Paying Estate Taxes Prior to Extrajudicial Settlements in the Philippines

Executive Summary

In the Philippines, heirs may settle an estate extrajudicially (outside court) if statutory conditions are met. Estate tax must be computed and paid (or validly placed on installment/extended terms) before the Bureau of Internal Revenue (BIR) issues an electronic Certificate Authorizing Registration (eCAR), which is the key document required by registries, banks, and corporations to effect transfers of title, release bank deposits, and re-register shares. While parties can sign an extrajudicial settlement (EJS) document prior to full payment, no lawful transfer or release of estate assets can occur without the eCAR, and tax liabilities (with penalties and a government lien) continue to attach until settled.

Legal Foundations

1) Extrajudicial Settlement (EJS): Rule 74, Rules of Court

When allowed: No will; no outstanding debts (or all creditors have been paid/waived), and all heirs are of legal age (or duly represented).
Forms:
- Extrajudicial Settlement by Heirs (multiple heirs): public instrument (notarized), usually titled Deed of Extrajudicial Settlement of Estate (often combined with a deed of partition).
- Affidavit of Self-Adjudication (single heir).
Publication: Once a week for three consecutive weeks in a newspaper of general circulation.
Two-year window for claims: Persons unduly deprived may file claims within two years from settlement.
Bond: Commonly required where personal property is involved, to answer for after-discovered debts/claims (practice varies by registry; confirm local requirements).

Practical truth: Even if EJS is signed and published, registries, banks, transfer agents, and corporate secretaries will not effect transfers or releases without the BIR eCAR, which presupposes proper estate tax compliance.

2) Estate Tax: National Internal Revenue Code (NIRC), as amended

Taxable event: Transfer of the decedent’s net estate at death (resident citizens taxed on worldwide assets; non-resident aliens on Philippine-situated property).
Rate (TRAIN Law): 6% of the net estate.
Return & payment: File BIR Form 1801 and pay within one (1) year from death (extensions possible for meritorious cases).
eCAR: Issued per asset (or asset group) upon complete payment/approval of extensions/installments and compliance with documentary requirements.
Government lien: Estate taxes constitute a lien on estate properties until fully paid.

Note on extensions/installments: The Commissioner may grant reasonable extensions to file and/or pay (e.g., up to 2 years for extrajudicially settled estates; longer if under judicial settlement), upon a showing of undue hardship and subject to interest/surety undertakings.

Must-Knows Before (and While) Executing EJS

A) Timing & Sequencing

Inventory & valuation as of date of death.
Determine regime & shares (absolute community/conjugal partnership vs. exclusive property; deduct the surviving spouse’s share from community assets before computing the gross estate attributable to the decedent).
Draft EJS (or self-adjudication), but align its allocations with tax computations.
File Estate Tax Return (BIR 1801) with supporting documents; pay or secure extension/installment approval.
Obtain eCARs from BIR.
Register/transfer titles, shares, vehicles, bank deposits, and other registrable assets using the eCARs.
Publish the EJS and keep proof for land registration and risk-management.

Key principle: Payment (or approved extension/installment) precedes registration or release—notarizing and publishing the EJS is not enough to transfer ownership in the eyes of registries and third parties.

B) Valuation Rules (as of date of death)

Real property: Use the higher of (i) BIR zonal value, or (ii) the fair market value per the local assessor’s schedule.
Shares of stock:
- Listed: Closing price on date of death (or nearest trading day).
- Unlisted common: Book value from the latest audited financial statements nearest death.
- Unlisted preferred: Typically par value, subject to terms.
Personal property (vehicles, jewelry, etc.): Appraised at fair market value at death.
Bank deposits & time deposits: Principal plus interest accrued to date of death (banks require BIR clearance/eCAR to release).

C) Deductions & Net Estate

Standard deduction: ₱5,000,000 (TRAIN).
Family home deduction: Up to ₱10,000,000 (if part of the gross estate).
Claims against the estate: Valid, legally enforceable debts existing at death (documentary proof is essential; often requires notarized debt instruments and proofs of disbursement).
Losses and expenses: Certain losses/expenses may be creditable if directly connected with estate settlement and compliant with NIRC rules; many pre-TRAIN specific caps (e.g., funeral/medical) were simplified into the standard deduction.
Surviving spouse’s share: Deduct the spouse’s net share in community/conjugal property before computing net estate.

Compliance tip: Align the EJS schedule of distribution with the taxed net estate to avoid mismatches that can delay eCAR issuance.

Documentary Checklist (Typical)

For BIR (eCAR issuance)

BIR Form 1801 (Estate Tax Return).
Death Certificate.
TIN of the Estate and TINs of heirs (secure a new TIN for the “Estate of …”).
Notarized EJS (or Affidavit of Self-Adjudication) and, where applicable, publication proofs.
Inventory & valuations as of death (asset-by-asset).
Title documents:
- Real property: Certified true copy of TCT/CCT, latest tax declaration, real property tax clearance, and Certificate of No Improvement (if vacant land).
- Vehicles: OR/CR.
- Bank accounts: Bank certifications of balances at death and accrued interest.
- Shares/securities: Stock certificates, Secretary’s Certificate, latest audited FS (for unlisted), broker certifications (for listed).
Liabilities documents (if claiming deductions).
Marriage, birth, and related civil registry documents to establish heirship.
Proof of payment (or approved extension/installment documents and surety).

For Registries/Institutions

eCAR per property/asset class.
EJS (or self-adjudication), IDs, and SPA if acting through a representative.
Publication proofs (Rule 74), as required by the Register of Deeds.
Local transfer tax/fees receipts (city/municipal/provincial).
RPT clearance for real property.

Payment Mechanics, Extensions, and Installments

One-year deadline from death to file and pay (baseline).
Extensions to file and/or pay may be granted for undue hardship, with interest and a surety bond if required.
Installments may be allowed within the extension period (commonly up to 2 years for extrajudicial settlements, longer if under judicial proceedings), with interest.
Partial eCARs: BIR may issue eCARs asset-by-asset as proportional payments are made (helpful when selling one asset to fund tax on others).
Penalties for late compliance:
- Surcharge (e.g., 25% for late filing/payment; higher for willful neglect/false returns).
- Interest under NIRC §249 (rate floats by law).
- Compromise penalties in certain cases.
Tax amnesties: Congress has enacted estate tax amnesties in recent years with deadlines set by statute; availability is time-bound and law-specific.

Practical Issues & Pitfalls

“Can we notarize the EJS now and pay taxes later?” You may execute and notarize the EJS at any time, but no registrations, releases, or retitling will occur without eCAR—and the estate remains exposed to penalties and a tax lien until paid.
“No debts” declaration vs. reality. Rule 74 requires that there be no unpaid debts (or that creditors are satisfied). Estate tax is a debt to the State; practically, nonpayment undermines the EJS and exposes heirs to claims.
Under- or mis-valuation. Using values lower than BIR zonal or assessor’s FMV triggers BIR adjustments and deficiencies (plus penalties). Always value as of date of death.
Conjugal/community property traps. Include only the decedent’s share in community/conjugal assets. Misallocations distort tax and future titles.
After-discovered assets or creditors. Heirs may need to amend the return/EJS and pay additional tax; bond (if any) answers for claims within the two-year Rule 74 period.
Bank releases and the “BIR stop.” Banks require BIR clearance (eCAR or bank-specific BIR release protocols) before releasing decedent’s deposits.
Multiple eCARs and sequencing transfers. Plan which assets to clear first (e.g., liquid assets or easily marketable property) to fund the rest.

Local Taxes & Fees on Transfers

Apart from national estate tax, LGUs impose local transfer taxes/fees on transfers by succession (rates and rules vary by city/province). These are typically settled after obtaining the eCAR but before registration with the Register of Deeds or other registry. Real property transfers also require current Real Property Tax (RPT).

Strategy and Best Practices

Start early: Secure the estate TIN and asset list immediately after death.
Model scenarios: Run preliminary valuations to decide on installments vs. sale of an asset to fund taxes.
Document rigorously: Save appraisals, bank certifications, and corporate statements aligned to date of death.
Coordinate drafts: Ensure the EJS (who gets what) matches the tax computation (who is taxed for what) to avoid post-BIR revisions.
Use partial eCARs strategically: Clear a liquid asset to pay the remainder.
Mind the two-year Rule 74 window: Publication protects third parties but keeps a claim window open—keep proofs.
Check special assets: Foreign property (for resident decedents), usufructs, life insurance proceeds exempt only if beneficiary is irrevocably designated, etc.
Keep receipts: Registries will ask for BIR payment proofs, eCAR, and clearances; inconsistencies cause long delays.

FAQs

Q1: Is paying estate tax a legal prerequisite to signing an EJS? No. You can sign and notarize the EJS first. But payment (or approved extension/installment) is a prerequisite for eCAR issuance, without which you cannot lawfully transfer titles or obtain releases from registries, banks, or transfer agents.

Q2: Can heirs transfer one parcel while taxes on others are pending? Often yes, if the proportional estate tax attributable to that parcel is fully paid and an eCAR is issued for it.

Q3: What if we miss the one-year deadline? You can still file and pay, but surcharge and interest accrue; if a legislated amnesty is active and you qualify, it may reduce liabilities (subject to statutory deadlines and coverage).

Q4: Do we need court approval for EJS? No court approval is needed if Rule 74 conditions are met, but courts remain available to resolve disputes or to conduct a full testate/intestate proceeding when EJS is not possible.

Q5: Are capital gains tax and documentary stamp tax due on succession? Capital gains tax: Not applicable to transfers by succession. Documentary stamp tax: Generally not imposed on pure succession; related DS taxes may arise on specific instruments (e.g., issuance of new share certificates), depending on the instrument and current rules.

Bottom Line

You may execute an EJS before paying estate taxes, but you cannot complete transfers, releases, and registrations without BIR’s eCAR, which presupposes payment or approved extension/installment.
Proper valuation as of death, correct sharing under the marital property regime, and complete documentation are essential to smooth, enforceable, and timely extrajudicial settlements.

This article summarizes prevailing rules and common practice under the NIRC (as amended, including TRAIN) and Rule 74. Specific facts and local office practices can materially affect outcomes; when in doubt, coordinate with your RDO and your local Register of Deeds.