Check out our interview with one of the country’s top tax lawyers on what you should know when planning your estate

It was best said by Benjamin Franklin, “In this world, nothing can be said to be certain except death and taxes.” In most states around the world, both are most notoriously assured to be conjoined upon anyone’s last breath with the settlement of one’s estate and paying estate tax. Most people don’t really understand the legal consequences of death and the tax implication upon passing one’s properties to heirs upon death.

Philippine Tatler sought the expertise of one of the country’s top legal minds, Atty. Jules Riego of SGV & Co. Philippines about what people should know about estate planning:

PHILIPPINE TATLER: When should a person start on planning his estate?

ATTY. JULES RIEGO: Ideally, a person should start his estate planning the moment he has earned or acquired substantial assets other than having a steady income stream to finance his day to day needs.  Of course, the word substantial is a relative term but if you will consider the estate tax system of the Philippines, the estate tax will only begin to apply if a person has a gross estate of more than P2.2 Million to P2.7 Million pesos.  

You might ask why P2.2 M to 2.7 M? Please note that under the Tax Code, an estate is allowed a standard deduction of P1 Million, no questions asked. The estate is also allowed a “family home” deduction in the maximum amount of P1 Million.  It is also allowed a deduction of maximum amount of P200,000 for funeral expenses.  In some cases, medical expenses in the maximum amount of P500,000 incurred within one year prior to the death of decedent is also allowed provided that said expenses can be substantiated with supporting documents.

Thus, if the decedent’s assets are not worth more than P2.2 Million, including a family home of at least P1 Million, it is safe to say that you do not even have to worry about estate tax.

PT: What are the common mistakes in estate planning?

ATTY: There are a lot of common mistakes in estate planning, but the most common that I have encountered is people just assume that what others did is also applicable to their case, be it tax-free exchange, formation of asset-holding companies, donation or sale.  You cannot assume that “one size fits all” in estate planning as each family is unique in terms of their values, aspirations, and goals. 

For example, a father buys a real property and has the title issued under the name of the minor child directly. The father does not understand that he is exposing himself to donor’s tax.  Another example would be the parents transferring their lone substantial asset, say their house and lot in Ayala Alabang, to their only child while the parents are still living. Admittedly, this will help avoid the significant impact of estate tax when the parents die, but it unnecessarily exposes the parents to the risk of losing complete control over the property while they are still alive. What if the son gets married and predeceases the parents? The daughter-in-law will definitely inherit the property together with the grandchildren.

In some cases, a person just decides to form a real estate company and puts all real property acquisitions in that company because he heard that that’s what his friend did. He did this not having a real vision or plan on what he will do with the real properties he acquired.  What if he decides to dispose only of a specific asset or the buyer is only interested to buy a specific asset and not the entire realty company? The asset only sale will now attract higher taxes of 30% corporate income tax, 12% VAT and documentary stamp tax (DST), which is obviously costly both to the buyer and seller now. Whereas, if a property was retained under the name of the individual with the view that it is only for investment purposes and not for development, it will only be subject to 6% capital gains and DST but not to 12% VAT.

There is also the wrong assumption, for lack of knowledge of the law, that one can do everything he wants in designing an estate plan. I often encounter parents that simply decide based on traditions handed down through generations, for example, giving the entire family business to the eldest son. This violates the concept of “legitime” enshrined in our New Civil Code, which refers to the minimum entitlement of each compulsory heir under the law. Note that once the legitime is impaired, any aggrieved compulsory heir can go to court and invalidate the entire will and ask for the collation of the assets disposed to make his legitime whole.

PT: Would you recommend the use of wills for estate planning, considering the limitations imposed by law as to legitimes and collation?

ATTY: I try to avoid using wills as much as possible in designing an estate plan for three reasons: 

a) The existence of a will necessitates a court proceeding for the probate of the will where the heirs need to prove the intrinsic and extrinsic validity of the will. Extrinsic validity refers to the observance of the required formalities of the will to make it valid, for example, in case of a notarial will, was the will attested and subscribed by three or more credible witnesses in the presence of the testator and of one another?  Intrinsic validity refers to the compliance with the substantive requirements of the law, for example, was the legitime of the compulsory heirs observed and respected by the testator?

b) A court proceeding for probate of the will often becomes a public spectacle which makes it susceptible to intrigues; and

c) A court proceeding often becomes a protracted, long and costly exercise for the heirs. You will only make the lawyers happy.

A decedent can still achieve the same goals without having to execute a will by forming a trust or trusts, for example.

PT: What are the most efficient ways to transfer one's estate while effectively reducing tax liabilities and avoid internal conflicts in the family as to the division of properties?

ATTY: If the main goal is to carve out value from the estate so as to avoid the bite of estate tax, insuring one’s life and designating the heirs as irrevocable beneficiaries is a very effective way of minimizing estate tax. This will also address liquidity problems in terms of settling the estate tax and local transfer taxes that will apply particularly if the estate is not liquid. 

The formation of irrevocable trust or trusts is also effective since any asset transferred to an irrevocable trust is no longer the asset of the transferor, thus, reducing the gross estate of the transferor. Note though that any asset transferred to an irrevocable trust is subject to donor’s tax but donor’s tax is still lower than estate tax.  Through the letter of wishes of the trustor (transferor), the trustee can make distribution of the income of the trust and/or body of the trust to the beneficiaries in such time and such manner that the trustor has so provided in his letter of wishes.    

Of course there is also straightforward donation or sale of assets to the children as a mode of transferring ownership to reduce the taxable estate of the transferor subject to the payment of applicable taxes. The taxes applicable like capital gains tax and DST, as the case may be, or donor’s tax is still lower compared to estate tax, plus, you will spare your heirs the perennial headache of transferring the titles under their name if those real properties and shares of stocks were not yet distributed prior to the death of the decedent.

PT: Is transferring properties via contract of sale to heirs really more tax efficient?

ATTY: If we are only talking about tax costs, the answer is yes. But this is only true of the property being transferred is any asset other than real property that is considered ordinary asset (meaning, used in business). If you transfer by sale a real property that is used in business or is for sale or for lease, you may, in fact, incur tax costs that are higher than estate tax.  If a real property is part of the inventory or is being leased or is being used in business, the sale of said property will be subject to 32% (if owned by individual) income tax, 12% VAT and DST. If it is owned by a corporation, then, subject to 30% corporate income tax, 12% VAT and DST.

On the other hand, if the real property is a capital asset, it is only subject to capital gains tax (CGT) of 6% and DST but not subject to 12% VAT.  Obviously, 6% CGT is much lower than estate tax, so it is really much more tax-efficient to transfer it by sale than be hit with estate tax.

PT: What is the best way to secure the transfer of devices and legacies with minimal risk of being contested? 

ATTY: By legacies and devises, it necessarily means that these are dispositions done by a testator through the execution of a will.  The only way that they cannot be contested is to see to it that they are not inofficious, that is, not encroaching on the legitime of the compulsory heirs. This means that they should be taken only from the free portion of the estate.


Atty. Jules Riego is a Principal for Business Tax Services at SGV & Co. He is experienced in international tax – inbound and outbound investments. He has advised local and foreign clients on various tax (national and local) issues, including: tax implications of proposed transactions; corporate tax planning; and family wealth planning and local taxation. He is the Chairman of the Taxes and Tariffs Committee of the American Chamber of Commerce of the Philippines. Atty. Riego earned his Master of Laws degree from Harvard Law School and earned his Juris Doctor degree from the Ateneo Law School (silver medal for academic excellence). He is also a graduate of the Harvard Tax Concentration Program. He graduated from the University of Santo Tomas with a Bachelor of Arts degree in Philosophy.