Put a rest to problems on inherited properties

Put a rest to problems on inherited properties

By Marivic C. Españo

(As published in BusinessWorld, February 18, 2008)

It is common to hear stories of properties inherited from the parents or other relatives that are already being used by the children even if the titles of ownership have not yet been transferred in their name. Most of these people also say that at some point, they had looked at the requirements to effect the transfer of the titles to their names, but they were daunted by the amount of taxes they may have to pay.

If you have inherited real estate properties from your parents or other relatives but their legal titles are still in the name of a person other than yourself, you may be entitled to amnesty on the estate tax.

Taxes on Transfer of Property upon Death

What are these taxes? For one, the transfer of properties of a deceased person requires the payment of estate taxes to the Bureau of Internal Revenue (BIR). In addition, if the estate includes real property, the heir must pay the local tax on transfer of real property to the local government where the said property is located.

The Estate Tax is a tax on the right of the deceased person to transfer his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers which are made by law as equivalent to testamentary disposition. It must be paid by the executor or administrator before the delivery of the distributive share in the inheritance to the heir or beneficiary. The executor or administrator of an estate has the primary obligation to pay the estate tax but the heir or beneficiary has a subsidiary liability to pay for the portion of the estate which bears his distributive share to the value of the total net estate. In cases where there has been no appointment of a qualified executor or administrator within the Philippines, any person in actual or constructive possession of any property of the decedent must file the return.

The Estate Tax Return is required to be filed and payment made to an Authorized Agent Bank (AAB) of the BIR office which has jurisdiction over the place of residence of the decedent at the time of his/her death. Under existing rules, the Register of Deeds is required to check whether the estate taxes due on inherited properties, along with the other local taxes, have been paid before it processes any application for the transfer of title to the new owner. For this purpose, it requires the applicant to present the Estate Tax Clearance issued by the Commissioner or the Revenue District Officer (RDO) which has jurisdiction over the estate.

In practice however, since unlike with income tax, VAT and other business taxes, the BIR does not actually pursue the collection of estate taxes, the decedent’s heirs take over the administration of the property and receive the income generated therefrom even without settling the estate tax.

Usually, plans to put the titles in order are only revisited when there is an actual need for the corrected papers to be presented, i.e., if there is a buyer for the property who requires that the title be in the name of the seller. When the heir or the estate administrator eventually decides to sell the property, he has to pay the basic estate tax due, plus the penalties and interests for the late payment of the tax.  Since the law does not provide for a cap on total interest payable,  the interest, which is pegged at the annual rate of 20%, may already be a substantial amount in cases where several years had passed since the death of the decedent. 

Amnesty Program

For heirs who want to pay the estate tax and finally clean up the title, the on-going tax amnesty program may be the answer.

BIR Revenue Regulations No. 69-2007 explicitly states that the amnesty program covers estate taxes. For estates, the amnesty tax is 5% of net worth or P50,000, whichever is higher.

The 5% amnesty tax shall be based the net worth of the estate’s value at the time of the death of the decedent where net worth is equal to asse ts less liabilities.

For purposes of computing the net worth of the estate, only the decedent’s exclusive properties and liabilities as well as his/her share in the conjugal assets and liabilities shall be included.

The deductible liabilities shall strictly be limited to unpaid legitimate and enforceable obligations incurred in acquiring the properties included in the gross taxable estate. The regulations clearly state that the usual deductions/expenses allowed in computing the taxable value of the estate for estate tax purposes such as the family home, medical and funeral expenses incurred, standard deductions and other deductions not related to the acquisition of the properties forming part of the gross taxable estate are not allowed to be claimed as liabilities.

For estates under administration, the valuation of assets and liabilities and net worth shall follow Generally Accepted Accounting Principles  (GAAP).  For estates not under administration, the valuation shall be based on GAAP for business-related assets.  For non-business-related assets, valuation shall be at cost if are acquired by purchase,  or at fair market value if acquired through donation or inheritance. If fair value is considered, the valuation of the properties of the decedent shall be at the time of death.

In cases where the estate is under administration, the administrator/executor of the estate should avail of the tax amnesty for the estate. In cases where the estate is not under administration, the persons required to avail of the tax amnesty shall be the heirs.
 
If the estate involved is still in the name of another decedent, the present holder must file a tax amnesty return for this decedent.

Availment of the amnesty will provide the estate administrator or the heirs of the decedent immunity from payment of the estate tax and documentary stamp tax. However, it does not cover the local tax due on the transfer of the property.

Amnesty Tax vs. Estate Tax

Should heirs of inherited properties with unpaid estate taxes apply for tax amnesty?

This is not a case of “one size fits all” solution. Heirs or estate administrators must evaluate whether it would be advantageous for them to avail of the amnesty or if they are better off paying the estate tax and the applicable penalties.

First of all, they must determine if their case is covered by the amnesty program. If the unpaid estate tax was due in 2005 or prior years, i.e., the decedent died before 2006, then they are qualified to apply.

Second, they must do some pencil-pushing. For purposes of computing the estate tax, certain deductions are allowed to determine the taxable estate. The amount allowed as deduction depends on the law prevailing at the time of death of the decedent. Examples of these deductions are:

1. Funeral Expenses
2. Non-taxable portion of the estate as follows:
• 5 % of gross estate, if deceased died prior to Jan 1, 1973;
• 5 % of gross estate but not exceeding P 50,000 (Jan. 1, 1973 to July 27, 1992)
• 5% of gross estate but not exceeding P 100,000 (July 28, 1992 to December 3l, 1997)
• 5% of gross estate but not exceeding P 200,000 (Jan. 1,1998)
3. Judicial expenses of the testamentary/intestate proceedings
4. Claims against insolvent persons
5. Casualty losses
6. Deduction for property previously taxed, or a portion thereof, that was received either as an inheritance or gift within five (5) years from date of death of prior decedent or date of gift
7. Transfer for public purposes
8. Medical expenses - those incurred by the decedent within one (1) year prior to his/her death which shall be substantiated with receipt s
9. Family Home - fair market value but not to excee d P1,000,000.00
10. Standard Deduction - an amount equivalent to P1,000,000.00 (applicable only for death occurring after the effectivity of RA 8424 which is January 1, 1998.)

In contrast, under the tax amnesty program, only the decedent’s exclusive liabilities as well as his share in the conjugal liabilities are deductible against the value of the assets. The deductible liabilities are further limited to those incurred in connection with the acquisition of the assets.

Thus, if the property involved is just the family home and the decedent’s share in the conjugal property does not exceed P1 Million, the heirs will be better off filing the estate tax return since no estate tax has to be paid. In contrast, under the amnesty program, the heirs have to pay the minimum amnesty tax of P50,000 to qualify.

The same analysis may also be true if a substantial portion of the estate of the decedent consists of properties previously inherited within five years prior to his death. For example, Mr. S has an estate worth P6 Million at the time of his death. Of this amount, he inherited P5 Million from a relative who died a year prior to his death. The amnesty tax to be paid is P300,000 (P6 Million times 5%). On the other hand, no estate tax is due since the P5 Million inherited property is allowed as a deduction from the taxable estate and Mr. S is entitled to a P1.0 Million standard deduction. A penalty, however, will be imposed for the late filing of the estate tax return.

On the other hand, if the property was inherited by Mr. S from a relative who died 10 years prior to the death of Mr. S, then the estate tax due could go as high as P915,000, excluding penalties and interest.  In such cases, it would cost the heirs less if they pay the 5% amnesty tax.

The calculations should also consider that the estate tax has a graduated tax rate structure with the highest rate set at 20% beginning in1998. Before that, the top rate was 35% and was as high as 60% for certain years.

Applying for Tax Clearance

Quite a few people have asked if, with the payment of the amnesty fee, the title to the property can already be transferred. While the regulations do not mention anything about tax clearances, it will be reasonable to expect that the BIR will still require the estate administrator or the heir to apply for the tax clearance even with the availment of the tax amnesty. And that such tax clearance should still be presented to the Register of Deeds.

The tax clearance should identify the specific properties that it covers.  For this reason, the following may still be required, to wit:

1. To establish the date of death and name of the decedent:
• Notice of Death duly received by the BIR, if gross estate exceeds P20,000 for deaths occurring on or after Jan. 1, 1998; or if the gross estate exceeds P3,000 for deaths occurring prior to January 1, 1998. (Note: Filing of the notice is an administrative requirement and, as such, is not eliminated even with the application for tax amnesty.)
• Certified true copy of the Death Certificate
2. To establish the properties included in the estate that require clearances before the titles or other documents covering the same can be changed to reflect the heirs’ name:
• Certified true copy(ies) of the Transfer/Original/Condominium Certificate of Title(s) of real property(ies) (front and back pages), if applicable
• Certified true copy of the latest Tax Declaration of real properties at the time of death, if applicable
• "Certificate of No Improvement" issued by the Assessor's Office declared properties have no declared improvement or Sworn Declaration/Affidavit of No Improvement by at least one (1) of the transferees
• Photocopy of certificate of stocks, if applicable
3. To establish the new owners of the different proper tie s in the estate in whose names the title or other document evid encing ownership will be placed:
• Deed of Extra-Judicial Settlement of the Estate, if the estate is settled extra judicially, or Court Order/Decision, if the estate is settled judicially;
• A certified true copy of the schedule of partition of the estate and the order of the court approving the same, if applicable

Considering that the BIR is not supposed to audit the declaration made in the statement of assets and liabilities, it should no longer require the following:

1. Proof of valuation of shares of stocks at the time of death, if applicable
• For listed stocks - newspaper clippings or certification from the Stock Exchange
• For unlisted stocks - latest audited Financial Statement of issuing corporation with computation of book value per share
2. Proof of valuation of other types of personal property, if applicable
3. Proof of claimed tax credit, if applicable
4. CPA Statement on the itemized assets of the decedent, itemized deductions from gross estate and the amount due if the gross value of the estate exceeds two million pesos, if applicable
5. Certification of Barangay Captain for claimed Family Home
6. Duly notarized Promissory Note for "Claims against the Estate" arising from Contract of Loan

However, such a possibility cannot be totally precluded since it is within the authority of the BIR to require the submission of documents that it may deem necessary for the issuance of the tax clearance. It would thus be prudent for the taxpayer to consider the information in the above-listed documents as applicable in the valuation of the properties to be declared as part of the assets of the estate.

Amnesty, anyone?

The bottom-line is that, each case must be examined thoroughly taking into account factors relevant to the determination of the taxes due on the estate such as the types of taxes due, date and time of decedent’s death, nature and value of the properties comprising the estate, period of delay in the payment of taxes, etc, which will be waived in the event that the heirs or the estate administrator avails of the tax amnesty.

Interested applicants have until March 6, 2008 to decide if they wish to consider this program to finally put to rest this tax issue.

(The author is a tax partner at Punongbayan & Araullo, member of Grant Thornton International.  For comments and inquiries, please e-mail Marivic.Espano@pna.ph or call 886-5511.)