This Is What Happens When You Don't Pay Your Estate Taxes
Keep track of the payments you need to make to avoid problems concerning your family's properties
In a previous article, we talked about the importance of a will and how it can help settle the properties left behind by a deceased family member. Aside from learning about inheritance and the percentage of inheritance each heir is entitled to, you also need to note the different kinds of taxes that need to be paid involving real estate.
For starters, you need to pay the estate tax as soon as possible to avoid problems with asset distribution. Do this within six months from the date of death of the previous owner. Otherwise, you need to pay the subsequent penalties and other related charges.
What taxes should be paid by the heirs? How is the tax computed? What happens when you don't pay your estate taxes? Lawyers Alejandro M. Tupas III and Adrian B. Campilla share these insights:
Estate Taxes Facts From Lawyers
Q: Our family is worried mostly about inheritance tax. How is this computed?
A: Inheritance tax is properly called in the Philippines as estate tax. Estate tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death. Simply put, it is a tax on the “right of transferring the property.”
This is computed based on the Net Estate of the decedent, or the remaining estate once all the debts of the person who died (funeral costs, expenses of administering the estate, and other deductions allowed) are subtracted from the total assets. To get the Estate Tax due, the Net Estate is multiplied by a certain percentage, based on the following graduated rates:
Q: As an heir, what is my tax liability?
A: You are liable for the whole taxable amount, divided among co-heirs, if any, depending on the value of the Net Estate. Take note that distribution of assets is only allowed after payment of the obligations (including taxes,debts, and other charges) has been made. (Section 1, Rule 90 Rules of Court)
Q: What happens when estate taxes remain unpaid?
A: As mentioned, assets will not be distributed accordingly until the estate tax is paid. It is imperative that payment and filing of the Estate Tax Return be made within six months from the decedent’s death. Otherwise, tax due shall be subjected to further interests and surcharges. Consequently, the properties may not be transferred to the heirs or third parties without proof of payment of estate taxes.
Q: My parents’ house and lot were under their names until they passed away three months ago. I am an only child. How deep in debt am I in real estate taxes?
A: If the property stays under the name of the deceased after six months from death, then the real estate property will be liable for penalties for delayed filing of estate taxes. This will be in addition to surcharges and compromise penalty fees, computed on an annual basis.
Q: Will I be able to get out of paying taxes if I sell my assets to a potential heir instead?
A: No. One may consider selling property to a potential heir (except a spouse) rather than allowing it to become part of the estate. But the sale of real property will still be charged 6% capital gains tax, 1.5% documentary stamp tax, and 75% of 1% local transfer tax. Compare this with estate tax, which has a maximum effective rate of 16%. Just make sure that the heir who will buy the property has the capacity to buy and will actually purchase the property at a considerable amount.
Q: What is the process for donating property to an heir? What taxes are involved?
A: If the potential heir has no capacity to buy, one may just donate the property to the heir. Donor’s tax has a maximum effective rate of 12.5%, which is still lower than the maximum effective estate tax rate of 16%. The amount or value of the asset donation is also already carved out from the estate, reducing the taxable estate. It’s important to know that if you donate to a stranger (someone who is not your brother or sister, ancestor or lineal descendant or first cousin), the donor’s tax goes up to 30%.
Frequently Asked Questions on Estate Tax
Can you explain the difference between estate tax and inheritance tax?
Estate tax is a tax on the total value of a deceased person's estate, while inheritance tax is imposed on the beneficiaries or heirs who receive assets or property from the estate. In some cases, these terms may be used interchangeably, but it's important to understand their distinctions based on where you live and, in the case of physical assets, where the structure in question is located.
Are there any exemptions or deductions available for estate taxes?
There may be exemptions or deductions available for certain types of assets or specific amounts. Common exemptions can include allowances for spouses or charitable donations. Consulting with a tax professional or a lawyer with specialization in properties can help you navigate these intricacies.
What is the role of an executor in handling estate taxes?
An executor is responsible for managing the deceased person's estate. This includes filing the necessary tax returns and paying the estate taxes due. They ensure that all debts, expenses, and taxes are settled before distributing the assets to the rightful heirs. Because of their roles, executors play a crucial part in the estate administration process.
Can life insurance policies be subject to estate taxes?
In many cases, life insurance proceeds are not included in the taxable estate. However, there are exceptions, such as if the deceased person had control over the policy or if the proceeds are payable to their estate. It's essential to understand the rules in your jurisdiction regarding life insurance and estate taxes.
How can I plan ahead to minimize estate taxes for my heirs?
Estate planning strategies can help minimize the impact of estate taxes on your heirs. These strategies may include creating a trust, making lifetime gifts, utilizing the annual gift tax exclusion, and structuring your assets in a tax-efficient manner. Consulting with an estate planning attorney is advisable for personalized guidance.
What happens if the estate does not have enough liquid assets to pay estate taxes?
If the estate lacks sufficient liquid assets to cover estate taxes, heirs may need to sell assets or take out loans to pay the tax liability. It's crucial to plan for this scenario in advance to avoid financial difficulties for your heirs.
Are there any special considerations for non-resident or foreign heirs?
Non-resident or foreign heirs may have specific tax obligations and withholding requirements when inheriting assets from an estate. These obligations can vary depending on the exact place where the assets are located and the recipient's tax status. Seeking advice from a tax professional with international expertise is advisable in such cases.
How can I keep accurate records of the estate's financial transactions and assets?
Maintaining meticulous records is essential for estate administration and tax purposes. Consider using accounting software or working with a professional accountant or attorney to ensure accurate record-keeping throughout the process.
What is estate tax amnesty?
This is a tax amnesty program that lets Filipinos settle their obligations. It expired last June 14, 2023, but the Senate passed another bill on May 29, 2023 that extended the effect to June 2025. This is known as the Republic Act (RA) No. 11956.
Got questions about inheritance and other similar concerns? We'd love to help! Send us a message on Facebook and we'll try to answer your queries, too!
This article first appeared in an issue of Real Living magazine. With reports from Nica Jose.
