Estate Tax Computation for Surviving Spouse on Conjugal Property in the Philippines

Introduction

In the Philippine legal system, the computation of estate tax upon the death of a spouse involves intricate rules governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act (RA) No. 10963 (Tax Reform for Acceleration and Inclusion or TRAIN Law), RA No. 11534 (Corporate Recovery and Tax Incentives for Enterprises or CREATE Law), and relevant Bureau of Internal Revenue (BIR) regulations. Estate tax is a transfer tax imposed on the privilege of transmitting the decedent's estate to heirs or beneficiaries. When a married individual dies, the treatment of conjugal property—properties acquired during the marriage under the Conjugal Partnership of Gains (CPG) regime—plays a critical role in determining the taxable estate.

This article focuses on the CPG regime, which was the default property relation for marriages solemnized before August 3, 1988 (the effectivity date of the Family Code of the Philippines). For marriages after that date, the default is Absolute Community of Property (ACP), though couples may opt for CPG via prenuptial agreement. While ACP and CPG have similarities in estate tax computation (both involve sharing net assets), this discussion emphasizes CPG, where properties are classified as exclusive (separate) or conjugal. The surviving spouse's share in the conjugal property is not subject to estate tax, as it is considered a deduction from the net estate.

Key principles include:

The estate tax is levied on the net estate after deductions, at a flat rate of 6%.
The surviving spouse's net share in conjugal property is deducted, ensuring only the decedent's portion is taxed.
Compliance involves filing BIR Form 1801 within one year from death, with possible extensions.

This article outlines the legal framework, step-by-step computation, deductions, examples, and considerations, drawing from Philippine civil law (Family Code), tax law (NIRC), and jurisprudence.

Property Regimes and Conjugal Property Under Philippine Law

Overview of Marital Property Regimes

The Family Code (Executive Order No. 209, as amended) governs property relations between spouses. Under CPG (Articles 106-126):

Exclusive Properties: These belong solely to one spouse and include:
- Properties owned before marriage.
- Properties acquired by gratuitous title (e.g., inheritance, donation) during marriage, including fruits if stipulated.
- Properties for personal and exclusive use (except jewelry of significant value).
- Properties acquired with exclusive funds.
Conjugal Properties: These are jointly owned and include:
- Properties acquired during marriage by onerous title (e.g., purchased with conjugal funds or labor).
- Fruits from exclusive properties (unless otherwise agreed).
- Net winnings from gambling.
- Properties acquired through the labor or industry of either or both spouses.

Upon marriage dissolution (e.g., by death), the CPG terminates, and the conjugal assets are liquidated: debts are paid, and the net remainder is divided equally between the surviving spouse and the decedent's estate.

In contrast, under ACP (default post-1988), most properties are community-owned from the start, with fewer exclusives. However, estate tax treatment is analogous: the surviving spouse deducts their 1/2 share of the net community property.

Jurisprudence, such as in Heirs of Christina Ayuste v. Malabonga (G.R. No. 172800, 2010), emphasizes proper classification to avoid double taxation or underreporting.

Impact of Death on Conjugal Property

Death dissolves the marriage and the CPG (Family Code, Art. 126). The surviving spouse becomes entitled to:

Their exclusive properties.
1/2 of the net conjugal properties.
Inheritance rights under the Civil Code (e.g., as a compulsory heir, entitled to legitime).

For tax purposes, the decedent's estate comprises their exclusive properties plus 1/2 of the net conjugal properties. The surviving spouse's share is not inherited but owned outright, hence not taxable as part of the estate (NIRC, Sec. 86(A)(9)).

Legal Basis for Estate Tax on Conjugal Property

Governing Laws

NIRC Section 84: Imposes a 6% estate tax on the net estate of citizens, residents, or non-residents (for Philippine-sited property).
NIRC Section 85: Defines gross estate, including all property at death, with conjugal shares included initially.
NIRC Section 86: Allows deductions, crucially the "net share of the surviving spouse in the conjugal partnership property" (Sec. 86(A)(9)).
TRAIN Law (2018): Simplified the rate to 6% flat, increased standard deduction to P5 million, family home deduction to P10 million, and removed vanishing tax for properties acquired post-2017.
CREATE Law (2021): Further amendments, but minimal direct impact on estate tax for individuals.
BIR Revenue Regulations (RR) No. 12-2018: Provides guidelines on estate tax under TRAIN, including forms and valuation.
Family Code Integration: Ensures property classification aligns with civil law.

Non-resident aliens are taxed only on Philippine property, with reciprocity rules.

Valuation of Properties

Fair Market Value (FMV): Used for all assets (NIRC, Sec. 88).
- Real property: Higher of zonal value (BIR) or assessed value (local government).
- Personal property: Appraised value.
- Shares: Book value for unlisted; market value for listed.
Conjugal properties are valued at death, then split.

Step-by-Step Computation of Estate Tax

The computation follows a structured process to isolate the taxable net estate.

Step 1: Determine the Gross Estate

Include all worldwide properties for citizens/residents; only Philippine properties for non-residents.
Classify into exclusive and conjugal.
Example components:
- Real estate (land, buildings).
- Personalty (vehicles, jewelry, bank deposits).
- Intangibles (stocks, receivables).
- Proceeds from life insurance (if decedent is beneficiary or revocable).
- Transfers in contemplation of death.

Gross Estate = Exclusive Properties + Conjugal Properties (full value initially).

Step 2: Identify and Allocate Deductions

Deductions are categorized as ordinary (ELIT) or special.

Ordinary Deductions (NIRC Sec. 86(A)(1))

Expenses: Funeral (up to 5% of gross estate or P200,000, whichever lower); judicial (actual, approved by court).
Losses: From fire, storm, etc., not compensated.
Indebtedness: Claims against the estate (e.g., loans, unpaid mortgages), substantiated.
Taxes: Unpaid at death (e.g., income tax).
Allocation: Deduct from conjugal properties first if attributable (e.g., conjugal debts); excess from exclusive.

Net Conjugal Property = Conjugal Gross - Conjugal Ordinary Deductions.

Net Exclusive Property = Exclusive Gross - Exclusive Ordinary Deductions.

Special Deductions

Applied after ordinary deductions and spouse's share:

Transfers for Public Use (Sec. 86(A)(2)): Bequests to government/charity.
Vanishing Property (Sec. 86(A)(3)): Tax paid on property inherited/acquired within 5 years (phased out post-TRAIN for new acquisitions).
Family Home (Sec. 86(A)(5)): Up to P10 million, if certified as such.
Standard Deduction (Sec. 86(A)(6)): P5 million (no substantiation needed).
Medical Expenses (Sec. 86(A)(7)): Up to P500,000, incurred within 1 year before death.
RA 4917 Benefits (Sec. 86(A)(8)): Retirement benefits from private firms.

Step 3: Deduct Surviving Spouse's Net Share

Compute Net Conjugal Property (after ordinary deductions).
Surviving Spouse's Share = 1/2 of Net Conjugal Property.
Deduct this from the preliminary net estate (Net Exclusive + 1/2 Net Conjugal).

This ensures only the decedent's share is taxed.

Step 4: Compute Net Taxable Estate

Net Taxable Estate = (Net Exclusive + 1/2 Net Conjugal) - Surviving Spouse's Share - Special Deductions.

Note: Surviving Spouse's Share is deducted before special deductions.

Step 5: Apply Estate Tax Rate

Estate Tax Due = 6% × Net Taxable Estate.

Credits for foreign estate taxes paid (if applicable) reduce the due amount.

Step 6: Filing and Payment

Who Files: Executor/administrator (often surviving spouse) or heirs.
Form: BIR Form 1801.
Deadline: 1 year from death; extension up to 30 days possible.
Payment: Via authorized banks; installments if estate > P2 million and illiquid.
Penalties: 25% surcharge for late filing, plus interest.

Illustrative Example

Assume a decedent (husband) dies in 2025, married under CPG. Gross Estate:

Exclusive: P5,000,000 (inherited land).
Conjugal: P20,000,000 (house P10M, stocks P5M, bank deposits P5M).

Ordinary Deductions:

Conjugal: Funeral P200,000; debts P1,000,000.
Exclusive: None.

Computations:

Net Conjugal = P20M - P1.2M = P18.8M.
Surviving Spouse's Share = P18.8M / 2 = P9.4M.
Decedent's Share in Conjugal = P9.4M.
Preliminary Net Estate = Exclusive P5M + P9.4M = P14.4M.
Deduct Spouse's Share: Already accounted as only decedent's share included.
Special Deductions: Family Home P10M (part of conjugal house); Standard P5M; Medical P500,000.
Net Taxable Estate = P14.4M - P10M - P5M - P0.5M = Negative? Wait, adjust: Family home is deducted from the estate, but capped.

Corrected: Family home deduction is up to P10M from the net estate before this deduction.

Assume family home is the P10M house (conjugal), so deductible up to P10M.

Net Taxable = (P5M exclusive + P9.4M decedent's conjugal share) - P10M family home - P5M standard - P0.5M medical = P14.4M - P15.5M = P0 (no tax).

This illustrates how deductions can zero out tax.

If no family home deduction, Net Taxable = P14.4M - P5M - P0.5M = P8.9M.

Tax = 6% × P8.9M = P534,000.

Special Considerations

Common Pitfalls

Misclassification: E.g., treating inherited fruits as exclusive (they are conjugal unless stipulated).
Valuation Disputes: BIR may challenge FMV; appeals to Court of Tax Appeals possible.
Extrajudicial Settlement: For estates < P5M gross, possible without court, but tax must be paid.
Donations Inter Vivos: If within 1 year of death, may be added back if in contemplation of death.

Jurisprudence

CIR v. Vda. de Prieto (G.R. No. L-13912, 1960): Confirmed spouse's share not taxable.
Heirs of Delgado v. CIR (G.R. No. 208150, 2017): Emphasized substantiation for deductions.

Updates and Reforms

Post-TRAIN: Removed estate tax amnesty deadlines (last in 2021).
Proposals: Ongoing discussions for higher thresholds, but none enacted as of 2025.
Digital Filing: BIR eAFS system for submissions.

For Non-Residents or Special Cases

Non-resident Filipinos: Worldwide estate taxed.
Joint Properties: If titled jointly, presume conjugal unless proven otherwise.
Second Marriages: Prior settlements affect classification.

Conclusion

Estate tax computation for a surviving spouse under the CPG regime safeguards the spouse's ownership rights while taxing only the decedent's transmissible estate. By deducting the spouse's net conjugal share and applying generous deductions, the system aims for equity. However, complexity necessitates professional advice from lawyers or accountants to ensure compliance and minimize liabilities. This framework reflects the interplay between family law and taxation, promoting fair wealth transfer in the Philippine context. For specific cases, consult current BIR rulings or legal experts, as laws may evolve.