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Money Matters

How Do You Protect Your Inheritance from Taxes?

Yes, the government gets a cut from your inheritance. Don't worry�"they don't get everything, and there are ways to protect a huge chunk of it.

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Photography: EasyProperty (Main Photo) | Pexels

Only death and taxes are certain in this life. The two collide because the inheritance you get from a parent’s passing is subject to estate tax. 

Yes, it sounds awful that the government gets to benefit from such a terrible occurrence like your parent’s death, but it’s an unavoidable fact of life. While paying estate tax is something that cannot be changed, there are ways to protect your inheritance from getting taxed more than it should be—and in legal ways!

What is a person’s “estate”?

A person’s estate is everything that is of value. When someone says the words “estate,” what instantly comes to mind are real estate properties and huge sums of money locked in vaults, but in reality, it’s anything of value to you, like bank accounts, company stocks, jewelry, furniture pieces, artwork, and any worldly possession.


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Why is it important to plan your estate?

No one wants to be a burden to those they’ll leave behind when they pass away. This is especially true for parents who leave behind children—they want to secure their children’s future as much as possible, and not become a burden to them. Estate planning assures a smooth enough transition of wealth from the deceased to their descendants, if any.

Coni Tejada, a Financial Consultant with PRULife UK, says that Filipinos are usually concerned with accumulating wealth, and forgetting the cost behind passing it on to those they’ll leave behind. She says, “Making provisions to plan your estate will help your children get their hands on their inheritance. No provisions made will mean they need money of their own to pay the estate tax. Without paying your estate tax, your children can’t transfer property titles to their name, bank accounts of their parents will be frozen upon your death until the tax is paid.”

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Lolit San Miguel*, 72 years old, arranged her estate along with her husband, when they were still in their 50s, and continued to do so as they accumulated their properties. Both real estate brokers by profession, Lolit and her husband divided their estate among their three children. “It takes a lot of work to do plan for your estate, so it’s best you’re still physically and mentally strong enough to create a will, talk to lawyers and consultants. You might also need to travel to the locations of your properties to do the necessary paperwork and legwork.” 

What is estate tax?

Plainly speaking, estate tax is the tax you pay to the government when you inherit money or properties from a person who passed away. Prior to the TRAIN Law, 5 to 20% of your inheritance is subject to estate tax. But the new TRAIN Law that was passed under the Duterte administration states that the net estate of each decedent (a person who died) is subject to a flat rate of six percent (6%) estate tax.

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For a quick computation, say a parent leaves Php100,000 in cash behind to only one descendant, Php6,000 will be given to the government as estate tax. The sum naturally gets bigger according to the size of the estate. 

How do you protect your inheritance from estate tax?

Descendants are taken by surprise when they find out that they don’t have access to the estate that was left behind until they pay estate tax. If the deceased was able to plan their estate properly, there will be money set aside to pay for the estate tax. If not, descendants will need to use their own money to pay the estate tax themselves. To protect your inheritance, you can do the following:

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1. Urge your parents to plan and periodically revise their estate.


According to Miss San Miguel, they revised their estate as the years went along, dividing properties among their three children, basing it on their current needs, even their personalities.

She says, “We divided the properties fairly in terms of monetary value among the three kids, but the houses were given to the children with families of their own. The ‘problematic’ properties, such as those with informal settlers, were given to our daughter who is a lawyer, so that she’ll know how to deal with it properly.”

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Miss San Miguel further suggests reviewing your estate from time to time, especially during any major life events, such as a civil union of a child, in order to arrange for any separation of assets, if needed.

2. Do estate planning with a financial planner.

Coni says that estate planning is, in simple terms, “Taking the necessary legal and financial steps in preparation for the distribution of your estate while you’re still alive. Having the proper plan would help your heirs afford to pay the said taxes.”

If you’re the one looking into inheriting properties or large sums of money, it would be best to talk to your parents about your inheritance, so that you can plan your own estate. And if they don’t have a plan put in place, get a financial instrument that might be able to cover the payment of the tax of your inheritance. Coni adds, “A financial consultant can help you choose the right financial products that can help generate funds. Insurance policies can be useful because policies with irrevocable beneficiaries are tax-free, and can be designed towards paying the estate tax.”

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3. Buy assets from your parents.


When real estate properties are sold to the heir, the taxes might be smaller than paying estate taxes—but it depends on the value of the property to be bought, plus the taxes that come with it.

4. File the estate tax return within a year after the decedent's death.

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It’s best to know the requirements and documents needed to file the estate tax ASAP, because failure to file the estate tax return within the allotted period of time will only amount to fines or penalties—more money to give the government!

5. Know your deductibles.

The TRAIN Law now allows you to deduct the following expenses from the amount of estate tax: Medical expenses of the deceased, judicial expenses you’ll incur from settling any disputes regarding the deceased person's estate, and funeral expenses.

Another change that came about with the TRAIN Law is that family homes that are worth 10 Million Pesos or more are not subject to estate tax.

For a complete list of deductibles and amendments on the Tax Code due to the TRAIN Law, you can access it here: https://www.bir.gov.ph/index.php/train.html. Given the current implementation of the TRAIN Law, it is yet to be seen if these amendments to the estate tax will be effective in getting more Filipinos to be more honest in declaring the value of a deceased person's estate. But one thing’s for sure—planning for the future right now will lessen the amount of estate tax that you need to pay when the time comes for you to do so.

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*Ed's note: Name has been changed to protect privacy

Main Photo: EasyProperty

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