Indeed, it is quite confusing at first. When I took the program and exam on Chartered Trust and Estate Planner a few years ago, my brain was puzzled by legal terminologies. It is imperative to learn and properly understand the provision of laws relating to estate planning. I was thinking, what is the difference between all these tools? If the goal is to transfer ownership of the assets to the desired “heirs” (person called the estate), then the choice of tools won’t matter, right?
Every chapter and storyline in life is unique, and there is no “one size fits all”. A will, gift or sale is an estate planning tool. A person’s life stages and priorities are constantly changing and require a distinct planning approach.
What secrets do the rich have that the poor and much of the middle class take for granted? To guess!
If your answer is “Tax Knowledge”, then you are correct.
Albert Einstein once said, “The hardest thing in the world to understand is income tax.
The WDS applies different tax rates. The latest law implemented in 2018, known as the Trains Law (Tax Reform for Acceleration and Inclusion or Republic Law 10963), contains tax calculations for various modes of transfer of ownership. We will explore them shortly.
This is a type of testamentary succession which results in the designation of an heir under the conditions provided for by law. A “will” is an act by which a person is authorized, with the formalities prescribed by law, to control to some extent the disposition of his estate to take effect after his death. There are two kinds of wills.
First, the notarial will (NW) is executed in a language or dialect known to the “testator” (the person who wrote the will). It is attested and subscribed by at least three credible witnesses in the presence of the testator and of each other. It must be recognized before a notary.
Second, the holograph will (HW) is executed in a language or dialect known to the testator. It is entirely written, dated and signed by the hand of the testator himself. It is not subject to any other form and can be done inside or outside the Philippines and does not need to be certified.
Either NW or HW, on the death of the testator, the “will” must be probated. Probate is the legal process by which a will is proven in court. Once the court approves the “will,” the transfer of assets takes place. The costs associated with the probate process are estimated at 2% of the value of the asset, excluding legal fees and other costs.
Don’t forget the property tax before you can officially transfer ownership of the property. Under the Train Act, the maximum allowable deduction from the gross estate of the deceased is 15 million pesos (10 million pesos for a family home and 5 million pesos for the standard deduction). The excess is the 6 percent tax.
You may ask, is there a way to avoid probate? Yes. Rule 74, Section 1 of the Rules of Court allows for the out-of-court settlement of the estate by agreement between the heirs. Certain conditions must be met before opting for this strategy. It is essential to seek the advice of a lawyer.
A donation is an act of liberality by which a person disposes of a thing or a right free of charge in favor of another who accepts it. According to the Train Law, the donor’s tax is a flat rate of 6 percent with 1.5 percent DST (Documentary Stamp Tax) on net donations for donations over 250,000 pesos, which whatever the relationship between the donor and the donee.
In the previous law, the donor’s tax was in the order of 2 to 15% if the donor and the donee are related, while 30% if the donation was made to a foreigner.
The classification of assets is a fixed asset (CA) and an ordinary asset (OA). The first refers to all real estate owned by a taxpayer and not used for business purposes; an example is a primary residence or a family home. The latter refer to real estate used in the trade or business of the taxpayer.
The sale of CA is taxed at 6 percent CGT (Capital Gains Tax) with 1.5 percent DST. The sale of OA is taxed at 1.5 to 6% of the sale price. An income tax of 6 percent applies if the seller is not ordinarily engaged in the real estate business. 1.5 to 5% CWT (Creditable Withholding at Source) if the seller is usually engaged in real estate. In addition to CWT, the sale of OA is subject to VAT (value added tax) of 12% of the gross sale price plus DST of 1.5%.
Hope this article gives you a better understanding of the tax implications of your decisions going forward. Let me end with the quote:
“You have to pay taxes. But there is no law that says you have to leave a tip.” – Morgan Stanley.
Jose Rodelio Paruginog is a registered financial planner with RFP Philippines. To learn more about personal financial planning, attend the 92nd Bidding Program in October 2021. To inquire, email [email protected] or send an SMS to 0917-6248110.