Estate Planning Made Easy

Death is undeniably inevitable.  Though bound to happen, the only thing that is uncertain is when.

This uncertainty, coupled with the financial risks to the family members that we are leaving behind, reminds us that we’ve got to plan ahead. Hell, after all, is not just a spiritual concept, but an unfortunate reality that heirs of a decedent usually experience when there is no plan for the settlement of his or her estate and for the payment of taxes that will fall due from the transfer of assets to the heirs. What should we do now in order not to be caught unprepared when that time finally comes?

Estate planning may provide an answer.

Estate planning is a tool towards managing the transfer of one’s properties, personal or real, to the beneficiaries in an efficient way, either during his lifetime or upon his death.  One of the basic considerations in doing estate planning is the tax benefit.

Do you know that while the bereaved are still grieving, heirs already have to pay the local transfer tax due from the estate within 60 days from the death of the decedent?  At a glance, the local transfer tax might look minimal, with a maximum rate of 75% of 1% of the fair market value of the real estate assets involved in an estate, but the common problem is that heirs point to each other to foot the bill.  This results in delays in payment with corresponding penalties and interests.

The estate tax return, on the other hand, must be filed within six months from the death of the decedent, and, ideally, the estate tax must have already been paid at that time.  However, if paying the tax will bring undue hardship to the heirs, the Commissioner of Internal Revenue may extend payment for five years or two years depending on whether the estate is settled judicially or extrajudicially.

Preserving peace and harmony among heirs would be more ideal.  More than the wealth to be passed down, maintaining cordial relationships between the heirs should be secured.  We often hear the phrase “that will never happen to our family, we are all at peace with each other.”  Yet, just as frequently, we have seen families end up in court engaging each other in costly suits that would drag for so long over the partitioning of the estate.  A sad reality which could have been minimized or ultimately avoided if one should plan ahead.

The extent of estate planning depends on various considerations, such as the nature of the properties involved, the beneficiaries, the intentions and objectives of the transferor.  Following are some estate planning tools that may be considered in addressing the common problems mentioned above:

  • Life insurance. The proceeds of a life insurance policy taken out by the decedent upon his own life, which designates the heirs as irrevocable beneficiary, is not subject to estate tax.  Thus, life insurance can address the liquidity problems of heirs.
  • Irrevocable trust fund may be considered whereby an amount shall be earmarked per child. A trust fund in favor of the beneficiary designated as irrevocable shall be considered a gift, and shall be exempted from tax up to P100,000.00.
  • Donation may also be used since donor’s taxes only ranges from 2% to 15% depending on the net gift as compared to estate taxes of 5% to 20%. Donation will also give the luxury of choosing what property will go to whom, provided the legitime of each compulsory heir will not be impaired.  It should be noted, however, that if you donate to a stranger or someone who is not your brother or sister, ancestor or lineal descendant or first cousin, the donor’s tax rate goes up to 30%.
  • Alternatively, you may sell certain properties to your heirs or future beneficiaries. While sale of real properties classified as capital asset is subject to 6% capital gains tax, said tax is, in some instances, may be lesser than the estate tax or donor’s tax.  Make sure that your buyer-heir has the capacity to make the purchase otherwise, the buyer may be assessed deficiency taxes.  Note that sale between spouses is allowed only when the husband and wife are under the regime of complete separation of property.
  • For those who have acquired substantial amount of properties, you may consider converting these properties in the form of shares of stock. This could be done by transferring properties to a corporation in exchange for shares.  The shares of stock may later on be sold to the intended beneficiaries and be subject to a lesser tax compared to the estate tax.

Interestingly, one question that some people ask is how they can exclude sons-in-law or daughters-in-law from inheriting the property that their own children will receive upon their demise.  Strangely, some worry that they might be working too hard for their in-laws.  How then do you address this practical problem?

One way is through the execution of a last will and testament.  At least, for assets pertaining to the free portion, one may impose conditions as to who, when, and how succession will take place with respect to those assets.  The free portion is the part that a testator may dispose freely to anybody he wants to, after the legitime of the compulsory heirs has been satisfied.  Legitime is the minimum entitlement of each compulsory heir under the law and which cannot be made subject to any condition or imposition whatsoever.  Compulsory heirs are heirs who will inherit from us whether we like them or not.

These are just some of the many estate planning tools available and each one should be evaluated on the basis of objectives and circumstances of the transferor.  An estate planning device applicable to one may not be applicable to another.  One approach may not give them same result to different transferors.  This would depend on the circumstances of the parties involved.  But certainly, there is always a scheme applicable to a specific situation.

So if you want to see your hard-earned properties transferred to your heirs or beneficiaries with less hassles and less tax costs, you need to seriously consider estate planning now.

(Prepared by Atty. Neil Eric E. Ochoco, CPA, tax practitioner, with sources from SGV & Co. Philippines and Punongbayan & Araullo.  This article is for general information only and is not a substitute for professional advice where the facts and circumstances may differ.  For comments and inquiries, you may send an email at or call (038) 411-1248.)