I. Introduction

When a person dies in the Philippines, everything they leave behind—properties, rights, obligations—forms their estate. That estate does not automatically pass in full to the heirs. Before the heirs can lawfully divide and register titles in their names, the estate must go through settlement, which generally involves:

Identifying and preserving estate assets
Determining and paying debts and obligations
Complying with tax requirements (especially estate tax)
Rendering proper accounting of estate transactions
Effecting partition among the heirs (judicial or extrajudicial)

This article focuses on three critical aspects under Philippine law:

Accounting obligations of executors, administrators, and sometimes heirs
Tax clearance requirements (with emphasis on estate tax)
Partition of the estate, whether judicial or extrajudicial

All within the context of the Civil Code, Rules of Court, and tax laws (primarily the National Internal Revenue Code as amended).

II. Overview of Estate Settlement in Philippine Law

Settlement of estates can be broadly categorized as:

Judicial settlement
- Testate (with a will)
- Intestate (without a will)
- Or a mixed proceeding
Extrajudicial settlement
- When certain legal conditions are met (no will, no pending case, all heirs agreed, etc.)
Summary settlement of small estates
- Allowed for estates not exceeding a statutory value limit, via simplified judicial process.

Regardless of mode, the core legal sequence is usually:

Death of decedent; opening of succession
Determination of heirs and legitimes
Inventory and appraisement of estate assets
Payment of debts, funeral expenses, and charges of administration
Compliance with estate tax and other taxes; obtaining tax clearances
Accounting by the executor/administrator (judicial) or by the acting heirs (extrajudicial)
Partition and distribution of the net estate to heirs

III. Modes of Settlement and Where Accounting, Tax, and Partition Fit

A. Judicial Settlement (with or without will)

If there is a will, or if conflicts arise, or if minors are involved without proper representation, the estate often goes to court:

A probate case (if with a will) or
An intestate proceeding (if without a will).

Here, the court appoints an executor (if named in the will) or an administrator (if not).

Key obligations:

Inventory and accounting of estate assets and liabilities
Payment of obligations, then taxes
Submission of a project of partition for court approval before final distribution

B. Extrajudicial Settlement (EJS)

Extrajudicial settlement is allowed when:

The decedent left no will;
The decedent left no debts, or debts have been fully paid;
All heirs are of legal age, or minors are duly represented;
There is no pending judicial estate proceeding;
Heirs execute a public instrument (notarized) of extrajudicial settlement and publish the fact of settlement as required.

Even in EJS, the same substantive steps apply, but without active court supervision:

The heirs (or their lawyer) informally do the accounting (assets, debts, expenses).
They file estate tax returns and secure BIR tax clearances (eCARs).
They embody the partition in the notarized Deed of Extrajudicial Settlement (with or without simultaneous settlement of debts).

C. Summary Settlement of Small Estates

When the gross value of the estate is within the small-estate threshold defined by law, the Rules of Court allow a shorter judicial process. The court may dispense with detailed administration procedures, but:

There is still an accounting (at least in summary form),
Taxes must still be paid and tax clearance secured,
And a partition is still necessary for distribution.

IV. Accounting in Estate Settlement

Accounting is the backbone of estate settlement. Whether supervised by a court or done privately by the heirs, it answers three questions:

What did the decedent leave? (assets)
What does the estate owe? (liabilities & expenses)
What is left to distribute? (net estate)

A. Executor/Administrator’s Accounting (Judicial Estates)

Under the Rules of Court and Civil Code:

Initial inventory and appraisal
- The executor/administrator must submit, within a prescribed period, a true and complete inventory of all the estate’s properties, including:
  - Real properties (land, buildings, condos)
  - Personal properties (vehicles, bank accounts, shares, jewelry, etc.)
  - Credits and receivables (loans receivable, claims, etc.)
Management and preservation
- They manage the estate as a prudent administrator:
  - Collect income (rent, dividends, receivables)
  - Pay legitimate expenses
  - Preserve value (eg, maintain properties, pay insurance and basic taxes)
Periodic accounts
- The court may require periodic accounting (e.g., annually) showing:
  - Receipts (rents, interest, sales proceeds)
  - Disbursements (funeral expenses, management costs, court fees, taxes)
  - Current status of assets and liabilities
Final accounting
- Before the court approves the project of partition and orders distribution, the executor/administrator renders a final account, which the heirs can examine and oppose if irregular.
Liability for failure to account
- An executor/administrator who fails to render proper accounts or mismanages assets can be:
  - Removed,
  - Ordered to reimburse losses,
  - Held personally liable for damages or even criminally liable in extreme cases (e.g., estafa).

B. Accounting in Extrajudicial Settlement

There is no court compelling the heirs, but good practice (and self-protection) dictates a clear, written accounting, typically prepared before the EJS deed:

List of assets with indicative values
List of debts and how they were paid (or will be paid)
Estate expenses (funeral, wake, memorial lot, medical bills shortly before death if paid by the estate, legal fees, etc.)
Net estate after deducting obligations and expenses

Heirs may attach this accounting as an annex to the EJS. This can:

Avoid disputes later (e.g., accusations that someone hid assets).
Help in BIR estate tax computations (the BIR will want valuations and proof of claims).

C. What Counts as a Proper Expense of the Estate?

Depends on law and practice, but commonly:

Funeral and burial expenses (within reasonable amounts)
Medical expenses incurred as a result of the last illness
Judicial and extrajudicial administration expenses (attorney’s fees, publication costs, filing fees, notarial fees)
Maintenance and preservation of estate property (repairs, real property taxes of the estate period)
Executor’s/administrator’s fees, if allowed

Extravagant or personal expenses may be disallowed in both accounting and tax deduction.

V. Tax Clearance: Estate Tax and Related Requirements

Heirs cannot freely transfer titles and enjoy the estate until tax obligations are settled and clearance issued, typically in the form of electronic Certificate Authorizing Registration (eCAR) or its equivalent.

A. Estate Tax Basics

Who is liable?
- The estate itself is the taxpayer. Heirs are responsible in their capacity as heirs, to the extent of what they receive.
What is taxed?
- The net estate:
  - Gross estate (all properties and property rights at time of death) minus
  - Allowable deductions and exemptions (standard deduction, funeral expenses within limits, claims, unpaid mortgages, certain transfers, family home up to a cap, etc.)
Rates and deductions
- Estate tax is generally a single flat rate (rather than older graduated rates) under recent tax reforms.
- There are standard deductions and family home deductions up to a statutory cap, plus specific deductions for certain obligations.
- Exact amounts and caps are statutory and may change by legislation; heirs should always check the latest revenue regulations or consult professionals.
Filing of estate tax return
- The estate tax return must be filed within a statutory period from decedent’s death (which, after recent reforms, has been extended relative to older law), with possible extension for meritorious reasons.
- Even if the estate is small or exempt, filing may be needed for purposes of clearance.
Payment of estate tax
- Payment is ideally made upon filing.
- The law may allow installment payments without penalty under certain conditions (e.g., difficulty in liquidating assets), subject to BIR approval.
- Late filing/payment results in surcharges, interest, and penalties.

B. BIR Requirements for Estate Tax and eCAR

Exact documentary requirements may vary by BIR regulations and local RDO practice, but typically include:

Certified true copy of the death certificate
Taxpayer Identification Number (TIN) of the decedent and the estate
Certified true copies of titles and tax declarations for real properties
Certificates and documents for bank accounts, shares of stock, vehicles, insurance policies, etc.
List of heirs and their TINs, relationship, and addresses
Evidence for claims and deductions (e.g., debts owed by the decedent, medical bills, mortgages)
Supporting documents for any donations or transfers made prior to death that may be included in the taxable estate

After verification, the BIR issues eCARs, usually one for each real property or group of properties, which the heirs will need to present to:

Register of Deeds (to transfer land titles)
LTO (for vehicles)
Relevant agencies for shares and other registrable assets

Without estate tax clearance, registries will not transfer titles to the heirs.

C. Other Tax Clearances

Local Real Property Taxes (RPT)
- Local treasurers may require that RPTs are paid up to a certain year before title transfer.
- Sometimes, a tax clearance from the city/municipality is needed as a prerequisite to transfer.
Capital Gains or Documentary Stamp Taxes
- If partition involves a subsequent sale of properties by the heirs, capital gains tax (CGT) and documentary stamp tax (DST) may apply to those sales.
- Partition itself (mere allocation of shares in co-owned property to reflect hereditary rights) is generally not a sale; but if the deed is in substance a sale disguised as partition, taxes may still apply.
Donor’s Tax Concerns in Partition
- If partition is unequal and an heir effectively gives up part of their hereditary share for free to another, that excess may be considered a donation subject to donor’s tax.
- Example: Each heir is entitled by law to 1/3, but one heir assigns their entire share to a sibling without consideration; that assignment (beyond their legal obligation) can be treated as a donation.
- Donor’s tax and eCAR for donation may then be required for that transfer.

VI. Partition Requirements and Processes

Partition is the final stage where the net estate is divided and allocated to the heirs according to:

The will’s dispositions, if valid, and
The laws on legitime and succession (Civil Code), especially the rights of compulsory heirs (legitimate children, spouse, etc.).

A. Project of Partition in Judicial Proceedings

In judicial settlement, after accounting and payment of debts and taxes, a project of partition is submitted to the court, either:

Agreed by all heirs; or
Proposed by some, opposed by others (the court then resolves the issues).

The project of partition should:

Identify all heirs and their respective legitimes and free portions
List all properties (real and personal) forming the net estate
Show how each property (or its value) is allocated to each heir
Address collation (properties previously given by decedent that must be brought into the mass of the estate for legitime computation)
Ensure the legitime of compulsory heirs is not impaired

Once approved, the court issues a decree of partition, which is used for registration and transfer.

B. Extrajudicial Settlement with Partition

When done extrajudicially, partition is usually embodied in a deed titled along the lines of:

“Deed of Extrajudicial Settlement of Estate with Partition”
Sometimes combined with “and Waiver of Rights” or “and Sale,” etc.

Minimum formal requirements:

Public instrument – must be notarized, otherwise registries and the BIR will not act on it.
Signatures of all heirs – either personally or through authorized attorneys-in-fact, including:
- Legitimate, illegitimate, acknowledged, or compulsory heirs
- With minors or incompetents represented by legal guardians authorized by the court
Publication – the fact of extrajudicial settlement must be published in a newspaper of general circulation once a week for three consecutive weeks, as required by Rule 74, to protect unknown heirs and creditors.
Bond requirement (personal property) – Rule 74 requires posting a bond in an amount equivalent to the value of personal property, unless otherwise allowed by law or jurisprudence. In practice, there may be bonds or undertakings; failure to comply may expose heirs to liability to unpaid creditors.

The deed usually contains:

Recitals of death, date, place, and marital and family circumstances
Statement that decedent left no will and no unpaid debts (or that debts have been settled)
List and descriptions of all known properties
Agreement on how these are partitioned among the heirs
Any waivers or renunciations (e.g., one heir waives in favor of another)
Undertakings to assume responsibility for unpaid obligations if they later appear

The deed is then:

Notarized
Submitted to the BIR for estate tax processing and eCAR issuance
Submitted with eCAR to the Register of Deeds and other registries for transfer

C. Co-ownership Pending Partition

From the moment of death until final partition:

The heirs generally become co-owners of the estate properties in proportion to their hereditary shares.
No single heir can unilaterally dispose of specific property as if exclusively theirs, though they may assign their undivided share in the inheritance.
Acts of administration may be done by those representing the majority interests, but important acts (like sale of real property) typically require consent of co-owners or a court order in judicial estates.

D. Protection of Creditors and Unknown Heirs

To prevent abuse by heirs:

Publication of extrajudicial settlement alerts creditors and unknown heirs.
Persons unduly deprived (e.g., omitted heir, unpaid creditor) may:
- File a claim within the period allowed by law;
- Annul or rescind the settlement/partition;
- Enforce their share against the properties or the heirs who received them.

Rule 74 also allows claims against the properties distributed to heirs within a certain prescriptive period, subject to nuances of jurisprudence.

VII. Special Issues and Doctrines Affecting Accounting, Taxes, and Partition

A. Legitime and Free Portion

The Civil Code protects compulsory heirs by reserving for them a legitime (fixed share). Examples:

Legitimate children and descendants
Surviving spouse
Legitimate parents and ascendants (in some situations)
Illegitimate children (entitled to their own legitime)

If the will or partition prejudices legitimes, the aggrieved heir can file an action for reduction or nullity. This can affect:

Accounting (what must be brought back to the estate)
Taxes (collation affects the computation of gross/net estate)
Partition (shares must be recomputed and redistributed)

B. Collation of Donations

Inter vivos donations by the decedent to compulsory heirs may be collated—added back to the hereditary mass to correctly compute legitimes. This can:

Increase the gross estate for both civil and tax purposes
Affect how estate tax is computed and how property is partitioned

Heirs should disclose significant lifetime transfers to avoid future disputes and tax issues.

C. Partial Partition / Partial Distribution

Courts and heirs may allow partial distributions when:

Some properties are ready to be distributed (e.g., no title issues)
Estate tax can already be computed and paid for those specific assets

However, the executor/administrator must still safeguard that enough assets remain to cover debts, expenses, and taxes for the remainder of the estate.

D. Waivers and Quitclaims

Heirs often execute waivers in favor of other heirs. These waivers may:

Be onerous (for consideration) – akin to sale, possibly subject to CGT, DST, etc.
Be gratuitous – akin to donation, subject to donor’s tax if beyond hereditary obligations.

Proper classification affects both tax clearance and partition validity.

VIII. Practical Step-by-Step Flow (Typical Scenario)

Here is a simplified sequence many Philippine families follow:

Immediately after death
- Secure death certificate
- Secure and safeguard titles, documents, bank books, corporate records
Preliminary inventory and family meeting
- List all properties and debts
- Identify all heirs (including compulsory heirs outside the “main” family if any)
Decide on judicial vs extrajudicial settlement
- If there is a will → usually probate case
- If no will, no debts, all adult heirs cooperative → EJS possible
- If minors, disputes, large debts, or complex assets → safer to go judicial
Prepare accounting
- Itemize assets and liabilities
- Gather supporting documents (titles, bank certifications, bills)
File estate tax return and pay taxes
- Prepare BIR forms and documentary attachments
- Apply allowable deductions
- Pay estate tax (possibly in installments, if allowed)
- Obtain eCARs and other BIR clearances
Draft partition documents
- For judicial estates: submit a project of partition to court, backed by accounting and tax proof
- For EJS: prepare Deed of Extrajudicial Settlement with Partition, notarize, and publish
Transfer titles
- Register EJS or court-approved partition and eCARs with the Register of Deeds, LTO, corporate secretaries, etc.
- Update tax declarations with local assessors and secure local tax clearances as needed
Final accounting and closure
- In judicial cases: executor files final accounting, court approves, and estate may be closed.
- In extrajudicial cases: heirs maintain the accounting and documentation for their own protection and for possible future audits or disputes.

IX. Common Pitfalls and Practical Tips

Ignoring estate tax deadlines
- Leads to hefty interest and penalties. The longer you wait, the more expensive.
Incomplete inventory / hidden assets
- May cause void partition, tax assessments, and intra-family lawsuits.
- It can also expose heirs to liability toward omitted heirs or creditors.
Extrajudicial settlement despite existing debts or minors without proper representation
- Risks later annulment or court intervention.
- Minors must be properly represented by court-appointed guardians.
No proper accounting among heirs
- Even when law does not compel formal accounting, failure to keep records can lead to long-term suspicion and litigation.
Improper classification of waivers as “pure inheritance” rather than donations or sales
- BIR may later reclassify and assess donor’s tax or capital gains tax plus penalties.
Not securing local tax clearances
- Even if BIR issues eCARs, the Register of Deeds or local treasurer may refuse transfer if real property taxes are unpaid.
Assuming partition is “purely private” and not subject to legal rules
- Partition that violates legitime or excludes compulsory heirs is vulnerable to rescission or annulment.

X. Conclusion

In the Philippine legal system, estate settlement is much more than just dividing property among heirs. It is a structured legal process that requires:

Accurate accounting of assets, debts, and expenses
Strict tax compliance, particularly estate tax and related clearances
A legally valid partition that respects the rights of all heirs and creditors

Handled correctly, it preserves the value of the estate, minimizes disputes, and ensures that titles and ownership are legally secure for generations. Handled carelessly, it can lead to tax penalties, void transfers, and protracted litigation.

Because laws and administrative rules can change and every estate has unique complexities (foreign assets, complicated family structures, corporate holdings, prior donations, etc.), it is always prudent for heirs or executors to work closely with:

A Philippine lawyer specializing in estate and succession law, and
A tax professional or BIR-accredited representative

to navigate the accounting, tax clearance, and partition requirements properly.