Unit 4. Estate Planning

Question 1

_________________ can be defined as arranging for the transfer of a person’s property (can be real or personal property) from one generation to another to achieve, as much as possible, the person’s objectives for his or her family and perhaps others.

Answer 1

Estate Planning

Question 2

Estate planning can be defined as arranging for the transfer of a person’s property (can be ______ or __________ property) from one generation to another to achieve, as much as possible, the person’s objectives for his or her family and perhaps others.

Answer 2

real; personal

Question 3

Laws that Govern Estate Planning in the Philippines (4)

Answer 3

1. Civil Code – Law on Succession
2. Family Code
3. Rules of Court – Rule 73-90 (Procedural Steps)
4. NIRC as amended by TRAIN Law

Question 4

Some Terminologies about Estate Planning (11) - Familiarize only

Answer 4

Some Terminologies
1. Will – Article 783, New Civil Code
2. Joint wills are not allowed in the Philippines – Art. 818, New Civil Code
3. Forms of Will (Holographic Will and Notarial Will ) – Article 805, New Civil Code
4. Legitime - Article 886, New Civil Code
5. Compulsory Heirs – Article 887, New Civil Code
6. Rule 75, Section 1 – A will should be probated
7. Rule 76, Section 12 - the testator can probate his will while still alive (Ante Mortem Probate)
8. Extrajudicial Settlement – Rule 74
9. Testator and Decedent
10. Administrator and Administratrix
11. Executor and Executrix

Question 5

_________ is everything you own: financial assets; real estate; collections such as art, stamps, or coins; businesses; and non-tangible assets, such as trademarks, copyrights, and patents.

Answer 5

Estate

Question 6

The most common tool used to transfer assets is a _____.

Answer 6

will

Question 7

A _______ is the legal document that states the rights others will have to your assets at your death.

Answer 7

will

Question 8

The person transferring assets through a will is known as the ____________.

Answer 8

testator

Question 9

_________ is a legal process that takes place at death, during which a court determines the validity of the decedent’s will, inventories the decedent’s property, resolves any claims against the decedent, and distributes remaining property according to the will.

Answer 9

Probate

Question 10

(T or F) Assets solely owned by the decedent must be transferred by a will through the probate process.

Due to the cost, the time it takes, and the public nature of the probate process, however, individuals often take steps to avoid it.

Answer 10

True

Question 11

(T or F) Assets solely owned by the decedent must be transferred by a will through the probate process.

Even with the cost, the time it takes, and the public nature of the probate process, individuals would often still choose to undergo the process.

Answer 11

False

Question 12

Individuals who avoid the probate process can utilize these processes as alternative (5)

Answer 12

1. joint ownership with rights of survivorship
2. living trusts
3. retirement plans
4. life insurance
5. other means which transfer assets outside the probate process

Question 13

Objectives of Estate Planning (9) - Familiarize only

Answer 13

• Determining who will be the estate owner’s heirs or beneficiaries and how much each will receive
• Planning adequate financial support for the estate owner’s dependents
• Reducing estate transfer costs (death taxes, expenses of administration, and the like) to a minimum, consistent with the estate owner’s other objectives
• Planning for the way in which the estate owner’s heirs or beneficiaries are to receive the assets passing to them. This often involves the question of whether they are to receive assets outright or in trust, and if a trust is to be used, what its terms, conditions, and duration should be, as well as who should be the trustee or trustees
• Providing sufficient liquid assets for the estate to meet its obligations
• Planning for possible arrangements (such as irrevocable life insurance trusts) that will conserve the estate for the
  owner’s heirs and beneficiaries in the face of inevitable shrinkage due to taxes and expenses
• Deciding who is to settle the estate. This involves selecting the executor or coexecutors
• Planning for the disposition of any closely held business interests
• Planning for any charitable giving

Question 14

Main Methods of Property Disposition (2)

Answer 14

1. Lifetime transfers
2. Transfers at Death

Question 15

Methods under Lifetime transfers (5)

Answer 15

1. Lifetime Gifts (Outright, In irrevocable trusts (inter vivos trusts), In custodianships
2. Exercise of powers of appointment
3. Exercise of powers of attorney
4. As noncharitable beneficiary of split gifts to charity
5. Sales within the family

Question 16

Methods under Transfers at Death (8)

Answer 16

1. By Will (Outright, In Trust (testamentary trust))
2. Intestate distribution (not desirable)
3. Life insurance beneficiary designations
4. Qualified retirement plan, TSA, and IRA beneficiary designations
5. Other beneficiary designations
6. Revocable living trusts
7. Joint tenancy with right of survivorship
8. Other arrangements (such as transfers on death [TOD] in states that have adopted the Uniform Transfer on Death Act)

Question 17

Life insurance beneficiary designations (2)

Answer 17

1. Individuals (Outright, Under settlement options)
2. To Trusts

Question 18

Qualified retirement plan, TSA, and IRA beneficiary designations (4)

Answer 18

1. To surviving spouse
2. To other individuals
3. To trusts
4. To charity

Question 19

Other beneficiary designations (2)

Answer 19

1. nonqualified annuities
2. nonqualified deferred compensation

Question 20

Two Kinds of Property (2)

Answer 20

1. Real property
2. Personal property

Question 21

_____________ (or ___________) is land, and everything attached to the land with the intention that it be part of the land

Answer 21

Real property; real estate

Question 22

_______________ is all other kinds of property. This property can be tangible—property that has physical substance, such as a car, jewelry, art, or antiques—or it can be intangible—property that does not have physical substance, such as a stock certificate, bond, bank deposit, or life insurance policy.

Answer 22

Personal property

Question 23

Forms of Property Ownership (3)

Answer 23

1. Outright Ownership
2. Joint Ownership (or Concurrent Interests in Property)
3. Community Property

Question 24

Joint Ownership (4)

Answer 24

1. Joint Tenancy with Right of Survivorship
2. Tenancy by the Entirety
3. Other Joint Interests
4. Tenancy in Common

Question 25

_________ or _______ owners hold property in their own names and can deal with it during their lifetimes.

Answer 25

Outright; sole

Question 26

This exists when two or more persons have ownership rights in the same property at the same time.

Answer 26

Joint Ownership (or Concurrent Interests in Property)

Question 27

___________________ - its outstanding characteristics is that if one of the joint owners dies, all ownership in the property passes automatically, by operation of law, to the other joint owner(s).

Answer 27

Joint Tenancy with Right of Survivorship

Question 28

________________ - property held as tenants by the entirety generally is protected against the claims of creditors of one of the parties, with some exceptions.

Answer 28

Tenancy by the Entirety

Question 29

_________________ - outright or sole owners hold property in their own names and can deal with it during their lifetimes

Answer 29

Outright ownership

Question 30

__________________ - There are some other forms of joint ownership that involve the right of survivorship. These include joint bank accounts, some joint brokerage accounts, and jointly owned government savings bonds.

Answer 30

Other Joint Interests

Question 31

___________________ - tenants in common do not have the right of survivorship

Answer 31

Tenancy in Common

Question 32

___________________ can have different proportionate interests in the property. For example, John and Frank could have 75 and 25 percent interests, respectively.

Answer 32

Tenants in common

Question 33

__________________ and _________________ always have equal interests.

Answer 33

Joint tenants WROS; tenants by the entirety

Question 34

(T or F) Eight states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington) are community property states.

Answer 34

True

Question 35

The ___________________ provides each spouse owns one-half of property acquired during marriage, with certain exceptions. This is called ________________.

Answer 35

Uniform Marital Property Act (UMPA); marital property

Question 36

(T or F) In community property states, husbands and wives can own separate property and community property.

Answer 36

True

Question 37

(T or F) In community property states, husbands and wives cannot own separate property and community property.

Answer 37

False

Question 38

Other Property Interests (5)

Answer 38

1. life interest
2. term interest
3. remainder interest
4. present interest
5. future interest

Question 39

A _________ in property entitles the holder to the income from or the use of the property, or a portion of the property, for his or her lifetime.

Answer 39

life interest

Question 40

A __________ entitles the holder to the income or the use of the property, or a portion of the property, for a term of years.

Answer 40

term interest

Question 41

The ___________ (or ____________) is entitled to the property itself after a life interest or term interest has ended.

Answer 41

remainder interest; remainder person

Question 42

A _____________ exists in property when the holder has a present and immediate right to the use, possession, or enjoyment of the property.

Answer 42

present interest

Question 43

A ______________, the right to use or enjoy the property is postponed to some future time or is in the control of someone other than the holder.

Answer 43

future interest

Question 44

CASE EXAMPLE:

Suppose that by his will, A leaves property to the XYZ Bank in trust to keep it invested and to distribute the net income from it to his wife, B, if she survives him, during her lifetime. At B’s death, or at A’s death if B does not survive him, the property is to go outright in equal shares to C and D (A’s adult children) or their issue.

Question:
A. What interest does B (wife) has?
B. How about C and D (adult children)?

Answer 44

A. Equitable interest
B. Equitable interest (Future interest, if B survives)

Question 45

_______________ - is a power or right given to a person (called the ________________) that enables the donee to designate, sometimes within certain limits, who is to get property that is subject to the power (called the _______________________).

Answer 45

Powers of Appointment; donee of the power; objects of the power

Question 46

(T or F) The basic nontax purposes of powers of appointment are to postpone and delegate the decision about who is to get property until a later time when the circumstances can be better known.

Answer 46

True

Question 47

Powers of Appointment (2)

Answer 47

1. General Powers
2. Special or Limited Powers (Nongeneral Powers)

Question 48

A _____________ is a power to appoint property to the person with the power (the donee), the donee’s estate, the donee’s creditors, or creditors of the donee’s estate. It is close to owning the property.

Answer 48

general power

Question 49

(T or F) For federal estate tax purposes, property will be included in the gross estate of someone who has a general power over it.

Answer 49

True

Question 50

(T or F) For federal estate tax purposes, property will not be included in the gross estate of someone who has a general power over it.

Answer 50

False

Question 51

These powers allow donees to appoint property only to certain persons who are not the donees themselves, their estate, their creditors, or the creditors of their estate.

Answer 51

Special or Limited Powers (Nongeneral Powers)

Question 52

(T or F) The possession of a special or limited power over property at a person’s death does not result in the property’s being included in the donee’s gross estate.

Answer 52

True

Question 53

(T or F) The possession of a special or limited power over property at a person’s death results in the property’s being included in the donee’s gross estate.

Answer 53

False

Question 54

How Property Is Appointed? (3)

Answer 54

1. Power exercisable by will
2. Power exercisable by deed
3. Powers Subject to an Ascertainable Standard

Question 55

_________________, or a __________________ – happens when donees of either a general or non-general power can appoint the property only at their death

Answer 55

Power exercisable by will; testamentary power

Question 56

_______________ - is one where donees can appoint the property only during their lifetime

Answer 56

Power exercisable by deed

Question 57

When the exercise of a power by a person is subject to an ascertainable standard (such as for the person’s health, education, maintenance, or support), it is not considered a general power for tax purposes; hence, the property subject to the power will not be included in the powerholder’s gross estate. This point can be important in structuring trusts.

Answer 57

Powers Subject to an Ascertainable Standard

Question 58

Marital Rights in Property (2)

Answer 58

1. Spouse’s Elective Share
2. Marital Rights upon Divorce

Question 59

With certain exceptions, people can leave their property by will to whomever they like. One important exception, however, is that in most common law (________________) states, a husband or wife cannot deprive his or her surviving spouse of the spouse’s statutory elective share of the estate.

This is referred to as the _________________________________.

Answer 59

separate property; spouse’s right to elect against the will

Question 60

_________________ modified this traditional approach by allowing a surviving spouse to elect to take part of his or her deceased spouse’s augmented estate. The augmented estate includes probate and some non-probate assets.

Answer 60

Uniform Probate Code (UPC)

Question 61

States have adopted equitable-distribution statutes applying to so-called ____________ in the event of divorce.

Under these statutes, the appropriate court can divide a divorcing couple’s marital property between the parties in an “________________” according to certain factors specified in state domestic relations law, regardless of how title to the marital property is actually held.

Answer 61

marital property; equitable manner

Question 62

___________ - is the property that is handled and distributed by the personal representative (___________ if there is a will; _____________ if there is not) upon a person’s death.

Answer 62

Probate Estate; executor; administrator

Question 63

Thus, probate property is the property disposed of by the decedent’s will, including: (4)

Answer 63

1. Property owned outright in the person’s own name
2. Interests in property held as tenants in common
3. Proceeds or benefits payable to a person’s estate at death
4. A person’s half of community property

Question 64

Disadvantages in leaving property so that it will be part of a person’s probate estate: (6) - Familiarize only

Answer 64

• There may be delay in settling the estate
• The costs of administering an estate (executor’s fees, attorney’s fees, etc.) may be based largely on
  the probate estate
• Assets in the probate estate are subject to creditor’s claims
• The probate estate can be made public knowledge
• Disgruntled heirs may seek to contest a will and obtain probate assets
• Sometimes, state death taxes can be increased, depending on the property and the state involved.

Question 65

Gross Estate for Federal Estate Tax Purposes (2)

Answer 65

1. State Death Tax Value
2. The Net Estate to One’s Heirs

Question 66

State Death Tax Value (2)

Answer 66

1. Inheritance taxes
2. Estate taxes

Question 67

_______________ are levied on the right to receive property by inheritance.

Answer 67

Inheritance taxes

Question 68

_______________ are levied on the right to give property at death.

Answer 68

Estate taxes

Question 69

The _______________ is perhaps what is significant to most people. This estate consists of the assets that will go to one’s heirs after the payment of the costs of dying (debts, claims, administration expenses, and taxes)

Answer 69

net estate to one’s heirs

Question 70

CASE EXAMPLE
To illustrate these ideas, let us take the case of a successful executive, George Able, and his wife, Mary. They have three children, ages 22, 18, and 14. George’s asset picture may be summarized as follows. He owns in his own name about $1,500,000 worth of his employer’s stock, which he acquired under the company’s employee stock purchase plan and by exercising some NQSOs. He also owns in his own name about $40,000 worth of other listed common stocks, $100,000 worth of mutual fund shares, $40,000 in a money market fund, and $30,000 worth of tangible personal property. George and Mary own jointly (WROS) their main home, worth about $680,000 and with a $180,000 mortgage still due; their summer home, valued at about $500,000 and with a $30,000 mortgage still due; and savings and checking accounts of $100,000. In addition to these mortgages, George has a $40,000 bank loan outstanding and about $10,000 of other personal debts. Through his employer, George has group term life insurance of $500,000, which is payable to Mary as primary beneficiary; a qualified profit-sharing plan, with $600,000 credited to George’s account; and a qualified savings plan with a Section 401(k) option, with $1,000,000 credited to his account. The benefits of the profit-sharing and savings plans also are payable to Mary at George’s death. Finally, George owns individually purchased life insurance policies on his life with total death benefits of $800,000. This insurance is payable to George’s estate as beneficiary. George has a will that leaves everything outright to Mary if she survives him; otherwise, everything is left outright to his children in equal shares. George and Mary have always lived in common law states.

(a) How much is George’s Probate Estate?
(b) Gross Estate?
(c) Net Estate?

Answer 70

(a) 2,510,000
(b) 5,250,000
(c) 5,575,000

Question 71

It is important to note that the _______ percent tax rate is multiplied with the NET estate.

Answer 71

six (6)

Question 72

(T or F) To be able to know the net estate, one must be able to start determining the gross estate.

If the decedent is resident and citizens of the Philippines, his/her gross estate shall be comprised of all properties, real or personal, tangible or intangible, wherever situated.

Answer 72

True

Question 73

(T or F) In case of non-resident aliens, gross estate shall be comprised of only properties situated in the Philippines, provided, that, with respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity.

Answer 73

True

Question 74

Deductions on the Net Estate of a Citizen or Resident Alien in the Philippines

The value of the net estate of a citizen or a resident alien of the Philippines shall be determined by deducting from the value of the gross estate the following items of deduction: (9) - Familiarize only

Answer 74

1. Standard Deduction in the amount of Five Million Pesos (P5,000,000.00);
2. Claims against the estate which mean debts or demands of a pecuniary nature which could have been
   enforced against the deceased in his lifetime and could have been reduced to simple money judgments;
3. Claims of the deceased against insolvent persons, where the value of the decedent’s interest therein is included in the value of the gross estate;
4. Unpaid mortgages, taxes and casualty losses;
5. Property previously taxed;
6. Transfers for public use which is the amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines or any political subdivision thereof, for exclusively public purposes;
7. The Family Home which is equivalent to its current fair market value and provided that if its current fair market value exceeds ten (10) million, the excess shall be subject to estate tax;
8. Amount received by heirs under Republic Act No. 4917 which includes any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee;
9. Net share of the surviving spouse in the conjugal partnership or community property

Question 75

Steps in Estate Settlement (6) - Familiarize only

Answer 75

1. Assembling the property belonging to the estate (probate property).
2. Safekeeping, safeguarding, and insuring estate property during estate administration.
3. Temporary management of estate property
4. Payment of estate debts, expenses, and taxes. A will normally contains a tax clause indicating what interest or interests will bear death taxes
5. Accounting for the estate administration.
6. Making distribution of the net estate to the proper heirs.

Question 76

(T or F) The time required to settle an estate can vary greatly—from a year or less to many years.

Answer 76

True

Question 77

(T or F) The time required to settle an estate can vary greatly—from a month or less to many years.

Answer 77

False

Question 78

_______ is a fiduciary arrangement set up by someone, called the grantor, creator, or settlor of the trust, whereby a person, corporation, or organization, called the trustee, has legal title to property placed in the trust by the grantor.

Answer 78

Trust

Question 79

Trust is a fiduciary arrangement set up by someone, called the ________, ________, or _________ of the trust, whereby a person, corporation, or organization, called the _________, has legal title to property placed in the trust by the grantor.

Answer 79

grantor; creator; settlor; trustee

Question 80

Trustee holds and manages this property, which technically is called the ______________, for the benefit of someone, called the _____________ of the trust.

Answer 80

trust corpus or principal; beneficiary

Question 81

Kinds of Trust (3)

Answer 81

1. Living (inter vivos) Trust
2. Testamentary Trust
3. Insurance Trust

Question 82

_____________ is created during the grantor’s lifetime to benefit the grantor or someone else.

Answer 82

Living (inter vivos) Trust

Question 83

The terms of a living trust are contained in a ____________ executed during the grantor’s lifetime.

Answer 83

deed of trust

Question 84

(T or F) Living trust can be revocable or irrevocable.

Answer 84

True

Question 85

(T or F) Living trust cannot be revocable or irrevocable.

Answer 85

False

Question 86

____________ or ____________ is created under a person’s will that, like the will, does not become effective until the grantor’s death.

Answer 86

Testamentary Trust; trust under will

Question 87

The terms of a testamentary trust are part of the __________.

Answer 87

grantor’s will

Question 88

_______________ is a particular kind of living trust whose corpus consists partly or wholly of life insurance policies during the insured’s lifetime and life insurance proceeds after the insured’s death.

Answer 88

Insurance trust

Question 89

Reasons for Creating Trusts (9) - Familiarize only

Answer 89

• To allow the trustee to use his, her, or its discretion (as a fiduciary) in handling trust property for the benefit of the creator, his or her family, or others within the terms of the trust
• To provide a vehicle for holding family wealth as it passes from one generation to the next and perhaps over a number of generations.
• To protect the creator’s family or dependents against demands and entreaties from well-meaning, or perhaps not so well-meaning, family members, friends, spouses, ex-spouses, spouses-to-be, and the like
• To provide a way for giving or leaving property to minors
• In some cases, to protect trust beneficiaries
• To provide professional investment and property management for other beneficiaries
• To manage a business interest after the owner’s death
• To provide a vehicle for setting up tax-saving plans
• As a recent development, in some states, grantors can protect themselves from their own future creditors by placing assets in irrevocable trusts created in those states

Question 90

Two types of trustee (2)

Answer 90

1. Individual trustee
2. Corporate trustees

Question 91

_______________ (or trustees) may be the creator, a member of the family, a trusted friend, an attorney, or someone else.

Answer 91

Individual trustee

Question 92

_____________ are professional money and property managers and, hence, can provide technical expertise in this area.

Answer 92

Corporate trustees

Question 93

(T or F) Corporate trustees are unbiased and independent of family pressures.

Answer 93

True

Question 94

(T or F) Individual trustees are unbiased and independent of family pressures.

Answer 94

False

Question 95

(T or F) Corporate trustees can serve as co-trustee with one or more individual trustees, thus combining at least some of the advantages of both.

Answer 95

True

Question 96

_________________ are financially able to respond to damages in the event of trust mismanagement.

Answer 96

Corporate trustees

Question 97

______________ can be removed and another independent corporate trustee substituted upon the demand of trust beneficiaries, the grantor, or someone else.

Answer 97

Corporate trustees

Question 98

Property Regimes (5)

Answer 98

1. Conjugal Partnership of Gains
2. Absolute Community of Property
3. Separation of Property
4. Complete Separation of Property
5. Partial Separation of Property

Question 99

What is the effect of a second marriage on the property regime?

Art. 92. The following shall be _________ from the community property:

(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. (201a)

Answer 99

excluded

Question 100

(T or F) In unions without marriage and no legal impediment, same rules would apply to void marriage.

Answer 100

True

Question 101

What property regime should spouses follow, who got married on August 1, 1988?

Answer 101

Conjugal Partnership of Gains

Question 102

Spouses who got married on ________________ or after follow the Absolute Community of Property.

Answer 102

August 3, 1988

Question 103

Among the two taxes that consist the State Death Tax Value, which is the only one present in the Philippines?

Answer 103

Estate Tax

Question 104

(T or F) In the Philippines, you are not liable of your parents’ loans. Their loans can only be paid through their estate, not your own properties.

Answer 104

True

Question 105

What is the standard deduction in gross estate in the Philippines jurisdiction?

Answer 105

PHP 5,000,000

Question 106

How much is the deduction in gross estate if the family home is worth 70million pesos?

How much is the taxable, on the other hand?

Answer 106

(a) PHP 10,000,000
(b) PHP 60,000,000

Question 107

Mr. Masipag spent his lifetime working and building his wealth. He forgot to get married because he was just focused on working. He came from a poor family and studied really well. Through hard work, prayers, and studying investments, he was able to accumulate the following:

A P50 Million 3-storey residential house in Antipolo overlooking the Marikina Valley
Three Cars: a P4.5M Porsche Cayenne, a Php 4.2M Toyota Land Cruiser. and a Toyota Grandia amounting to P2.6M
He also has multiple financial securities: P25 Million worth of stocks in COLFinancial, a P5 Million UITF invested in bonds in UnionBank, and P12.5M worth of cryptocurrencies in Binance.
A newly constructed commercial building in Caloocan worth P50M.
The lot where the building resides is worth P100 Million.

Unfortunately, Mr. Masipag was not able to take care of his health. He was overweight and is suffering from hypertension and diabetes. Two days ago, his stock investments went down to P10 Million, his Binance account went down 50%.

On that same day, the Manager of BPI Antipolo called Mr. Masipag since he issued a check amounting to P10M but his account balance is just P1 Million. That P10Million check should be his payment to Mr. Pautang whom he asked for a loan so he can construct the building in Caloocan.

As you can see, Mr. Masipag has a lot of assets but is not liquid. All the cash he has is the P1M in the bank.

Because of the stress and the summer heat, Mr Masipag had a stroke and died.

Round to the nearest whole number. No need to place the currency such as P or PHP.

Take Note: Do not overthink. Answer only based on the facts stated above.

Q1. How much is Mr. Masipag’s gross estate?
Q2. How much is Mr. Masipag’s net taxable estate?
Q3. How much is Mr. Masipag’s estate tax?
Q4. In the case where Mr. Masipag was able to get married without a prenuptial agreement two months before he died, wherein his wife has no assets and no debt, how much will be his wife’s marital or conjugal share?
Q5. Based on Q4, how much will be Mr. Masipag’s net taxable estate?
Q6. Based on Q4, how much is the Estate Tax that Mrs. Masipag will be paying to the BIR?

Answer 107

1. PHP 233,550,000
2. PHP 208,550,000
3. PHP 12,513,000
4. PHP 111,775,000
5. PHP 96,775,000
6. PHP 5,806,500