Unlocking the bank account of the living and the dead

(Second of two parts)

Posting sources of joy on social media is difficult to resist. Men or husbands may not subscribe to the habit of posting new expensive buys, but wives are tough to control. And before you know it, you are in that picture too: of foreign trips, restaurants, and what have you. They are data, indeed, that can estimate one’s bank account – maybe.

In the world of legal evidence though, just because you posed on top of the hood of a vintage car does not mean you just bought that enviable automobile. Or just because you posed beside George Clooney does not mean you are George Clooney’s wife, or – is that George Clooney at all?

This tells you that if evidence of tax fraud or unpaid taxes is what is required, bank account information is critical. Deny that to the government and you let tax fraud prosper.

Because our secrecy of bank deposit rules are tough, they are used quite well to hide non- or under-declaration of income. This unwittingly creates an impact on ordinary folks, including those who inherit money, but are not allowed to withdraw the money from the bank because of our tax rules. Tax rules require you to show proof of settlement of estate taxes before you are allowed to withdraw money in the bank account of the deceased parent, spouse, or relative.

Why is it so? Because tax authorities know the level of compliance is low and they do not trust that those who inherit will file an estate tax return. So this law attempts to compel payment of estate tax. This is unlike the US rules, for example, where the heirs are allowed to withdraw the full bank account of the deceased so long as they prove they are the legal heirs or administrator of the estate. Banks are not mandated to trap the money there because they expect estate taxes to be paid anyway by the heirs.

Back here, because the surviving relatives may not know how to comply with the complex procedure of filing an estate tax return, or may not really know how much they owe, the return is not filed by many. The fear of losing the little that was left in their possession also prevents them from making the estate tax return. So the money in the bank account of the deceased is legally trapped in the meantime with banks, until the meantime become years, and the years become decades, until forgotten.

Theoretically, if the bank account contains earnings that were undeclared for income tax purposes during the lifetime of the deceased, estate taxes can at least be collected when they are withdrawn by the heirs. The reality, however, is that estate tax issues or bank account issues are most likely managed already by those who have money that are large enough to worry about. But they remain the concern of the rest, especially the average folks.

Our legislators now made the first step to help estate tax compliance and potentially unlock these bank accounts in favor of those that inherit them. The bicam-approved Train bill lowered estate taxes to six percent from 20 percent.

This should now be followed up by an estate tax amnesty by allowing as well a six percent estate tax payment for all unfiled estate tax returns, but using market values at the time of death. This will not only hasten the release of bank accounts, but also lead to the development of properties that remain idle or uninvested in because of uncertainty of title.

Due to the manageable estate tax rate of 6 percent, it is administratively possible to simply ask the banks to withhold six percent estate tax on actual cash withdrawals of the heirs on the bank account of the deceased, subject to allowing the estate tax withheld as credit when the estate tax return of the entire estate is filed.

This will finally expedite the lifting of the trap on the bank account of the dearly departed, and perhaps, lull the departed to a more peaceful sleep.

* * *

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.