ABC replies before XYZ

Year-ends are apt for some closures, in business or personal matters. I am feeling as positive as the feedback we get. After a dozen issues since we started, we pause to honor our readers by replying to some of their questions to ABC.

Q: Father died without a will. When he was still alive, he bought properties and put each individually in the name of his children. There are still properties in his name. How should we settle the estate?

A: If the parent died without a will, things can be a lot easier if the siblings agree on an extra-judicial (out-of-court) settlement. Even the properties already placed under the names of specific children are counted and virtually brought back to a common pool so that the siblings may divide them equally among themselves. This, in law, is called “collation.” In the vernacular, it may very well be called “walang lamangan.” The sibling with the more valuable property placed under his name can keep the property, but he must pay his siblings the difference.

The extra-judicial settlement is an agreement among the heirs that lists the properties of the decedent and to which heir they will go. It needs to be notarized to become a public instrument. It is used to support payment of estate taxes with the Bureau of Internal Revenue (BIR) and to secure the certificate authorizing registration (CAR). The CAR and the extrajudicial affidavit are also filed with the register of deeds to secure a Transfer Certificate of Title (TCT) under the name of the new owner.

Q: When is the best time to transfer property?

It is generally cheaper to transfer property while the owner is still alive. For example, the donor’s tax maximum rate is 15 percent if transferring property to a relative in the ascending or descending line, or up to first cousins. Everything else is donation to strangers taxed at 30 percent. Donor’s tax can be cheaper if donation is made in installments as it is at graduated rates applied on total donations made during the year. For instance, if you donate worth P100,000 of property per year, the tax is only two percent. If you donate P500,000 worth per year, tax is at six percent. If you donate P3 million per year, tax is still lower at 10 percent. Obviously, no similar management is available for the 20 percent estate tax because there is no partial death—only absolute.

Q: Is it better to put the properties in a corporation for estate tax purposes?

A tailored answer requires a different venue. But it is still a question of who owns the property invested in the corporation, or how did the corporation get the resources to acquire the property? The attraction to use corporations taxwise is the potentially lower 10 percent capital gains tax when the shares are disposed. There are two important issues though that must be addressed: how you bring the property into the corporation efficiently, if this is possible; and whether the properties are old properties with negligible costs. Note than when the shares are sold, the current market value of the asset of the corporation (which is that old property) will be considered in the tax computation. So if that old property is now very valuable, there could still be substantial gains and tax costs when the shares of the corporation are sold.

Q: When I applied for water connection, I was classified as residential. I was thereafter reclassified as commercial at 7x the residential rate. Can they do that?

A: The initial classification done by the water company cannot hold if that was done out of mistake. The law allows correction for mistakes, and thus, you may not be able to tie them to a “promise” as to price, if they have the facts wrong. The commercial rate is stiff, I agree. Hence you should explore if you can be classified as “Semi-Business,” which applies to small-scale businesses (the handbook even says that “semi-business” applies to medium-scale business). It will be persuasive if you can show the water company that you are a typical small scale business with just a handful of employees and your operations do not use water as the main resource. The water company is bound to honor their policy as that forms part of the contract and deemed written as part of the terms.

Q: I am an OFW, aged 65, and SSS member for more than 20 years. Can I continue to contribute past 65 years to increase my pension?

A: No. You will have to stop paying as soon as you accumulated 120 contributions. Any excess should be refunded to you as it will not increase your pension.

It is advisable that you avail of your monthly pension without making any further contributions, because since you are a retiree-member who is 65 years old, you can resume employment or self-employment without suspending your monthly pension.

In case you have not paid the required 120 monthly contributions, a lump sum amount shall be granted to you that is equal to the total contributions made by you and your employers, including interest.

It is worthy to note, however, that SSS Circular No. 2013-003 allows members who have turned 65 years old before April 1, 2013 and who have not accumulated 120 contributions to continue paying monthly contributions in order to qualify for monthly pension. But the SSS suspended the implementation of the said circular on July 16, 2013. Presently, if the retiree-member fails to reach the required 120 monthly contributions, he will receive the lump sum amount equal to the contributions that he has made.

Q: I bought into a candidate with hidden defects, can I return him to where he surfaced from?

In general, if a product is publicly known to have defects, such defects would not be considered hidden, and we can be bound by the transaction. I would honor the question more with legal rationale, if only I knew how (more replies to queries in my next column).

To all my readers, may your passion to always make yourselves better light up the New Year sky to welcome an amazing year for all of us!

* * *

Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He also chairs the tax committee of the Management Association of the Philippines (MAP). Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.