Learn all about transferring assets, inheritance and estate taxes
Do you have family members, relatives, siblings or anyone who is dependent to your income? If you do, then you should know about the basic ins and outs of Estate Tax because one day, it would concern you. Have you been hearing news about inheritance problems, estate tax or inheritance tax issues? Not everyone is aware of this obligation we have to the government. But BIR has recently stepped up to boost Estate Tax collection in the Philippines. Instead of complaining, let us be aware with what is due from us.
Hi everyone, thanks for reading this article! As most of you know, the TRAIN Tax Reformation for Acceleration and Inclusion (TRAIN) law has taken effect starting January 1,2018. The law made some amendments on income tax, estate tax, donor’s tax, VAT, excise tax, and more. The rates indicated in this article are based from the 1997 Tax Code and are not updated any longer. You may still view this article as you wish, but take note that the values written below are not accurate any longer. Unfortunately, I do not have the time to create a new article with the updated rates. In the meantime, you may consult a lawyer for estate planning matters.
Learn all about transferring assets, inheritance taxes and estate taxes in this article.
Filipino “Default” Method on Transferring Assets
Since most Filipinos are not aware of Estate Tax and Inheritance Tax transfers, this diagram illustrates an average Filipino’s “default” and the only method they know of on how to transfer assets. For a typical Filipino family, an ideal transfer of assets is by:
- Changing property names
- Withdrawing and depositing money from parent’s bank accounts to their children’s bank accounts
- Creating JOINT bank accounts
This is How Inheritance and Assets Should Be Transferred Legally (Capital Gains Tax and Donors Tax)
Legally speaking, when parents want to transfer their assets to their children, they must consider the following:
Sell The Property – Pay Capital Gains Tax
- What is Capital Gains Tax? Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale.
- Deadline: Within 30 days after each sale, exchange, transfer or other disposition of real property.
- Tax Rates are as of follows:
- For real property – 6%.
- For Shares of Stocks Not Traded in the Stock Exchange:
– Not over P100,000 – 5%
– Any amount in excess of P100,000 – 10%
Donate the property to their children – Pay Donors Tax
Donor’s Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer of property between two or more persons who are living at the time of the transfer. It shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible. View the chart below for Donors Tax Rates:
Notes (text as from www.bir.gov.ph):
- Rate applicable shall be based on the law prevailing at the time of donation.
- When the gifts are made during the same calendar year but on different dates, the donor’s tax shall be computed based on the total net gifts during the year.
Donation made to a stranger is subject to 30% of the net gift. A stranger is a person who is not a:
- brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or
- relative by consanguinity in the collateral line within the fourth degree of relationship.
For Cash in Bank:
Cash in Bank may be transferred, withdrawn and deposited to their children’s bank accounts as long as the parents are still LIVING. Withdrawing funds from a deceased persons bank account, even if it is a joint account, is a big no-no. Once you do, you may be charged with estate tax evasion.
Of course, selling of shares, transferring cash from the parents to their children means that the parents have no control over their assets anymore. Which brings us to the following problems:
- Parents have no control over their assets
- Children fighting over inheritance while parents are still living
- Parents become a burden to their children as they cannot support themselves on their own any longer
What Happens if One or Both Parents Dies?
Once one or both parents dies, how do you transfer assets legally? Capital Gains Tax and Donors Tax would not apply in this scenario because the asset owner has passed on. This is where Estate Tax comes in.
What is Estate Tax
Estate Tax is an inheritance tax which heirs and beneficiaries must pay to the government before they are able to transfer the assets of a deceased person to their name.
Take a typical Filipino family of 4 people (two parents and two children). Once one of the parents’ dies, their children must automatically pay estate tax to the BIR before any of their parent’s assets are transferred to their name.
What’s tricky here is when once one of the parents dies, their bank accounts are automatically frozen. And withdrawing a single centavo from these accounts are a big no-no, as the BIR will hold banks criminally liable for such act. To make things more complicated, estate tax must be filed and paid within 6 months of the deceased, otherwise, penalties and surcharges applies. Therefore, heirs must come up with the cash to pay for the taxes, given that cash in banks is frozen.
Delving into Estate Tax Details
How much exactly is estate tax? It would all depend on your total net estate. Know how much your net estate/ total net worth is first. After which, refer to the table below.
To compute for your Net Estate:
ASSETS – LIABILITIES = NET ESTATE
Assets = Properties, land and houses under your name, cash in bank, joint local and foreign accounts, business, stocks and shares under your name
Liabilities = debt
Figured out your total net worth/ net estate? Great! See what bracket you belong to:
- Below P200,000
- Between P200,000 – P500,000
- Between P500,000-P2,000,000
- Between P5,000,000-O10,000,000
- Over P10M
Let us take these examples for further understanding:
- If your net estate is P6,000,000. As indicated by the table above, your estate tax would be P465,000 + 15% of P1,000,000 (excess of P5,000,000) = P615,000
- If your net estate is P3,000,000. As indicated by the table above, your estate tax would be P135,000 + P110,000 (11% of P1,000,000 which is of the excess over P2,000,000) = P245,000
- If your net estate is P50,000,000. As indicated by the table above, your estate tax would be P1,215,000 + P8,000,000 (20% of P40,000,000, which is of the excess over P10,000,000) = P9,215,000
Estate Tax Collection in the Philippines
Not everyone is familiar with Estate Taxes, and this is precisely the reason why a lot of people do not bother to comply. But do you know that part of our path to a better economy starts with a better government tax collection system? Instead of complaining, let us be aware with what is due from us. Here are some recent news regarding Estate Tax collection in the Philippines.
Let us be informed that there is NO BANK SECRECY LAW FOR THE DECEASED. Once you pass away, BIR has the right to check your existing bank accounts and records. Any bank who does not comply, or assist the heirs in withdrawing the funds after the account holder has passed away, will be held criminally liable.
Also, BIR has now collaborated with the NSO. As you know, the NSO are the ones who issues birth certificates and death certificates. Therefore, once someone passes away, the BIR will know who to expect estate tax from.
Issues without Estate Tax Planning
Estate Tax would be a big headache to your beneficiaries if you do not do something about it today. When one or both parents passes away:
- Personal and Joint Bank Accounts are automatically FROZEN– Until proper Estate Tax has been paid, you cannot withdraw money in any manner, in any amount and for any reason.
- Heirs, Children and Beneficiaries must file Estate Tax within 6 months – Yes. You must file and pay proper estate taxes within 6 months or else penalties and surcharges would apply.
- Forced to Sell Properties at a Loss – Oftentimes, when heirs are in dire need to come up with liquid money to pay off taxes, they are forced to sell properties at a loss.
SOLUTION: Estate Tax Planning
There are many ways on how you can plan your estate. But let me expound on the value of LIFE INSURANCE in Estate Planning. Believe it or not, a simple concept like having life insurance can solve all your estate tax worries.
Why would it work?
- LIQUID FUNDS ASAP, NO QUESTIONS ASKED: When someone passes away, all his liquid assets (cash in bank) are frozen. In order to unfreeze your account and access funds to transfer this money, you need to pay proper estate tax. How? By using life insurance proceeds! Life insurance is fool proof. Once someone passes away, life insurance automatically gives the insurance amount to the beneficiaries.
- SAFETY NET: These liquid assets can also be used for emergency needs, and to make sure your family has sufficient income to continue on with their current lifestyle.
- IRREVOCABLE TRUST, NO ESTATE TAX: When you purchase a life insurance policy, you get to choose if you want to designate your beneficiaries in a revocable trust or irrevocable trust. Each option has its own pros and cons, but choosing an irrevocable trust automatically protects the whole insurance proceeds from estate tax. The life insurance amount will NOT BE SUBJECT TO ESTATE TAX as long as beneficiaries as deemed IRREVOCABLE.
- CHEAPER SOLUTION: Life Insurance is by essence an inheritance gift you can leave to your children. Instead of paying 20% of your assets to Estate Tax, why not use 1-10% of your assets to pay for insurance premiums to generate an insurance policy that is worth your probable estate tax liability? This way, you are only paying for life insurance premiums, and the life insurance coverage can be used to pay your estate taxes.
- NO FAMILY FEUD, HAVE FULL CONTROL OF ASSETS UNTIL YOU ARE READY TO PASS IT ON: Children normally fight over inheritance issues even when the parents are still alive. We can avoid this with life insurance. By naming beneficiaries, you can make sure that everyone gets an equal share in the pot money. At the same time, while you are still alive, you remain to be the owner of the policy. When you pass away, the money is automatically passed on in equal shares to your children.
- PAY YOUR ESTATE TAX ON TIME: Ensure you do everything correctly. Ensure proper estate taxes can be paid from life insurance proceeds.