Basics of Inheritance and Succession Law in the Philippines (Heirship, Estate Settlement, Taxes)

Basics of Inheritance and Succession Law in the Philippines

Introduction

Inheritance and succession law in the Philippines governs the transfer of property, rights, and obligations from a deceased person (decedent) to their heirs or successors. Rooted in the Civil Code of the Philippines (Republic Act No. 386, as amended), these laws ensure an orderly distribution of the estate while protecting the rights of compulsory heirs and addressing fiscal obligations through taxation. Succession can occur through a will (testate) or without one (intestate), and involves concepts of heirship, estate settlement procedures, and applicable taxes. This article provides a comprehensive overview of these fundamentals, drawing from key provisions of the Civil Code, the Family Code, the National Internal Revenue Code (NIRC), and relevant jurisprudence.

Heirship: Defining Heirs and Their Rights

Heirship refers to the legal status of individuals entitled to inherit from the decedent. Under Philippine law, heirs are classified based on their relationship to the decedent and the manner of succession.

Types of Heirs

1. Compulsory Heirs: These are individuals entitled to a reserved portion of the estate, known as the legitime, which cannot be freely disposed of by the testator. Article 886 of the Civil Code identifies compulsory heirs as:

   • Legitimate children and descendants (with respect to their legitimate parents and ascendants).
   • In the absence of children or descendants, legitimate parents and ascendants (with respect to their legitimate children and descendants).
   • The surviving spouse.
   • Illegitimate children (entitled to half the legitime of legitimate children).

   The legitime ensures that these heirs receive at least a minimum share, typically half of the estate for children and descendants, divided equally among them. For example, if there are legitimate children, they are entitled to two-thirds of the estate if the surviving spouse is also present.

2. Voluntary Heirs: These are persons named in a will who are not compulsory heirs. They receive portions of the estate beyond the legitime, from the free portion (the disposable part after reserving the legitime).

3. Legal or Intestate Heirs: In the absence of a will, the estate is distributed according to intestate succession rules under Articles 978-1014 of the Civil Code. The order of priority is:

   • Legitimate children and descendants.
   • Legitimate parents and ascendants.
   • Illegitimate children and descendants.
   • Surviving spouse.
   • Collateral relatives (e.g., siblings, nephews/nieces) up to the fifth degree of consanguinity.
   • The State, if no heirs exist (escheat).

   Intestate shares are computed based on concurrency rules. For instance, if there is a surviving spouse and legitimate children, the spouse receives a share equal to one child.

Rights and Obligations of Heirs

• Collation: Heirs must bring back to the estate any advances or donations received during the decedent's lifetime (Article 1061), ensuring equitable distribution.
• Representation: Descendants can inherit in place of a predeceased or unworthy parent (Article 970).
• Unworthiness: Heirs can be disqualified for reasons like attempting to kill the decedent or falsifying the will (Article 1032).
• Acknowledgment of Illegitimate Children: Under the Family Code (Republic Act No. 386, as amended by Republic Act No. 9255), illegitimate children have inheritance rights if acknowledged by the parent.
• Adopted Children: Adoptive children under Republic Act No. 8552 (Domestic Adoption Act) have the same rights as legitimate children.

Heirs also inherit obligations, such as debts, but only up to the value of the inheritance (Article 774). Creditors must file claims during estate settlement.

Estate Settlement: Procedures and Mechanisms

Estate settlement involves administering, partitioning, and distributing the decedent's estate. The process differs based on whether succession is testate or intestate.

Testate Succession

• Wills and Testaments: A will must be in writing, executed with formalities (e.g., holographic wills entirely handwritten and dated by the testator; notarial wills signed before witnesses and a notary public under Articles 804-814).
• Probate: All wills must be probated in court to prove validity (Article 838). The Regional Trial Court has jurisdiction. Probate involves:
  • Filing a petition by the executor or interested party.
  • Notice to heirs and creditors.
  • Allowance or disallowance of the will.
  • Appointment of an executor or administrator.
• Execution: The executor distributes the estate per the will, after paying debts and taxes.

Intestate Succession

• Without a will, a petition for intestate proceedings is filed in court, similar to probate, leading to the appointment of an administrator.
• Distribution follows the intestate rules mentioned above.

Extrajudicial Settlement

• If all heirs are of legal age, agree on distribution, and there are no debts (or debts are paid), the estate can be settled extrajudicially via a notarized deed (Article 1 of Rule 74, Rules of Court). This avoids court proceedings but requires publication in a newspaper for three weeks and filing with the Register of Deeds.
• For estates with real property, a bond equivalent to the property's value must be posted.

Judicial Settlement

• Mandatory if there are minors, disagreements, or outstanding debts. Involves:
  • Inventory and appraisal of assets.
  • Payment of claims (debts, taxes).
  • Partition and distribution.
• Special proceedings under Rules 73-90 of the Rules of Court govern this.

Key Considerations in Settlement

• Community Property vs. Separate Property: Under the Family Code, conjugal or absolute community property is divided before inheritance. The surviving spouse retains half of community assets.
• Prescription: Claims against the estate prescribe after two years from settlement (Rule 74).
• Escheat: If no heirs, the estate goes to the local government or State (Articles 1011-1014).
• Foreign Elements: For Filipinos abroad or foreigners with Philippine property, choice-of-law rules apply (Article 16, Civil Code: national law governs succession).

Taxes on Inheritance and Succession

Taxation ensures the government collects revenue from estate transfers. Governed by the NIRC (Republic Act No. 8424, as amended by Republic Act No. 10963 or TRAIN Law, and further by Republic Act No. 11534 or CREATE Law).

Estate Tax

• Imposition: A 6% flat tax on the net estate (gross estate minus deductions) of Filipino citizens and residents, or on Philippine-situs property for non-residents (Section 84, NIRC).
• Gross Estate: Includes all property (real, personal, tangible, intangible) owned at death, wherever situated for residents/citizens, or only Philippine property for non-residents.
• Deductions: Include:
  • Expenses (funeral, judicial, medical within one year before death).
  • Claims against the estate.
  • Unpaid mortgages/taxes.
  • Vanishing deduction for property previously taxed.
  • Standard deduction of PHP 5 million.
  • Family home up to PHP 10 million.
  • Benefits for government employees/military.
• Filing and Payment: The executor/administrator or heirs file the estate tax return (BIR Form 1801) within one year from death (extendable). Tax is due at filing, with penalties for delays (25% surcharge, 12% interest per annum).
• Amnesty and Extensions: Periodic amnesties may apply; under TRAIN, the deadline was extended for certain cases.

Donor's Tax (If Applicable)

• While not strictly inheritance tax, inter-vivos transfers to avoid estate tax may trigger donor's tax at 6% on net gifts exceeding PHP 250,000 annually (Section 99, NIRC). Anti-avoidance rules scrutinize transfers within five years before death.

Other Taxes

• Capital Gains Tax (CGT): 6% on sales of inherited real property (if not principal residence).
• Documentary Stamp Tax (DST): On deeds of partition or transfer.
• Value-Added Tax (VAT): If the estate includes business assets sold.
• Local Taxes: Transfer taxes (up to 0.75% of fair market value) payable to local governments.

Non-payment can lead to liens on the estate, preventing title transfers.

Special Issues and Jurisprudence

• Preterition: Omitting a compulsory heir annuls the will's institution of heirs (Article 854), leading to intestate succession for the omitted portion.
• Fideicommissary Substitution: Allows conditional inheritance (Article 863).
• Disinheritance: Valid only for specific causes (e.g., maltreatment) and must be in the will (Article 919).
• Muslim Personal Laws: In Mindanao, the Code of Muslim Personal Laws (Presidential Decree No. 1083) applies to Muslims, with distinct rules on inheritance (e.g., male heirs receiving double female shares).
• Jurisprudence: Key cases like Heirs of Rosello v. CA (on legitime computation) and Estate of Hizon v. CIR (on tax deductions) clarify applications.

Conclusion

Inheritance and succession law in the Philippines balances familial rights with state interests, ensuring fair distribution while imposing fiscal duties. Heirs must navigate heirship rules, settlement procedures, and tax obligations diligently. Consulting a lawyer or notary is advisable for complex estates to comply with legal requirements and avoid disputes. This framework promotes stability in property transfers, reflecting the civil law tradition's emphasis on family protection.