Understanding the Extrajudicial Settlement of Estate in the Philippines

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Not many people know what an out-of-court estate settlement is. Well, not unless they experienced the loss of a family member and the division of their remaining properties.

The out-of-court settlement of the estate consists simply in drawing up a contract in which the assets are distributed among the heirs, as the latter deem it appropriate. The contract lists the property left by the deceased, collectively called the “estate”. Properties can range from real estate like plots of land, buildings, or personal property like money left in the bank, cars, jewelry, furniture, and even shares in a corporation.

It should be noted that an out-of-court settlement by agreement is only possible if there is no will on the part of the deceased. Even if there is a will but the will does not include the entire estate of the deceased, then those that are not covered may be subject to extrajudicial partition by agreement.

In addition, an out-of-court settlement is not possible if the heirs cannot agree on the division of the property. In this case, they can file an ordinary share for the partition.

Publication requirement

After the settlement agreement is signed, the heirs should have the agreement published in a newspaper with a general circulation to ensure that interested parties, if any, such as the unknown creditors and heirs, will be duly notified.

Payment of inheritance tax

After publication, a transfer of title may follow. When transferring the estate, inheritance tax must be paid in accordance with section 84 of the National Internal Revenue Code of the Philippines.

Inheritance tax is defined as a tax on the right of the deceased person to transmit his estate to his heirs and legitimate successors at the time of death and on certain transfers, which are effected by law as equivalent to a testamentary disposition. This is a form of transfer tax, not a property tax. More specifically, it is a tax on the privilege to transfer the property from the deceased to the heirs.

The declaration of inheritance tax must be filed within six (6) months of the death of the deceased. The deadline may be extended by the Commissioner of the BIR, in meritorious cases, not exceeding thirty (30) days.

Interestingly, the domain itself will have its own Tax Identification Number (TIN). The BIR treats the estate as a legal person.

The inheritance tax return is filed with the Revenue District Office (RDO) having jurisdiction over the deceased's place of residence at the time of death.

If the deceased does not have a legal residence in the Philippines, the statement can be filed with:

1. The Tax District Agent's Office, Tax District No. 39 Office, South Quezon City; or

2. The Philippine Embassy or Consulate in the country where the deceased resides at the time of death.

For inheritance taxes, the BIR puts the payment system on file, which means you have to pay inheritance tax at the same time as the return is filed.

In cases involving a huge estate where the tax imposed may become too high, or in cases where the deceased has left property that is difficult to liquidate and does not have the cash to pay the taxes, the BIR commissioner may extend the payment period but the extension may not exceed two (2) years if the estate is settled out of court. If an extension is granted, the BIR Commissioner may require a deposit in an amount not exceeding double the amount of the tax, if he deems it necessary.

Property tax is based on the value of the net estate as follows:

1. If it is not more than 200,000 P, it is exempt

2. If more than 200,000 P but not more than 500,000 P, the tax is 5% of the excess of more than 200,000 P

3. If more than 500,000 P but not more than 500,000 P, the tax is 15,000 P PLUS 8% of the excess over 500,000 P

4. If more than P2,000,000 but not more than 5,000,000 P, the tax is 135,000 P PLUS 11% of the excess of more than P 2,000,000

5. If more than 5,000,000 P but not more than 10,000,000 P, the tax is 465,000 P PLUS 15% of the excess over 5,000,000 P

6. If more than 10,000,000 P, the tax is 1,215,000 P PLUS 20% of the excess over 10,000,000 P

In calculating net estate, allowable deductions should always be taken into account. These deductions include funeral expenses, the surviving spouse's share, medical expenses incurred by the deceased less than one (1) year before his death, the family deduction of at most 1,000,000.00 P, the standard deduction of P 1,000,000.00, among others. It is best to consult with a lawyer or accountant to determine to ensure that the heirs can correctly state the deductions and exemptions and thus determine the exact net estate of the deceased.


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