The following properties, rights and interests are included in the gross estate at the time of the decedent’s death:
(1) As to resident (citizen or alien) or citizen (resident or non-resident)
(a) Real property wherever situated
(b) Personal property (tangible or intangible) wherever situated
(2) As to non-resident alien
(a) Real property in the Philippines
(b) Tangible personal property in the Philippines
(c) Intangible personal property in the Philippines, unless excluded on the basis of reciprocity under Section 104 NIRC (see above)
ITEMS TO BE INCLUDED IN GROSS
ESTATE
DECEDENT’S GROSS ESTATE
(1) Property owned by the decedent actually and physically present in his estate at the time of his death;
(2) Decedent’s interest;
(3) Properties not physically in the estate, such as:
(a) Transfers in contemplation of death [Sec.
85(B), NIRC];
(b) Transfers with retention or reservation of certain rights [Sec. 85(B), NIRC];
(c) Revocable transfers [Sec. 85(C), NIRC]; (d) Property passing under general power of
appointment [Sec. 85(D), NIRC];
(e) Transfers for insufficient consideration [Sec. 85(G), NIRC];
(f) Proceeds of life insurance [Sec. 85(E),
NIRC];
(g) Claims against insolvent persons; and (h) Capital of the surviving spouse [Sec.
85(H), NIRC].
Property Owned by the Decedent Actually and Physically Present in His Estate at the Time of Death
Land, buildings, shares of stock, vehicles, bank deposits, etc.
Decedent’s Interest
Decedent’s interest refers to the extent of equity or ownership participation of the decedent on any property physically existing and present in the gross estate, whether or not in his possession, control or dominion; also refers to the value of any interest in property owned or possessed by the decedent at the time of his death (interest having value or capable of being value or transferred. [cf. Sec. 85(A), NIRC]
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Examples: dividends declared before his death but received after death; partnership profits which have accrued before his death.
Properties Not Physically in the Estate
These have already been transferred during the lifetime of the decedent but are still subject to payment of estate tax), such as the following: Transfers in Contemplation of Death
The transfers referred to are those where the motivating factor or controlling motive is the thought of death, regardless of whether the transferor was near the possibility of death or not. Note: There is no transfer in contemplation of death when the transfer of property is a bona fide sale for an adequate and full consideration in money or money’s worth [Sec. 85(B), NIRC]. US v Wells (1931): The mere fact that death ensues even shortly after the gift does not determine absolutely that it is in contemplation of death. The question, necessarily, is as to the state of mind of the donor. Furthermore, it is the contemplation of death, not necessarily contemplation of imminent death, to which the statute refers.
Transfers with retention or reservation of certain rights
It involves cases where the owner transfers his property his lifetime but still retains economic benefits during his life or for any period which does not in fact end before his death.
The rights retained or reserved include:
(1) The possession or enjoyment of the property;
(2) The right to the income from the property; or
(3) The right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom.
By reason of the restriction or encumbrance, the transferee is incapable of freely enjoying and disposing of the property until the transferor’s death, and the transfer may be regarded as having been intended to take effect in possession or enjoyment at the transferor’s death.
Exception: Bona fide sale for an adequate and full consideration.
Illustration:
X transfers his property to Y in naked ownership and to Z in usufruct throughout Z’s lifetime subject to the condition that if Z predeceases X, the property shall return to X. If X dies during Z’s life, the value of the reversionary interest of X at death is includible in his gross estate (see Articles 756-757 of the Civil Code). The transfer is taxable as intended to take effect at or after death because the possibility of reversion to X makes Z’s interest conditional as long as X lives. Revocable Transfers
Decedent’s transfer of any interest by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of power by the decedent ALONE or by the decedent IN CONJUNCTION WITH ANY OTHER person, to alter, amend, revoke, or terminate such transfer, OR where such power which would bring the property in the taxable estate is relinquished in contemplation of the decedent’s death [Sec.
85(C )(1), NIRC].
Exception: Bona fide sale for an adequate and full consideration.
The power to alter, amend or revoke shall be considered to exist on the date of the decedent’s death EVEN THOUGH:
(a) The exercise of the power is subject to a precedent giving of notice, or
The alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised.
If notice has not been given or the power has not been exercised before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of his death.
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Property Passing under General Power of Appointment
Power of appointment refers to the right to
designate the person or persons who will succeed to the property of the prior decedent [Sec. 85(D), NIRC].
When general. — The power of appointment is general when the power of appointment authorizes the donee of the power to appoint any person he pleases. The power may be exercised in favor of anybody including the done-decedent. The donee of a general power of appointment holds the appointed property with all the attributes of ownership, and, thus, the appointed property shall form part of the gross estate of the donee of the power upon his death.
When special. — Special power of appointment exists when the done can appoint only from a restricted or designated class of persons other than himself. Property transferred under a special power of appointment should be excluded from the gross estate of the donee of the power because the done-decedent only holds the property in trust.
Gross estate shall include any property passed or transferred under a general power of appointment exercised by the decedent:
(1) By will, or
(2) By deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or
(3) By deed under which he has retained (for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death): (a) the possession or enjoyment of, or the
right to the income from, the property, or (b) the right, either alone or in conjunction
with any person, to designate the persons who shall possess or enjoy the property or the income therefrom [Sec. 85(D), NIRC]. Exception: Bona fide sale for an adequate and full consideration.
Two Kinds of Appointment and their Effects:
General Special
As to nature. — DONEE
has power to appoint any person he chooses who shall possess or
enjoy the property
without restriction
DONEE must appoint
successor to the
property only within a limited group or class of persons
As to tax implications.
— Makes appointed property, for all legal intents, the property of the DONEE (includible in his estate)
Not includible in the gross estate of the DONEE when he dies
As to effects. — DONEE
holds the appointed property with all the
attributes of
ownership, under the concept of owner
DONEE holds the
appointed property in trust, or under the concept of trustee
Transfers for Insufficient Consideration
When a sale of transfer (other than a bona fide sales of property for an adequate and full consideration in money or money’s worth) was made for a price less than its fair market value at the time of sale or transfer, the excess of the fair market value of the transferred property at the time of death over the value of the consideration received should be included in the gross estate [Sec. 85(G), NIRC].
.
Case A: If bona fide sale – no value shall be included in the gross estate
Case B: If not a bona fide sale - the excess of the fair market value at the time of death over the value of the consideration received by the decedent shall form part of his gross estate. Case C: If inter vivos transfer is proven fictitious/simulated – total value of the property at the time of death included in the gross estate.
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Over Case A Case B Case C
FMV, transfer 2,000 1,500 2,500
FMV, death 2,500 2,000 2,000
Consideration received 2,000 800 0
Value included in the
Gross Estate 0 1,200 2,000
Note: The transfer for insufficient consideration must fall under any of the following:
(1) Transfer in contemplation of death; (2) Revocable transfer, or
(3) Property passing under a GPA.
Otherwise, the tax imposed is donor’s tax. Proceeds of Life Insurance
Proceeds of life insurance taken out by the decedent on his own life shall be included in the gross estate in the following cases:
(1) Beneficiary is the estate of the deceased, his executor or administrator, irrespective of whether or not the insured retained the power of revocation; or
(2) Beneficiary is other than the decedent’s estate, executor or administrator, when designation of beneficiary is not expressly made irrevocable [Sec. 85 (E), NIRC].
Note: Under the Insurance Code of 1978, if not clear or silent, the designation of the beneficiary is presumed to be revocable; hence, includible in the decedent’s gross estate.
Cases when Proceeds of Life Insurance Not Taxable
(1) Accident insurance proceeds;
(2) Proceeds of a group insurance policy taken out by a company for its employees;
(3) Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured. The transfer is absolute and the insured did not retain any legal interest in the insurance [Sec. 85 (E),
NIRC];
The proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of the person whose life was insured, and that such proceeds are the separate and individual property of the beneficiary, and not of the heirs of the person whose life was insured. [Del Val v Del Val (1915)]
(4) Proceeds of insurance policies issued by the GSIS to government officials and employees [P.D. 1146], which are exempt from all taxes; (5) Benefits accruing under the SSS law [RA 1161,
as amended]; and
(6) Proceeds of life insurance payable to heirs of deceased members of military personnel [RA
360].
To determine the conjugal or separate character of proceeds, the following factors are considered: (1) Policy taken before marriage – Source of funds determines ownership of the proceeds of life insurance
(2) Policy taken during marriage
(a) Beneficiary is estate of the insured – Proceeds are presumed conjugal; hence, one-half share of the surviving spouse is not taxable
(b) Beneficiary is third person – Proceeds are payable to beneficiary even in premiums were paid out of the conjugal Claims Against Insolvent Persons
For estate tax purposes, an insolvent is a person whose properties are not sufficient to satisfy, whether fully or partially, his debts. A judicial declaration of insolvency is not required but the incapacity of the debtor should be proven. As a rule, regardless of the amount the debtor is unable to pay, the full amount of the claim against the insolvent person should be included in the gross estate of the decedent. The portion of the claim which is not collectible should be allowed as a deduction from the gross estate. Capital of the Surviving Spouse
It is NOT part of the gross estate of the deceased spouse [Sec.85(H), NIRC] .
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