In a country like the Philippines, where there exists a disparate wealth divide, diligent bookkeeping and accounting of assets, as well as estate planning is often seen as an exercise for only the wealthy. For many households, planning for one’s death and the matters that must be handled afterward is taboo, as most would argue that their finite time and limited resources would be better spent in the here and now.
However, against the backdrop of a global pandemic that does not appear to wane, especially in third world nations like the Philippines, people have placed a great deal of importance of planning for unforeseen circumstances. This holds especially true considering the rising costs of healthcare, funeral services, and the taxes that need to be paid after death.
Looking after one’s family extends beyond life in the physical world, along with the preparedness attached to having covered all matters after death, is one way to take care of those whom you love. Making sure they don’t get saddled with financial burdens and obligations long after your earthly body has left the ephemeral is one of the best things you can do. Below is everything you need to know about the estate tax, which may be used in your preparations for the unforeseeable.
What is Estate Tax?
When a person dies, succession occurs. This means that the estate of the decedent will be passed on to his or her heirs. The State then has the right to tax the privilege to transmit the estate. The Philippine Tax Code, as of 2018 imposes a six percent rate of the estate tax (6%) based on the estate’s net value, and whether the decedent is currently registered as a resident or non-resident of the Philippines.
For deceased Philippine residents and citizens, the gross estate includes all properties, real or personal, tangible or intangible, and wherever situated. This is inclusive of the interest on the properties at the time of death, which includes transfers for insufficient consideration, transfers in contemplation of death, properties under a general power appointment, proceeds of life insurance, and revocable transfers.
Noteworthy, if the deceased was neither a citizen nor a resident of the Philippines at the time of death, only the portion of the estate within the Philippines is included in the list of the taxable estate, excluding personal and intangible property as subjected by the rule on reciprocity. The estate, and all its inclusions, must be valued at the fair market value at the time of the decedent’s death.
Are There Any Allowable Deductions?
After doing a quick inventory and accounting of all the deceased’s assets, it will be subjected to the estate tax. Fortunately, the Tax Code allows deductions from the gross estate in the determination of net taxable estate.
For Citizens or Residents
- Standard deduction of five million Philippine pesos (P 5,000,000)
- Claims against the estate
- Claims off the decedent against insolvent persons, where the value of the deceased’s interests is included in the gross estate computation
- Unpaid taxes, mortgages, and casualty losses
- Property that has been previously taxed
- Transfers for public use
- Family home
- Amounts received by the heirs under Philippine Republic Act No. 4917
- Net share of the living spouse, if any, in the conjugal partnership or community property.
For Non-resident Aliens
- Standard deduction of five hundred thousand Philippine Pesos (P 500,00)
- Losses or indebtedness in proportion to the value of the estate in the Philippines, including:
- a) Claims against the estate
- b) Claims of the decedent against insolvent persons, where the value of the deceased’s interests is included in the gross estate computation and valuation
- c) Unpaid taxes, mortgages, and casualty losses
Note that the allowable deductions must be computed using this formula:
Philippine Gross Estate
—————————— x Item No.2 = Allowable Deduction
Total Gross Estate
- Properly that has been previously taxed
- Transfers for public use
- Net share of the surviving spouse, if any, in the conjugal partnership or community property
How to File and Pay for the Estate Taxes
If you have any properties left behind by the deceased, they are subject to the estate tax. This includes all real estate, shares of stock, vehicles, bank accounts, stocks, etc. You will need a CAR or Certificate of Registration to transfer the properties to the rightful heirs. If the gross estate is beyond P5M, a CPA must certify the return with attached supporting statements.
The legal heir, executor, or administrator should file the estate tax within a year of the death. If you need more time to file and pay (installments are permitted), it must be approved by the RDO Commissioner where the estate has the assigned TIN. All taxes must be paid before the distributive shares are delivered. If you need assistance on these matters, give our team of CPAs a call. We can help you facilitate estate tax payments so you can move on with your life after the demise of your loved one.