“If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”
– Paul Neal “Red” Adair, American Oil Well Fighter and Innovator
MP recently left a comment on the most read article in our website – “6 Steps in Settling the Estate of a Dead Person in the Philippines.” This is what she wrote:
“Our mother died 5 years ago and pass away without a last will. We are a family of 7 children. I have encoutered (sic) the terms like Inheritance Tax, Extra Judicial Settlement but have not give it much attention till (sic) now that we want to sell our Mother’s house. Can you please help me understand this further and how to go about it?”
Although executing a Last Will and Testament is a very important estate planning tool, most Filipinos are not yet that sophisticated and open in adopting such a tool. Whether it is a cultural thing or fear of facing one’s mortality, Filipinos just do not consider preparing for their death in advance.
Hence, when one passes away the heirs are left to deal with whatever issues that were not taken cared of during the lifetime of the decedent. In my 15 years of experience settling the estate of the deceased, there are a myriad of issues faced by the heirs – young and old alike.
In the Philippines, there are two ways to settle the estate of the deceased – judicially and extra-judicially. But, what does it mean to “settle the estate of the deceased”?
Typically, when a person dies he or she leaves behind assets and liabilities. Since the deceased can no longer exercise acts of ownership over the assets and pay off the liabilities, the heirs are given the legal task to perform those things in behalf of the decedent.
The first thing to be done in the process of settling the estate of the decedent is to pay off all the debts and liabilities carried over even upon the death of the deceased. If there is no cash available then properties must be sold in order to generate cash to recompense the creditors.
Only after the debts and liabilities have been fully paid can the heirs divide amongst themselves the remainder of the assets of the deceased. However, the heirs cannot automatically allocate the remaining assets without paying the estate tax due on what is left of the estate of the decedent.
The payment of estate tax to the Bureau of Internal Revenue (BIR) and the issuance of the Certificate Authorizing Registration (CAR) are necessary before the properties of the decedent can be transferred to the names of the heirs of the decedent.
Prior to Martial Law, the Philippine government imposed both an estate tax and an inheritance tax under the National Internal Revenue Code (Commonwealth Act No. 466, July 1, 1939). However, Presidential Decree No. 69 (November 24, 1972) integrated the estate and inheritance tax into an estate tax.
According to the Bureau of Internal Revenue website, an “estate tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition…”
Meanwhile, an inheritance tax is an excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will, intestacy law, or deed, grant or gift becoming operative at or after death. (Lorenzo vs. Posadas, 64 Phil. 353 [G.R. No. 43082, June 18, 1937])
In the Philippines, the estate of the deceased can be settled by 2 methods – judicially and extra-judicially. Judicial settlement of estate happens when there is a will executed by the testator. If there is no will then settlement of the estate is done extra-judicially – usually through a document known as “Extrajudicial Settlement of Estate of the Deceased” (if there are several compulsory heirs) or “Affidavit of Self-Adjudication” (if there is only one heir).
These 2 documents are the transferring documents that will be submitted to the BIR in order to process and facilitate the payment of estate tax. Thereafter, one has to determine the gross estate of the deceased and at the same time know what deductions can be claimed against the gross estate to come up with the net estate. The net estate of the deceased is the basis for computing the estate tax that will be paid.
Suffice to say, the assistance of professionals (Certified Public Accountants and Lawyers) is crucial in navigating the maze of settling the estate of a deceased person in the Philippines. It is a highly technical process. And when done haphazardly, can create costly complications on the heirs.
My advice to everyone with issues on the settlement of estate: Hire the right professional with ample experience in the process.