Leaving a Legacy, Not a Tax Bill
The passing of a loved one brings not only emotional grief but also the practical reality of settling their affairs. A crucial part of this is understanding estate tax, a tax imposed by the government on the privilege of transferring the deceased person's (the decedent's) properties, rights, and interests to their lawful heirs and beneficiaries.
Often misunderstood, estate tax is not a tax on the property itself, nor on the heir's right to receive the inheritance. Instead, it's a tax on the transfer of wealth from the dead to the living. Ensure your loved one's legacy is passed on smoothly and without unnecessary penalties.
What is Estate Tax?
Under the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 10963 (TRAIN Law), estate tax is applied to the net value of the decedent's estate. The "estate" is considered a separate legal entity for tax purposes, distinct from the heirs.
Who Pays and Who Receives?
Who Pays: The estate itself is the one legally obligated to pay the estate tax. This payment is typically handled by the executor (if there's a will) or the administrator (if there's no will and one is appointed by the court), or by the legal heirs themselves (especially in cases of extrajudicial settlement).
Who Ultimately Bears the Burden: While the estate pays, the amount of the inheritance that heirs receive is reduced by the estate tax. Essentially, the tax is paid out of the inherited properties before they are fully transferred.
Understanding Heirship and Shares: The "Legitime" and Intestate Succession
Before calculating the estate tax, it's vital to know who the legal heirs are and their respective shares. Philippine law ensures that certain individuals, known as compulsory heirs, cannot be deprived of a portion of the inheritance (their legitime), except for very specific legal reasons like disinheritance. This is primarily governed by the Civil Code of the Philippines.
Here's a simplified overview of how shares are generally determined, especially in cases of intestate succession (no will), or how legitimes affect distribution even with a will:
Legitimate Children/Descendants (Article 887, 888 Civil Code):
Legitimate children are considered primary compulsory heirs.
They inherit equally among themselves.
Their legitime (reserved portion) is generally one-half (1/2) of the hereditary estate, to be divided equally among them.
Surviving Spouse (Article 887, 892, 893, 996-999 Civil Code):
The surviving spouse is also a compulsory heir.
Their share depends on who else they concur with:
With one legitimate child: The spouse gets a share equal to that of the legitimate child. (e.g., if one child and spouse, they share the legitime equally).
With two or more legitimate children: The spouse gets a share equal to that of one legitimate child.
With illegitimate children only (no legitimate children): The spouse generally gets half of the estate, while illegitimate children share the other half.
Illegitimate Children (Article 887, 895, 990 Civil Code):
Illegitimate children are also compulsory heirs, but their legitime is generally one-half (1/2) of the share of a legitimate child.
This 1:2 ratio (illegitimate:legitimate) is strictly maintained in the distribution of the estate.
Example (simplified, assuming no spouse): If a legitimate child gets ₱2 Million, an illegitimate child gets ₱1 Million.
Other Compulsory Heirs: In the absence of children/descendants, legitimate parents/ascendants become compulsory heirs. Other relatives (like siblings) may inherit if there are no compulsory heirs.
The portion of the estate not reserved as legitime is called the "free portion," which the decedent can dispose of freely through a will. However, even with a will, the legitimes of compulsory heirs cannot be impaired.
How is Estate Tax Computed?
The computation of estate tax under the TRAIN Law has been simplified to a flat rate of 6% of the net taxable estate. Here's a simplified breakdown:
Determine the Gross Estate: This includes the fair market value of all property, real or personal, tangible or intangible, wherever situated, owned by the decedent at the time of their death (for Filipino citizens and resident aliens). For real properties, the higher value between the zonal value (BIR) and the fair market property value (City/Municipal Assessor's value) at the time of death is considered.
Marital Property Regimes and Gross Estate Inclusion:
When the decedent was married, it's crucial to distinguish between properties belonging solely to the decedent and those shared with the surviving spouse. Only the decedent's exclusive (separate) properties and their one-half (1/2) share in the common properties (conjugal or community) are included in the Gross Estate for tax purposes.
The Family Code of the Philippines governs the marital property regime, which determines what constitutes common versus exclusive property:
Absolute Community of Property (ACP): For marriages celebrated on or after August 3, 1988, in the absence of a prenuptial agreement. Generally, all properties owned by the spouses at the time of marriage or acquired thereafter, form part of the communal property (Article 90, 91 Family Code), except for certain exclusions (e.g., property acquired before marriage by gratuitous title). Upon death, the decedent's share is one-half of the net community property.
Conjugal Partnership of Gains (CPG): For marriages celebrated before August 3, 1988, in the absence of a prenuptial agreement. Generally, properties acquired during the marriage through the efforts of either or both spouses, or from their common funds, form part of the conjugal property (Article 106, 117 Family Code). Upon death, the decedent's share is one-half of the net conjugal property.
Separation of Property: This regime exists if agreed upon in a prenuptial agreement or by judicial decree. Under this, spouses own their properties separately, and there is no common property.
The surviving spouse's own one-half (1/2) share in the common properties is excluded from the decedent's gross estate for estate tax purposes (Section 85(H) of the NIRC, which states: "The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate").
Deduct Allowable Deductions: From the Gross Estate, certain deductions are allowed to arrive at the Net Taxable Estate:
Standard Deduction: A fixed amount of PHP 5,000,000.00 (no need for substantiation).
Family Home Deduction: Up to PHP 10,000,000.00, provided it was the decedent's actual family home.
Claims Against the Estate: Valid debts of the decedent.
Unpaid Mortgages/Indebtedness: On properties included in the gross estate.
Property Previously Taxed: If certain property was recently inherited or gifted and already taxed.
Transfers for Public Use: Bequests to the government for public purposes.
Net Share of the Surviving Spouse: One-half of the conjugal or community property (if applicable) is excluded from the decedent's gross estate.
(Note: Under TRAIN Law, specific deductions for funeral and medical expenses are no longer allowed as separate items; they are deemed covered by the larger Standard Deduction.)
Compute Net Taxable Estate: Gross Estate minus all allowable deductions.
Apply Tax Rate: Multiply the Net Taxable Estate by the flat 6% rate.
Key Deadlines for Ordinary Estate Tax Filing:
Filing of Estate Tax Return (BIR Form 1801): Within one (1) year from the decedent's date of death. This period can be extended by the Commissioner for valid reasons, for a maximum of 30 days.
Payment of Estate Tax: Generally due at the time the return is filed. Payment by installment is allowed within two (2) years from the statutory due date without civil penalty and interest, if the estate has insufficient cash.
Estate Tax Amnesty
The government provided a significant opportunity for many heirs to settle outstanding estate tax liabilities through the Estate Tax Amnesty program, introduced under Republic Act No. 11213 and later extended by Republic Act No. 11956. This amnesty covered the estates of decedents who died on or before May 31, 2022, with unpaid or accrued estate taxes as of that date.
Benefit of Amnesty: It allowed eligible estates to pay a flat 6% estate amnesty tax on the net estate (or a minimum of PHP 5,000, whichever was higher), with all penalties, surcharges, and interest waived.
Final Deadline: The deadline to avail of this amnesty was Monday, June 16, 2025. The BIR issued a Tax Advisory (e.g., dated June 11, 2025) to remind taxpayers of this final extension from June 14, 2025, and encouraged early filing and over-the-counter payments (as online payment was not available for amnesty).
What This Means Now: For those who successfully availed and completed the requirements by June 16, 2025, they have secured significant relief from penalties and regular estate taxes. For estates that missed this final deadline, the regular estate tax rates (including 20% interest per annum and surcharges) will apply from the original due date of the tax. The BIR has stated that any incomplete applications or payments made without full compliance by the deadline may be applied against the regular tax due with all penalties.
Need expert guidance on navigating Estate Taxes? Aboveboard provides transparent and straightforward compliance advice to individuals and businesses throughout the Philippines.