Paying Estate Tax Without Extrajudicial Settlement in the Philippines

Introduction

In the Philippines, the settlement of a deceased person's estate involves both tax obligations and the distribution of assets among heirs. The estate tax, often referred to as inheritance tax in common parlance, is a levy imposed by the government on the privilege of transferring the decedent's properties to their heirs or beneficiaries. Governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws such as Republic Act (RA) No. 10963 (TRAIN Law) and RA No. 11534 (CREATE Law), the estate tax is computed based on the net value of the estate after allowable deductions.

A common misconception is that an extrajudicial settlement of estate (EJS) is a prerequisite for paying estate tax. However, this is not the case. While an EJS is a popular method for heirs to partition and transfer properties out of court, paying the estate tax is a separate legal requirement that can—and often must—be fulfilled independently. This article explores the legal framework, processes, implications, and practical considerations for paying estate tax without an EJS in the Philippine context, drawing on relevant laws, regulations, and Bureau of Internal Revenue (BIR) guidelines.

Legal Framework for Estate Tax

Overview of Estate Tax

The estate tax is imposed under Section 84 of the NIRC on the entire estate of a Filipino citizen or resident alien at the time of death, regardless of where the properties are located, and on the Philippine-situs properties of non-resident aliens. The tax rate is a flat 6% on the net estate exceeding PHP 5 million (as amended by the TRAIN Law effective January 1, 2018). Prior to this, rates were progressive up to 20%.

The net estate is calculated as follows:

Gross Estate: Includes all real, personal, tangible, and intangible properties owned by the decedent at death, valued at fair market value (FMV). This encompasses conjugal or community properties (with half deductible if married), bank deposits, shares of stock, real estate, vehicles, jewelry, and even claims against others.
Deductions: Allowable items include funeral expenses (up to PHP 200,000 or 5% of gross estate, whichever is lower), judicial expenses, medical expenses (up to PHP 500,000 incurred within one year before death), family home (up to PHP 10 million), standard deduction (PHP 5 million), claims against the estate, unpaid mortgages, and transfers for public use.
Exemptions: Certain properties like proceeds from GSIS, SSS, or life insurance (if irrevocable beneficiary) are excluded.

The tax must be paid within one year from the date of death (extended from six months under pre-TRAIN rules). Failure to pay on time incurs interest, surcharges (25% or 50% for willful neglect or fraud), and penalties.

Role of Extrajudicial Settlement

An EJS is a private agreement among heirs to divide the estate without court intervention, as provided under Rule 74, Section 1 of the Revised Rules of Court. It requires:

All heirs to be of legal age or represented.
No outstanding debts (or bonds posted if debts exist).
Publication in a newspaper of general circulation once a week for three weeks.
Registration with the Register of Deeds and BIR for property transfers.

The EJS is primarily for partitioning assets and facilitating title transfers. It is not a tax document but often accompanies tax compliance because proof of tax payment is required for property transfers (e.g., via Certificate Authorizing Registration or CAR from the BIR).

Importantly, the NIRC does not mandate an EJS as a condition for filing or paying estate tax. Section 90 of the NIRC allows the executor, administrator, or any heir to file the estate tax return (BIR Form 1801), even in the absence of a formal settlement.

Is Paying Estate Tax Without Extrajudicial Settlement Possible?

Yes, it is not only possible but sometimes necessary. The estate tax obligation arises immediately upon death and is independent of how the estate is settled. Delaying tax payment while awaiting an EJS (e.g., due to heir disputes) can lead to penalties. Key reasons for proceeding without an EJS include:

Heir Disagreements: If heirs cannot agree on division, a judicial settlement (via probate court) may be pursued later, but tax must still be paid timely.
Urgency: To avoid accruing interest (12% per annum) and surcharges.
Partial Compliance: Heirs may pay tax first to secure a CAR for urgent asset transfers (e.g., selling property to fund funeral costs).
Sole Heir Scenarios: If there's only one heir, an Affidavit of Self-Adjudication (a form of EJS) is used, but even here, tax payment precedes full adjudication.
Non-Resident or Complex Estates: For estates involving foreign elements or multiple jurisdictions, tax payment may occur before settlement.

In practice, many estates pay tax without an immediate EJS, especially if the decedent's will requires probate or if litigation is anticipated.

Process for Paying Estate Tax Without Extrajudicial Settlement

Step 1: Determine the Responsible Party

The executor (if named in a will) or administrator (court-appointed) is primarily responsible.
If none, any heir can file jointly or individually. All heirs are solidarily liable for the tax under Section 91 of the NIRC, meaning the BIR can collect from any one of them.

Step 2: Gather Required Documents

Even without an EJS, the following are needed to prepare BIR Form 1801:

Death certificate.
TIN of the decedent and heirs.
Inventory of assets (e.g., deeds of title, stock certificates, bank statements).
Proof of deductions (e.g., funeral receipts, medical bills).
Marriage contract (if applicable) for conjugal deductions.
Will, if any (notarized copy).
Affidavits from heirs attesting to the gross estate and deductions (if no executor).

No EJS is listed as a requirement in BIR Revenue Regulations (RR) No. 12-2018 or subsequent issuances.

Step 3: Compute the Tax

Use BIR Form 1801 to calculate the net estate and apply the 6% rate.
Valuation: Real properties at zonal value (BIR) or assessed value (local assessor), whichever is higher; shares at FMV or book value.
If disputes arise over valuation or deductions, heirs can seek BIR rulings or appraisals.

Step 4: File the Return and Pay

File at the Revenue District Office (RDO) where the decedent resided or, for non-residents, RDO 39 (South Quezon City).
Payment via authorized agent banks, BIR collection officers, or online (e.g., eBIRForms).
Extensions: Up to two years (ordinary cases) or five years (hardship) may be requested, but with interest.

Step 5: Obtain Certificate Authorizing Registration (CAR)

After payment and audit (if required for estates over PHP 2 million), the BIR issues a CAR.
The CAR allows transfer of properties but does not partition them; an EJS or court order is still needed for actual division.

Implications and Considerations

Advantages

Timely Compliance: Avoids penalties, which can exceed 50% of the tax plus interest.
Flexibility: Allows heirs to address tax first while resolving disputes judicially.
Asset Liquidity: With a CAR, certain assets can be sold or accessed (e.g., bank accounts up to PHP 20,000 exempt from tax per Banking Secrecy Law amendments).
No Court Costs Initially: Defers judicial expenses if EJS is impractical.

Disadvantages

Incomplete Settlement: Without EJS, properties remain in the decedent's name, complicating sales or loans.
Solidary Liability: Heirs risk personal liability if others don't contribute.
Audit Risks: BIR may scrutinize filings without settlement documents, leading to deficiencies.
Delays in Transfers: Registries (e.g., Land Registration Authority) require EJS or court orders plus CAR for title changes.
Tax on Subsequent Transfers: If properties are sold post-tax payment but pre-settlement, capital gains tax may apply.

Special Cases

Intestate Succession: Without a will, legal heirs (spouse, children, etc.) per Civil Code Articles 960-1014 can file jointly.
Estates Below PHP 5 Million: No tax due, but a return must still be filed if gross estate exceeds PHP 200,000.
Non-Taxable Transfers: Donations mortis causa or trusts may reduce taxable estate but require separate compliance.
Foreign Elements: For non-resident decedents, only Philippine assets are taxed; treaties (e.g., with the US) may provide credits.
COVID-19 Extensions: Under BIR advisories, deadlines were extended during the pandemic, but standard rules apply as of 2025.

Penalties and Remedies

Late Filing/Payment: 25% surcharge, 12% interest, PHP 1,000 compromise penalty.
Fraud: 50% surcharge, potential criminal charges under Section 255 NIRC (up to PHP 10,000 fine or imprisonment).
Appeals: Deficiencies can be protested within 30 days; appeals to Court of Tax Appeals if denied.
Amnesty Programs: Occasional tax amnesties (e.g., under RA 11213) forgive penalties for past estates.

Conclusion

Paying estate tax without an extrajudicial settlement is a viable and often essential step in Philippine estate administration, ensuring compliance with fiscal obligations while allowing time for heir agreements or court proceedings. While the EJS streamlines property division, it is not a barrier to tax payment. Heirs are advised to consult a lawyer or accountant to navigate computations and filings accurately, as errors can lead to costly audits. Ultimately, proactive tax payment protects the estate's value and upholds the legal principle that death taxes are inevitable, settlement notwithstanding. For personalized advice, engagement with the BIR or legal professionals is recommended.