11 Possible Deductions from your Estate Tax

In computing estate tax, the amount can sometimes be so outrageous and irritatingly hefty it can nearly wipe off the total net amount the heirs will be receiving from the estate of a deceased.

Oh yes, I have definitely encountered widows who wished their husbands have done some estate planning. It is even worse when people have failed to settle their estate taxes for the longest time so that penalties and surcharges have gravely and enormously accrued. This is such a frustrating tax condition because considering the grief/state the heirs might still be in, the last thing they need is the government telling them:   “We are sorry for the death of your loved one, but this is how much you owe us and you still have to pay us”.

Sadly, there is no way getting around it because we have to submit to the power of the government to tax us, even if we are already 6 feet below the ground. Don’t they say that tax, aside from death, is the only thing that is certain on earth? Talk about ironies.

That is why as property owner and/or prospective property owner it won’t hurt to know some key information about estate taxation. Apart from estate planning, (this was already discussed in previous blog) below are some deductions one should consider or prepare for to write off as deductions from the estate of a deceased or decedent.

A)   If the decedent is a Citizen or a Resident, the following deductions are allowed: 

1.    Actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but not to exceed Two hundred thousand pesos (P200,000);

2.      Judicial expenses of the testamentary or intestate proceedings;

3.   Claims against the estate subject to certain documentary requirements such as i) duly notarized debt instrument executed at the time of indebtedness; and ii) if the loan was contracted within three (3) years before the death of the decedent, a statement showing the disposition of the proceeds of the loan;

4.   Claims of the deceased against insolvent persons provided such value is included in the gross estate;

5.    Unpaid mortgages upon, or any indebtedness in respect to, property provided the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate.

6.    Property Previously Taxed. – this deduction is otherwise called vanishing deductions and involves a property previously taxed (for either donor’s or estate tax) because of the death and/or transfer of prior decedent to the present decedent. The amount to be deducted, equal to percentage value of the property, depends on time frame of the death of prior decedent from the death of present decedent. For example, if prior decedent died within one year to the death of the present decedent, the deduction is equal to 100% of the value of the property. Such value to be deducted vanishes by percentage as the time frame of death increases. Below is the table of percentage value to be deducted:

 100% - 1 year from death

                       80%   - More than 1 year from death but not more than 2 years

                       60%   - More than 2 years from death but not more than 3 years

 40%  -  More than 3 years from death but not more than 4 years

 20%  -  More than 4 years from death but not more than 5 years              

7.    Transfers for Public Use. – All amounts given as bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes.

8.   Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said current fair market value exceeds One million pesos (P1,000,000), the excess shall be subject to estate tax. This deduction shall be supported by a Certificate by the barangay captain of the locality.

9.    Standard Deduction. - An amount equivalent to One million pesos (P1,000,000).

10. Medical Expenses. - Medical Expenses not exceeding Five Hundred Thousand Pesos (P500,000) incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts.

11.  Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That such amount is included in the gross estate of the decedent.

Watch out for my next blog for allowable deductions in case the decedent is a non-resident of the Philippines.

Most decisive thing to do, BEFORE YOU DIE.

If you have properties, whether real or personal, it is critical for you to manage your estate before you die. We Filipinos never seem to realize the importance of estate planning. Traditional Filipinos do not usually talk about “mana” while parents are still alive, and consider this topic taboo, only to realize later on that the properties, should have been disposed of or transferred prior to any death.

The primary reason for estate planning is to ensure your family is properly cared for after your death. Often people only start thinking about transferring registration of property left by an estate to the heirs, when a prospective buyer shows interest on an estate property. But this is an extremely wrong practice. Sadly, the estate left by a deceased sometimes burdens rather than favors the heirs. Thus, it is always wise to do estate planning that will have your family and heirs thanking you even after you are long gone. Estate planning however does not always involved transfer of property before one's death, but planning the most efficient way to transfer property whether to take effect during one's lifetime or after death.

An example of an estate planning tool is, firstly, by establishing a trust fund for your children. If the designation of a child is irrevocable, this shall be considered as a gift and exempted from tax up to the amount of PHP  100,000.00. The designation of an irrevocable trust fund is however subject to donor’s tax.

If the designation is revocable, then the amount so designated shall be considered as part of the estate and subject to estate tax. For real properties, one can always transfer property to his children. It should however be studied which is more tax efficient in the transfer, whether it is through estate or gift tax.

Secondly, another estate planning tool is to secure life insurance policy because the proceeds thereof are exempted from estate tax for the estate and income tax for the recipient or heirs of the deceased.

Thirdly, an effective way of deferring payment of estate tax as an estate planning tool is by establishing a family corporation. If you have substantial number of properties, these properties can be converted to shares of stock by transferring the properties to a newly established corporation in exchange for the shares. As a tax free-exchange transaction, the law recognizes that no tax is imposable if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation. This way the transferor or heirs still gain control over the properties via the corporation.

Lastly, one may consider selling properties to his heirs. The capital gains tax due on the sale transaction which is 6% may be a lot less than the estate tax due if these properties are part of the estate.

Lot of considerations have to be factored in in doing your estate planning such as the nature of the properties, intentions of the transferor and transferee etc. All these strategies have to be applied on a case to case basis and are crucial considerations in doing your estate planning. 

So before you die, do your estate planning.......