CO-OWNERSHIP,

ESTATES AND
TRUSTS
CHAPTER 4
CO-OWNERSHIP
2
There is a co-ownership when two or more heirs or
beneficiaries inherit an undivided property from a decedent, or
when a donor makes a gift of an undivided property in favor of
two or more donees.
 3

Inheritance is subject to “Estate Tax”

while Donation is subject to “Donors
Tax”.
CO-OWNERSHIP
4
CO-OWNERS are taxed individually on their distributive share in
the income of the co-ownership. Meaning, co-ownership itself
is not taxable for the reason that the activities of co-ownership
are generally limited to the preservation of the common
property and the collection of the income therefrom.

Should the co-owners INVEST the income in the business for

profit, they would be constituting themselves into a
partnership and such shall be taxable as a corporation
CO-OWNERSHIP
5
When inherited property remained UNDIVIDED for more than
10 years and no attempt was ever made to divide the same
among the co-heirs, nor was the property under administration
proceedings nor held in trust, the property should be
considered as owned by an unregistered partnership,
consequently, taxable as corporation.
SAMPLE PROBLEM:
6
1. Ana, Lorna and Fe bought a parcel of land for the purpose of
improving the same before leasing it out to interested tenants.

Q. Is a co-ownership created?
SAMPLE PROBLEM:
7
2. On January 1, 2017, Noy a resident citizen taxpayer died leaving an undivided
parcel of land to his heirs Allan, Mar and Pacquiao valued at 60,000,000. The
property is an income producing property primarily through rentals. In 2018, the
property earned gross rentals amounting to 15,000,000 while expenditures
necessary to carry out the operations was 3,000,000.

On the other hand, the heirs, who are all engaged in businesses in their own
individual capacity, provided the ff. data for 2018 taxable year.

Allan Mar Pacquiao

Gross Business Income 6,000,000 5,000,000 8,000,000
Business Expenses 3,000,000 2,500,000 6,000,000
Income Subject to final taxes (net) 200,000 320,000 500,000
SAMPLE PROBLEM:
8
Questions in Problem #2
a. Is a co-ownership created?
b. Assuming Noy was able to secure a partition and three separate
land titles were issued by the government before his death,
naming his heirs as the rightful owners in his last will testament,
is a co-ownership created?
c. What is the applicable tax for the gratuitous transfer
(inheritance) of the property from Noy to his heirs?
d. How much is the taxable income of the co-ownership?
e. How much is the taxable income of Allan in 2018?
f. How much is the income tax payable of Allan in 2018?
INCOME TAX OF AN ESTATE
9
INCOME TAX OF AN ESTATE refers to the tax on income
received by the estate during the period of administration or
settlement.

ESTATE is a mass of all the property, rights, and obligations of a

deceased person which are not extinguished by his death,
including those which have accrued thereto since the opening
of succession.
TRANSFER TAX
10
Is a tax on gratuitous transfer of property either through
gift/donation (subject to donors tax) or through inheritance
(subject to estate tax).

A transfer tax is not an income tax because there is no taxable

income realized from the passage of property to the heirs upon
the death of the decedent.
ADMINISTRATION OR SETTLEMENT PERIOD
11
Refers to the period when title to the properties left by a decedent
is not yet finally transferred to the heirs/beneficiaries.

At this period, the executor named by the deceased in his “last will
or testament”, if any, or the administrator appointed by the court,
as the case may be, is temporarily in-charge of the administration
of the estate until such time that the estate is finally distributed to
the rightful heirs.

WHILE UNDER ADMINISTRATION, the estate may earn income,

thus, the corresponding income tax should be paid.
SAMPLE PROBLEM
12
A decedent died leaving the following to his lawful heirs:
Cash 5,000,000
House and lot 15,000,000
Vacant parcel of land 5,000,000
Commercial building 30,000,000
Vehicles 5,000,000
Total (@ FMV upon death) 60,000,000
JUDICIALLY OR EXTRAJUDICIALLY
13
The estate of a decedent may be settled judicially or
extrajudicially.

JUDICIAL SETTLEMENT pertains to settlement of an estate in a

court proceeding while in EXTRAJUDICIAL SETTLMENT the heirs
or beneficiaries settle for themselves the distribution of the
estate or their inheritance
CLASSIFICATION OF ESTATES UNDER SETTLEMENT OR
ADMINISTRATION
14
Estate under “judicial” Fiduciary / Trustee
Administration (administration or
executor) files the ITR
and pays the tax due
thereon

Estates not under “judicial” Heirs and beneficiaries

Administration (i.e. extrajudicial files the ITR of the
Settlement) estate and pay the tax
due thereon
APPLICABLE TAX
15
The taxable income of the estate is computed in the same manner
as an individual taxpayer. Consequently, the tax due is therefore
computed using the graduated income tax rates for individuals.
Likewise, an estate is required to adopt the calendar year as its
accounting period. Where prior to the settlement of the estate, the
executor or administrator sells property of a decedent’s estate for
more than the appraised value place upon it at the decedent’s
death, the excess is income taxable to the estate. Where the heir
sells the property after the settlement, the heir is taxable
individually on any profit derived.
SAMPLE PROBLEM
16
On November 1, 2017, Juan Dela Cruz died leaving various property worth
30,000,000. The properties are income producing properties deriving rental
income. The net income form rentals for 2017 amounted to 2,500,000. A
last will and testament was executed by the decedent prior to his death
assigning GJ as the executor. In 2018, (while under administration), the
estate earned 4,750,000 (net of 5% creditable withholding tax on rent) and
incurred operating expenses of 2,000,000.

Q.1. How much is the taxable income of the Estate of Juan Dela Cruz in
2017?
Q.2. How much is income tax payable of the Estate of Juan Dela Cruz in
2018?
DEDUCTION ROM ESTATE’S GROSS INCOME
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Deductions from the estate’s gross income are the same items
for deductions (business expense) allowed for individual
taxpayers. However, in addition to the usual allowable business
expense, the amount of income of the estate for the taxable
year which is properly paid or credited during such year to any
legatee, heir or beneficiary should be deducted (also known as
special deduction) in the determination of the estate’s taxable
income. However, such amount of income distributed shall be
included in the determination od the taxable income of the
legatee/heir/beneficiary.
PROFORMA COMPUTATION OF THE TAXABLE INCOME OF
ESTATE
18
Taxable Income of the Estate Taxable Income of the Beneficiary
Gross Income Compensation Income (if any)
Less: Deductions Net income of the beneficiary from business
Business Expenses and or practice of profession
Special Deduction: Add:
Distribution of estates income to beneficiaries Amount received from the income of the estate
Taxable Income of the Estate Taxable Income
Tax Due (Graduated Tax Rate) Tax due (Graduated Tax Rate)
SAMPLE PROBLEM
On November , 2017, Juan Dela Cruz died leaving various property worth 30,000,000 to his
19
heirs: Ana, Lorna and Fe. The properties are income producing properties deriving rental
income. The net income form rentals for 2017 amounted to 2,500,000. A last and will
testament was executed by the decedent prior to his death assigning GJ as the executor. IN
2018 (while under administration), the estate earned 4,750,000 (net of 5% CWT on rent)
and incurred expenses of 2,000,000.

During 2018, Fe (one of the lawful heirs) received 200,000 from the income of the estate.
Pedro’s other income and expenses were as follows:
Compensation Income 800,000
Business Income 1,500,000
Business Expenses 600,000

Q.1. Assume that the estate is still under administration, how much is the taxable income of
the estate in 2018?

Q.2. How much is the taxable income of Pedro?

TERMINATION OF JUDICIAL / EXTRAJUDICIAL
SETTLEMENT
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After termination of judicial/extrajudicial settlement of the estate
where the heirs still do not divide the property but instead
contribute to the estate money, property or industry with intention
to divide the profits between/among themselves, an unregistered
partnership is created ad the estate becomes liable for the payment
of corporate income tax.

On the other hand, if the heirs, without contributing money

property or industry to improve the estate, simply divide the fruits
thereof between/among themselves, a co-ownership is created,
and individual income tax is imposed on the income received by
each of the heirs, payable in their separate and individual capacity
TAXATION OF TRUSTS
21
TRUST is a right on property, real or personal, held by one party
for the benefit of another. It may be arranged inter-vivos or
created by will under which title to a property is padded to
another for conservation or investment with the income
therefrom and ultimately the corpus (principal) to be
distributed in accordance with the directions of the creator as
expressed in the governing instrument.
TAXATION OF TRUSTS
22
Trust Agreement allows individuals to create sustained benefits
for an individual or entity. For instance, a parent may place a
sum of money, property or other types of financial assets such
as equity and debt instruments in the hands of a trustee for the
benefit of an incapacitated or minor child.
PARTIES TO A TRUST
23
TRUSTOR
Person who establishes a trust

TRUSTEE
One in whom confidence is reposed as regards property for the benefit of
another person

BENEFICIARY
Person for whose benefit trust is created

FIDUCIARY
Any person or corporation that holds in trust an estate of another person
or persons. A fiduciary may exist only if a legal trust is created
TAXABILITY OF INCOME OF TRUST
24
The income of a trust may be taxable to the trustee, beneficiary
or grantor, as the case may be.
TAXABLE TO THE “TRUSTEE” IF:
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The income is to be accumulated or held for future
distributions, whether ordinary income or gain from sale of
assets included in the corpus of the trust. The imposition of the
tax is not affected by the fact that the ultimate beneficiary may
be a person exempt from tax. Likewise, the income of a trust
administered in a foreign country is taxable to the trustee
TAXABLE TO THE “GRANTOR / TRUSTOR” IF:
26
❖ Under the term of the trust, the title to any part of the
corpus or principal of the trust may be revested to the
grantor (Revocable Trust). The income of the corpus or
principal that may be revested to grantor shall be taxable to
the grantor.
❖ The income of the trust may be held or distributed for the
benefit of the grantor
❖ Under the term of the trust, the income of the trust shall be
applied for the benefit of the grantor.
TAXABLE TO THE BENEFICIARIES:
The income of the trust is taxable to the beneficiaries if the income 27

is to be distributed to the beneficiaries. In such a case, the

beneficiaries include in their return their distributive share in the
net income of the trust. The distribution of the year’s income to an
heir or beneficiary is a special item of deduction for the trust. At the
same time, the income distributed (actual or constructive) shall be
treated as a special item of income to the heir/beneficiary

Note: Special deductions are not allowed in case a trust

administered in a foreign country
PROFORMA COMPUTATION OF THE TAXABLE INCOME OF
A TRUST AND A BENEFICIARY
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Taxable Income of the Trust Taxable Income of the Beneficiary
Gross Income Compensation Income (if any)
Less: Deductions Net income of the beneficiary from business
Business Expenses and or practice of profession
Special Deduction: Add:
Distribution of trust’s income to beneficiaries Amount received from the income of the trust
Taxable Income of the Trust Taxable Income of the beneficiary
Tax Due (Graduated Tax Rate) Tax due (Graduated Tax Rate)
CLASSIFICATION OF TRUST
1. Ordinary Trust – the income and corpus of the trust do not revert to the 29
grantor. The trust income is accumulated and held for distribution to the
beneficiaries. Ordinary trust is any of the ff. trusts:
➢ A trust where the income is accumulated or held for future distribution
under the terms of a will trust
➢ A trust where the income is to be distributed currently by the fiduciary to
the beneficiaries
➢ A trust where the income is accumulated for the benefit of unborn or
unascertained person or persons with contingent interest
➢ A trust where the income collected by a guardian of a infant is held or
distributed as the court may direct; and
➢ A trust where the income, is at the discretion of fiduciary, may be either
distributed to the beneficiaries or accumulated
CLASSIFICATION OF TRUST
2. Revocable Trust – a trust where at any time, the power to 30

revest in the grantor, title to any part of the corpus of the

trust is vested:
➢ In the grantor either alone or in conjunction with nay
person not having a substantial adverse interest in the
disposition of such part of the corpus or the income
therefrom; or
➢ In any person not having a substantial adverse interest in
the disposition of such part of the corpus or the income
therefrom
CLASSIFICATION OF TRUST
3. Employees’ Trust – income shall not apply to employee’s 31

trust which form part of pension, stock bonus, or profit-

sharing plan of an employer for the benefit of some or all of
his employees. The income of an employees trust is likewise
exempt from the payment of final taxes as well as income
derived from the sale of real property whose funds are
sourced from the employees trust fund.
CLASSIFICATION OF TRUST
Requisites or Conditions for Exemption of Employee’s Trust 32

➢ The employee’s trust must form part of a pension, stock bonus, or

profit-sharing plan of an employer for the benefit of some or all of his
employees
➢ Contributions are made to the trust by such employer, or employees, or
both
➢ The contributions are made for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the
trust in accordance with such plan
➢ Under the trust instrument, it is impossible at any time prior to the
satisfaction of all liabilities with respect to employees under the trust,
for any part of the corpus or income to be with (within the taxable year
or thereafter) used for, or diverted to, purposes other than for the
exclusive benefit of his employees
CONSOLIDATED INCOME TAX RETURNS (TWO OR MORE
TRUSTS)
33
Where two or more trusts is created by the same trustor or grantor and the
beneficiary is the same person, the following rules shall apply:

1. The taxable income of all the trust shall be consolidated and the tax
computed on such consolidated income. The tax computed on the
consolidated income shall be apportioned to the different trusts, such
that each trust have a share in the income tax on consolidated income.

The format of computation follows (Tax apportionment)

Tax Apportioned = taxable Income of the trust x consolidated

to a trust taxable income of all trust income tax
CONSOLIDATED INCOME TAX RETURNS (TWO OR MORE
TRUSTS)
34
2. Such proportion of said tax shall be assessed and collected
from each trustee which the taxable income of the trust
administered by him bears to the consolidated income of
the several trusts. Each trust shall pay an income tax still
due or payable computed as follows:

Income Tax Apportioned to a Trust P xxxxx

Less: Income Tax already paid xxxxx
Income Tax Payable P xxxxx
SAMPLE PROBLEM
35
In 2018, George created three (3) trusts for his minor daughter.
The ff. data were furnished by the trusts during 2018.

Trust Gross Income Expenses Net Income Income Tax

Paid
1 5,000,000 2,500,000 2,500,000 500,000
2 10,000,000 5,000,000 5,000,000 1,200,000
3 15,000,000 7,500,000 7,500,000 2,000,000

1. Compute the income tax payable of Trust 1,2,3

FILING OF INCOME TAX RETURNS
36
The ff. persons acting in any fiduciary capacity shall file the
income tax return for an estate or trust
➢ Guardians
➢ Trustees
➢ Executors / Administrators
➢ Receivers
➢ Conservators
➢ All other persons or corporations acting in any fiduciary
capacity
FILING OF INCOME TAX RETURNS
37
In case of two or more joint fiduciaries, return filed by on of
them shall be a sufficient compliance with the requirements of
the tax Code. The return may be filed in:
➢ Authorized agent banks
➢ Revenue District Officer
➢ Collection Agent
➢ Duly Authorized city or municipal Treasurer in which the
taxpayer has his legal residence or principal place of
business