“In this world, nothing is certain except death and taxes.”
– Benjamin Franklin
It is true that death and taxes are certain. Estate planning in the Philippines, however, mitigates the negative impact of taxes upon a person’s death. In CIR v. The Estate of Benigno P. Toda, Jr. (G.R. No. 147188, 14 Sep. 2004), the Supreme Court of the Philippines differentiated between “tax avoidance” and “tax evasion.” Thus:
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
Estate planning, if done properly, is one of the legal ways to avoid or mitigate the effect of taxes. In the Philippines, the Bureau of Internal Revenue (BIR) imposes an estate tax at the rate of six percent (6%) of the net estate. In addition, the filing and payment of estate tax, application for Certificate Authorizing Registration (CAR), and transfer of title, among others, are tedious processes that will surely burden your heirs.
Each estate has unique circ*mstances. There is no one-size-fits-all solution to estate planning in the Philippines. We have to consider the kinds of properties involved, total value of the estate, priorities of the property owner, and the number and relationship of the heirs, among others.
If you would like to prepare for the future, some of the important considerations for estate planning are discussed below.
1. You should create an inventory of your properties. While this may seem self-explanatory, sometimes the heirs are not even aware of the properties owned by their loved one. In relation to this, you should also secure all titles and other proofs of ownership of your properties.
2. Establish your purpose for estate planning. Do you want your heirs to enjoy your properties according to their own preferences? Do you want them to continue the business that you will leave behind? Do you want to secure the education of your children and grandchildren? Estate planning provides you so many options.
3. The donor’s tax is also at six percent (6%). If you would donate a property now, however, the tax base is the value of the property as of today, which is certainly much lower compared to the tax base upon your death several years or decades from today.
4. You may also create an irrevocable trust for a specified beneficiary involving some of your properties. Similar to donation, the tax is assessed based on the value of the property at the time of creation of the trust, and not at the appreciated value of the same upon your death several years or decades from today.
5. A last will and testament does not necessarily reduce the amount of taxes. However, it will promote certainty, peace, and harmony among your heirs, especially if they are not in good terms among each other.
6. A tax-free exchange transaction under Section 40(C)(2) of the Tax Code, where properties are transferred to a corporation in exchange for the shares of the latter, may also be an option especially for those who own several real estate properties.
7. Another way of indirectly transferring property to your heirs during your lifetime, but to take effect upon your death, is a life insurance upon your own life that names your heirs as irrevocable beneficiaries. The amount that your beneficiaries will receive upon your death will not be subjected to estate tax.
8. For persons who passed away on or before 31 December 2017, the most important and urgent method of estate planning right now is to avail of the Philippine estate tax amnesty on or before 14 June 2023. Doing so will allow the heirs to save significantly on interest and penalties.
If estate planning appears to be overwhelming and complicated, you should consider asking the advice of an expert, especially an estate planning lawyer.
For information related to estate tax amnesty and estate settlement, you may read our articles about these through these links:
Arceo and Irasusta Law Firm is an estate planning law office in Quezon City that serves clients anywhere in the Philippines. Its estate planning attorneys have an extensive experience in advising estate clients in the Philippines. Should you need the help of an estate planning law firm, you may contact us at lawfirm@arceotandoc.com to get in touch with any of our estate lawyers.
