Understanding Extrajudicial Property Liquidation in the Philippines

Not many people know what an out-of-court estate settlement is. Well, not unless they have experienced the loss of a family member and the division of their remaining properties.

The extrajudicial liquidation of the inheritance simply means the drafting of a contract in which the properties are divided among the heirs, as deemed appropriate. The contract lists the property left by the deceased, collectively referred to as “estate.” Properties can range from real property like parcels of land, buildings, or personal property like money left in the bank, cars, jewelry, furniture, and even shares of a corporation.

It should be noted that an out-of-court settlement by agreement is only possible if there is no will of the deceased. Even if there is a will, but the will does not include the entire estate of the deceased, those that are not covered can be divided out of court by agreement.

Also, extrajudicial liquidation is not possible if the heirs cannot agree on how the properties will be divided. In that case, they can file one common share for partition.

Publication requirement

Once the conciliation agreement is signed, the heirs must have the agreement published in a newspaper of general circulation to ensure that interested parties, if any, such as unknown creditors and heirs, receive due notice.

Payment of inheritance tax

After publication, you can follow the transfer of the title. Upon transfer of inheritance, inheritance tax must be paid in accordance with Section 84 of the Philippine National Internal Revenue Code.

The inheritance tax is defined as a tax on the right of the deceased to transmit their assets to their legitimate heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to the testamentary provision. It is a form of transfer tax, not a property tax. More particularly, it is a tax on the privilege of transferring property from the deceased to the heirs.

The estate tax return must be filed within six (6) months after the decedent’s death. The term may be extended by the BIR Commissioner, in meritorious cases, no more than thirty (30) days.

It is interesting to note that the estate itself will have its own Tax Identification Number (TIN). The BIR treats assets as a legal entity.

The estate tax return is filed with the Revenue District Office (RDO) which has jurisdiction over the decedent’s place of residence at the time of death.

If the deceased does not have legal residence in the Philippines, then the declaration can be filed with:

1. The Revenue District Officer Office, Revenue District Office No. 39, South Quezon City; gold

2. The Philippine Embassy or Consulate in the country where the deceased resides at the time of death.

For inheritance taxes, the BIR imposes the pay-per-return system, which means that you must pay inheritance tax at the same time the return is filed.

In cases involving a huge estate where the tax applied may be too high, or in cases where the decedent left properties that are difficult to liquidate and do not have the cash to pay the taxes, the BIR Commissioner may extend the time of payment the extension cannot exceed two (2) years if the patrimony is liquidated extrajudicially. If an extension is granted, the BIR Commissioner may require a bond for such amount, not to exceed double the amount of the tax, as deemed necessary.

The wealth tax is based on the value of the net worth as follows:

1. If it does not exceed P200,000, it is exempt

2. If it is more than P200,000 but not more than P500,000, then the tax is 5% of the excess of P200,000

3. If it exceeds P500,000 but does not exceed P2,000,000, then the tax is P15,000 PLUS 8% of the excess over P500,000

4. If it is more than P2,000,000 but not more than P5,000,000, then the tax is P135,000 PLUS 11% of the excess of P2,000,000

5. If it is more than P5,000,000 but not more than P10,000,000, then the tax is P465,000 PLUS 15% of the excess over P5,000,000

6. If it exceeds P10,000,000, then the tax is P1,215,000 PLUS 20% of the excess over P10,000,000

When calculating net worth, allowable deductions will always be considered. These deductions include funeral expenses, surviving spouse share, medical expenses incurred by the decedent within one (1) year prior to death, family home deduction of not more than P1,000,000.00, standard deduction of P1,000,000.00, between others. It is best to consult an attorney or an accountant to ensure that the heirs can correctly state the deductions and exemptions and thus determine the exact net worth of the deceased.