CHAPTER 4: EXCLUSIONS FROM GROSS ESTATE

- Synonymous with “Exemptions from Gross Estate”

- This refers to properties, rights, or transfers that are specifically declared by the law as
free from the burden of estate tax.
Exemptions and exclusions from gross estate may be categorized as follows:
1. Exclusions under the Tax Code
2. Exempt transfers under the tax code
3. Exemptions under special laws
4. Other exemptions and exclusions

EXCLUSIONS UNDER THE TAX CODE

1. Capital of Surviving Spouse
- This refers to the separate property of the decedent’s surviving spouse.
 Husband’s Capital – property exclusively owned by the husband.
 Wife’s Paraphernal – property exclusively owned by the wife.
2. Excluded Property Outside the Philippines
- All properties whether real, personal (tangible or intangible)
Conditions:
The decedent is a non-resident alien
The properties are situated outside the Philippines
3. Excluded Intangible Personal Properties
Intangible personal property has:
Philippine Situs
Owned by a non-resident alien
Subject to Reciprocity law
o The laws of his foreign country allow similar exemption on
transfer taxes on intangible personal property situated in that
foreign country and owned by a Filipino citizen not residing
in the said foreign country.
o The rule of reciprocity is not applicable for real and/or
tangible personal property.
 EXEMPT TRANSFER UNDER THE TAX CODE
1. Merger of Usufruct in the Owner of the Naked Title
Usufruct – the legal right to use and enjoy the benefits
Two persons involved in the merger:
Usufructuary – the person who has the right of enjoying the use and the fruits
of the property belonging to another.
Owner of the Naked Title – the person who is vested with the ownership,
dominion, or title of property under the usufruct agreement.
Note: The transfer exempt from estate tax is the usufruct merging in the naked
title, not vice versa.
2. Transmission of Legacy by the Legatee (Fiduciary Heir) to the
Fideicommissary
Legacy – a gift or bequest of personal property by will.
Legatee – the person whom the legacy in a will is given.
Devise – testamentary disposition of real estate.
 Fiduciary Heir – the first heir of the property who is usually a trustee in
relation to a beneficiary.
Fideicommissary – the second heir whose relationship to the fiduciary heir
must be one degree of generation such that of a parent and a child (vice versa)
Fiduciary is entitled to all the rights of a usufructuary, although the fideicommissary
is entitled to all the rights of owner of naked title.
3. TRANSFERS TO SOCIAL WELFARE, CULTURAL AND CHARITABLE
INSTITUTIONS
 Donation is given to a duly accredited institution.
 No part of the net income inures to the benefit of any individual
 Not more than 30% of the said bequests, devises, legacies, or transfers
shall be used by such institutions for administration purposes.
 EXEMPTIONS AND EXCLUSIONS UNDER SPECIAL LAWS
1. Death and Retirement Benefits
 Death benefits from SSS or GSIS
 Retirement benefits of officials/employees of a private firm.
- Excluded from Gross Income under the Section 32 (6)(a) of the NIRC
- The same amount is likewise treated as “deduction from the gross estate” of the decedent
provided that the same was included in the gross estate of the deceased.
2. Insurance Benefits
 Proceeds of life insurance and benefits received by the members of the
GSIS.
 Life insurance policy taken out by the decedent himself upon his own
life, where the beneficiary is a third person and is irrevocably
designated.
3. War Benefits
 Benefits received from U.S Veterans Administration
 Benefits received from the Philippines and US Government for damages
suffered during World War II
 Payments from the Philippines of US Government of the legal heirs of the
deceased of World War II Veterans and deceased civilians for supplies/services
furnished to the US and Philippine Army.
4. Grants and Donations
 To the Intramuros administration
 Bequests to be actually, directly, and exclusively for educational purposes.
 OTHER EXEMPTIONS AND EXCLUSIONS
- Properties held in trust by the decedent.
- Transfer by way of bona fide sales.
- Portion paid under sales with inadequate consideration.
- Right of usufruct if non-transferrable to the heir.
- Properties passing under the special power of appointment.

Important features:
1. Items 1 to 2 have common prerequisites
a. They involve two (2) transmissions of property or rights
 b. The transmissions are stipulated in the last will and testament by the first
decedent
c. The first transmission has been subjected to estate tax, while the second
transfer is exempt from taxes (estate or donor’s tax as the case may be). In the
second transfer is not subject to transfer taxes because there is no gratuitous
transfer of ownership as the transfer is only to follow route of transfer in
accordance with the Will.
2. Items 1 to 3 are excluded from gross estate to prevent double taxation, while the
exclusion of item 4 is based on public policy.
3. Item 4 is usually considered a deduction from gross estate because the said
testamentary donations should first be reported as part of the gross estate before
deducting the same.