Preparing for the certainty of estate taxes

Nothing, it is said, is certain in this world but death and taxes. With such inevitability upon us, we should be prepared.  Much more should we anticipate estate tax, the so-called “tax on death” that morbidly combines these two certainties.

Estate tax, due six months after death, is a tax on the right to transfer properties of the deceased to his or her heirs and pass the enjoyment of the properties to them. While it is quite a tribulation for a family to mourn and handle emotional pain, overcoming estate tax matters should be seen as part of moving forward. The heirs will sooner be able to enjoy the inherited properties as true owners, including the ability to sell, as soon as the estate tax is settled. A few tasks must be accomplished to make the ordeal easier.

Identify the estate properties. The first task of the heirs upon the passing of a family member is to identify the properties of the deceased relative, including conjugal properties if the relative was married. These comprise the departed’s gross estate.

For residents and citizens, all properties, wherever they may be located, are included in the gross estate. For non-resident aliens, generally, only properties found in the Philippines are included.

In addition, a notice of death must be filed within two months from date of death if the gross estate exceeds P20,000. This is done by sending a letter informing the Revenue District Office where the deceased resided, and providing a copy of the Death Certificate.

Organize receipts and documents. Estate tax is based on the value of the net estate (that is, the gross estate less deductions and the share of the surviving spouse if the deceased is married), so maximizing allowable deductions under tax laws would lessen the amount of tax.

Dealing with the BIR consists mostly of presenting documents in support of the properties included in the gross estate and the expenses claimed as deduction. As such, it is important to keep these documents organized and the originals available for inspection. For properties forming part of the estate, the examiner will require proof of ownership such as land titles, tax declarations, certificates of registration and stock certificates.

Among the deductions allowed, medical expenses and funeral expenses are commonly unexhausted due to lack of documentation. The tax rules allow up to P500,000 in medical expenses incurred up to one year prior to the death, and up to 5 percent of the gross estate or P200,000 of actual funeral expenses, whichever is lower, from the date of death up to interment.

While the rules allow substantiation of expenses through receipts, invoices or other evidence showing they were in fact incurred, it is best to present official receipts with TIN and VAT registration numbers indicated to avoid the claims being disallowed.

Exert earnest efforts to settle the estate. Some families encounter delays in payment of the estate tax due to disagreement on the partition of the properties. The Tax Code allows a reasonable extension of the period to file the estate tax return and to pay the taxes, but most of the time, the period is insufficient considering the stressful and emotionally charged dialogues.

Filing beyond the extended period puts the estate at risk of surcharges and interests in addition to other penalties. The heirs should remember these risks, as well as the ultimate objective of closure and enjoyment of the estate properties. The heirs may consider asking a respected family member or a neutral third party mediator to help move things along should they be caught in an impasse.

Consider consulting a professional. While anybody can fill up an estate tax return, expertise in tax laws can lead to significant tax savings. A tax professional can be most helpful in arriving at a reduced computation of the tax due and addressing concerns of the BIR examiner regarding legal and factual matters.

Prepare for payment. Ideally, the cash of the estate would be enough to answer for the taxes due. However, most of the time, the heirs will need to liquidate properties first. The estate tax rules under Revenue Regulations 2-2003 allow payment in installment, subject to applicable penalties or interest for the portions paid after the due date. With a schedule in mind, the heirs should be able to financially plan for the payment lest a higher amount be due on the estate.

All Saints’ Day is an occasion for most Filipinos to recall the life, and honor the memory, of our dearly departed. It should not be an event to spook us with unaccomplished estate tax responsibilities. Settling estate taxes sooner rather than later will help families move on as quickly and painlessly as possible.

(Ria Carmela R. Cruz is a Senior Associate at Tan Venturanza Valdez.)