babylon2k Feb 10, 2023

Managing Tax Liability on Estates

A Guide for Filipino Families courtesy of Babylon2K

NIKKO B. ROMERO

In the settlement of estates in the Philippines, most tax consultants will note several considerations that need to be taken into account. In particular, transferring ownership through inheritance, subject to estate tax– a figure calculated at a rate of 6% of the net estate after allowable deductions.

However, there are ways to manage the amount of tax owed on the property transfer if you are partnering with the correct tax firm. One such method is through a living will (inter vivos), which is still considered as a will that is subject to probate. This practice entails a legal agreement wherein a couple (let's call them Mr. and Mrs. M in this case) can divide their estate among their three children while they are still alive rather than waiting until after the testator passes away. Only one has the right to sign the agreement as joint wills are not allowed in the Philippines. Nonetheless, opting for such a process can reduce the overall estate tax liability by considering the transfer as a donation while the signee is still alive.

There's also the option to manage the estate tax by taking advantage of the exemptions provided under Philippine law. For example, the Philippines has a Php 5 million standard deduction and a Php 10 million maximum allowed deduction for the family home for residents and citizens of the country, which can be applied to reduce the value of the property subject to tax.

If you're looking to manage the tax burden on the transfer of estate, it is crucial to work with a reputable tax and accounting firm which you will find through Babylon2K. Our team of experts can help you navigate the complex legal and tax landscape in the Philippines to ensure compliance and manage tax liability.

One strategy we can implement is a tax-free exchange. This process transfers the said property to a new corporation, in this case, one owned by Mr. and Mrs. M and their children. We, in Babylon2K, call this method the “incorporation model.”

The first step in this process is to establish a new corporation consisting of Mr. and Mrs. M with their children. Babylon2K can then assist with this by providing guidance on the legal requirements and paperwork needed to set up the corporation. After all, tax compliance should always be the first step to making things easier concerning transferring properties.

The next step is to transfer the estate to the corporation, which involves obtaining authorization from the Bureau of Internal Revenue (BIR) and filing the required documents and forms with the Securities and Exchange Commission (SEC). Babylon2K can also assist with this by helping to gather and compile the necessary documentation, including the deed of conveyance, and ensuring that all taxes, DST on the original issuance of shares, and registration fees, are paid accordingly.

Once the transfer is authorized, our firm will process incorporation of a company which will serve as a vehicle to house the properties of the estate.

Finally, the LGU Assessor's Office will issue new tax declarations in the corporation's name. Babylon2K can help with these processes by ensuring that all required paperwork filing is performed, taxes are paid on time, and full compliance is accomplished.

In summary, transferring estate rights can be a complex and time-consuming process. Still, with the help of Babylon2K, Mr. and Mrs. M can rest assured that their property transfer will be handled efficiently and in compliance with all relevant laws and regulations.

Our partner firms’ expertise allows more taxpayers to manage their tax liability while taking advantage of available tax incentives. Our objective is to provide a smoother process in the transfer of real estate inheritance and other associated requirements by avoiding Philippine tax law violations and oversight.