Taxability of renounced estate shares
Depending on the manner by which one renounces his share, the act of renunciation may be subject to donor’s tax.
Published in Daily Tribune on August 13, 2021
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In one segment of KaTribu Legal Diaries, I mentioned that there is nothing certain in life except death and taxes. I was then discussing the Succession Law in the Philippines.
What I did not discuss in the said segment is that succession is basically a form of transferring ownership. The wealth a person acquires in life transfers to his heirs upon his death and is viewed legally as the decedent’s final act of beneficence for his loved ones.
He, through his estate, transfers his wealth to his heirs; hence, we have estate taxes. One would think that estate taxes would be the end of it all but there is an instance when, aside from estate taxes, donor’s taxes are likewise imposed.
In settling the estate, heirs usually discuss who gets what and how much each gets of the monies in the bank. Often, some choose to waive their share in the estate because they are already well off and opt to just let the other siblings participate in his share.
Depending on the manner by which one renounces his share, the act of renunciation may be subject to donor’s tax. If the heir renounces his share without specifying who gets his share, such general renunciation is not subject to donor’s tax because donative intent cannot be deduced from the absence of a specific beneficiary.
However, if the heir renounces his share in favor of a specific person, the act becomes a donation and is subject to donor’s tax. This is partial renunciation.
Seems simple enough, but the Bureau of Internal Revenue recently passed Revenue Memorandum Circular (RMC) 94-2021, which clarifies the computation of donor’s tax in case the heir waives/renounces his share.
The circular recognizes the above-mentioned rule, however. There are, as quoted in the RMC, “instances where in the settlement of the estate of the decedent, instead of all the heirs receiving their respective shares in all the properties of the decedent, the heirs will agree among themselves for a specific property that each one of them will receive.”
This is in effect a partial renunciation since the heir is waiving his share only to specific properties but not to the entire estate of the decedent.
As the RMC illustrates, say a decedent has three lots of the following value: Residential Lot with a Fair Market Value (FMV) of P1M and Zonal Value (ZV) of P3M; a commercial lot with a FMV of P1.5M and ZV of P2.4M and an agricultural land with FMV of P500K and ZV of P2.1M. In the valuation of lots, the assigned value of land is whichever is higher between FMV and ZV. In this situation properties have a higher ZV and FMV so the valuation of the lots is their respective ZVs.
Assume that the decedent has three heirs who did the following: Heir X waived his share from the commercial and agricultural land; Heir Y waived his share from the residential and agricultural land, and Heir Z waived his share in the residential and commercial land.
Partial renunciation is evident in this situation since an heir will receive a higher or lower share than what he or she gets should there be no renunciation at all. Donor’s tax will be imposed on the difference between the value of the supposed rightful share of the heir against the value of the property he actually received from the estate of the decedent.
In our example, we divide by three the ZV of each property since this is the assigned valuation of the lots, which the three heirs supposedly inherit equally. If we look closely at Heir Z, he will have to pay a donor’s tax of P9K. The total value of his supposed share is P2.5M but due to the renunciations of his co-heirs, he will only receive P2.1M.
In such situation, he is deemed to have partially renounced P400K from his share in the three properties. This will be subject to donor’s tax after deducting the standard deduction of P250K. Hence, there shall be donor’s tax due in the amount of 6 percent of P150K or P9K.
To avoid donor’s tax, the heir must renounce his entire share to the estate without specifying in whose favor it is made. To my mind, this RMC expands the definition of partial renunciation by including in its coverage the renunciation of shares to a specific property.
