29.1 Estate Tax under the NIRC as Amended by the TRAIN Law

Estate Tax under the NIRC as Amended by the TRAIN Law

Estate tax is an excise tax imposed on the privilege of transmitting property upon the death of the owner. In Philippine jurisprudence, estate tax is not a property tax; rather, it is a tax levied on the gratuitous transfer of the decedent's net estate mortis causa. Pursuant to Article 777 of the Civil Code of the Philippines, "the rights to the succession are transmitted from the moment of the death of the decedent." Consequently, the tax accrues at the exact instant of death, and the substantive tax law in force at the time of death governs the rights and obligations of the estate.

The Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963), effective January 1, 2018, fundamentally reformed Philippine estate taxation by replacing progressive tax brackets with a flat rate, restructuring deductions, eliminating procedural notices, and extending filing periods.

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1. Composition of the Gross Estate & Situs of Taxation

The composition of a decedent's gross estate depends directly on citizenship and residency at the time of death:

                               Scope of the Gross Estate
                                           │
         ┌─────────────────────────────────┴─────────────────────────────────┐
         ▼                                                                   ▼
Resident Citizens, Non-Resident Citizens                            Non-Resident Aliens (NRAs)
      & Resident Aliens                                             • Properties situated within the
• ALL properties wherever situated                                    Philippines ONLY
• Real property (worldwide)                                         • Real & tangible personal property in PH
• Tangible personal property (worldwide)                            • Intangible personal property with PH situs
• Intangible personal property (worldwide)                            (subject to Reciprocity Rule!)

The Reciprocity Rule for Non-Resident Alien Decedents (Section 104)

Under Section 104 of the NIRC, intangible personal property located in the Philippines belonging to a non-resident alien decedent is exempt from Philippine estate tax if either of the following conditions is satisfied:

1. The foreign country of which the decedent was a citizen and resident at the time of death did not impose a transfer tax or death tax of any character on intangible personal property of citizens of the Philippines not residing in that foreign country; OR
2. The laws of the foreign country allow a reciprocal exemption from transfer taxes on intangible personal property owned by citizens of the Philippines not residing in that foreign country.

Intangible personal properties with a Philippine situs under Section 104 include:

• Franchise which must be exercised in the Philippines;
• Shares, obligations, or bonds issued by any corporation or society organized or constituted in the Philippines in accordance with its laws;
• Shares, obligations, or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines;
• Shares, obligations, or bonds issued by any foreign corporation if such shares have acquired a business situs in the Philippines;
• Shares or rights in any partnership, business, or industry established in the Philippines.

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2. Inclusions in the Gross Estate (Section 85)

Under Section 85 of the NIRC, the gross estate includes the value at the time of death of all property to the extent of the interest therein of the decedent:

1. Decedent's Interest (Section 85(A))

Refers to all property physically owned by the decedent at the time of death, including accrued dividends, accrued interest, unpaid partnership profits, and rights of action surviving death.

2. Transfers in Contemplation of Death (Section 85(B))

Transfers of property where the decedent transferred ownership during life, but the impelling motive was the thought of impending death (e.g., terminal illness, advanced age), or where the transferor retained for life the possession or enjoyment of the property or the right to the income from the property.

3. Revocable Transfers (Section 85(C))

Transfers where the decedent retained the power to alter, amend, revoke, or terminate the enjoyment of the property, regardless of whether the power was actually exercised prior to death.

4. Property Passing under General Power of Appointment (Section 85(D))

Property transferred where the decedent possessed a general power of appointment—meaning the decedent had the unrestricted legal right to appoint any beneficiary, including the decedent himself, his estate, his creditors, or the creditors of his estate.

5. Proceeds of Life Insurance (Section 85(E))

Proceeds of life insurance policies taken out by the decedent upon his own life are:

• TAXABLE:
  1. If the designated beneficiary is the decedent's estate, his executor, or his administrator (regardless of whether the designation is revocable or irrevocable);
  2. If the designated beneficiary is a third person (e.g., spouse, children), and the designation is REVOCABLE.
• EXEMPT (Excluded from Gross Estate):
  • If the designated beneficiary is a third person, and the designation is explicitly IRREVOCABLE.
  • Under the Insurance Code, if the policy does not state whether the designation is revocable or irrevocable, it is presumed to be revocable.

6. Transfers for Insufficient Consideration (Section 85(G))

If any of the inter vivos transfers described in Section 85(B), (C), or (D) is made for less than an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value at the time of death over the value of the consideration received by the decedent.

$\text{Inclusion in Gross Estate} = \text{FMV at Date of Death} - \text{Consideration Received}$

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3. Valuation of Gross Estate Items

Properties comprising the gross estate must be appraised at their fair market value (FMV) at the time of death:

1. The Zonal Value determined by the Commissioner of Internal Revenue; and
2. The Fair Market Value shown in the Schedule of Values of the Provincial or City Assessor (Assessor's FMV). | | Listed Shares of Stock | The average between the highest and lowest quoted selling prices on the date of death, or the closing price on the valuation date (or nearest trading date). | | Unlisted Common (Ordinary) Shares | Appraised at their book value based on the corporation's latest financial statements before the date of death (RR No. 12-2018). The adjusted net asset method under RR No. 6-2013 applies to sales of unlisted shares, not to estate valuation. | | Unlisted Preferred Shares | Appraised at their par value. | | Personal Properties & Vehicles | Appraised at fair market value based on prevailing secondary market values or dealer blue books. |

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4. Allowable Deductions under the TRAIN Law (Section 86)

The TRAIN Law simplified allowable deductions, categorizing them into Ordinary Deductions and Special Deductions:

                                Deductions from Gross Estate
                                             │
         ┌───────────────────────────────────┴───────────────────────────────────┐
         ▼                                                                       ▼
    Ordinary Deductions                                                     Special Deductions
• Losses (casualty losses during settlement)                           • Standard Deduction: PHP 5,000,000
• Indebtedness / Claims against the estate                               (flat, no receipts; PHP 500k for NRA)
• Unpaid mortgages                                                     • Family Home: up to PHP 10,000,000
• Unpaid taxes accrued prior to death                                  • Amounts received under RA 4917
• Claims against insolvent persons                                     
• Vanishing Deduction (property previously taxed)                                │
• Transfers for public use                                                       ▼
                                                                           Surviving Spouse
                                                                       • 50% Net Share in Conjugal Estate

1. Ordinary Deductions

Ordinary deductions reduce the gross estate of both single and married decedents (allocated between exclusive and conjugal properties):

1. Losses: Casualty losses from fire, storm, shipwreck, or theft incurred during the settlement of the estate, not compensated by insurance, and not claimed as an income tax deduction on an income tax return, occurring before the deadline for estate tax payment.
2. Claims against the Estate (Indebtedness): Valid debts contracted bona fide for full consideration. Under RR 12-2018, the debt instrument must be notarized at the time the obligation was contracted. If contracted within three (3) years prior to death, the executor must submit a statement of disposition of proceeds.
3. Unpaid Mortgages: Mortgages on property included at full undiscounted value in the gross estate.
4. Unpaid Taxes: Taxes that accrued prior to death (e.g., unpaid real property taxes or income taxes up to the date of death). Income taxes on income received after death and property taxes accrued after death are not deductible.
5. Claims against Insolvent Persons: The full receivable is included in the gross estate, while the uncollectible portion is deducted under this item, supported by proof of insolvency.
6. Transfers for Public Use: The amount of all bequests, devises, or transfers to or for the use of the National Government or any political subdivision exclusively for public purposes.
7. Vanishing Deduction (Property Previously Taxed): An ordinary deduction designed to mitigate double taxation on property transferred by gift or inheritance within five (5) years prior to the decedent's death.

The Vanishing Deduction Sliding Scale

To qualify for vanishing deduction: (1) property must be located in the Philippines; (2) acquired by gift or inheritance within 5 years prior to death; (3) prior estate/donor's tax was paid; (4) property is identified; (5) no vanishing deduction was claimed on the prior transfer.

2. Special Deductions (for Citizens and Resident Alien Decedents)

Special deductions are subtracted directly from the net estate after deducting ordinary deductions and the surviving spouse's share:

1. Standard Deduction: A flat PHP 5,000,000 for citizens and resident aliens, allowable without requiring any proof or documentation. (For Non-Resident Aliens, the TRAIN Law introduced a standard deduction of PHP 500,000).
2. Family Home Deduction: The fair market value of the decedent's family home (house and lot) up to a maximum statutory ceiling of PHP 10,000,000. The family home must be the actual residential home of the decedent and his family, certified by the Barangay Captain. If the family home is conjugal/community property, only the decedent's 50% share is subject to the deduction, capped at PHP 10,000,000.
3. Amounts Received under RA 4917: Any amount received by the heirs from the decedent's employer as a consequence of the death of the decedent-employee under an approved private retirement benefit plan, provided the amount is included in the gross estate.

CRITICAL TRAIN AMENDMENT: The TRAIN Law completely REPEALED the deductions for Funeral Expenses (formerly up to PHP 200,000), Judicial Expenses of Testamentary Proceedings, and Medical Expenses (formerly up to PHP 500,000). None of these three items are deductible under current Philippine estate tax law!

3. Net Share of the Surviving Spouse

In the case of a married decedent governed by the Absolute Community of Property (ACOP) or Conjugal Partnership of Gains (CPG), the net share of the surviving spouse is equivalent to 50% of the Net Conjugal/Community Estate:

$\text{Net Share of Surviving Spouse} = \frac{1}{2} \times (\text{Gross Conjugal Estate} - \text{Conjugal Ordinary Deductions})$

Special deductions are never deducted in arriving at the net conjugal estate; special deductions are applied afterwards.

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5. Estate Tax Rate and Compliance Requirements under TRAIN

Flat 6% Tax Rate

Under Section 84 of the NIRC as amended by TRAIN, the estate tax is imposed at a flat rate of 6% on the Net Taxable Estate:

$\text{Estate Tax Due} = \text{Net Taxable Estate} \times 6\%$

Administrative & Filing Mandates

1. Notice of Death: Completely REPEALED by the TRAIN Law.
2. Estate Tax Return (BIR Form 1801): Must be filed within one (1) year from the date of the decedent's death (extended from the pre-TRAIN 6-month deadline).
3. CPA Certification Threshold: If the gross estate exceeds PHP 5,000,000, the return must be accompanied by a statement certified by an independent CPA.
4. Extension of Filing: In meritorious cases, the Commissioner of Internal Revenue may grant an extension not exceeding thirty (30) days.
5. Extension of Payment: When payment on the due date would impose undue hardship upon the estate, the CIR may extend payment for a period not exceeding five (5) years in case of judicial settlement, or not exceeding two (2) years in case of extrajudicial settlement.
6. Installment Payment: Under TRAIN, when the estate is cash-deficient, the estate tax due may be paid in partial installments within two (2) years from the statutory filing deadline without civil penalties or interest.
7. Withdrawal of Bank Accounts: Bank deposits of a deceased depositor may be withdrawn by heirs subject to a 6% final withholding tax on the amount withdrawn, upon certification under oath by the executor/heirs (using BIR Form 1927). Alternatively, bank accounts may be reported as part of the gross estate in Form 1801.

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6. Comprehensive Worked Calculation Example: Married Decedent with Conjugal Estate

Decedent Profile

Danilo Santos, a resident Filipino citizen, died testate on June 15, 2025. He was survived by his wife, Elena. The spouses were married under the system of Absolute Community of Property (ACOP). The estate presents the following assets and obligations:

• Exclusive Real Property (inherited by Danilo 6 years prior): FMV = PHP 8,000,000.
• Conjugal Family Home (House and Lot in Quezon City): Assessor's FMV = PHP 18,000,000; BIR Zonal Value = PHP 22,000,000.
• Other Conjugal Real and Personal Properties: FMV = PHP 14,000,000.
• Proceeds of Life Insurance: PHP 3,000,000 (taken out by Danilo on his life; beneficiary is his daughter, designated revocably).
• Claims against the Estate (validly notarized bank loan): PHP 2,000,000 (conjugal debt).
• Unpaid Real Property Taxes on Family Home (accrued prior to death): PHP 200,000 (conjugal).
• Actual Funeral Expenses paid: PHP 350,000.
• Actual Medical Expenses during last illness: PHP 600,000.

Step-by-Step Estate Tax Computation

Step 1: Determine Gross Estate Inclusions and Classifications

• Valuation of Family Home: Higher of Assessor's (PHP 18,000,000) and Zonal (PHP 22,000,000) = PHP 22,000,000 (Conjugal).
• Life Insurance Proceeds: Daughter is revocable beneficiary $\rightarrow$ included in gross estate = PHP 3,000,000 (Conjugal).
• Other Conjugal Assets: PHP 14,000,000 (Conjugal).
• Total Conjugal Gross Estate = $\text{PHP }22{,}000{,}000 + \text{PHP }3{,}000{,}000 + \text{PHP }14{,}000{,}000 = \text{PHP }39{,}000{,}000$.
• Exclusive Gross Estate = PHP 8,000,000.
• Total Worldwide Gross Estate = $\text{PHP }8{,}000{,}000 + \text{PHP }39{,}000{,}000 = \text{PHP }47{,}000{,}000$.

Step 2: Determine Allowable Ordinary Deductions

• Claims against the estate (notarized bank loan): PHP 2,000,000 (Conjugal ordinary deduction).
• Unpaid property taxes accrued prior to death: PHP 200,000 (Conjugal ordinary deduction).
• Funeral expenses (PHP 350,000): PHP 0 (REPEALED by TRAIN).
• Medical expenses (PHP 600,000): PHP 0 (REPEALED by TRAIN).
• Total Ordinary Deductions = $\text{PHP }2{,}000{,}000 + \text{PHP }200{,}000 = \text{PHP }2{,}200{,}000$.

Step 3: Compute Net Share of Surviving Spouse

• Gross Conjugal Estate = PHP 39,000,000.
• Less: Conjugal Ordinary Deductions = PHP 2,200,000.
• Net Conjugal Estate = $\text{PHP }39{,}000{,}000 - \text{PHP }2{,}200{,}000 = \text{PHP }36{,}800{,}000$.
• Net Share of Surviving Spouse (50%) = $\frac{1}{2} \times \text{PHP }36{,}800{,}000 = \text{PHP }18{,}400{,}000$.

Step 4: Determine Allowable Special Deductions

1. Standard Deduction: Flat PHP 5,000,000.
2. Family Home Deduction: Decedent's 50% share in the conjugal family home ($50\% \times \text{PHP }22{,}000{,}000 = \text{PHP }11{,}000{,}000$), subject to the statutory cap of PHP 10,000,000. Allowable deduction = PHP 10,000,000.

• Total Special Deductions = $\text{PHP }5{,}000{,}000 + \text{PHP }10{,}000{,}000 = \text{PHP }15{,}000{,}000$.

Step 5: Compute Net Taxable Estate and Estate Tax Due

$\text{Estate Tax Due} = \text{PHP }11{,}400{,}000 \times 6\% = \text{PHP }684{,}000$