Thursday, May 30, 2013

Settlement of Estate; Estate Taxes; Delays and their Consequences

Incidents of a Person’s Death.
Typically, there are, to my mind, two main incidents of a person’s death: Succession and Taxation. These two come hand in hand, meaning if you succeeded to a nil estate, you are taxed nil.
The legal process by which a deceased’s net estate is distributed to the heirs is called Settlement of Estate. It could either be a testate proceeding, where the deceased left a will, in which case the latter is also called the testator, or intestate proceeding, where the deceased left no will, and in which case the latter is simply referred to as the decedent. The term decedent is plain and generic to a person who dies with or without a will.
Settlement of Estate may be done either judicially or extra-judicially. However, there are circumstantial requirements that make extra-judicial settlement (fast and less expensive) available or possible. For instance, if the decedent left a will, the heirs foreclose their option of settling the estate out of court (extra-judicial), submission to probate being the only route.
Even if the decedent left no will, but the heirs are in disagreement on the particulars or conditions of partition, or the decedent left debt/s, they likewise have to go to court for the settlement of respective creditor’s claims, and to make a determination of the heirs’ share thereof applying the laws on intestacy or legal succession. Also, if the amount of the estate exceeds Ten Thousand Pesos (Php10,000.00), extra-judicial partition is not available. In judicial settlement of estate, where the decedent left no will, a letter of administration shall be applied for, and granted by, the court where the same is filed.
Probate of a Will, Testate Proceeding
Book 2, Chapter 2 of the New Civil Code defines a Will, viz:
Art. 783. A will is an act whereby a person is permitted, with the formalities prescribed by law, to control to a certain degree the disposition of his estate, to take effect after his death. (667a)
Two kinds of Will:
Holographic Will. A holographic will must be entirely written, dated, and signed by the hand of the testator himself. It is subject to no other form, and may be made in or out of the Philippines, and need not be witnessed (Article 810, Civil Code).
Notarial Will. Notarial Will is governed by the following provisions of the Civil Code, among others:
Art. 805. Every will, other than a holographic will, must be subscribed at the end thereof by the testator himself or by the testator’s name written by some other person in his presence, and by his express direction, and attested and subscribed by three or more credible witnesses in the presence of the testator and of one another.
The testator or the person requested by him to write his name and the instrumental witnesses of the will, shall also sign, as aforesaid, each and every page thereof, except the last, on the left margin, and all the pages shall be numbered correlatively in letters placed on the upper part of each page.
The attestation shall state the number of pages used upon which the will is written, and the fact that the testator signed the will and every page thereof, or caused some other person to write his name, under his express direction, in the presence of the instrumental witnesses, and that the latter witnessed and signed the will and all the pages thereof in the presence of the testator and of one another.
If the attestation clause is in a language not known to the witnesses, it shall be interpreted to them.
Art. 806. Every will must be acknowledged before a notary public by the testator and the witnesses. The notary public shall not be required to retain a copy of the will, or file another with the office of the Clerk of Court.
In a Will, four parties may figure out: Indispensably, the testator who made the Will; the executor (she is also called executrix),or the person upon whom the testator has left the task of implementing the provisions of the Will; the legatee or the person on whom personal property is given; and the devisee on whom real property is given.
While the will takes effect upon the death of the testator, it can however be probated during the testator’s lifetime. In fact, this is favored as the testator could no doubt establish and affirm the validity of his own Will.
Where the decedent left a Will, any interested party (heirs, creditors, or anyone with equitable claim against the estate) may file a petition for Probate of the Will (a special proceeding governed by special set of rules under Rule 73 of the Revised Rules of Court) before the proper court: within Metro Manila, Municipal Trial Court (MTC) if the estate does not exceed Four Hundred Thousand Pesos (Php400,000.00) or the Regional Trial Court (RTC) if the estate exceeds said amount; outside of Metro Manila, Municipal Trial Court (MTC) if the estate does not exceed Three Hundred Thousand Pesos (Php300,000.00) or the Regional Trial Court (RTC) if the estate exceeds said amount.
Probate of a Will is mandatory: a Will shall pass no property, either personal or real, unless it is proved and allowed in a proper court. It is not at the option of the heirs whether to file for Probate or not. Even when an intestate proceeding had already commenced, once a Will of the same decedent is submitted to court, the latter is under obligation to suspend the same and supplant it with the proper Probate proceeding to determine its extrinsic validity: genuineness and due execution; and thereafter confirm its intrinsic validity.
This is so because as held by the Court in Dy Yieng Sangio V. Reyes (G.R. 140371-72, Nov. 27, 2006):
 “It is a fundamental principle that the intent or the will of the testator, expressed in the form and within the limits prescribed by law, must be recognized as the supreme law in succession. All rules of construction are designed to ascertain and give effect to that intention. It is only when the intention of the testator is contrary to law, morals, (sic) public policy, that it cannot be given effect.”
The judicial venue is determined by the decedent’s residence at the time of his death, and if he was an alien, the place in which he had estate (where properties are located).
Power of the Probate Court
Probate courts and proceedings therein deal generally with the extrinsic validity of the Will: that it is indeed the decedent’s will; that the testator has the testamentary capacity; that the Will complies with the formalities prescribed by law; and that the Will was duly executed (includes the determination if the testator was of sound and disposing mind at the time of execution, that he had freely executed the will, and was not acting under duress, fraud, menace or undue influence).
However, the courts have the power to pass upon issues concerning intrinsic validity (legitime or reserved shares of compulsory heirs, or compliance with the provisions on succession), and can declare a Will void even after it had been admitted to probate (declared extrinsically valid). In that sense, probate proceeding is in fact a two-stage proceeding. If a will is extrinsically invalid, it is voided and laws on intestacy (legal succession) apply even if it is found intrinsically valid. If the Will is intrinsically invalid, it is voided and laws on intestacy apply even if it had been found extrinsically firm.
When the Will has already been allowed, and creditors have already been paid, the net estate is now ready for distribution to the heirs. Here is where the snag comes in.
In our jurisdiction transfer of properties incident to the Settlement of Estate is allowed only upon securing a Tax Clearance or Certificate Authorizing Registration (CAR) from the Bureau of Internal Revenue (BIR) evidencing that Estate Taxes on the decedent’s Estate have been satisfied or paid.
Section 90 of the National Internal Revenue Code (NIRC) provides:
SEC. 90. Estate Tax Returns.
(A) Requirements. - In all cases of transfers subject to the tax imposed herein, or where, though exempt from tax, the gross value of the estate exceeds Two hundred thousand pesos (P200,000), or regardless of the gross value of the estate, where the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee, the executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth:
(1) The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;
(2) The deductions allowed from gross estate in determining the estate as defined in Section 86; and
(3) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes.
Provided, however, That estate tax returns showing a gross value exceeding Two million pesos (P2,000,000) shall be supported with a statement duly certified to by a Certified Public Accountant containing the following:

(a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;
(b) Itemized deductions from gross estate allowed in Section 86; and
(c) The amount of tax due whether paid or still due and outstanding.
(B) Time for filing. - For the purpose of determining the estate tax provided for in Section 84 of this Code, the estate tax return required under the preceding Subsection (A) shall be filed within six (6) months from the decedent's death.
A certified copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner within thirty (30) days after the promulgation of such order.

Naturally, there are consequences to delays or failure to comply with the provisions of the tax law. In this case, the consequences are rather hefty. For failing to file on time, the filer is charged a penalty (some fixed amount), plus interest (at some rate per annum) from the time the tax is due until it is paid.
However, the Commissioner may, in meritorious cases, grant a reasonable extension for the filing of Estate Tax Return of not exceeding thirty (30) days. Further, if the Commissioner finds that the payment of the estate tax or any part thereof on the due date would impose undue hardship upon the estate or any of the heirs, he may extend the payment of such taxes for a period not exceeding five (5) years in case of judicially settled estate, or two (2) in case of extra-judicially settled estate.
To reinforce the foregoing provisions and ensure payment of estate taxes the NIRC imposes upon, among others, RD, SEC, LTO, and other agencies with which registration of registrable properties is filed, the duty to allow transfers or registration in the name of transferee/s only upon production and presentation of Tax Clearance or Certificate Authorizing Registration (CAR) evidencing payment of estate taxes thereon.
Settle the Estate Taxes Promptly and Save the Estate
In my experience, it is NOT uncommon to come across heirs settling the estate of the decedent, and pay the corresponding estate taxes years after the latter’s death. Heirs, oblivious of the implications, do not bother to settle the estate of the decedent until there is that need to transfer titles to properties comprising the estate like when they decide to partition or sell whole or part of the estate.
Sadly, by that time, considerable time has likely elapsed, and the tax consequences have already factored in. One thing is for sure, though, you had better settle that NOW regardless of delays already incurred, than settle later and decimate the estate with penalties and interest on unpaid taxes.
Once you have the Tax Clearance, next stop is with Register of Deeds (RD) for registration: cancellation of prior titles, and issuance of new titles (subject to provision of law on redemption, where applicable). Of course, there is a registration fee of some amount for every thousand. By the time you get to the RD, you might have already sold the property so things should now be lighter for you.
With regards to extra-judicial settlement, again where circumstances warrant, it should be a breeze: less tedious and costly process. The heirs simply have to execute an affidavit stating that they are the only and sole heirs of the decedent, that the decedent left no will and no debt, and that the heirs voluntarily agreed to divide the estate among themselves. File the affidavit with the proper court, and the latter finding the same in order shall issue an order approving or affirming the same. With the order or approval of the court at hand, transfers may now be effected.