General information only. Laws and tax rules change, and specific situations can be messy. This is not legal advice and does not create a lawyer–client relationship. Always consult a Philippine lawyer and tax adviser for your particular case.

I. Big Picture: What Are You Trying to Do?

Scenario:

A person (the “decedent”) dies owning property in the Philippines (often land, buildings, or condo units).
The heirs want to organize the inherited assets under a “family corporation”—usually for easier management, succession planning, and tax/estate planning for the next generation.

Legally and tax-wise, you are combining several things:

Succession (transferring ownership from the deceased to the heirs or estate),
Estate settlement (with or without court),
Tax compliance (estate tax, transfer taxes, possible capital gains/donor’s tax, DST),
Corporate law (creating or using a corporation to hold the property),
Property registration (updating titles and tax declarations).

You cannot “skip” steps: the property must pass from decedent → estate/heirs → corporation, even if documents are structured to look smooth.

II. First Layer: Succession and the Estate

1. When a person dies, who owns the property?

Under Philippine civil law, upon death:

Ownership passes to the heirs by operation of law, but
The estate must still be settled (pay debts, estate tax, determine each heir’s share, etc.).

In practice, until the estate is settled, you can think of the properties as being under co-ownership of the heirs or under the “estate” as a juridical mass.

2. Types of heirs

You must know who is entitled to inherit and in what shares. Philippine law protects compulsory heirs, notably:

Legitimate children and their descendants
Surviving spouse
Legitimate parents/ascendants (if no legitimate children)
Illegitimate children (with specific fractional shares)

They have legitime – a reserved portion of the estate that cannot be impaired by donations or testamentary dispositions.

If the decedent left a will, succession follows the will so long as it does not violate the legitime or mandatory rules.

If there is no will (intestate), the Civil Code’s default distribution rules apply.

3. Estate vs. heirs: practical distinction

The estate is the totality of the decedent’s assets and liabilities at death.
Until settlement, creditors may claim against the estate; heirs generally don’t receive property free and clear yet.
Only after settlement (whether via court or extrajudicial) are the specific properties and shares clearly allocated to heirs.

You can’t validly transfer a property to a corporation if it’s not yet properly vested in someone (estate/executor, administrator, or heirs) who can legally dispose of it.

III. Settlement of the Estate: Judicial vs. Extrajudicial

Before involving a family corporation, you almost always have to settle the estate.

A. Extrajudicial Settlement of Estate

This is common for family-owned properties when:

The decedent left no will (intestate);
The decedent left no outstanding debts, or debts have been fully paid;
All heirs are of legal age, or minors are properly represented;
There is no serious dispute among heirs.

Steps (high-level):

Prepare Deed of Extrajudicial Settlement (EJS) (with or without simultaneous sale/assignment).
Publish the fact of the extrajudicial settlement in a newspaper of general circulation once a week for three consecutive weeks.
Pay estate tax and secure the BIR Electronic Certificate Authorizing Registration (eCAR) for each property.
Pay local transfer tax (with the city/municipality/PTO).
Present documents to the Registry of Deeds for issuance of new titles in the names of the heirs or as to their designated shares.

Note: Under Rule 74 of the Rules of Court, the extrajudicial settlement is subject to a two-year lien in favor of excluded heirs or unpaid creditors, who can challenge the settlement within that period (and even after, via other remedies).

B. Judicial Settlement (With or Without a Will)

Required or advisable when:

There is a will that must be probated;
There are disputes among heirs;
There are substantial unpaid debts, or complicated creditors’ claims;
There are minors or persons with disabilities and significant conflicts of interest.

In judicial settlement, the court:

Appoints an executor (if there’s a will) or an administrator (if none);
Supervises inventory, valuation, payment of debts and taxes;
Approves project of partition, where the properties are assigned to heirs.

Only after or under court authority can the executor/administrator validly transfer property (including to a corporation).

IV. Estate and Tax Compliance Before Transferring to a Corporation

1. Estate tax

Key modern rule (TRAIN Law framework):

Flat estate tax of 6% on the net taxable estate (gross estate minus allowed deductions).
Estate tax return generally due within one (1) year from death (extensions may be allowed in meritorious cases).

Non-payment or late payment can result in:

Surcharges, interest, and penalties,
Difficulty in securing eCAR, and hence in transferring title.

2. BIR eCAR and significance

For each real property, you need an eCAR from the BIR to transfer title at the Registry of Deeds. Without estate tax clearance / eCAR:

The Registry of Deeds will not process transfer to heirs or corporation;
LGUs may withhold issuance of updated tax declarations.

Thus, whether you are:

Transferring from decedent to heirs, or
Transferring from heirs/estate to corporation,

you will encounter the eCAR requirement.

V. What Is a “Family Corporation”?

A “family corporation” is not a special legal category in itself; it is usually:

A stock corporation whose shareholders are mostly or exclusively family members; or
A close corporation under the Revised Corporation Code (few shareholders, share transfer restrictions, no public offering); or
A holding company whose main business is holding property and investments.

It may also be:

A One Person Corporation (OPC) if only one heir or one family member initially holds the shares and plans to issue or transfer shares later.

Why park inheritance in a family corporation?

Common reasons:

Centralized management (board of directors rather than multiple co-owners);
Avoidance of future multiple co-ownerships after each generation’s deaths;
Easier transfer of shares (vs. repeated retitling of land);
More straightforward governance rules (by-laws, voting rights, restrictions on sale to outsiders);
Potential tax planning for future generations (though gains, dividends, etc., have their own tax treatment).

VI. Legal and Constitutional Constraints

1. Foreign ownership restrictions

The 1987 Constitution and various laws restrict:

Foreigners from owning land in the Philippines, directly or indirectly.
A corporation that owns land must be at least 60% Filipino-owned (sometimes described as “60-40 rule”).

So, if some heirs are foreign citizens or dual citizens:

You must ensure the corporation that will hold land remains at least 60% Filipino-owned by citizens, if it will own land directly.
Foreign heirs may instead hold shares that do not represent “land-ownership” beyond the threshold, or be bought out, or receive other types of assets.

The Anti-Dummy Law also penalizes the use of Filipino “dummies” to circumvent nationality restrictions.

2. Family Code issues (conjugal/community property)

If the property is part of absolute community or conjugal partnership of gains:

Only the proper share of the decedent goes into the estate.
The surviving spouse retains their own share as owner, not as heir, over that portion.

You must carefully distinguish:

Spousal property rights, and
Inheritance rights of the spouse as compulsory heir.

VII. Ways to Move Property from Heirs/Estate to a Family Corporation

Once estate issues and estate tax are dealt with (or at least properly in process and legally enabled), you have a few main paths:

Path 1: Estate/Heirs Contribute Property as Capital to the Corporation

A. Forming the family corporation

Basic steps (simplified):

Draft Articles of Incorporation and By-laws.
List incorporators and their share subscriptions.
Decide what property will be contributed as “paid-in capital”.
Register the corporation with the SEC.
Obtain BIR registration, etc.

The contributions can be:

Cash
Property in kind (real estate, shares, etc.)

In-kind contributions are typically reflected as:

“Paid-in capital” at par value
Possible share premium if the property’s fair value exceeds par

B. Property-for-share contribution

Heirs (or the estate) may transfer inherited real property to the corporation in exchange for shares.

Key points:

There should be proper valuation/appraisal of the property (fair market value) to avoid “deemed donation” issues for tax purposes.
Corporate approvals: board and stockholders’ approvals for issuing shares for property.
Documentation: Deed of Assignment / Deed of Property-for-Share Exchange, corporate secretary’s certificates, board resolutions.

Tax-wise, this may be treated as:

A taxable transfer (subject to capital gains tax or ordinary income, plus DST, local taxes); or
A possible tax-free exchange under special rules (see Section IX below).

Path 2: Sale of Property by Heirs/Estate to an Existing Family Corporation

Instead of contributing as capital, heirs may sell property to the corporation:

The corporation pays cash or issues a promissory note.
The heirs receive sale proceeds (not shares, unless structured as a mixed transaction).

Tax consequences:

For individual sellers of real property classified as a capital asset: typically 6% capital gains tax on the higher of (a) gross selling price or (b) zonal/fair market value.
Documentary stamp tax (DST) on the deed of sale.
Local transfer tax and registration fees.

If the seller is engaged in real estate business, the property may be an ordinary asset; taxation can be under regular income tax/VAT instead of the 6% CGT regime.

Path 3: Donation by Heirs to the Corporation

Heirs could donate property to the corporation:

This is less common because a corporation is not a compulsory heir, and donations trigger donor’s tax (6% on net gifts under TRAIN rules, subject to exemptions and thresholds).
There will still be DST and local taxes.

This is generally chosen only for specific tax or structural reasons and should be evaluated carefully.

VIII. Tax-Free Exchange (Property for Shares) – Section 40(C)(2) Concept

Philippine tax law allows certain tax-free exchanges when:

A person (or persons) transfer property to a corporation, and
In exchange, they receive shares of stock, and
As a result of the exchange, the transferors (alone or together) gain “control” of the corporation (commonly defined as ownership of at least 51% of voting shares), and
The transaction qualifies under the specific requirements of the law.

If requirements are met:

No gain or loss is recognized for income tax and capital gains tax purposes at the time of exchange.
However, DST, transfer taxes, and other incidental fees may still apply.
The basis of the property and shares carry over for future tax purposes.

In estate planning:

The heirs can use a tax-free exchange to move inherited property into a family corporation without immediate income/CGT impact, provided all technical conditions and documentation are satisfied.
Typically, taxpayers seek BIR confirmatory ruling or prior ruling (or follow updated BIR policies) to confirm tax-free treatment or at least have documentary support.

This must be handled with very careful legal and tax advice; mistakes can result in large assessments.

IX. Other Taxes and Fees Along the Way

Aside from estate tax and possible CGT or donor’s tax, expect:

Documentary Stamp Tax (DST)
- On deeds of sale, deeds of donation, deeds of assignment, and on the original issuance of shares (DST on original issue).
Local Transfer Tax
- Imposed by the province/city/municipality when real property changes ownership.
Registration Fees
- To the Registry of Deeds and possibly to the Assessor’s Office for issuance of new tax declarations.
Real Property Tax (RPT)
- Must be updated; arrears can block transactions.
Publication costs
- For extrajudicial settlement.

X. Documentation Flow – Typical Sequences

Example Sequence A: No Will, Heirs Create a New Family Corporation

Heirs identify estate assets and heirs.
Extrajudicial Settlement of Estate (EJS) is executed and published.
Estate tax return filed and estate tax paid; BIR issues eCAR for estate transfer.
Titles are transferred from decedent to heirs (or to “Heirs of…” as co-owners).
Heirs incorporate a family corporation.
Heirs execute Deed of Assignment / Deed of Exchange transferring property to the corporation in exchange for its shares (possibly structured as a tax-free exchange if qualified).
Tax compliance on this subsequent transfer:
- CGT or tax-free exchange rules;
- DST;
- Local transfer tax;
- New titles issued in the name of the corporation;
- New tax declarations issued to the corporation.

Example Sequence B: Judicial Settlement, Executor Transfers Directly to Corporation

Testate or intestate proceeding; executor/administrator appointed.
Inventory, valuation, estate tax and other liabilities managed under court supervision.
Court-approved project of partition may assign property directly to heirs or authorize sale/transfer.
With court authority, the executor may execute a Deed of Exchange/Sale transferring property directly to the family corporation.
Corporation issues shares to the estate or heirs (depending on the structure).
Estate distributes those shares to heirs as part of partition.

This approach can reduce the number of transfers, but it is slower and more formal because of court involvement.

XI. Corporate Governance and Family Arrangements

Once the property is in the corporation, issues shift from succession law to corporate governance:

Shareholding structure: who owns how many shares?
Classes of shares: common vs. preferred, voting vs. non-voting, etc.
Board composition: how many directors, from which branches of the family?
Share transfer restrictions: right of first refusal; prohibitions on selling to outsiders; tag-along and drag-along rights.
Succession of ownership in the next generation: Will shares be transferred by donation during the parents’ lifetime or by inheritance upon their death?

Family constitutions or shareholder agreements can supplement the corporation’s by-laws to help avoid future disputes.

XII. Common Pitfalls and Risks

Skipping estate tax compliance
- You may manage informally, but titles will not be clean; BIR can still pursue estate tax with penalties.
Ignoring legitime and compulsory heirs
- A compulsory heir who was excluded from the settlement or transfer can challenge transactions, including transfers to a corporation, especially within the prescriptive periods.
No clear valuation
- Underpricing or overpricing properties can trigger tax issues (deemed gifts, challenges, assessments).
Nationality violations
- Having a landholding corporation that is effectively foreign-owned can result in void transfers and penalties.
Not respecting creditors
- Transfers that hinder creditors may be attacked as fraudulent conveyances.
DIY complicated structures without professional help
- Tax-free exchange rules, corporate law, and succession law are complex; a misstep can lead to double taxation or invalid transactions.

XIII. Strategic Considerations

When planning the transfer of inherited property to a family corporation, families often consider:

Timing:
- Do we form the corporation before or after estate settlement?
- Do we do the tax-free exchange soon after the estate is settled, or later?
Which assets go into the corporation?
- Sometimes only income-generating or developmental properties are placed in the corporation, while family homes or sentimental properties stay in personal names.
Balance among heirs:
- Some heirs may receive shares in the corporation; others may receive cash or different assets to equalize their shares.
Future exit scenarios:
- If the family later sells the property, it may be simpler to sell shares of the corporation or let the corporation sell the property, depending on market, tax, and legal considerations.

XIV. Practical Checklist (High-Level)

1. Succession & Heirs

Identify all heirs and their legal shares.
Determine if there is a will and if probate is needed.
Check for minor heirs, foreign heirs, or special cases.

2. Estate Settlement

Decide on extrajudicial vs. judicial settlement.
Prepare EJS or court pleadings.
Publish EJS (if applicable).
Prepare inventory and property appraisals.

3. Tax Compliance

File estate tax return and pay tax.
Secure BIR eCAR for each real property.
Pay local transfer taxes.

4. Title Transfer to Heirs/Estate

Transfer titles to heirs or as directed by court.
Update tax declarations.

5. Formation/Use of Family Corporation

Draft and register Articles of Incorporation & By-laws.
Ensure compliance with nationality requirements.
Plan share structure and governance.

6. Transfer to Corporation

Decide if using sale, donation, or property-for-shares exchange (possibly tax-free).
Obtain relevant BIR advice/rulings for tax-free exchange if needed.
Execute and notarize Deed of Assignment/Sale/Exchange.
Pay CGT or donor’s tax if applicable; pay DST and local transfer taxes.
Secure eCAR for the transfer from heirs/estate to corporation.
Transfer titles to the corporation and update tax declarations.

7. Family Governance

Set up shareholder agreements, family constitution, or similar instruments.
Clarify board representation and decision-making processes.

XV. Conclusion

Transferring inherited property in the Philippines into a family corporation is not a single act but a chain of legal and tax steps:

Proper settlement of the estate (respecting legitime and compulsory heirs, dealing with debts, and paying estate tax);
Careful structuring of the corporation (ownership, governance, nationality compliance);
Tax-conscious transfer of property from the estate or heirs to the corporation (possibly using tax-free exchange rules, if available and appropriate);
Updating titles and registrations to reflect the corporation as the new owner.

Done carefully—with professional guidance from a Philippine lawyer and tax specialist—it can be a powerful tool for long-term family wealth management, avoiding repeated fragmentation of land and reducing future succession headaches. Done carelessly, it can trigger disputes, tax assessments, and invalid transfers that defeat the very purpose of forming a family corporation.