Plan your estate before it's too late

Nothing is certain except death and taxes. In the Philippines, the inevitable burden of taxes cannot be more emphasized by the fact that estate tax even ensues at the time of death.

Estate tax is an excise tax on the right of transmitting the property of a deceased person to his legal heirs and beneficiaries. Under the Philippine Revenue Regulations (RR) No. 02-03, otherwise known as the Consolidated Revenue Regulations on Estate Tax and Donor’s Tax, “succession takes place upon the death of the decedent and the right of the State to tax the privilege to transmit the estate vests instantly upon death”. Thus, while House Bill No. 5602, which seeks to abolish the imposition of estate tax by repealing Title III, Chapter I, Sections 84 to 97 of the Philippine Tax Code, is not passed into law, the estate tax is indeed an inevitable burden to our heirs.

We’ve heard so many stories about grieving asset-rich (but not necessarily cash-rich) families getting the shock of their lives when they learn about the amount of estate tax that has to be paid to transfer their deceased relative’s property. In some cases, families with limited funds end up borrowing cash or selling properties and businesses to be able to settle the estate tax, including penalties and interest that arise when the tax is not paid within the prescribed period.

As we remember our loved ones who have passed away, it may be wise to start thinking of our own estate. Is it necessary to have an estate tax plan? Is it more tax-efficient to establish trusts and holding companies? To help you answer this question, it is best to know first your potential estate tax liability.

The Philippine Tax Code imposes estate tax at progressive rates ranging from five to 20 percent based on the decedent’s net estate, which is gross estate less allowable deductions. A decedent’s gross estate is comprised of the value of all his property, real or personal, tangible or intangible, wherever situated, including, among others, transfers in contemplation of death, revocable transfers, and transfers for insufficient consideration.

The following items are deductible from the gross estate:

1. Expenses, losses, indebtedness, and taxes

Included under this item are the following expenses:

a. Funeral expenses

This category refers to actual funeral expenses up to the time of interment, or an amount equal to five percent of the gross estate, whichever is lower, but not exceeding PhP 200,000. Expenses incurred after the interment and any portion of the funeral expenses shouldered by relatives and friends of the deceased are not deductible.

b. Judicial expenses of the testamentary or intestate proceedings

Expenses deductible under this category are those incurred during the settlement of the estate but not beyond the last day prescribed by law, or the extension thereof, for the filing of the estate tax return. The filing of the estate tax return and payment of the corresponding tax must be made within 6 months from the decedent’s death. In meritorious cases, an extension of time not exceeding 30 days may be granted for the filing of the estate tax return.

c. Claims against the estate

The term “claims” means debts or demands of pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments.

d. Claims against insolvent persons where the value of the decedent’s interest therein is included in the value of the gross estate

e. Unpaid mortgages, taxes and casualty losses

This category includes (i) unpaid mortgages upon property where the value of the decedent’s interest therein is included in the value of the gross estate, (ii) taxes that have accrued as of the death of the decedent which were unpaid as of the time of death, and (iii) losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise.

2. Property previously taxed

This deductible item is referred to as “vanishing deduction”, which is a deduction allowed for properties which were previously subject to donor’s or estate taxes. It is called such because the deduction allowed diminishes for a period of five years.

3. Transfers for public use

This refers to the amount of all bequests, legacies, devises or transfers to or for the use of the government, or any political subdivision thereof, exclusively for public purposes.

4. The family home

The current fair market value of the decedent’s family home is deductible only to the extent of P1,000,000. In order to be deductible, the family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the barangay captain of the locality where the family home is situated and the total value of the family home must be included as part of the gross estate of the decedent.

5. Standard deduction of P1,000,000 without need of substantiation

6. Medical expenses

The amount of deductible medical expenses should not exceed P500,000. This item includes cost of medicines, hospital bills, doctors’ fee, etc. which were incurred within one year prior to the decedent’s death.

7. Amount of retirement benefits from the decedent’s employer as a consequence of the death of the decedent-employee, provided that the amount of the separation benefit is included as part of the gross estate of the decedent.

8. Share in the conjugal property

The amount deductible under this category is the net share of the surviving spouse in the conjugal partnership property after deducting the obligations chargeable to such property.

Except for the standard deduction of P1,000,000, the deductions from the gross estate must be duly substantiated in accordance with the provisions of the Tax Code and RR No. 02-03.

The resulting net estate shall be the basis for the computation of the estate tax in accordance with the following schedule:

Knowing your potential estate tax liability, you may start developing an estate plan that will legally minimize estate tax and protect your wealth for the benefit of your legal heirs and beneficiaries. Death and taxes are not only certain, but the possible convergence of their respective consequences may haunt our loved ones.

(Maria Myla S. Maralit is a Director for Tax & Corporate Services of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email mmaralit@kpmg.com or mmaralit@kpmg.com.ph)

KPMG CORNER By Maria Myla S. Maralit (The Philippine Star) Updated December 08, 2009 12:00 AM