Understanding the Extrajudicial Settlement of Estate in the Philippines
Not a lot of people know what an extrajudicial settlement of the estate is. Well, not unless they have experienced losing a member of the family and dividing his remaining similarities.
Extrajudicial settlement of the estate simply method drafting a contract where the similarities are divided among the heirs, as the latter may see fit. Enumerated in the contract are the similarities left by the deceased, collectively called the “estate”. The similarities may range from real similarities such as parcels of land, buildings, or personal similarities such as money left in the bank, cars, jewelry, furniture and already shares in a corporation.
It should be well-noted that an extrajudicial settlement by agreement is only possible if there is no will left by the deceased. already if there is a will but the will does not include all of the decedent’s estate, then those not covered can by extrajudicially partitioned by agreement.
additionally, extrajudicial settlement is not possible if the heirs cannot agree on how the similarities will be divided. In that case, they can file and ordinary action for partition.
After the settlement agreement is signed, the heirs should cause the publication of the agreement in a newspaper of general circulation to ensure that interested parties, if there are any, such as creditors and unknown heirs, will be given due notice.
Payment of Estate tax
After the publication, move of title may follow. Upon the move of the estate, the Estate Tax must be paid in accordance with Section 84 of the National Internal Revenue Code of the Philippines.
Estate tax is defined as a tax on the right of the deceased person to transmit his estate to his lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition. It is a form of move tax, not a character tax. More particularly, it is a tax on the privilege of transferring the character of the decedent to the heirs.
The Estate Tax Return must be filed within six (6) months from the decedent’s death. The deadline may be extended by the Commissioner of the BIR, in meritorious situations, not exceeding thirty (30) days.
It is interesting to observe that the estate itself will have its own Tax Identification Number (TIN). The BIR treats the estate as a juridical person.
The Estate Tax Return is filed with Revenue District Office (RDO) having jurisdiction over the place of residence of the decedent at the time of his death.
If the decedent has no legal residence in the Philippines, then the return can be filed with:
1. The Office of the Revenue District Officer, Revenue District Office No. 39, South Quezon City; or
2. The Philippine Embassy or Consulate in the country where decedent is residing at the time of his death.
For estate taxes, the BIR imposes the pay-to-file system which method that you have to pay the estate tax at the same time the return is filed.
In situations involving a huge estate where the tax imposed can get too high, or in situations where the decedent left similarities which are difficult to liquidate and they do not have the cash to pay the taxes, the BIR Commissioner can extend the time of payment but the extension cannot be over two (2) years if the estate is settled extrajudicially. If an extension is granted, the BIR Commissioner may require a bond in such amount, not exceeding double the amount of tax, as it deems necessary.
The estate tax is based on the value of the net estate as follows:
1. If not over P200,000, it is exempt
2. If over P200,000 but not over P500,000, then tax is 5% of the excess over P200,000
3. If over P500,000 but not over P2,000,000, then tax is P15,000 PLUS 8% of the excess over P500,000
4. If over P2,000,000 but not over P5,000,000, then tax is P135,000 PLUS 11% of the excess over P2,000,000
5. If over P5,000,000 but not over P10,000,000, then tax is P465,000 PLUS 15% of the excess over P5,000,000
6. If over P10,000,000, then tax is P1,215,000 PLUS 20% of the excess over P10,000,000
In computing the net estate, allowable deductions shall always be considered. These deductions include funeral expenses, proportion of the surviving spouse, medical expenses incurred by the decedent within one (1) year prior to his death, family home deduction of not more than P1,000,000.00, standard deduction of P1,000,000.00, among others. It is best to consult a lawyer or an accountant to determine to ensure that the heirs can properly indicate the deductions and exemptions and thereby determine the accurate net estate of the decedent.