NET ESTATE AND ESTATE TAXATION

Basic Formula:

Gross Estate – Deductions = Net Estate

Net Estate x Estate Tax Rate = Estate Tax

DEDUCTIONS

A. Funeral Expenses

The allowable deduction is the amount actually incurred or 5% of the Gross Estate whichever is lower, but in no case can it exceed P 200,000.

Example:

A B C

Gross estate P 2,500,000 3,500,000 4,500,000

1. Actual expenses

100,000 185,000 250,000

2. 5% of gross estate

125,000 175,000 225,000

3. Maximum allowed

deduction

200,000 200,000 200,000

Deduction is 100,000 175,000 200,000

B. Judicial Expenses

Includes attorney’s fees, accountant’s fees, court fees, appraiser’s fees, fees of executor or administrator, etc.

C. Claims against the Estate

An obligation contracted by the decedent while he was still alive, but wasn’t able to pay such obligation during his lifetime. The creditor is allowed to claim the amount from the estate, and such amount becomes a deduction from gross income.

D. Unpaid Mortgages

An encumbrance (burden) on the property that was left unpaid by the

decedent.

E. Casualty Losses

Losses incurred by reason of:

1. Fires, storms, shipwrecks, or other casualties or;

2. Robbery, theft or embezzlement.

It is a requirement that the loss was not compensated by any insurance policy. Otherwise, it would be unfair for the government if the estate can recover twice.

F. Vanishing Deductions/Property Previously Taxed or PPT

This is allowed to lessen the impact of successive taxation of the same property within a very short period (5 years) due to the death of the decedent-transferee (second or present decedent).

Table for Vanishing Deduction Percentage

How to find the Vanishing deduction:

1. Find the initial basis:

Value of Property – Mortgage Debt = initial basis

2. Find the second deduction:

Initial basis Expenses = Second Deduction Gross Estate 3. Find the Final Basis and the Vanishing Deduction

Percentage Transfer for more than:

But not more than:

1oo% - One year80% One year Two years60% Two years Three years40% Three years Four years20% Four years Five years

Initial Basis – second deduction = Final Basis

Final basis x percentage of vanishing deduction = Vanishing Deduction

Sample Problem:

Mr. E died in February 2009 leaving behind a property worth P 3,000,000. This was inherited by his son D. D died on July 2011, with a gross estate of P 7,000,000. The Funeral Expenses incurred were 150,000 and medical expenses of 90,000. The mortgage debt was 20,000.

Total expenses: *150,000 + 90,000 = 240,000

1. Initial basis:

3,000,000 – 20,000 = 2,980,000.

2. Second Deduction:

(2,980,000/7,000,000) x 240,000* = 102,171.43

3. Final Basis and VD2,980,000 – 102,171.43 = 2,877,828.6

2,877,828.6 x 60%* = 1,726,697.2 VD

*We used 60% because the transfer was for more than 2 years but not more than 3 years ( Mr. E died Feb 2009, D died July 2011)

G. Family Home

Limit is P 1,000,000; Total value of Family Home must be included in the Gross Estate

H. Standard Deduction

Only available to the following:1. Resident Citizen Decedents;2. Non-resident Citizen Decedents;

3. Resident Aliens.

Fixed Standard Deduction = P 1,000,000.

I. Medical Expenses

Must be incurred within 1 year prior to the death of the decedent;

Must be substantiated with receipts; Limit is only P 500,000;

ESTATE TAX

Table for Estate Tax Rates

If net estate is over

But not over Tax shall be Plus Of the excess over

- P 200,000 Exempt - -P 200,000 500,000 0 5% P 200,000500,000 2,000,000 15,000 8% 500,000

2,000,000 5,000,000 135,000 11% 2,000,0005,000,000 10,000,000 465,000 15% 5,000,00010,000,000 And over 1,215,000 20% 10,000,000

Basic Formula:

Gross Estate - Deductions = Net Estate

Net Estate x Estate Tax Rate = Estate Tax

Sample problems:

A died leaving behind the following properties. Landholdings worth P 2,000,000, a family home worth 700,000, and cash worth 2,000,000. The funeral expenses incurred by his family was 275,000. Medical expenses of 565,000 were likewise incurred.

How much is the:1. Net Estate;2. Estate Tax.

Solution:

Funeral Expense:Actually incurred 275,0005% of Gross Est 235,000

Max allowed 200,000Deduction is 200,000

Gross Estate: P 2,000,000 (landholdings) 2,000,000 (cash) 700,000 (family home)

P 4,700,000

Gross Estate P 4,700,000.Less:Standard Ded 1,000,000Funeral Exp 200,000Medical Exp 500,000Family Home 700,000 Total Deductions: 2,400,000 Net Estate 2,300,000Estate Tax:

On the first 2,000,000 tax is 135,000 Plus 11%* x 300,000* 33,000 Estate Tax is P 168,000

* we used 11% because basing on the chart, net estate of 2,300,000 is over 2,000,000 but not over 5,000,000.

* 300,000 is the excess of 2,300,000 over 2,000,000.

Sample problem with Vanishing deduction:

X died in January 2007 leaving behind a car worth 1,000,000. This was inherited by Y who also died in August 2011. Y left an estate of 5,000,000 (inclusive of the car from X). His family incurred funeral expenses of 200,000, and medical expenses of 450,000.

Compute for:1. Vanishing deduction;

2. Net Estate;3. Estate Tax.

1. Vanishing deduction

a. Initial Basis: 1,000,000 – 0 = 1,000,000. (no mortgage debt)

b. Second Deduction

(1,000,000/5,000,000) x 650,000 = 130,000

c. Final Basis and VD

1,000,000 – 130,000 = 870,000

870,000 x 60% = 522,000.

2. Net Estate:

Gross Estate: P 5,000,000Less: Standard Deduction 1,000,000 Funeral Expenses 200,000

Medical Expenses 450,000 Total Deductions 1,650,000 Net Estate 3,350,000

3. Estate Tax:

On the first 2,000,000 tax is 135,000 Plus 11% x 1,350,000 148,500 Total Estate Tax P 283,500

Good Luck