Living Inheritance in the Philippines: Donation Inter Vivos vs Testamentary Succession

Introduction

In the Philippine legal system, the transfer of property from one generation to the next can occur through various mechanisms, primarily governed by the Civil Code of the Philippines (Republic Act No. 386). Two key methods for passing on assets are donation inter vivos and testamentary succession. These approaches represent "living inheritance" strategies, allowing individuals to distribute their estate either during their lifetime or upon death. Understanding the distinctions between them is crucial for estate planning, as they carry different implications for taxation, revocability, legal formalities, and family relations.

Donation inter vivos involves the gratuitous transfer of property while the donor is alive, immediately vesting rights in the donee. In contrast, testamentary succession pertains to dispositions made through a will, which only take effect after the testator's death. This article explores these concepts comprehensively within the Philippine context, including their legal foundations, requirements, advantages, limitations, and practical considerations.

Legal Foundations

The Civil Code provides the primary framework for both donation inter vivos and testamentary succession. Articles 725 to 773 regulate donations, while Articles 774 to 1105 cover succession, including testamentary dispositions.

• Donation Inter Vivos: Defined under Article 725 as an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. It is distinguished from donation mortis causa, which is essentially a will and subject to succession rules (Article 728). The Supreme Court has clarified in cases like Austria-Magat v. Court of Appeals (G.R. No. 106755, 2002) that the intent to transfer ownership immediately, without contingency on the donor's death, marks it as inter vivos.

• Testamentary Succession: Governed by Article 783, a will is an act whereby a person is permitted, with the formalities prescribed by law, to control to a certain degree the disposition of his estate to take effect after his death. This aligns with the principle that succession occurs at the moment of death (Article 777), transmitting rights to heirs or devisees/legatees.

Both mechanisms respect the principles of legitime (forced heirship under Articles 886-914), ensuring that compulsory heirs (e.g., legitimate children, spouse) receive their protected shares, which cannot be entirely bypassed through either method.

Key Differences

1. Timing and Effectivity

• Donation Inter Vivos: Takes effect immediately upon acceptance by the donee. Ownership transfers during the donor's lifetime, allowing the donee to enjoy the property right away. This can reduce the donor's estate for future inheritance purposes.
• Testamentary Succession: Only effective upon the testator's death. The will remains revocable until then, and beneficiaries have no vested rights during the testator's life.

2. Revocability

• Donation Inter Vivos: Generally irrevocable, except for grounds specified in Articles 760-769, such as ingratitude of the donee, non-fulfillment of charges, or birth/appearance of children after the donation. Revocation requires judicial action.
• Testamentary Succession: Fully revocable at any time before death (Article 828). The testator can amend or revoke the will without justification.

3. Formalities and Requirements

• Donation Inter Vivos:
  • Must be in writing if the value exceeds PHP 5,000 (Article 748).
  • For immovable property, requires a public instrument and acceptance in the same or separate public instrument, with notification to the donor (Article 749).
  • Capacity: Donor must have capacity to contract and dispose (Article 735); donee must be capable of receiving (Article 738).
  • Prohibitions: Cannot donate future property (Article 751) or more than what the donor could give by will (Article 752, respecting legitime).
• Testamentary Succession:
  • Wills can be notarial (attested by witnesses and notary, Articles 804-808) or holographic (entirely handwritten, dated, and signed by the testator, Article 810).
  • Capacity: Testator must be at least 18 years old and of sound mind (Article 796-798).
  • Must respect legitime; free portion can be disposed freely.
  • Probate is required for validity (Article 838).

4. Taxation Implications

• Donation Inter Vivos: Subject to donor's tax under Section 98 of the National Internal Revenue Code (NIRC), as amended by the TRAIN Law (Republic Act No. 10963). The tax is 6% on the net value exceeding PHP 250,000 per year. Donees may also face estate tax if the donation is deemed mortis causa in disguise.
• Testamentary Succession: Subject to estate tax under Section 84 of the NIRC, at 6% on the net estate exceeding PHP 5 million. No donor's tax applies, but the estate tax computation includes all properties at death.

Donations made within one year before death may be considered in contemplation of death and added back to the estate for tax purposes (Section 85(B)(2), NIRC).

5. Impact on Legitime and Compulsory Heirs

• Both must not impair the legitime. Under Article 908, donations inter vivos are considered advances on legitime if to compulsory heirs, collated during partition (Article 1061).
• In testamentary succession, disinheritance is possible only for specific grounds (Article 919), and invalid dispositions are reduced pro-rata (Article 907).

Advantages and Disadvantages

Donation Inter Vivos

• Advantages:

  • Allows immediate transfer, enabling donees to use assets sooner (e.g., for business or education).
  • Reduces estate size, potentially lowering future estate taxes.
  • Provides tax planning opportunities, as donor's tax might be lower than estate tax in some scenarios.
  • Fosters family harmony by addressing inheritance during life.

• Disadvantages:

  • Irrevocability limits flexibility; donor loses control over the property.
  • Risk of ingratitude or misuse by donee.
  • Higher immediate tax burden on donor.
  • Potential challenges from heirs claiming impairment of legitime.

Testamentary Succession

• Advantages:

  • Retains control over assets during life.
  • Revocable, allowing adjustments for changing circumstances (e.g., family dynamics).
  • Can include conditions or trusts (fideicommissary substitutions under Articles 863-866).
  • Defers taxation until death.

• Disadvantages:

  • Probate process can be lengthy and costly, delaying distribution.
  • Risk of will contests or invalidation.
  • Beneficiaries may face uncertainties during the testator's life.
  • Larger estate at death may incur higher taxes.

Practical Considerations and Case Law

In practice, Filipinos often use donation inter vivos for real property to avoid probate delays, as seen in rural land transfers. However, improper classification can lead to disputes; for instance, in Gestopa v. Court of Appeals (G.R. No. 111904, 2001), the Court ruled a deed as mortis causa due to retention of possession by the donor.

Testamentary succession is preferred for complex estates, allowing detailed instructions. The case of Cayetano v. Leonidas (G.R. No. L-54998, 1984) emphasized strict adherence to will formalities.

Hybrid approaches exist, like conditional donations or wills with legacies, but must comply with rules against pactos sobre sucesion futura (Article 130), prohibiting agreements on future inheritance.

For void donations or wills, effects include nullity (Article 740 for donations; Article 839 for wills), with possible ratification or prescription applying.

Conclusion

Donation inter vivos and testamentary succession offer complementary paths for living inheritance in the Philippines, balancing immediacy with control. Choosing between them depends on factors like family needs, asset types, and tax strategies. Consulting a lawyer is essential to ensure compliance with the Civil Code and avoid pitfalls, preserving the intent of intergenerational wealth transfer.