Income Tax on Estate and Trusts

Estate

The mass of all property, rights, and obligations of a person not extinguished by death, including those accrued after death.

Decedent, or if there is a will, Testator

The person whose property is transmitted through succession

Heir

A person called to the succession

Devisee

A person whom a gift of real property is given by a virtue of a will

Legatee

A person whom a gift of personal property is given by a virtue of a will

1. Estate under judicial administration

2. Estate not under judicial administratio

How are estates classified for income tax purposes?

To the fiduciary or trustee (executor/administrator) during the period of administration.

To whom is the income of an estate generally taxed?

When the estate is not under judicial administration and there is no executor or administrator.

When is estate income taxed directly to heirs or beneficiaries?

In the same manner as a self-employed individual.

— if gross sales plus other income exceed VAT threshold of 3M = Graduated Rates

—- if gross sales plus other income does not exceed VAT threshold of 3M =

1. 8% of Gross sales plus other income in excess of 250K; or

2. Graduated Rate

How is the taxable income of an estate computed?

The mere passage of property to the executor or administrator upon death, even if appreciated.

What estate income is excluded from gross income?

Items of gross income taxable to individuals and;

Income received by the estate during the period of administration and gains from the sale of estate property above appraised value.

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—Delivery of property in kind to a legatee or distributee, no income is realized by such person.

—Property is sold after the settlement of the estate by the heir at a price greater than the appraised value, it is taxable individually on any profit derived

What is included in the gross income of an estate?

Same deductions allowed to an individual tax payer and;

Income properly paid or credited to heirs or beneficiaries during the taxable year.— be included in the taxable income of the heir.

—Allowance paid to an heir out of the property is not deductible from gross income

What special deduction is allowed to estates?

15% Creditable Withholding Tax (CWT)

—which is not applicable as a Credit CWT

What withholding tax applies to income distributed by an estate?

Trust

A right of property held by a trustee for the benefit of a beneficiary.

Trustor (Grantor) - person who establishes a trust

Trustee (Fiduciary) - the one in whom confidence is reposed

Beneficiary - the person for whose benefit the trust has been created

Who are the parties to a trust?

Generally, the trustee, unless income is distributable to beneficiaries.

Who is taxed in an ordinary trust?

The grantor, for income that may revert to or benefit him.

Who is taxed in a revocable trust?

No, if all statutory requisites for exemption are met.

• The trust must form part of a pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all of his employees;

• Contributions are made to the trust by such employer, or employees, or both;

• Contributions are made for the purpose of distributing such to employees the earnings and principal of the fund;

• Under the trust instrument, it is impossible for any part of the income to be used for, or diverted to, purposes other than for the exclusive benefit of his employees.

- Any amount which does not qualify as retirement benefits shall be taxable to him in the year in which distributed to the extent that it exceeds the amount contributed by such employee.

Is an employee’s trust subject to income tax?

When income is required to be distributed during the taxable year.

When is trust income taxed to beneficiaries?

15% CWT, withheld by the trust.

What withholding tax applies to income distributed by a trust?

In the same manner as a self-employed individual.

— if gross sales plus other income exceed VAT threshold of 3M = Graduated Rates

—- if gross sales plus other income does not exceed VAT threshold of 3M =

1. 8% of Gross sales plus other income in excess of 250K; or

2. Graduated Rate

How is the taxable income of a trust computed?

Same items of gross income applicable to individuals

Gross Income of Trusts

Same deductions applicable to individuals; and

1. Income of trust which is to be distributed currently to the beneficiaries.

2. Income collected by a guardian of an infant to be held or distributed as the court may direct.

3. income of the trust which is properly paid or credited to any beneficiary.

- Shall also be included in computing taxable income of the beneficiaries, whether distributed or not.

Deduction of Trusts

Their taxable incomes are consolidated, and tax is allocated proportionately.

Tax to be paid = (TNI of Trust / Consolidated TNI) X Tax on Consolidated TNI

What happens when multiple trusts have the same grantor and beneficiary?

Sales

-COGS

Gross Income

-Itemized deductions or OSD [inc. special deduction]

Net Income

+Non-Ops Income

+Share in GPP [excluded if trust]

Taxable Income

Tax Table

Cr. CWT

Tax Payable

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Sales

+Non-Ops Income

Total

-250,000

TNI

x 8%

Tax Due

Cr. CWT

Tax Payable

Format in computing the income tax payable of an Estate and Trust

Sales [inc. income from estate, gross of 15% CWT]

-COGS

Gross Income

-Itemized deductions or OSD

Net Income

+Non-Ops Income

+Share in GPP

Taxable Income

Tax Table

Cr. CWT

Tax Payable

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Sales

+Non-Ops Income

Total

-250,000

TNI

x 8%

Tax Due

Cr. CWT

Tax Payable

Format in computing the income tax payable of Heir/Beneficiary