All Saints’ and Souls’ Day have just passed, reminding us that, despite our advances in technology and medicine, death remains an inevitable part of life.

Visiting the graves of our loved ones prompts us to reflect on our own mortality. It’s natural to worry about how we can ensure we are able to take care of them financially after we die.

When someone passes away, their net worth—including property, possessions, and other assets—forms their “estate.” This is why planning for the smooth transfer of our assets is called “estate planning.”

When done thoughtfully and in accordance with the law, estate tax planning can be a beneficial form of tax avoidance.

Tax avoidance and tax evasion are two approaches to managing tax liabilities. Tax avoidance involves using legal strategies to minimize taxes and is valid and legal. On the other hand, tax evasion refers to illegal methods that can lead to civil and criminal penalties. (CIR v. The Estate of Benigno P. Toda, Jr., GR 147188, Sept. 14, 2004).

Here are some allowable estate tax planning methods.

1. Donation

The TRAIN Law has lowered the donor’s tax to 6% of the value of the property donated. Accordingly, estate tax, donor’s tax and capital gains tax on sale of real property are now all set at 6%.

Even with the uniform rates, there are still advantages in utilizing donations as an estate planning tool. For example, annual donations by the donor not exceeding the amount of PhP250,000 are exempt from donor’s taxes. This means donations can be made little by little every year and, this is tax free.

The recipient of a donation, the donee, does not need to show that they have the financial capacity to purchase the property donated as opposed to the sale/ purchase of property subject to the capital gains taxes. Here, the donee does not need to worry about the Bureau of Internal Revenue asking questions about how it was able to afford the property.

Significantly, donating a property in the present could also be a tax saving measure since the 6% donor’s tax is computed based on the present market value of the property at the time of the donation. Any appreciation of the property value is immaterial and will not change the amount of donor’s tax to be paid.

On the other hand, the estate tax is based on the value of the property at the time of death of the decedent. Since land and real property generally appreciate over time, taxes on real property paid now will usually be lower than taxes paid at a future time on the same property.

2. Irrevocable trust

The creation of a trust is also tool for estate planning. Notably, transfers of assets to an Irrevocable Trust, one which generally the terms and conditions can no longer be modified once created, is treated as a donation and will be subject to the 6% donor’s tax. The property held by the trust shall no longer be subject to the estate tax upon the death of the Trustor as the ownership over the property passes to the trust.

Should the property in trust appreciate in value in the meantime, there are no additional taxes involved.

Availing of a trust as a vehicle for estate planning may appeal to those who have heirs or beneficiaries who are minors or unable to manage the property. The Trustee of the trust is tasked with the management and care of the property held in trust for and on behalf of the named beneficiaries of the trust. Moreover, save for certain exceptions, assets transferred to an Irrevocable Trust are protected from creditors of both the Trustor and the Beneficiaries.

Accordingly, this tool can be useful for the peace of mind of parents of minor children who wish to ensure that their children are protected from claims from a failed marriage or future in-laws.

3. Life insurance

Our Tax Code provides that proceeds from life insurance policies shall not be included in the computation of the estate of the deceased when the beneficiary is other than the estate, executor or administrator, and the designation is “expressly stipulated” to be irrevocable.

For those who have met with insurance sales agents, they would be familiar with the sales pitch informing them that it would be a good idea to obtain a life insurance policy and naming their spouse or children as beneficiaries as any payout would be tax free.

4. Tax free exchange of property

A discussion on estate tax planning will not be complete without mentioning one of the most used tax planning tool which is the tax free exchange of property.

Under Section 40(C) (2) of the Tax Code, as amended by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, transfers of property by an owner by reason of reorganization or transfer of property to a controlled corporation in exchange for shares of stock are treated as no-gain and tax-free transactions.

With respect to estate tax planning of individuals, the tax code provides that no gain or loss shall also be recognized if property is transferred to a corporation by a person, alone or together with others, not exceeding four (4) persons, in exchange for stock or unit of participation in such a corporation of which as a result of such exchange, the transferor or transferors, collectively, gains or maintains control of said corporation.

Therefore, in such transactions, there is no capital gains and documentary taxes due on the transfer of the property. Any documentary stamp taxes due pertains to that covering the shares issued to the transferor. In addition, sale or exchanges of property used for business for shares of stocks covered under Section 40(C)(2) shall also not be subject to value-added tax.

There are several advantages in this method. Since the heirs inherit shares of stock in the corporation holding the asset, these shares are much easier and faster to transfer to the heirs as compared to a land title over a property. Moreover, even if the asset transferred into the corporation appreciates in value, this will not affect the estate tax to be paid as assets held in a corporation are valued based on their historical or acquisition cost.

If the transferors of the assets to the corporation, now the controlling stockholders, wish to transfer their shares to their beneficiaries during their lifetimes, they can also do so tax free via donation for as long as the value does not exceed PhP250,000 per year.

5. Estate and the family home

For those who have availed of the other methods of estate tax planning, they could also choose to retain their family home in their names depending on the value of their property.

The Tax Code provides that there are deductions to the gross value of the estate which are the Standard Deduction of PhP5 million and a maximum of PhP10 million for the family home. Accordingly, for those estates with assets that will not exceed the said amounts, there would be zero estate taxes due to be paid.

Estate tax amnesty

Before ending, it is worth mentioning that the estate tax amnesty has been extended to until June 14, 2025 and it covers the estates of persons who passed away on or before May 31, 2022. Penalties and interests have been waived and the estate tax rate is set at 6%.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)