From great grandfather to great grandson

I have always been approached in formal and informal gatherings about different tax, legal and accounting issues. Then The Philippine STAR opened the door for this column. What a great vehicle to answer questions that will help people whether at home, at work or in business.  I cannot promise that I can give the answers as easy as ABC, but I will certainly try, especially for a Sunday read. Any connection between my initials and the title of this column is not entirely coincidental.

It is probably cultural that a few of our grandfathers, during their time, bequeath property using the “turo-turo” system:

“Anak, you see that part of the land where the bamboo trees are? That is yours! And you see the big mango tree? Not the small one, but the big tree. From that part, that belongs to your brother!”

This “turo-turo” system appears to have settled lolo’s will – except that there was no will, no witness, no change in title, and no estate tax declarations.

There seems to be no problem here. Anyway, properties in succession transfer by operation of law, with death as the act that transfers. The only way to have some control over where the properties go is to die with a will, which is subject to some formalities, like writing down the will.

Without a valid will, properties will still transfer from one generation to the next. It seems sensible and good in theory, but to own a property from a different generation without breaking a sweat is quite problematic and impossible in real life.

If you inherited a property from your lolo who died without a will and then your tatay passed, also without a will, the first question that should be answered is: Who do you co-own the property with?

If a sibling dies ahead of you, the property is co-owned by you, your nephews and nieces. If your sibling bequeaths a portion of the undivided property to a third party, then you co-own it with the latter.

The above scenario may not be as bad if you can still somehow trace ownership. It will be more complex if your lolo has a large family. Say, some migrated to Canada, and you have no idea if they are still living, or how many children they have, or how interested they will be over the property. The status of the property, in this case, will be at a standstill.

Even if you can identify the property you believe you inherited, you may hesitate in making a claim, or much more, in attempting to sell it. The sad part is, even the government is a worthy co-owner, in a way, due to unpaid estate taxes (inheritance tax).

Speaking of estate tax woes on inherited property, every time the property transfers to the next generation, there is a fresh round of estate tax. Exemption from estate tax happens only if the second death occurs less than five years after the first one. And even then, such exemption will be prorated. (In accounting school, my professors call this “vanishing deduction”. I never did understand it then and I thought that it is the property that vanishes. I was not completely wrong).

In 1992, a law was passed that reduced estate taxes to 35 percent. Before that, it was as high as 60 percent of the market value of the property. Today, following the Tax Reform Law, estate tax is even down to 20 percent. But that is not amusing because theoretically, since estate taxes are based on the market value of the property, transfers of property through generations easily shave off half of the property value. This is the paper loss no one wants to bear, so transferring the property to heirs is often delayed for as long as possible.

Here are steps that compulsory heirs (spouse and children) need to do to transfer property to themselves when the deceased did not leave a will:

1. Enter into an extrajudicial settlement. Agree and make an affidavit on how to divide the properties among themselves. File and publish such settlement.

2. File a notice of death with the BIR within two months from death, and attach a copy of the death certificate.

3. Secure a tax identification number (TIN) for the estate, and file an estate tax return within six months with the district office that covers the residence of the deceased. Pay the BIR upon filing, or secure a two-year extension from the BIR to settle the tax.

4. After paying the estate tax due, secure a tax clearance certificate (TCC) or a certificate authorizing registration (CAR).

5. Transfer the title of the property in your name and secure a new real property tax (RPT) declaration. This may require you to update RPT payments.

Only after the above steps will you be absolutely ready to sell or develop the property. You can also use it as your capital in a joint venture with a developer. Transfer by operation of law (automatic) does not cut it. It’s more like by operation of men (manual).

Now, how do we transfer title of property from lolo without getting hit by folds of estate taxes? The answer is to avail of tax amnesty – that is, if one comes about. House Bill 3674 on tax amnesty is around the corner, but it does not include estate tax amnesty. So I am using this forum as a plea to legislators to include estate taxes in the amnesty bill.

Why not? People will not pay old estate tax liabilities anyway; their attitude is to make the property idle than lose them to estate taxes. If we forgive old estate tax debts, we actually encourage productive use of properties and economic activity.

The last amnesty was in 2007 under Republic Act 9480 for all taxes for 2005 and prior years. In the same law, Congress declared a moratorium on amnesty, but never said “never”. Seven years have passed since the last one and if Congress passes a new amnesty law, my rhetorical advice to all is: Grab it!

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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.