Planning for the future has always been part of everyone’s agenda. After going through the motions of establishing your career, saving up to acquire property and thereafter making sound investments for our family, did it ever cross your mind as to what you plan to do with your assets when you retire, until nature takes it course?
Morbid as it may sound, what would be even more terrifying would be family members squabble and quarrel over what is rightfully theirs. I know that at the back of your head, you might be thinking that it’s not coming to that, well do hope for the same but the reality is that, there is that looming possibility that it may happen.
The most overlooked part of the entire process would be estate planning. Wealth management includes Estate Planning which refers to the process of anticipating and arranging, during a person’s life, for the management and disposal of that person’s estate during the person’s life and at and after death, while diminishing donor’s, estate, income, and other applicable taxes.
In the Philippines, estate taxes range from 5%-20% depending on the value of the net estate, which is arrived at by getting the difference from the gross estate less the statutory exemption. This range may look deceivingly small but the imposition of this and other taxes, such local transfer taxes, are the reasons why liquidating assets and acquiring new Transfer Certificate of Titles for real property are left stuck in the middle ages.
These taxes have to be settled in order for the properties to be transferred to the deceased person’s heirs. Other than this, there are also legal fees and charges associated with the cost of transferring ownership and disposition of the estate.
Under the National Internal Revenue Code, the estate tax has to be settled and the return filed within 6 months from the death of the decent. The law likewise provides that if paying the estate tax would bring undue hardship to the family, upon a petition with the Commissioner of Internal Revenue may extend the payment of estate tax for 2 years in case of extrajudicial settlement of the estate. Extrajudicial settlement occurs when the decedent (deceased person) died without a last will and testament. This occurs when the heirs execute a partition agreement and divide the estate among themselves.
If the decedent died and left a last will and testament, the will would have to be submitted for probate. Probate refers to the legal process instituted by the heirs whereby a wills validity is proved as the last true statement of the deceased. Unlike the extra judicial settlement, the Commissioner may grant an extension of 5 years for the heirs to settle the estate tax.
The least we could do to help you avoid “Bad Blood” between family members is to plan for your future. Being in business of providing sound legal counsel and personal asset management, we have the following options available for you:
Life insurance – The proceeds of a life insurance policy taken out by the decedent upon his own life, which designates the heirs as the irrevocable beneficiary, is not subject to estate tax. Proceeds of the life insurance will address liquidity concerns while the estate is being settled. The premium payments can be taken from assets of the decedent which will lessen the estate tax.
Sale of Real Property – One may just consider selling assets, as a mode of transferring ownership, to a potential heir (other than a spouse) rather than allowing it to become part of the estate. In particular, the sale of real property that is considered a capital asset will only attract 6% capital gains tax, 1.5% documentary stamp tax and 75% of 1% local transfer tax, compared with estate tax which has a maximum effective rate of 20%. However, the sale between spouses is allowed only when the husband and wife are under the regime of complete separation of property.
Donation – If the potential heir has no capacity to buy property, one may just donate the property. Donor’s tax has a maximum effective rate of 15%, which is still lower than the maximum effective estate tax rate of 20%. The amount or value of the asset donation is also already carved out from the estate, reducing the taxable estate. It is important to note that if you donate to a stranger (that is, someone who is not your brother or sister, ancestor or lineal descendant or first cousin), the donor’s tax goes up to 30%.
Establishing a Trust – Trust is a legal instrument or device whereby a person called a Trustor delivers part or all of his properties to another person called Trustee who will administer and manage the property/ies for the benefit of designated person/s called Beneficiaries. The term “person” may refer to an individual or natural person or a juridical person like a corporation. Trust is grounded on the fact that the legal title to the property is in one person while the beneficial interest which is referred to as the “equitable title” is in another person. The legal right of ownership and control are in the trustee, subject to the duty of applying and using the property as directed by the trustor, while the right to enjoy the benefits from the property is in the beneficiary of the trust.
For more information about this topic, you may contact Atty. Joyce Felisa Domingo-Dapat at (+63) 917 548 8045. Atty. Joyce is the founding partner of Domingo-Munsayac and Associates. Her practice areas include intellectual property law, family law, real estate transactions, corporate law, immigration, taxation and litigation. She also specializes in estate planning and handles judicial and extrajudicial settlement of estates.