (the arithmetic mean between the
highest and lowest quotation at the date nearest the
date of death)

 the bid price nearest the date of death published in

   5.   Units of participation in any association,
any newspaper in general circulation.
recreation and amusement club.

 in accordance with the latest Basic Standard

   6.   Right to usufruct, habitation and
Mortality Table.
annuity.
Lesson6: Inclusions, Exclusion and exemption from gross estate

Gross estate consists of all properties and interest in properties of the decedent at the time of his death as
well as properties transferred during lifetime (only in form) but in substance was only transferred at the time of
death. The components of gross estate are properties existing at the time of death such as:

INCLUSIONS:

 real properties and other tangible personal properties

 decedents interest and intangibles
 properties transferred gratuitously during lifetime, but in substance, transferred upon death :
o transfer in contemplation of death
o transfer with retention or reservation of certain right
o revocable transfer
o property passing under General Power of Appointment
o transfer for insufficient consideration
o proceeds from life insurance

EXEMPTIONS and EXCLUSIONS from GROSS ESTATE:


o Under Section 85 and 86 of the National Internal Revenue Code (NIRC)
o Under Section 87 of the NIRC.
o Under special laws

Lesson7: Deductions from gross estate

To compute the net estate of a deceased, the Tax Code (RR 122-2018) stated certain items that can be
deducted from the value of the gross estate. These are classified as ordinary and special deductions as
summarized below.

CITIZEN and RESIDENT DECEDENTS NONRESIDENT ALIEN DECEDENTS

I.   Ordinary Deductions I.   Ordinary Deductions

  1.    Expenses, Losses, Indebtedness, Taxes (LIT)

  1. Proportionate deductions for LIT using the formula:

o Losses
o Indebtedness/claims against estate  Gross Estate Phils/Gross Estate World  
o Taxes ×LIT
o Claims against insolvent person

     2.  Transfer for public use      2.  Transfer for public use
     3.  Vanishing deductions      3.  Vanishing deductions
II.   Special Deductions II.   Special Deductions
 Standard deduction of P500,000
     1.  Standard deductions

     2.  Family Home  NA

  NA
     3.  RA 4917

III.   Share of Surviving Spouse III.   Share of the Surviving Spouse

Lesson8: Filing and payment of estate tax return

The following filing and payment of the estate tax are stated as follows:

Place of filing

 In case of a resident decedent:

o authorized agent bank (AABs)
o Revenue District Officer (RDOs)
o Collection Office
o duly authorized Treasurer of the city or municipality where the decedent was domiciled at the
time of death
 In case of a non-resident decedent:
o RDO where the executor or administrator is registered
o RDO having jurisdiction over the executor or administrator's legal residence, if either or both are
not registered.
o Office of the BIR Commissioner, RDO 39, if the estate does not have an executor or
administrator in the Philippines.

Payment of Estate Tax

 Estate tax shall be paid at the time the return is filed (Pay as you file system).
 When the Commissioner finds that the payment of the estate tax would impose undue hardship upon
the state or any heirs, he may extend the time of payment to either 2 or 5 years.

Prepared by Mr. Angelito C. Villegas,

CPA,MBA