ESTATE PLANNING IS THE KEY They say “never take life too seriously, after all, no one gets out alive.” For people who are in advanced age or suffering from serious illness, death comes at an expected time. But for many, it comes unforeseen like “a thief in the night.” From the tax point of view, death is something worth seriously planning for. Upon the death of a person, certain tax obligations have to be performed by his bereaved heirs, administrator or executor (in case the deceased left a last will). These include the following: -WITHIN 60 DAYS 1. Give a Notice of Death to the Commissioner of Internal Revenue (Commissioner); and 2. Pay the Local Transfer Tax (LTT). This is either 50% or 75% of 1% of the fair market value of the real estate assets depending on the location of the properties. -WITHIN 6 MONTHS 1. File the estate tax return. In meritorious cases, this could be extended by the Commissioner for another 30 days.; and 2. Pay the estate tax. In case the payment will impose undue hardship upon the heirs or the estate, the Commissioner may likewise extend the time within which to pay the estate tax for 2 years in case the estate is settled extra-judicially or 5 years in case of settlement is made through a court. On top of those tax duties, the bank in which the deceased maintained a bank deposit ALONE or JOINTLY WITH ANOTHER, upon learning of the depositor’s death, is likewise mandated by law not to allow ANY withdrawal from the said deposit account. The prohibition to withdraw shall only be lifted upon certification by the Commissioner that the taxes imposed thereon have been paid. This is the reason why bank withdrawal slips contain a statement under oath that all of the joint depositors are still living. Because of those tax consequences of death, the usual problem of the heirs is liquidity, that is where to get the cash to pay the LTT and estate tax. Note that late payment of those taxes will attract high penalties. The heirs are lucky if one of them would volunteer to shoulder or advance the taxes. Otherwise, they may end up either pointing to each other (who shall advance the tax) or selling prime properties way below the market value just to produce the badly needed money. But who will decide which properties shall be sold and how much will they be sold? More often than not, these unfortunate situations cause a disagreement among the heirs, thereby breaking their cordial relationship. With a good foresight, the problems encountered by the heirs could be avoided through a well thought estate planning. Some of the available estates planning tools are: 1. SALE OF REAL PROPERTIES TO THE POTENTIAL HEIRS. It should be noted that in the sale of real property classified as capital asset, the taxes would only be 6% Capital Gains Tax (CGT), 1.5% Documentary Stamp Tax and 50%-75% of 1% LTT (total of 8.25%). This is much lower compared to the maximum effective rate of estate tax which is 16%; 2. DONATION TO THE POTENTIAL HEIRS. If the potential heir has no apparent source of money to buy properties, donation could be a good alternative. Normally, a potential heir is a relative of the future decedent, that is a brother, sister (whether whole or half blood), spouse, ancestor and lineal descendant or relative by consanguinity in the collateral line within the fourth degree of relationship. In which case, the maximum effective rate of donor’s tax would be 12.5%. Again, that tax rate is much lower than the 16% maximum effective rate of estate tax. Please note, however, that when the donation is made to a stranger (not one of those mentioned), the donor’s tax rate is 30% regardless of the value of the property donated; 3. LIFE INSURANCE WITH IRREVOCABLE BENEFICIARY. As a general rule, proceeds of life insurance taken out by the deceased upon his own life shall be subject to estate tax. However, when the designation of the beneficiary is irrevocable, the proceeds shall NOT be subject to estate tax. The proceeds of life insurance may also be used by the heirs for the payment of LTT and estate tax, thereby solving their liquidity problem; and 4. TAX FREE EXCHANGE. This is done by transferring properties to a corporation in exchange for shares of stock. The law provides that no taxes shall be imposed if a. the property is transferred to a corporation by a person; b. in exchange for shares of stock in such corporation; and c. as a result of such transfer, the said person (making the transfer), alone or together with others, not exceeding four, GAINS CONTROL of the said corporation. After the transfer described above, the transferor may sell his shares of stock to his potential heirs and be subject to a lesser tax compared to estate tax. The sale of shares of stock not traded in the stock exchange is subject to CGT of 5% for the first P100,000.00 of the NET capital gains. In case the net capital gain is more than P100,000.00, the excess shall be subject to 10% CGT. Death is inevitable. With its tax consequences in mind, it is worthwhile to formulate an estate plan suitable to the nature of the properties and other circumstances of the property owner. If one desires to transfer his properties to the potential heirs in an orderly and tax efficient manner and to maintain peace in his family after his death, estate planning is the key. This article is for general information only and not intended as a substitute for a professional advice on a specific tax issue. For questions or comments, the author may be reached via business_tax@yahoo.
Posted on: Mon, 30 Jun 2014 00:46:04 +0000
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