Gross estate; vanishing deduction
QUESTION: In 2000, XXX purchased from YYY a picture worth 1,000,000. The fair market value at the time of sale was 2,000,000 pesos.
YYY paid all the taxes due on the transaction.
In 2002 or two (2) years later, XXX died. In his will, XXX gave the picture to his only daughter ZZZ. AT the time, the picture was already 3,000,000 pesos.
ZZZ, in XXX's will, was also given the power to appoint his wife, WWW, as successor to the picture in the even of ZZZ's death.
ZZZ died in 2008 and WWW acquired the property.
Should the painting be included in the gross estate of XXX or ZZZ for purposes of estate tax?
ANSWER: It should be included in XXX's gross estate. The fair market value of the picture in 2002 or at the time of his death should be included in XXX's gross estate subject to estate tax. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.
In the case of YYY, the painting should not be included in his gross estate. Only property passing under a general power of appointment is included in the gross estate of the decedent. In other words, a specific power of appointment in the testator's will (in this case, XXX's will) will result in the non-inclusion of the property passed in the gross estate of the heir-appointee.
Here, XXX specifically ordered that ZZZ be given the power to appoint WWW as successor. Hence, ZZZ had no control over the disposition of the property at the time of his death.
FOLLOW-UP QUESTION: Is vanishing deduction allowed in this case?
No, vanishing deduction is not allowed in either estate, XXX's or ZZZ's.
Vanishing deduction (VD) is a device to minimize the effects of a double taxation on the same property within a short period of time. For VD to apply, the following requisites must concur:
[1] There is a property forming a part of the gross estate of the present decedent situated in the Philippines;
[2] The second decedent acquired the property by inheritance from the first decedent or by donation within five (5) years prior to the former's death;
[3] The property subject to vanishing deduction can be identified as the one received from first decedent, or from the donor;
[4] The property acquired formed part of the gross estate of the first decedent, or of the taxable gift of the donor; and
[5] The estate of the first decedent has not previously availed of the vanishing deduction.
In the case of XXX, he acquired the picture by sale, not donation or succession. In the case of ZZZ, the painting cannot be included in his gross estate because of XXX's special instructions to appoint WWW. Hence, the purpose of VD does not exist.
Finally, between the time of acquisition (2002) by ZZZ and his death (2008), a period of more than five (5) years has probably elapsed.
YYY paid all the taxes due on the transaction.
In 2002 or two (2) years later, XXX died. In his will, XXX gave the picture to his only daughter ZZZ. AT the time, the picture was already 3,000,000 pesos.
ZZZ, in XXX's will, was also given the power to appoint his wife, WWW, as successor to the picture in the even of ZZZ's death.
ZZZ died in 2008 and WWW acquired the property.
Should the painting be included in the gross estate of XXX or ZZZ for purposes of estate tax?
ANSWER: It should be included in XXX's gross estate. The fair market value of the picture in 2002 or at the time of his death should be included in XXX's gross estate subject to estate tax. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.
In the case of YYY, the painting should not be included in his gross estate. Only property passing under a general power of appointment is included in the gross estate of the decedent. In other words, a specific power of appointment in the testator's will (in this case, XXX's will) will result in the non-inclusion of the property passed in the gross estate of the heir-appointee.
Here, XXX specifically ordered that ZZZ be given the power to appoint WWW as successor. Hence, ZZZ had no control over the disposition of the property at the time of his death.
FOLLOW-UP QUESTION: Is vanishing deduction allowed in this case?
No, vanishing deduction is not allowed in either estate, XXX's or ZZZ's.
Vanishing deduction (VD) is a device to minimize the effects of a double taxation on the same property within a short period of time. For VD to apply, the following requisites must concur:
[1] There is a property forming a part of the gross estate of the present decedent situated in the Philippines;
[2] The second decedent acquired the property by inheritance from the first decedent or by donation within five (5) years prior to the former's death;
[3] The property subject to vanishing deduction can be identified as the one received from first decedent, or from the donor;
[4] The property acquired formed part of the gross estate of the first decedent, or of the taxable gift of the donor; and
[5] The estate of the first decedent has not previously availed of the vanishing deduction.
In the case of XXX, he acquired the picture by sale, not donation or succession. In the case of ZZZ, the painting cannot be included in his gross estate because of XXX's special instructions to appoint WWW. Hence, the purpose of VD does not exist.
Finally, between the time of acquisition (2002) by ZZZ and his death (2008), a period of more than five (5) years has probably elapsed.