5 estate tax myths (and why death is not the fastest draw)

True, in the Tax Reform Act, it’s mainly tax increase, not tax reform. But the estate tax situation has certainly improved, and even reformed. Given the new low tax rate of six percent estate tax, is estate tax planning no longer required? You tell me as we go along and understand, and hopefully debunk some of the Philippine estate tax myths. For me, here they are:

Myth No. 1. The “survivorship” clause can survive death.

Survivorship clauses, which can be found in wills or bank arrangements, mean that property jointly owned by two (or more) persons will pass to either of them (or the named one) in case one dies. So in the case of a bank account jointly owned by two persons with a survivorship clause, if one dies, the bank account becomes completely owned by the surviving depositor – but not so fast.

Under our old tax law, technically, the survivor cannot withdraw the 50 percent of account that belonged to the deceased unless it is shown that estate taxes have been settled on the estate of the latter – based on the entire estate. Managing this is easier now because 1) estate tax has been lowered to six percent, and 2) no one will stop you from withdrawing the money because the bank is simply required to withhold six percent on the amount withdrawn (that was owned by the deceased). Estate tax returns are no longer required for withdrawal from the bank account of the deceased.

The survivorship arrangement does not avoid the estate tax because the last breath is quicker to the draw. I mean, death kicks in first, before any transfer per contract happens, hence the estate tax.

Myth No. 2. It’s better to just sell the property because it’s faster to do so.

Today, unless it’s for business reasons, transferring shares to a corporation then selling those shares to the children is a thing of the past for estate tax planning. Capital gains on sale of shares is 15 percent, which is much higher now than the reduced six percent estate tax. But say it’s real property not used in business that you want to transfer to your children. Many think it’s just faster to sell because the documentation is easier. You can do a sale in a day, and you pay the same six percent capital gains tax rate.

A bit easier, maybe, but more expensive. It’s not because a 1.5 percent documentary stamp tax (DST) applies on sale, but because that generally applies to donation, too. It is because, in addition to the sale, a donation also takes place – on the condoned selling price if you do not collect that from your children. Well, I know, how will the BIR know your children did not or will not pay you? Maybe the BIR won’t. You can take the risk. Or you can just donate now the property, subject only to 6 percent tax (plus DST) under the new tax law.

Myth No. 3. Since estate tax is now only six percent, there’s no need for estate tax planning.

Capital gains tax, donor’s tax, and estate tax are all at six percent anyway. So why bother? Because the tax rate may stay the same, but the market value of real property will not. With our young growing population that will continue to occupy space, with the build, build, build thrust that will augment property values, real estate prices will continue to rise, and the BIR will make the zonal values catch up.

So if you can decide now and not rely on your longevity, transfer the property to your children now, via donation.

Myth No. 4. Waive your right, skip succession line, and save tax.

You expect to inherit property, or say, shares of stocks. But you would want to pass this on to your children anyway. So can you just waive your right to the inheritance and let the inheritance go direct to your children, and pay just one tax?

The above is a situation that produces two taxable events. Technically, the waiver is subject to donor’s tax, and the direct transfer of property from the grandparent to the grandson is subject to excise tax. Note that one who inherits cannot substitute his wishes over the law that transfers property sequentially along the succession lines. Nor can one substitute his will for the testator’s will by waiving his right and assigning that right to someone else. You need the estate owner’s will for that. So you need to coach the estate owner on how to draw his will. But truth be told, if estate tax is paid on the property, the BIR may not be interested in investigating who inherited a particular piece. (I warned you, though of the technicalities.)

Myth No. 5. Estate tax payment is to transfer property, but formal transfer of property among family members is not important.

Maybe, and maybe why people don’t pay estate tax because the property stays in the family anyway. A property that remained titled to the original ancestor owner can have conflicting claims. Spouses or relatives of the spouse, who are not really members of the original family, can cause serious trouble, as I have observed. A property whose title is also not in the name of the person who claims ownership may not get developed or invested in, or even disposed. Its potential for value and revenue will be greatly stunted.

So those who are content to leave property and let the heirs take care of the formalities, you may just be leaving them with headaches. Fix it now. The estate tax amnesty will come out soon. Avail it. If you can, transfer via donation now. In planning for your children, do not let your last breath be the quicker draw.

(I would like to take this opportunity to thank everyone who supported the recently concluded Isla Cup 2018, where the real winners are the children of public schools through the Seat of Hope. These children may not be riding golf carts anytime soon, but they will have brand new chairs in their classrooms. Cheers to the children, and cheers to your generous hearts!)