Basic Taxation Law: Estates and Trusts

 Chapter 7

Estates and Trusts


A. Estates

  • It refers to the mass of properties left by a deceased person. 


  • Taxable estate entity

    • It is the estate under administration or judicial settlement.

    • If not under judicial testamentary or intestate proceedings, it is not a taxable entity.

    • The income thereof is taxable directly to the heir or beneficiary. 


  • Subject to income tax in the same manner as individuals. 

    • Its own status is dependent on the status of the decedent immediately prior to his death. 


  • BIR Ruling No. 233-86:

    • Distribution to the heirs during the taxable year is deductible from estate income which distributed share would then form part of the recipient heirs' respective income. 

    • Where no such distribution to the heirs is made during the taxable year that the income is earned, which is then subject to income tax payment by the estate, the subsequent distribution thereof after tax, is no longer taxable on the part of its recipient. 

      • Distribution within the taxable year: 

        • Deductible for the estate;

        • Taxable for the heirs.

      • No distribution within the taxable year: 

        • Taxable for the estate; 

        • Subsequent distribution after tax is non-taxable for the heirs.


B. Trust

  • It is the right to  the property, whether real or personal, held by one person for the benefit of another. 


  • Taxable Trusts:

    1. Trust, the income of which is to be accumulated;

    2. Trust, in which the fiduciary may, at his discretion, either distribute or accumulate the income.


  • Rules on Taxability: 

  • Taxable to the beneficiary

    • income of the trust for the taxable year which is to be distributed to the beneficiaries;

  • Taxable to trustee or fiduciary 

    • income of the trust which is to be accumulated or held for future distribution, whether consisting of ordinary income or gain from sale of assets included in the "corpus"of the estate (revocable trust). 


  • Exceptions: 

  1. Revocable trust 

    • taxable to grantor or trustee; 

  2. Income is held for the benefit of the grantor

    • taxable to the grantor.


  • The income of the trust shall be included in computing the taxable income of the grantor where the power to revest title to any part of the corpus of the trust is vested: 

    1. In the granter, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the corpus or the income therefrom; or

    2. In any person not having a substantial adverse interest in the disposition of the corpus or the income therefrom.


C. Computation of Tax on Estate and Trust

  1. Allowable deductions same as individual

  2. Special deductions 

    1. Amount of income which is to be distributed currently to beneficiaries. 

    2. Amount of income collected by a guardian of an infant which is to be held or distributed as the court may direct. 

  • However, the amount so allowed as deduction shall be included in computing the net income of the heir, legatee or beneficiary. 

  • ❌ Trust administered in foreign country deductions in (a) and (b) are not allowed.

Formula / Example: 


Consolidated gross income

P 1,000,000.00

Less: Consolidated deduction 

  • Allowable deductions:

  • Special deductions: 

—

      250,000.00

      250,000.00


Taxable income of several trusts 

Apply 20-35% (effective January 1, 2018) 

      500,000.00

x                  20%

Tax due 

P100,000.00

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