In the realm of Philippine estate taxation, determining whether a property is "exclusive" or "conjugal" (or "absolute community") is the critical first step in calculating the gross estate. This classification dictates whether the full value of a property is taxed against the decedent’s estate or if only a one-half portion is included as the decedent's share in a marriage partnership.
The governing rules depend primarily on the date of the marriage and the applicable property regime.
1. The General Rule: Nature of Inheritance
Under Philippine law, property acquired through inheritance (gratuitous title) is generally classified as the exclusive property of the recipient spouse. However, the specific treatment in the gross estate varies between the two primary property regimes: the Conjugal Partnership of Gains (CPG) and the Absolute Community of Property (ACP).
2. Classification Under Different Property Regimes
A. Conjugal Partnership of Gains (CPG)
Applicable to marriages celebrated before August 3, 1988 (unless ACP was agreed upon in a marriage settlement) or when specifically chosen in a marriage settlement.
Under CPG, the rule is strict:
- Exclusive Property: Properties acquired during the marriage by inheritance or donation remain the exclusive property of the inheriting spouse.
- Estate Tax Implication: If the inheriting spouse dies, the entire value of the inherited property is included in their gross estate. If the non-inheriting spouse dies first, the inherited property is excluded from their gross estate entirely.
- The "Fruits" Exception: While the property itself is exclusive, any income or "fruits" derived from that inherited property (e.g., rent from inherited land, dividends from inherited stocks) during the marriage are considered conjugal.
B. Absolute Community of Property (ACP)
Applicable to marriages celebrated on or after August 3, 1988, or when chosen in a marriage settlement.
The ACP regime operates on the principle that all property owned by the spouses at the time of the celebration of the marriage or acquired thereafter belongs to both. However, there are specific exceptions regarding inheritance:
- Exclusive Property: Property acquired during the marriage by gratuitous title (inheritance/donation) is exclusive, unless the testator or donor expressly provides that it shall form part of the community property.
- The Fruit Rule in ACP: Unlike CPG, the fruits or income of exclusive property in an ACP regime also remain exclusive property.
- Estate Tax Implication: Similar to CPG, the full value of the inherited property is typically included in the gross estate of the inheriting spouse as exclusive property.
3. Summary Table for Estate Tax Integration
| Feature | Conjugal Partnership of Gains (CPG) | Absolute Community of Property (ACP) |
|---|---|---|
| Inherited Property | Exclusive | Exclusive (unless stated otherwise) |
| Income/Fruits of Inherited Prop. | Conjugal | Exclusive |
| Included in Gross Estate of Inheritor? | Yes (100% as Exclusive) | Yes (100% as Exclusive) |
| Included in Gross Estate of Spouse? | No | No |
4. Vanishing Deduction (Property Previously Taxed)
The classification of property as "exclusive" is a prerequisite for claiming the Vanishing Deduction. This is a tax credit/deduction allowed to reduce the estate tax when the same property is taxed twice within a short period (5 years) due to successive deaths or a gift followed by death.
To qualify for a Vanishing Deduction:
- The property must be situated in the Philippines.
- The property must have been acquired by inheritance or donation within five years prior to the death of the current decedent.
- The property must be identified as the one received from the prior decedent or donor.
- The estate tax (or donor's tax) on the prior transfer must have been paid.
5. Importance of the Marriage Settlement
While the Family Code provides default regimes based on the date of marriage, the Marriage Settlement (Pre-nuptial Agreement) is the ultimate authority. If a valid settlement was executed and registered, it may override the default classifications. For estate tax purposes, the Bureau of Internal Revenue (BIR) requires proof of the property regime (usually the Marriage Contract or the Settlement) to validate whether a property is declared as exclusive or communal.
6. Determining the Share of the Surviving Spouse
Once the exclusive properties are identified and separated, the remaining properties are considered "Conjugal" or "Community." For estate tax calculation:
- The Gross Estate is the sum of the decedent's Exclusive Properties + the entire Conjugal/Community Properties.
- A deduction called the "Share of the Surviving Spouse" is then taken, which is equivalent to 50% of the net conjugal/community estate.
This ensures that the surviving spouse is not taxed on their own half of the marital assets, but the decedent is taxed on 100% of any property they inherited exclusively.