Estate Planning in the Philippines
My husband, Erwin, and I are licensed real estate brokers with combined thirteen years of professional experience as brokers, as of this writing. In our profession, we have come across issues about estate planning. It is also one of the subjects studied in review school for the board exam given by the Professional Regulations Commission (PRC) and a constant topic for Continuing Professional Development (CPD), a requirement for our PRC license renewals. Suffice it to say that we are no strangers about estate planning in the Philippines. However, let it be said that we are not lawyers. For a more comprehensive understanding of estate laws and estate planning in the Philippines, it is best to seek legal counsel from a lawyer.
CTTO: Some years back, Erwin and I attended a seminar on Estate Planning sponsored by China Bank-Manulife and conducted by Mr. Martin Ledesma. I give credit to Mr. Ledesma and to China Bank-Manulife for a number of ideas presented here like the asset table, the family constitution, efficient wealth transfer and life insurance as a practical way to settle estate taxes. We are not connected with China Bank-Manulife. If, like us, you are interested in learning more about life insurance to prepare for estate tax settlement, please directly get in touch with China Bank-Manulife about this.
We learned a lot from this seminar and are grateful for the added knowledge. By writing about it, we are sharing our learnings with you, our readers.
No one lives forever.
We are born, we live, we die.
It’s the cycle of life.
In the course of living, especially when you lead a life of success and wealth, you acquire assets like stocks, properties, cash, jewelry, paintings and other material things representing your wealth and status in life.
But when you die, what happens to your assets?
How would you transfer your wealth to your loved ones so that they can enjoy these assets when you are no longer around to guide them?
Death and Taxes
With death comes taxes. Benjamin Franklin laid it out well when he said – after the American Constitution was finalized – that the only constant things in this world are death and taxes. So when you die, what are the taxes involved? What are estate taxes? Why do these estate or inheritance taxes need to be paid? How are these taxes computed? What can you do so that your wealth transfers to your bloodline and not to other people like in-laws, especially when you do not like them?
I, the Asset Owner
As the asset owner, you can control what can you do to your assets when you are still alive and after you die. If you decide to enjoy your assets while you are still hale and hearty to do so, you can actually do that. You can just sit and watch and listen – but not do a thing – when your children beg you to give them some of your assets, by saying “No one touches my assets while I still live”. However, if you are feeling generous and it would be practical, you can give away your asset/s if it’s an asset that you are willing to lose control of. The sooner, the better.
The Asset Table
The first thing that you have to do is to create an Asset Table. What is an Asset Table? An Asset Table is an organized list of all the assets that you own. This table should consist of how much the asset is worth, when the asset was acquired, and the documents that support ownership of that asset (if it’s a property, list down the title number, when the property was titled; if the assets were stocks, when were the stocks purchased, how much are they worth, and so on and so forth).
Why do you need to draw up an Asset Table?
Do an Asset Table to (a) determine what your total estate is, (b) determine you total taxable estate and be prepared for these taxes, (c) determine which assets you do not want to lose control of and which assets you can give away while you are still alive, and (d) serve as basis for an efficient wealth transfer.
Just remember that you cannot give what you do not own. It pertains to the nemo dat legal rule, from the Latin phrase “Nemo dat quod non habet”, that literally means “no one gives what they don’t have”.
When you start drawing up your Asset Table, please bear in mind that there may be assets that you own exclusively and there are assets that you own conjugally, if you are married. If you are married, the date of your marriage determines what kind of ownership structure and control you have over your assets.
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The Conjugal Property of Gains
A marriage contract is a very powerful contract and the law subjugates itself unto the marriage contract.
Prior to August 3, 1988, the law that governed property ownership in a marriage was the Civil Code.
So if you were married before August 3, 1988, under the Civil Code, the property regime that governed property relations between husband and wife is called the Conjugal Property of Gains. In summary, the salient features of the CPG are: (1) anything that you owned before the marriage is exclusively yours and will be exclusively yours throughout the marriage, (2) anything that you owned after the marriage will be conjugal, if that asset was bought by the joint fund of the spouses, (3) anything that you owned exclusively and eventually purchased assets with, is exclusive, even during marriage. For the assets that you own exclusively, you can alter, move, sell, dispose of, enjoy the proceeds of these assets without having to seek approval from anyone. For the assets conjugally owned, you have to get the express approval of your spouse before you can do anything about them.
The Law and Date that Protects the Marriage Partner:
The Family Code and August 3, 1988
For spouses who married after August 3, 1988, property ownership is ruled by Absolute Community of Property. The difference between the Civil Code and the Family Code is that the Family Code became more protective of the incoming partner: as you sign the marriage contract, and if you did not place any condition on that marriage contract, you just donated half of your assets to the incoming party who is not even your blood. In the absence of any pre-nuptial agreement, the law of spousal right will prevail.
In a nutshell, the Absolute Community of Property says that everything that a spouse brings into the marriage and everything that the couple acquires during the marriage is jointly owned by both spouses. “Community of property” refers to everything that is owned by both the husband and the wife. The Family Code articulates that a husband or wife cannot sell sell, dispose, lease out, give away, donate, enjoy the fruits of any of the conjugal assets without the approval of both parties.
Complete Separation of Property
As parents, you cannot chose whom your children will marry. If you have assets, it is best to not give your unmarried children any of your assets while you are still alive. Why? One half (½) of any asset that your child brings into his/her marriage will be owned by the incoming spouse, who is not even your blood. In the unfortunate event of your child and his/her spouse’s separation, by operation of law (Family Code), ½ of that asset will belong to your son-in-law/daughter-in-law. Property ownership is at the center of bitter disputes in most separation cases.
So, what is your recourse? There are several things that you can do: (1) have your child and the fiance/fiancee sign a pre-nuptial agreement; (2) if a pre-nuptial contract is not possible, have your child execute an Affidavit of No Ownerhip and have it notarized before the wedding; (3) donate the asset to your child after the wedding since any asset given gratuitously after the wedding is not conjugal and it will be exclusively owned by your child; and (4) ask for grandchildren immediately. Wealth transfer is by bloodline so your wealth transfers to your child and to his/her children, not to your in-laws. If your child predeceases you, the wealth transfers to his/her children, not to your in-laws.
The Pre-nuptial Agreement and the Filipinos’ “hiya” Culture
For the sake of bloodline transfer of wealth, it is best to do a pre-nuptial agreement. However, in the Philippines, this is more of the exception than the norm. A pre-nuptial agreement traps the law but drawing up one and having it signed is easier said than done. Filipinos keep that “hiya” (it’s embarrassing) mentality, stemming from centuries-old culture of inherent hospitality (an incoming party/guest should always be treated well and should not be offended). The mere thought of having it prepared may be offensive to one party. There is also a matter of trust: the incoming party who will be asked to sign a pre-nuptial contract will wonder if your child thinks that he/she is only marrying your child for your family’s money.
As a parent and asset owner, if you anticipate that this may happen – of course, you know your child well and in the course of your child and the fiance/fiancee’s engagement, you also came to know of the incoming party – then, as early as possible, put together a family constitution. In fact, it is highly suggested that families with many assets and businesses carve their family constitution very early on to iron out issues like property ownership and the entrance of in-laws into the family. Before the marriage, your lawyer can go to the incoming party and tell him/her that your family constitution dictate that a pre-nuptial contract be signed and that this condition be applied to everyone in your family, bar none. It is hoped that this will somehow make the thorny issue of a pre-nuptial contract less offensive, less nakakahiya.
What is a family constitution? Simply put, a family constitution is a bespoke document specifically written up for your family. It contains your family’s dreams, aspirations, directions (especially in a family business and its management), marriages, inheritance, and many other things that are important to your family. For a better understanding of family constitution, please look up Taylor Wessing’s article about it. It is one of the more comprehensive documents about family constitution that came up in my research. If you have decided to adopt a family constitution, it is best to consult a lawyer.
Efficient Wealth Transfer
Now that you have a pretty good idea of what belongs to you exclusively and what belongs to you and your spouse conjugally, we can now go back to the Asset Table.
Once you’ve drawn up your Asset Table, you can now make a determination of what assets you want to keep and what assets you want to give away, while you are still alive.
Fair warning: Do not give away an asset that you do not want to lose control of. An example of an asset that you do not want to give away while you are alive is the house and lot you live in. You do not want to get into that soap opera-ish situation wherein your heirs will drive you away from your own house simply because you already gave it to them, especially in your old age (cue soap opera music)! Another example of an asset that you do not want to give away is one that you have an emotional connection to, like an old and valuable piece of jewelry.
For the determination of assets that you can gift now, it is best to seek counsel from your financial advisor, accountant and lawyer, with the end in view of an efficient wealth transfer.
You need to set up an efficient system of wealth transfer to (1) save money – by saving money, you can transfer your wealth more to the person/s you whom you chose to transfer your wealth to and (2) control your wealth – you don’t want the asset to enter into the legal system.
The Estate Tax
There are certain laws and processes to be observed before your heirs can lay claim to your assets. Everytime you transfer an asset, a tax is required and needs to be paid. When you die, the government shall tax your total net estate. This tax is called the estate tax. The estate tax is quite simple in its concept: as a citizen of this country, you are mandated by law to share a portion of your wealth when you pass away.
Based on the TRAIN Law that took effect on Jan. 1, 2018, the estate tax is now fixed at a flat rate 6% of your total taxable net estate. The word “net” refers to that amount of the estate less all allowable deductions (P10M on your primary home and P5M standard deduction). Do you know that the bank accounts of a deceased person are not subject to the Bank Secrecy Law? BIR shall control all your bank accounts after you die. Under the TRAIN Law, BIR will allow withdrawals from your bank accounts provided that they are all subject to a final tax of 6%, unlike before when your heirs can only withdraw a maximum of P20,000 from your bank accounts. Also, the valuation of the properties that you leave behind shall be determined by the BIR Commissioner and therefore, the valuation could be subjective and is expected be favorable to the government. It is as it is.
Even with the simpler, streamlined, less restrictive TRAIN Law, nothing is more prudent and practical than doing your last will and testament. Don’t feel cringey about it. Go back to the first sentence of this article and be reminded of your mortality. Put your estate in order and do not let your family suffer the consequences of you not planning for your death. How much estate taxes will your family have to pay if they do not know your taxable estate? How will they pay them? Where will they get the money to settle them? You have to ensure that the people you left behind will have the capacity to pay the estate taxes efficiently.
When you are still alive, be wise in giving away your assets. There is this thing called “revocable transfer” that BIR shall use against you if they think that you are giving away your assets to escape final taxes. I mentioned before that you should not be transferring assets in the name of your children, especially those who are not yet of age and have no capacity to acquire them. Again, this situation may call for revocable transfer because BIR will question your child/children’s capacity to acquire assets. If you are sick or old and you start giving away your assets, BIR will suspect “transfer in contemplation of death”. Remember the constancy of death and taxes.
As soon as you define your net taxable estate, you can start preparing for the estate tax settlement either by saving up for the payment or you can consider getting a life insurance as a way to settle your estate taxes. Life insurance proceeds cannot be garnished by your creditors and can be exempt from final tax.
Organized life, organized death. Prepare for the inevitable by planning your estate well and lessen the pain for the people you will be leaving behind.