Step-by-Step Extra-Judicial Settlement With Sale and ECAR Requirements

Introduction

In the Philippine legal system, the settlement of a deceased person's estate can be accomplished through various methods, one of which is the extra-judicial settlement (EJS). This process is particularly useful when the decedent dies intestate (without a valid will), leaves no outstanding debts, and all heirs are in agreement. An extra-judicial settlement with sale combines the division of the estate among heirs with the immediate transfer of property to a third-party buyer. This streamlined approach avoids lengthy court proceedings, making it efficient for real property transactions.

The process is governed primarily by the Civil Code of the Philippines (Republic Act No. 386), the National Internal Revenue Code (NIRC) as amended by Republic Act No. 10963 (TRAIN Law) and subsequent regulations, and rules from the Bureau of Internal Revenue (BIR) and the Registry of Deeds (RD). A key component is obtaining the Electronic Certificate Authorizing Registration (ECAR), which certifies that all necessary taxes have been paid, allowing the transfer of title.

This article provides a comprehensive, step-by-step overview of the procedure, including prerequisites, documentation, tax implications, and potential challenges. It is essential to note that while EJS is extrajudicial, it must still comply with legal formalities to be valid and enforceable.

Legal Basis and Prerequisites

Legal Foundation

• Civil Code Provisions: Articles 777 to 811 outline succession rights, emphasizing that heirs succeed to the estate upon the decedent's death. Article 1034 allows for extrajudicial partition if heirs are of legal age and there are no debts.
• Tax Code Requirements: Section 90 of the NIRC mandates the settlement of estate taxes before property distribution. For sales, capital gains tax (CGT) under Section 27(D)(5) and documentary stamp tax (DST) under Section 196 apply.
• BIR Revenue Regulations: RR No. 12-2018 and RR No. 6-2019 detail ECAR issuance, while RR No. 16-2005 covers estate tax returns.
• Administrative Code and Land Registration Authority (LRA) Rules: Ensure proper registration of deeds with the RD.

Prerequisites for Validity

For an EJS with sale to proceed:

1. The decedent must have died intestate.
2. No outstanding debts or claims against the estate (or they must be settled prior).
3. All heirs must be of legal age or represented by guardians if minors.
4. Unanimous agreement among heirs on the partition and sale.
5. The estate consists primarily of real property (though personal property can be included).
6. No pending judicial proceedings for settlement.

If any prerequisite is unmet, judicial settlement via probate court is required under Rule 74 of the Rules of Court.

Step-by-Step Process for Extra-Judicial Settlement with Sale

The process integrates settlement and sale into a single deed, often called a "Deed of Extra-Judicial Settlement with Sale" (DEJSS). Below is a detailed walkthrough.

Step 1: Gather Heir Information and Estate Inventory

• Identify all legal heirs (spouse, children, parents, etc., per Articles 887-1014 of the Civil Code).
• Compile an inventory of the estate: List all assets, focusing on real properties with titles, tax declarations, and appraisals.
• Obtain death certificate from the Philippine Statistics Authority (PSA).
• Secure affidavits from heirs confirming no debts and agreement to settle extrajudicially.
• If the estate value exceeds P5 million, engage a certified public accountant (CPA) or appraiser for valuation.

Step 2: Draft the Deed of Extra-Judicial Settlement with Sale

• Prepare the DEJSS document, which includes:
  • Recitals: Details of the decedent's death, heir identities, and estate description.
  • Partition: How the estate is divided (e.g., pro-rata shares).
  • Sale Clause: Agreement to sell specific properties to a buyer, including sale price, terms, and warranties.
  • Signatures: All heirs and the buyer must sign before a notary public.
• The deed must be in writing and notarized to be considered a public document under Article 1358 of the Civil Code.
• Include a publication requirement: If the estate's gross value is over P50,000, publish the deed once a week for three consecutive weeks in a newspaper of general circulation (per Section 1, Rule 74, Rules of Court). This creates a two-year period for claims against the estate.

Step 3: Pay Estate Taxes and File Returns

• Compute estate tax: 6% of the net estate (gross estate minus deductions like funeral expenses, up to P200,000 standard deduction under TRAIN Law).
• File BIR Form 1801 (Estate Tax Return) within one year from death (extendable).
• Pay estate tax at an authorized agent bank (AAB) or BIR Revenue District Office (RDO).
• If the sale occurs simultaneously, compute CGT: 6% of the higher of selling price or zonal value/fair market value.
• Pay DST: 1.5% of the selling price or zonal value, whichever is higher.
• Documentary requirements for tax payment:
  • Death certificate.
  • TIN of decedent and heirs.
  • Deed of EJS.
  • Certified true copies of titles and tax declarations.
  • Appraisal reports if needed.

Step 4: Obtain Electronic Certificate Authorizing Registration (ECAR)

• ECAR is issued by the BIR to authorize the RD to register the transfer.
• Submit application at the RDO with jurisdiction over the decedent's residence.
• Required documents:
  • Duly filed and paid estate tax return (BIR Form 1801).
  • Proof of payment (estate tax, CGT, DST).
  • Notarized DEJSS.
  • Original or certified copies of Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT).
  • Tax declarations from the local assessor's office.
  • Heirs' affidavits of self-adjudication or waiver if applicable.
  • Publication affidavit and newspaper clippings.
• Processing time: Typically 5-10 working days, but delays can occur if documents are incomplete.
• ECAR validity: Six months from issuance; revalidation needed if expired.
• Note: For properties in multiple RDOs, secure separate ECARs or a consolidated one.

Step 5: Register the Deed with the Registry of Deeds

• Present the DEJSS, ECAR, and tax receipts to the RD where the property is located.
• Pay registration fees: Based on property value (e.g., 0.25% entry fee, plus annotation fees).
• The RD will cancel the old title and issue a new TCT in the buyer's name.
• If the property is under the Torrens system, ensure no liens or annotations.

Step 6: Transfer Tax Declarations and Pay Local Taxes

• Update tax declarations at the local assessor's office with the new title.
• Pay real property tax (RPT) arrears, if any, and transfer tax (0.5-0.75% of value, depending on locality per Local Government Code).
• Secure a new tax declaration in the buyer's name.

Step 7: Post-Settlement Obligations

• File a bond equivalent to the estate's value if publication was required (valid for two years to cover potential claims).
• Heirs must report any income from the sale in their individual income tax returns.
• If minors are involved, secure court approval for the sale portion.

Tax Implications and Computations

Estate Tax

• Gross Estate: Includes all properties at fair market value (zonal or assessed).
• Deductions: Standard P5 million, family home up to P10 million, medical expenses up to P500,000.
• Rate: Flat 6% on net estate.

Capital Gains Tax

• Exempt if the property is the principal residence and proceeds are used to buy another within 18 months (with BIR confirmation).
• Otherwise, 6% on gain or selling price/zonal value.

Documentary Stamp Tax

• Applied on the deed of sale portion.

Penalties

• Late filing: 25% surcharge plus interest.
• Non-payment: Estate cannot be transferred; BIR can impose liens.

Potential Challenges and Considerations

• Disputes Among Heirs: Any disagreement necessitates judicial settlement.
• Outstanding Debts: Creditors can challenge the EJS within two years.
• Multiple Properties: Coordinate with multiple RDs and RDOs.
• Valuation Discrepancies: BIR may audit if values seem understated.
• COVID-19 and Digital Shifts: BIR allows online submissions via eBIRForms; check for updates.
• Professional Assistance: Engage a lawyer, CPA, or real estate broker to avoid errors.
• Special Cases: For agricultural lands, comply with CARP (Comprehensive Agrarian Reform Program) rules; for ancestral domains, IPRA (Indigenous Peoples' Rights Act) applies.

Conclusion

The extra-judicial settlement with sale offers a practical solution for efficiently transferring inherited properties in the Philippines, provided all legal and tax requirements are meticulously followed. By securing the ECAR and registering the deed, parties ensure a clean title transfer, minimizing future disputes. Adherence to these steps safeguards the interests of heirs and buyers alike, aligning with the principles of equitable succession and fiscal responsibility.