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FINALS 04.01: ESTATES AND DONOR'S TAX A. INCLUSIONS IN THE GROSS…

- - - - RAs:
        OUT-PH INCLUDED IN GROSS INCOME
        Just like in income tax, NRAs are taxable only on sources derived from income within the Philippines. This is also true for RAs. But, with respect to RAs, you don’t have that same provision for estate tax purposes. Only NRAs would have that benefit of exclusion of property situated outside of the Philippines for estate tax imposition. But, for resident aliens, the properties, wherever situated, would be included in their taxable gross estate
      - INTANGIBLE PROPERTIES
        
        RECIPROCITY = EXCLUDE
        
        NO RECIPROCITY = INCLUDE
        With respect to their intangible personal properties, their inclusion in the gross estate is subject to the rule on reciprocity provided in Section 104 of the NIRC.
    - - RECKONING POINT FOR:
        VALUATION & DEDUCTION
        Generally, at time of death, particularly for valuation purposes and determining allowable deductions from gross estate.
  - - - LEGAL TITLE EXCLUDED
        Conversely, if a decedent holds title to a property merely as a fiduciary, like a trustee or a guardian, then he has no interest in such property that would be includible in his gross estate
      - UNREGISTERED INTEREST
        ● The statute is worded in such a way that not only properties registered or titled in the name of the decedent are includible in his gross estate but also those which, though not registered or titled in his name, are beneficially owned by him or in which he had an interest.
    - - TRANSFERS TAKING EFFECT AT DEATH
        
        "TRANSFERS WITH RETAINED INTEREST"
        
        "REVOCABLE TRANSFERS"
        
        (F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this Code.
        
        (H) Capital of the Surviving Spouse. - 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.
        
        PROPERTY PASSING UNDER A GENERAL POWER OF APPOINTMENT
        
        PROCEEDS OF LIFE INSURANCE
        
        RECEIVABLE BY THE ESTATE or E/A
        (E) Proceeds of Life Insurance. -
        To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life,
        irrespective of whether or not the insured retained the power of revocation,
        or to the extent of the amount receivable by any beneficiary designated in the policy of insurance,
        except when it is expressly stipulated that the designation of the beneficiary is irrevocable.
        
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        "TRANSFERS FOR INSUFFICIENT CONSIDERATION
        
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        (D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment exercised by the decedent:
        (1) by will, or
        (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or
        (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death
        (a) the possession or enjoyment of, or the right to the income from, the property, or
        (b) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth.
        
        ● This general power of appointment is the equivalent of an ownership interest.
        ● General Power of Appointment given by A – income of the trust payable to B during his lifetime, with power of appointment given to C.
        ● Upon B’s death, C shall enjoy the corpus and its fruits for life but, by reason of his power of appointment, “appoints” the property to D under his last will and testament.
        ● A “general power of appointment” is deemed the equivalent of an ownership interest, hence, includible in gross estate of the decedent.
        
        (C) Revocable Transfer. -
        (1) To the extent of any interest therein, of which the decedent has at any time made a transfer
        (except in case of a bona fide sale for an adequate and full consideration in money or money's worth)
        by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power
        (in whatever capacity exercisable)
        by the decedent alone or by the decedent in conjunction with any other person
        (without regard to when or from what
        source the decedent acquired such power),
        to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death.
        
        "REVOCABLE TRANSFER"
        
        SUBJECT TO ANY! CHANGE
        While the heading of Section 85(C) speaks of “revocable transfer”, the provision is by no means limited to a lifetime transfer by a decedent, by trust or otherwise, where he has retained the power to revoke the transfer.
        
        Section 85(C) covers a lot more situations than the heading describes.
        Thus, lifetime transfers by the decedent where the enjoyment of the property is subject, at the time of his death, to any change through the exercise by the decedent of a power to alter, amend, revoke, or terminate, or where any of such powers is relinquished by the decedent in contemplation of death, are covered by Section 85(C).
        
        EXAMPLES OF REVOCABLE
        ● Thus, where the decedent, despite the transfer of properties to a trust, retained the power to
        
        CHANGE SHARES
        (a) change the proportionate share of the beneficiaries of a trust in the income or corpus,
        
        ADD BENEFICIARIES
        (b) name new or additional beneficiaries,
        
        ACCELERATE INCOME
        (c) accelerate delivery of the income or corpus to the beneficiaries, or
        
        INTERFERE IN INVESTMENT
        (d) interfere in the investment of the trust funds such as by investing in high-risk speculative portfolio which may diminish the entitlement of the beneficiaries, the interest of the decedent in the properties transferred may be included in his gross estate for estate tax purposes.
        
        (2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of death.
        
        RETAINED POWER
        TO REMOVE/DISCHARGE TRUSTEE
        ● “In whatever capacity exercisable” – where the decedent may remove or discharge a trustee at any time and appoint himself trustee, he is considered to have all the powers of the trustee.
        
        CONJUNCTION WITH ANY OTHER PERSON
        DESPITE CONSENT
        =Power exercisable only with another=
        through the exercise of a power by the decedent alone or by the decedent in conjunction with any other person the rationale here is that the decedent could easily avoid the estate tax by joining in the exercise of the power of an interested party who is reasonably certain to comply with the decedent’s wishes. It does not matter if the decedent needs the consent of another or the latter needs the decedent’s consent for the power to be exercised. In either case, the decedent is deemed to have the proscribed power.
        
        REAPPOINTED AS TRUSTEE =
        STILL REVOCABLE TO HIM
        “Source of the power” – in one case, the decedent named himself and others as trustees of the trust he created, with power to revoke. Then, he resigned, but only to be reappointed as trustee. Upon his death, his estate argued that he did not retain the power to revoke, but rather he acquired it by virtue of the action of the other trustees
        
        ESTATE TAX:
        TRANSFER IN CONTEMPLATION OF DEATH
        (B) Transfer in Contemplation of Death. -
        To the extent of any interest therein of which the decedent has at any time made a transfer,
        by trust or otherwise,
        in contemplation of or
        intended to take effect in possession or enjoyment at or after death,
        or
        of which he has at any time made a transfer,
        by trust or otherwise,
        
        RETAINED FOR:
        a. LIFE
        b. PERIOD NOT ENDING BEFORE DEATH
        under which he has retained for his life
        or
        for any period which does not in fact end before his death
        
        RIGHT TO:
        a. ENJOYMENT; OR
        b. DESIGNATE
        (1) the possession or enjoyment of, or the right to the income from the property,
        or
        (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom;
        
        except in case of a bona fide sale for an adequate and full consideration in money or money's worth.
        
        RETAINED INTEREST
        
        INCOME
        
        ENJOYMENT
        
        DIVIDEND
        So, that fits perfectly within the purview of this provision: the donor maintains interest over the right to receive the income from the property (nevermind the right to vote, because this can be done by proxy).
        
        But the right to receive dividend income is a retained interest, moreso because it was intended to be retained for life.
        So, she met the two requirements. If something had happened to the donor, those shares of stock, notwithstanding they have already been donated to the children, would be brought back to her estate for estate tax purposes.
        
        RIGHT TO VOTE
        
        "NOT ENDING BEFORE DEATH"
        DIED DURING PERIOD
        The period “which does not in fact end before his death” covers a situation where, for instance, a parent donates a rental property to a child on the condition that he shall continue to receive the rental income for a period of 5 years and he dies within the 5-year period.
        
        DIED AFTER PERIOD
        If the parent dies after the 5-year period, then he has no more “interest” in the property at the time of his death that would be includible in his gross estate.
        
        INTER VIVOS ENJOYMENT
        ● In order for Section 85(B) to apply, it is required that the possession or enjoyment of the property be conditioned on the transferee surviving the decedent. Thus, if the transferee can have possession or enjoyment of the property during the lifetime of the decedent, then the property is no longer includible in the gross estate of the decedent.
        
        DONEE PREDECEASE -> REVOKE
        MORTIS CAUSA
        More so, when the deed of donation states that “in the event that the DONEE should die before the DONOR, the present donation shall be deemed rescinded and of no further force and effect.” Ganuelas v. Cawed, 401 SCRA 447 (2003) ○ Again, it is no different from a testamentary disposition, or a transfer by will.
        
        MUST COMPLY WITH
        FORMALITIES OF A WILL
        ● Moreover, the SC held in Ganuelas v. Cawed that the donation inter vivos, being essentially equivalent to a testamentary disposition, must comply with the requirements and formalities of a will.
      - ESTATE TAX:
        TRANSFER IN CONTEMPLATION OF DEATH
        (B) Transfer in Contemplation of Death. -
        To the extent of any interest therein of which the decedent has at any time made a transfer,
        by trust or otherwise,
        in contemplation of or
        intended to take effect in possession or enjoyment at or after death,
        or
        of which he has at any time made a transfer,
        by trust or otherwise,
        under which he has retained for his life
        or
        for any period which does not in fact end before his death
        (1) the possession or enjoyment of, or the right to the income from the property, or
        (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom;
        except in case of a bona fide sale for an adequate and full consideration in money or money's worth.
        
        GRATUITOUS TRANSFERS ONLY
        ● The above provision, however, targets only gratuitous transfers. Thus, where a person with terminal illness sold a property for a valuable and sufficient consideration and dies a few weeks or months later, the transfer may not be considered made in contemplation of death. The proceeds of the sale, of course, will be includible in the decedent’s gross estate.
        
        CASE-TO-CASE
        This necessitates a case-to-case approach. The BIR cannot say it is a transfer in contemplation of death simply because death happened shortly after the transfer or the duration. You have to take into account a myriad of factors such as the donor’s age, his health, the intention, the relationship, or whether the donation was made with the transferor contemporaneously making a will.
        
        INSUFFICIENT CONSIDERATION
        Transfers for insufficient consideration are also treated under another heading in the NIRC.
        
        TRANSFER FOR
        VALUABLE CONSIDERATION
        Or what if, Sir is 85 years old, and he makes a donation or transfers the property for a valuable consideration. That is not a transfer in contemplation of death, even if death was his primary consideration, for selling his property. If he is 85 years old and wants to cash in on his properties, he sells, knowing that he doesn’t have much time left. Even if, one week after the sale, he drops dead, the same is not a transfer in contemplation of death. Such does not include transfers for valuable and sufficient consideration. It targets only gratuitous transfers like donations, where there is no valuable or sufficient consideration.