When Transfers Are Still Taxable After Estate Settlement

Introduction

In Philippine tax practice, it’s common to hear: “We already paid the estate tax—so everything is settled.” That’s only partly true.

Paying the estate tax settles the tax on the transfer from the decedent to the heirs/beneficiaries. But once the property is considered transmitted to living persons (the heirs), new transfers—especially waivers, assignments, unequal partitions, and post-settlement re-titling—can trigger donor’s tax (or, depending on the facts, capital gains tax, income tax, and documentary stamp tax), even if the estate has already been “settled.”

This article explains (1) the difference between estate tax and donor’s tax, and (2) the most common situations where transfers remain taxable after an estate settlement in the Philippines.

1) The Basic Distinction: What Exactly Is Being Taxed?

A. Estate Tax (Succession Transfer)

Estate tax is a tax on the privilege of transmitting property upon death (succession). It applies to the transfer from the decedent to the heirs/beneficiaries.

Tax base: the net estate (gross estate minus allowable deductions). Rate: under TRAIN-era rules, a flat 6% of the net estate (subject to deductions and compliance). Return: Estate Tax Return (commonly BIR Form 1801). Key compliance concept: you typically need an eCAR (electronic Certificate Authorizing Registration) to transfer title at the Registry of Deeds or update records for shares of stock, etc.

B. Donor’s Tax (Living-to-Living Gratuitous Transfer)

Donor’s tax is a tax on the privilege of giving property for less than full and adequate consideration while the donor is alive. It applies to transfers between living persons.

Tax base: total net gifts for the year in excess of allowable exclusions (commonly including an annual exemption threshold). Rate: generally 6% of net gifts in excess of the threshold under TRAIN-era rules. Return: Donor’s Tax Return (commonly BIR Form 1800).

Why This Matters After Estate Settlement

Once the decedent’s property is considered transmitted to heirs, the heirs are now living owners. If an heir then:

waives his share in favor of someone,
gives inherited property away,
partitions the estate unequally without proper compensation,
assigns hereditary rights for free or for inadequate consideration,

that act can be a separate taxable transfer, potentially subject to donor’s tax (or treated as a sale for capital gains / income tax purposes).

2) Estate Settlement Does Not “Immunize” Later Transfers

A. The Estate Tax Only Covers One Event

Estate tax covers the death transfer. It does not cover:

later agreements among heirs,
later transfers by heirs to third parties,
later restructuring of shares or rights that effectively shifts value without consideration.

B. The Tax Type Depends on the Legal Character of the Post-Death Transfer

A post-death document can be:

a partition (division of inherited property),
a waiver/renunciation (repudiation of inheritance),
a donation (gratuitous transfer by an heir),
a sale/assignment for consideration (transfer for value),
or a mix (e.g., partition + sale + donation in one instrument).

The label doesn’t control; the substance and effects do.

3) When Post-Settlement Transfers Commonly Trigger Donor’s Tax

Scenario 1: Specific Renunciation / Waiver of Inheritance in Favor of a Particular Person

Under Philippine succession law, an heir may accept or repudiate inheritance. Tax consequences often turn on whether the renunciation is:

General renunciation (in favor of the estate or “in favor of co-heirs” without naming a particular beneficiary), versus
Specific renunciation (in favor of a named heir or any particular person).

Why donor’s tax can apply: A specific waiver/renunciation that effectively directs the heir’s share to a particular person is often treated as a gratuitous transfer by the renouncing heir—i.e., a donation.

Typical fact pattern:

Three heirs (A, B, C) inherit.
A signs: “I waive my share in favor of B.” This is commonly treated as A making a donation to B (donor’s tax exposure), because A is not merely refusing inheritance; A is designating the recipient of what would have been A’s share.

Practice note: If the goal is to avoid donor’s tax risk, counsel typically analyzes whether the act can be structured as a general repudiation with legal accretion rules taking effect, rather than a directed transfer—but the civil-law consequences and family intent must be aligned.

Scenario 2: Deed of Extrajudicial Settlement With “Waiver” That Is Really a Donation

A common estate document is titled: “Deed of Extrajudicial Settlement with Waiver” (or similar).

Even when estate tax is paid, if the document shows:

one or more heirs receiving more than their hereditary share, and
the other heir(s) receive nothing (or disproportionately less),
without clear evidence of full and adequate compensation,

then the “waiver” portion can be treated as a donation by the disadvantaged heir(s) to the advantaged heir(s), triggering donor’s tax.

Example:

Estate has one parcel worth ₱9,000,000.
Three heirs each should receive ₱3,000,000 value.
The settlement transfers 100% to one heir, “in consideration of love and affection,” or without consideration. Even if the estate tax is paid, the excess value transferred to one heir can be treated as a donation by the other heirs.

Scenario 3: Unequal Partition Without “Owelty” or Equivalent Compensation

Partition can be legitimate even if not identical per asset, but value must be equalized if heirs are to receive fair shares—often by a cash equalization payment known in practice as “owelty” (not always named as such in Philippine documents, but the concept exists: paying to balance shares).

If the partition is unequal in value and the shortchanged heir does not receive equivalent consideration, the imbalance may be characterized as a donation of the value difference.

Key concept: A valid partition allocates property according to shares. If you shift value without compensation, that shift looks like a gift.

Scenario 4: An Heir Transfers Inherited Property for Free After Settlement

Once the property is transferred/recognized in the heir’s name (or the heir’s rights are settled), any subsequent gratuitous transfer is a classic donor’s tax case.

Examples:

Heir donates inherited land to a sibling.
Heir donates inherited shares of stock to a child.
Heir transfers inherited condominium to a partner for “love and affection.”

These are new transfers by a living owner, taxable under donor’s tax, separate from estate tax already paid.

Scenario 5: Assignment of Hereditary Rights for No or Inadequate Consideration

Instead of transferring the land itself, an heir may transfer hereditary rights (rights to inherit or to receive a share in the estate).

If for free: donor’s tax exposure.
If for consideration: it may be treated as a sale/transfer for value (with possible income tax/capital gains characterization depending on asset type and structure), plus documentary stamp tax implications.

Even if the estate is already settled, an assignment that shifts value without adequate consideration can still be treated as a donation.

Scenario 6: “Sale” to a Co-Heir or Relative at a Token Price

Sometimes heirs try to “avoid donor’s tax” by selling inherited property for a very low price.

Tax law recognizes transfers for less than adequate and full consideration. Depending on the circumstances, a transaction may be treated partly or wholly as a gift, or it may trigger other tax consequences:

Donor’s tax on the gift element; and/or
Capital gains tax or income tax on the sale element (depending on property type); plus
Documentary stamp tax on the instrument.

Bottom line: if the consideration is not real or not adequate, there is tax risk in treating it as a pure sale.

4) When Post-Settlement Transfers Are Not Donor’s Tax (But May Still Be Taxable)

A. Waiver for Full and Adequate Consideration (Often a Sale/Exchange)

If an heir gives up inheritance rights in exchange for a real payment, the transfer is not gratuitous. But it may be treated as a sale/assignment for consideration, which can trigger:

capital gains tax (common with real property classified as capital asset),
income tax (in some situations),
documentary stamp tax,
local transfer tax, registration fees, etc.

B. A “General” Repudiation (Civil-Law Accretion Effect)

A true repudiation that does not direct the share to a particular person may be treated differently from a specific waiver. But it must be consistent with succession law, the actual document wording, and how the estate is ultimately distributed.

Even when donor’s tax is avoided, the estate still needs proper settlement and the resulting recipients must be clear under succession rules.

5) Estate Tax vs Donor’s Tax: Practical Comparison Table (Conceptual)

Estate Tax

Trigger: death (succession)
Taxpayer: estate (through executor/administrator or heirs as filers)
Object: transmission from decedent
Key outputs: estate tax clearance, eCAR for transfer/registration

Donor’s Tax

Trigger: gratuitous transfer between living persons
Taxpayer: donor (the giver)
Object: transfer by gift/waiver without adequate consideration
Key outputs: donor’s tax return, eCAR if registrable property is transferred

6) Common “After-Settlement” Red Flags That Invite Donor’s Tax Issues

If any of these appear in the documents, donor’s tax analysis is essential:

“waiver” in favor of a named heir/person
“love and affection” as consideration
one heir gets everything, others get nothing
partition values are obviously unequal and no equalization payment is shown
“sale” price is token/nominal (e.g., ₱1.00 or suspiciously low)
repeated transfers shortly after estate settlement with no commercial explanation
heirs execute settlement and transfer directly to a third party while an heir “steps out” without receiving consideration

7) Compliance Notes (Philippine Practice)

BIR forms:
- Estate tax: typically BIR Form 1801
- Donor’s tax: typically BIR Form 1800
eCAR requirement: For real property and many registrable assets, you generally need an eCAR before registries (Register of Deeds, corporate secretary/transfer agent, etc.) will record the transfer.
Other taxes often overlooked:
- Documentary Stamp Tax (DST) on deeds/assignments
- Capital Gains Tax (CGT) on sale/transfer of real property classified as capital asset
- Local transfer tax (LGU) and registration fees
Prescriptive and documentary risk: Even if parties privately agree on shares, registration and BIR processing often surface inconsistencies. The “taxability” of a transfer is frequently determined by the instrument and the economic reality shown by documents.

8) Drafting and Structuring Tips to Reduce Tax Surprises (Without Abusing the Rules)

Be precise about the legal act: repudiation vs waiver vs donation vs sale.
Match the document to the real intent and consideration: if there is payment, show it, support it, and reflect it consistently.
If partition is unequal, document equalization: show how value differences are settled.
Avoid token consideration language that looks like disguise.
Consider separate instruments when appropriate: mixing settlement + donation + sale in one deed can invite recharacterization if the narrative is unclear.
Align civil law validity with tax reporting: a tax-efficient structure that is civil-law defective creates bigger problems.

9) Illustrative Examples

Example 1: Specific Waiver = Donation Risk

Estate settled; A, B, C are heirs. Deed states: “A waives his share in favor of B.” Result: potential donor’s tax on A (gift to B), separate from estate tax already paid.

Example 2: Unequal Partition Without Payment = Donation Risk

Two heirs should get 50/50. Property worth ₱10M goes entirely to one heir; the other receives nothing; no payment is stated. Result: potential donor’s tax on the value transferred to the favored heir.

Example 3: Waiver for Cash = Not Donor’s Tax (But Likely Sale Taxes)

Heir gives up rights in exchange for ₱3M supported by proof of payment. Result: generally not a donation; but may trigger sale-related taxes (plus DST), depending on asset classification and structure.

10) Key Takeaway

Estate tax settlement closes the tax on the decedent-to-heir transfer. But any subsequent shift of value among heirs or to third parties—especially waivers, directed renunciations, unequal partitions without compensation, or post-settlement “free transfers”—can trigger donor’s tax (or other transfer taxes).

Because the difference often turns on fine points of succession law, document wording, and proof of consideration, post-settlement transfers should be reviewed with both civil-law and tax-law lenses before signing.

Note: Tax rules and BIR implementation practices can evolve through new issuances and administrative interpretations. For actual cases—especially those involving large estates, mixed assets, or complex family arrangements—review the latest BIR guidance and consider a formal opinion tailored to the documents and valuations involved.