Effects of the Different Property Regimes in the Computation of the Estate Tax Due

Someone asked: “Atty. Terence, I just wanted to ask, what if there was a prenup agreement? How do you divide the properties and compute the estate tax due? Will a prenup supersede the law of a community property with regard to estate tax?”

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Answer: A prenuptial agreement, otherwise known legally as a marriage settlement, is a contract entered into by the parties intending to get married, which must be executed by them prior to the wedding, otherwise, the same shall be void. The primary purpose of a marriage settlement is to determine the property regime of the parties to the future marriage other than that provided for by law by default.

Estate tax, also known as inheritance tax, is a tax on the right of a deceased person to transmit his estate to his lawful heirs and beneficiaries. Contrary to popular belief, it is not a tax on property but on the right to transmit property at death, and is measured by the value of the property.

Now that we know what estate tax is, we should then consider the different kinds of property regimes that a married couple can enter into in order for us to properly compute the value of their respective gross estates and ultimately, their net taxable estates.

For marriages celebrated after or on the effectivity date of the Family Code, which is on August 3, 1988, in the absence of a valid marriage settlement, the default property regime of absolute community of property (ACP) shall govern. In a regime of ACP, the community property shall consist of all the property owned by the spouses at the time of the celebration of the marriage or acquired thereafter. However, the following are excluded therefrom: (1) Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property; (2) Property for personal and exclusive use of either spouse; however, jewelry shall form part of the community property; and (3) Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property.

On the other hand, for marriages celebrated before the effectivity of the Family Code, the default property regime of conjugal partnership of gains (CPG) provided for under the Civil Code, the effectivity of which began on August 30, 1950, shall prevail. The same is true in case the future spouses agree in the marriage settlements that the regime of conjugal partnership of gains shall govern their property relations during the marriage. In a regime of CPG, the husband and wife place in a common fund  the proceeds, products, fruits and income from their separate properties and those acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage of the partnership, the net gains or benefits obtained by either of both spouses shall be divided equally between them, unless otherwise agreed in the marriage settlements. Hence, the following shall be the exclusive property of each spouse: (1) That which is brought to the marriage as his or her own; (2) That which each acquires during the marriage by gratuitous title; (3) That which is acquired by right of redemption, by barter or exchange with property belonging to only one of the spouses; and (4) That which is purchased with exclusive money of the wife or of the husband.

Lastly, in a regime of complete separation of property (CSP), each spouse retains ownership of his or her own properties including the fruits thereof. In short, what’s yours is yours and what’s mine is mine. Article 134 of the Family Code provides that in the absence of an express declaration in the marriage settlements, the separation of property between spouses during the marriage shall not take place except by judicial order. Such judicial separation of property may either be voluntary or for sufficient cause.

So, after determining the share of each spouse from the mass of the community or conjugal property, we can now compute for their respective individual gross estates. Section 85 of the National Internal Revenue Code provides that “the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated; Provided however, that in the case of the non-resident decedent who at the time of his death was not a citizen of the Philippines only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.”

Having determined their respective individual gross estates, we can now proceed to computing their net taxable estates taking into consideration the applicable exclusions and deductions provided for by law.

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