Chapter 4

Chapter 4 - Co-Ownership, Estates and Trusts

Co-Ownership

Definition of Co-Ownership

  • According to Article 484 of the Civil Code, co-ownership exists when the ownership of an undivided thing or right belongs to different persons.

Presumption of Equal Portions

  • Under Article 485 (CC), the portions belonging to the co-owners in co-ownership are presumed equal unless a contrary proof is provided.

Tax Implications of Co-Ownership

  • For taxation purposes, co-ownership occurs when:
    1. Two or more heirs inherit an undivided property from a decedent.
    2. A donor gifts an undivided property to two or more donees.
  • Inheritance is subject to "Estate Tax" while donations are subject to "Donor's Tax." Both taxes are classified as "Transfer Taxes" (discussed in Volume 2).
  • Income from co-owned properties is subject to income tax over time.

Individual Taxation of Co-Owners

  • Co-owners are taxed individually on their distributive share in the income of the co-ownership. Co-ownership activities generally involve:
    • Preservation of common property.
    • Collection of income from the property.
  • Income derived from investing the collected income in a business will classify the co-owners as a partnership and therefore be subject to corporate tax (discussed in Chapter 6).

Undivided Property Ownership

  • Property that remains undivided for over ten (10) years without attempts at division, administration proceedings, or being held in trust, is considered owned by an unregistered partnership and is taxed as a corporation.

Illustrations

Illustration 1: Co-Ownership Case A

Question: Did co-ownership exist with Ana, Lorna, and Fe who bought a parcel of land?
Answer: No. The property was acquired through purchase, thus establishing a partnership rather than co-ownership. Partnerships are subject to corporate taxation.

Illustration 2: Co-Ownership Case B

  • Details: Noy died leaving undivided property valued at P60,000,000 to heirs Allan, Mar, and Pacquito, with gross rental income of P15,000,000 and expenses of P3,000,000 in 2024.
  • Question 1: Was co-ownership created?
    • Answer: Yes, as the property is undivided; estate valued at P60M is subject to estate tax.
  • Question 3: How much taxable income is attributable to Allan?
    • Answer: P7,000,000 after considering gross income, business expenses, and share of co-ownership net income.
  • Tax Calculations for Allan:
    • Income Tax Payable Calculation:
    • Gross Income: P6,000,000
    • Business Expenses: (3,000,000)
    • Share of Net Co-Ownership Income: (4,000,000)
    • Total Taxable Income: P7,000,000
    • Tax Payable: P1,902,500 (Based on graduated tax rates).

Income Tax of an Estate

  • Definition of Estate: Refers to the collective property rights and obligations of a deceased person, including post-mortem accruals.
  • Tax On Estate’s Income: Taxes apply to income accrued during the administration of the estate, separate from transfer taxes ( estate tax for inheritance and donor's tax for gifts).

Administration Period

  • Period when the title of the deceased's property isn't finally transferred to heirs—managed by an executor or administrator.

Illustrative Example - Estate Taxation

  • Example of Estate Composition:
    • Cash: P5,000,000
    • House and Lot: P15,000,000
    • Total Value: P60,000,000.
  • Tax Implications: They are not part of gross income for tax purposes as inheritance does not constitute taxable income.

Judicial vs Extrajudicial Settlement

  • In judicial settlements, the executor pays taxes, whereas in extrajudicial settlements, beneficiaries do.

Classification of Estates

Judicial Administration vs Extrajudicial Administration

  • Judicial Administration: Executed through court mechanisms by a fiduciary.
  • Extrajudicial Administration: Coordinated by heirs, settling property amongst themselves.

Applicable Tax Regimes

  • Taxable income computed as with individual taxpayers, following the section 24(A) of the Tax Code.

Income Tax Due Rates from 2023 Onwards

  • Taxable Income Rates:
    • Not over P250,000 - Exempt
    • Over P250,000 but not over P400,000 - 15%
    • Over P400,000 but not over P800,000 - P22,500 + 20% over P400,000.
    • Each income effectively accumulates applicable deductions before tax liability.

Income tax computation

  • Example of an Estate:
    • Gross Income from Estate: P4,750,000
    • Allowable Deductions: P2,000,000
    • Income Tax After Tax Due: PXxxx

Trusts Definition

Meaning and Structure of Trusts

  • Trusts entail holding property rights for another's benefits.
  • Types of Trusts:
    • Ordinarily classified as per their operation characteristics.
    • Trustor, Trustee, and Beneficiary clarify roles in a Trust structure.

Taxability of Trusts

  • Income of a trust may be attributed to:
    • Trust (if accumulated)
    • Grantor (if funds can revert)
    • Beneficiaries (if distributed).
  • Special Deductions for Trusts include distributions to heirs.

Computation of Trust Taxable Income

  • Mirrored to individual taxpayers while adjusting for unique trust income specific criteria.

Illustrative Example - Trust income

  • Example Trust Income Computation:
    • Gross Income: P4,750,000
    • Deductions: P2,000,000
    • Net Taxable Income of Trust: = P5,000,000

Consolidation of Income Tax Returns

  • For trusts created by the same trustor for one beneficiary, income consolidates for tax computation, apportioning tax based on share.

Preparation of Income Tax Return of the Trust

  • General Example: Trust income is reported separately, subject to the decreased graduation based taxes for total income under the original shareholder matrix.

Chapter Exercises

Problems requiring Calculation of Taxes:

  • Example Problem: Determining Taxable Income - estate tax calculation based on income received during estate administration assigned to the correct processing actor (executor vs beneficiaries).

Multiple Choices for Verification of Comprehension of Tax Concepts:

  1. Definition and Taxation of Co-ownership.
  2. Income Tax Assessments as applied to joint ownership or estates.

Example Answers to Questions on Income Stabilization,

  • Most queries focus on the differentiation between co-ownership, estate, and trust,