Cost and Procedure for Extra-Judicial Settlement of Estate in the Philippines

Introduction

In the Philippines, the settlement of a decedent's estate can be accomplished through judicial or extrajudicial means. An extrajudicial settlement of estate (EJS) is a non-court process that allows heirs to divide the deceased's properties among themselves without the need for probate proceedings. This method is governed primarily by Article 1056 of the New Civil Code of the Philippines (Republic Act No. 386) and relevant provisions of the National Internal Revenue Code (Republic Act No. 8424, as amended), particularly on estate taxation. It is a faster, less expensive alternative to judicial settlement, but it is only applicable under specific conditions.

EJS is ideal for estates where there are no outstanding debts, all heirs are in agreement, and no will exists or the will does not require probate. If these conditions are not met, the estate must undergo judicial settlement in the Regional Trial Court. This article provides a detailed examination of the procedure, requirements, costs, and potential pitfalls associated with EJS, drawing from Philippine laws, jurisprudence, and administrative guidelines.

Legal Basis and Applicability

The legal foundation for EJS stems from the Civil Code, which permits heirs to partition the estate extrajudicially if:

• The decedent left no will (intestate succession) or a will that does not institute a testamentary disposition requiring court approval.
• There are no debts or, if debts exist, they have been paid or settled by the heirs.
• All heirs are of legal age or, if minors, represented by their legal guardians.
• The heirs unanimously agree on the division of the estate.

This is reinforced by Revenue Regulations No. 2-2003 and subsequent issuances from the Bureau of Internal Revenue (BIR), which outline the tax implications. The Supreme Court has upheld the validity of EJS in cases like Heirs of Maglasang v. Manila Banking Corporation (G.R. No. 171206, 2010), emphasizing that it must be executed in a public instrument, published, and registered to bind third parties.

EJS applies to both real and personal properties, including bank accounts, shares of stock, vehicles, and intellectual property. However, it cannot be used for estates involving public lands or those subject to agrarian reform under Republic Act No. 6657.

Requirements for Extra-Judicial Settlement

To initiate an EJS, the following prerequisites must be satisfied:

1. Death Certificate: A certified true copy from the Philippine Statistics Authority (PSA) proving the decedent's death.
2. Heirship Documentation: Affidavits or declarations establishing the heirs' identities and relationships, such as birth certificates, marriage certificates, or affidavits of self-adjudication if there is a sole heir.
3. Inventory of Assets: A complete list of the decedent's properties, including descriptions, locations, and assessed values.
4. No Outstanding Debts: Certification or affidavit from heirs confirming that all debts have been settled.
5. Agreement Among Heirs: Unanimous consent on the partition, evidenced by a Deed of Extrajudicial Settlement (DES).
6. Tax Compliance: Payment of estate taxes and securing a Certificate Authorizing Registration (CAR) from the BIR.

If the estate includes real property, the DES must be annotated on the titles. For personal properties like vehicles, separate transfers via the Land Transportation Office (LTO) may be required.

Step-by-Step Procedure

The EJS process typically takes 3-6 months, depending on BIR processing and publication timelines. Below is a detailed procedural outline:

1. Gather Documents and Assess the Estate:

   • Collect all necessary documents, including the death certificate, titles/deeds, and financial statements.
   • Appraise the properties through a licensed appraiser or use fair market values from the BIR zonal valuation or local assessor's office.
   • Determine the gross estate value by summing all assets minus allowable deductions (e.g., funeral expenses, medical costs up to PHP 500,000, family home exemption up to PHP 10 million).

2. Execute the Deed of Extrajudicial Settlement:

   • Draft the DES, a public instrument detailing the partition. It must be signed by all heirs before a notary public.
   • If the estate value exceeds PHP 2 million, it requires acknowledgment before a Philippine consul if any heir is abroad.
   • Include provisions for waiver of rights if applicable.

3. Publication Requirement:

   • Publish the DES once a week for three consecutive weeks in a newspaper of general circulation in the province where the decedent resided or where the properties are located.
   • This is mandated by Section 1, Rule 74 of the Rules of Court to notify potential creditors or claimants.
   • Obtain an affidavit of publication from the newspaper.

4. File and Pay Estate Taxes:

   • Submit the Estate Tax Return (BIR Form 1801) to the Revenue District Office (RDO) where the decedent resided, within one year from death (extendable under certain conditions).
   • Compute estate tax based on the graduated rates under Republic Act No. 10963 (TRAIN Law): 6% on the net estate value exceeding PHP 5 million (with a PHP 5 million standard deduction).
   • Pay the tax via authorized banks or online. Secure the Electronic Certificate Authorizing Registration (eCAR) or manual CAR.

5. Register the Deed:

   • File the DES with the Register of Deeds (RD) for the province/city where the real properties are located.
   • Pay documentary stamp tax (DST) at 1.5% of the property's fair market value or consideration, whichever is higher.
   • Transfer titles to the heirs' names, paying transfer taxes (1-3% of zonal value, depending on locality) and registration fees.

6. Transfer Personal Properties:

   • For bank accounts: Present the DES, death certificate, and CAR to the bank for release.
   • For stocks: Coordinate with the stock transfer agent or Philippine Stock Exchange.
   • For vehicles: Register with LTO, paying motor vehicle user's charge and other fees.

7. Bond Requirement:

   • Under Rule 74, Section 3, heirs must file a bond equivalent to the value of personal property with the RD. This protects against claims for two years from distribution.
   • The bond is not required for real property but is for movables.

If any disputes arise post-EJS, aggrieved parties can file claims within two years, potentially voiding the settlement if fraud is proven.

Costs Involved

The costs of EJS vary based on estate size, location, and complexity. Key expenses include:

1. Estate Tax:

   • Flat 6% on net estate over PHP 5 million (after deductions like PHP 5 million standard, family home up to PHP 10 million, etc.).
   • Example: For a PHP 10 million net estate, tax is PHP 300,000 (6% of PHP 5 million excess).

2. Publication Fees:

   • PHP 5,000 to PHP 20,000, depending on the newspaper and ad size. National dailies charge more.

3. Documentary Stamp Tax (DST):

   • 1.5% of the higher of fair market value or consideration for real property transfers.
   • PHP 15 per PHP 1,000 for the DES itself.

4. Registration and Transfer Fees:

   • RD fees: PHP 500 to PHP 5,000 per title, plus 0.25% entry fee.
   • Local transfer tax: 0.5-0.75% of assessed value in cities like Manila; up to 3% in provinces.
   • Capital gains tax: 6% on gains from property sales, but exempt if part of inheritance.

5. Professional Fees:

   • Lawyer/notary: PHP 10,000 to PHP 50,000 for drafting and notarization.
   • Appraiser: PHP 5,000 to PHP 15,000.
   • Accountant for tax computation: PHP 5,000 to PHP 20,000.

6. Other Incidental Costs:

   • PSA certificates: PHP 155-365 each.
   • Bond premium: 0.5-1% of personal property value annually for two years.
   • Bank/LTO processing: PHP 1,000-5,000.

Total costs can range from PHP 50,000 for small estates to millions for large ones, primarily driven by taxes. Penalties for late filing include 25% surcharge, 20% interest per annum, and compromise fees.

Advantages and Disadvantages

Advantages:

• Speed: Avoids lengthy court proceedings (judicial settlement can take 1-5 years).
• Cost Savings: Lower legal fees compared to probate.
• Privacy: No public court records.
• Simplicity: Straightforward for amicable heirs.

Disadvantages:

• Limited Applicability: Not for indebted estates or disputes.
• Two-Year Liability: Heirs remain liable for claims.
• Tax Burden: Upfront payment required.
• Risk of Invalidity: If not properly executed, it can be challenged (e.g., Sampilo v. Court of Appeals, G.R. No. L-10474, 1958).

Special Considerations

• Sole Heir: Use an Affidavit of Self-Adjudication instead of DES.
• Minor Heirs: Guardians must secure court approval via special proceedings.
• Non-Resident Decedent: If Filipino citizen, estate is taxed on worldwide assets; for aliens, only Philippine-situs properties.
• COVID-19 Adjustments: BIR allowed electronic submissions and extensions via Revenue Memorandum Circulars.
• Jurisprudence Updates: Recent cases like Heirs of Reyes v. Reyes (G.R. No. 224172, 2020) clarify that EJS binds only upon publication and registration.
• Reforms: Under the Ease of Paying Taxes Act (Republic Act No. 11976, 2024), simplified filings reduce administrative burdens.

Conclusion

Extra-judicial settlement offers an efficient mechanism for estate distribution in the Philippines, provided all conditions are met and procedures followed meticulously. Heirs should consult legal professionals to ensure compliance and avoid pitfalls. Proper planning, such as pre-death estate arrangements, can further streamline the process. This method underscores the Philippine legal system's emphasis on family harmony and administrative efficiency in inheritance matters.