Tax Articles

Death and Taxes

By Atty. Mabel L. Buted

Tax is as certain as death. Tax is a natural consequence of death for individuals leaving significant amount of assets to their loved ones. Some people are able to plan ahead to manage their asset base in the event of death. Tax may not be the primary driver but it is always a key factor to consider.

The significance of estate tax planning has been minimized with the implementation of various tax reforms where tax rates had been made uniform regardless of the mode of disposition of the properties. But other than the tax rates, there are many other factors that could differentiate the tax impact of a specific mode of disposition over other modes of transfer of properties. Before you even consider those other modes of transfer, let me discuss the taxes associated with death.

Estate Tax. The usual tax associated with death is the estate tax. It is the tax on the fortune left by a deceased before this is distributed to the heirs which is levied, assessed, collected and paid upon the transfer of the net estate. The present tax rate is 6%, which is imposed on the value of the net estate.

Donor’s Tax. This a tax that is imposed on a gratuitous transfer of property. It is levied, assessed, collected and paid upon the transfer by any person of a property by gift or donation. Previously, the tax was imposed at the graduated rate of 0% to 15% and a higher rate of 30% if the beneficiary is a stranger. The Tax Reform for Acceleration and Inclusion eliminated the graduated rate and the difference between the tax rate for strangers and non-strangers and replaced these with a uniform rate of 6%.

How does donation come into play on the transfer of properties left by a deceased loved one? Is donor’s tax imposed when properties are simply being distributed to the heirs?

The transfer of properties from the estate of the deceased to any heir is not a donation. Hence, the donor’s tax does not apply but the manner of distribution among the beneficiaries may result in donation and attract donor’s tax. This happens when a beneficiary waives his share in the hereditary estate. The waiver of inheritance may amount to a donation of the property, subject to the donor’s tax. However, not all waivers will yield the same result.

When is a waiver of inheritance not considered a donation?

According to the Revenue Regulations (RR) No. 12-2018, the general renunciation by an heir, including the surviving spouse, of his share in the hereditary estate left by the deceased is not subject to donor’s tax. This is echoed by the recently issued Revenue Memorandum Circular (RMC) No. 94-2021. A number of rulings issued by the tax authorities justified the non-imposition of donor’s tax by referring to the right of accretion under the rules on succession as provided in the Civil Code. In the right of accretion, the heir who renounces or cannot receive his share is added or incorporated to that of his co-heirs, co-devisees or co-legatees. His share accrues to his co-heirs in the same proportion that they inherit. Consequently, the heir can never be considered to have owned his share in the inheritance that he renounced. He could not donate a property that he never owned. This is the reason why there is no donor’s tax that can be imposed upon waiver of an heir’s share in the hereditary estate.

When does a waiver of inheritance considered a donation? There are at least two instances:

1. RR 12-2018 implies that a renunciation of share in hereditary estate shall be treated as donation when an heir declines the inheritance and offers it in favor of one or more of his co-heirs.

2. The other instance is that provided in the recently issued RMC 94-2021. While the regulation recognizes that a general renunciation is not subject to donor’s tax, a donor’s tax will be imposed on the partial renunciation of inheritance as a result of the waiver. This happens when an heir waives his share to only identified properties but not to the entire properties of the deceased, resulting to the heirs receiving lower or higher value than their rightful share.

I register my reservation on this. Co-ownership is discouraged and all the heirs cannot be expected to co-own each of the properties left by the deceased. To avoid this scenario, the heirs usually resort to identifying and allocating the properties that each one of them will receive. In fact, the laws do not require each of the properties of the estate to be distributed to all of the heirs. They are allowed to agree on the properties to be assigned to each. While this may result in unequal sharing, as it is impossible to expect the properties to be of equal value, there is no taxable repudiation. The fact that the heirs would be receiving lower or higher values than their supposed proportionate share in the estate is a necessary consequence of the nature of the properties of the estate. However, the heir who is receiving properties of lower value cannot be said to be making a taxable repudiation. To say so would discourage the preservation of properties and encourage their disposition only for the purpose of having equal sharing for all the heirs.

Besides, the reason for the non-imposition of donor’s tax in a general renunciation still applies. An heir who receives a property of lower value than his rightful share is not considered to have received his share in full. Not being the owner of the difference between his share and the value of the property actually received – that difference in value could not be donated and therefore could not be subject to donor’s tax.

Having said that, this is already part of the rules. The tax impact should be taken into consideration when making distributions of the estate properties.