The rules in taxation of individuals generally apply to estates and trusts. The taxable income of an estate or trust shall be computed in the same manner and on the same basis as in the case of an individual. Estates and trusts are allowed a personal exemption of P20,000. The income tax rates for individual taxpayers likewise apply. The taxable year of estates and trusts shall be the calendar year. Just like individuals. Estates and trust are required to file a declaration of estimated income for the current taxable year on or before April 15, of the same taxable year.
Definition of Terms
Estate or inheritance- refers to all the properties, rights and obligations of a person which are not extinguished by his death and also those which have accrued thereto since the opening of the succession.
Trust- is an agreement by will or an agreement under which title to property is passed to another for conservation or investment with the income therefrom and ultimately the corpus or principal to be distributed in accordance with the directives of the creator as expressed in the governing instrument.
Trustor or grantor- is the person who establishes a trust.
Beneficiary- is the person for whose benefit the trust ahs been created. A beneficiary has equitable title to the property transferred to the trust, including, generally, the possession and use of the property.
Fiduciary- is the general tern which applies to all persons or corporations that occupy positions of peculiar confidence towards others, such as trustees, executors, guardians, or administrators, receivers or conservators. For income tax purposes, a fiduciary is any person or corporation that holds in trust an estate of another person or persons.
Taxable Estates
Taxable estates are estates of deceased persons under judicial settlement. Taxation of an estate begins from the time of death. Hence any income received after the death shall form part of the income of the estate.
Taxable Trusts
For a trust to be taxable, it must be irrevocable, meaning it cannot be changed by recall or cancellation, both as to the corpus or principal and income. In a revocable trust where title to income may be revested in the grantor, the trust itself is not subject to income tax. It is the grantor who is taxable. In case of trust where the income may be held or distributed for the benefit of the grantor, such income is likewise taxable directly to the grantor.
Gross Income
The items of gross income of estates and trust are the same items of gross income of individuals as provided in the tax code. They include:
1. income accumulated in trust for the benefit of an unborn or unascertained person or persons with contingent interest, and income accumulated or held for future distribution under the terms of the will or trusts.
2. Income which is to be distributed currently by the fiduciary to the beneficiaries and income collected by a guardian of an infant which is to be held or distributed as the court may direct.
3. Income received by estates of deceased persons during the period of administration or settlement of the estate.
4. Income, which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
Allowable deductions
Estate or trust is allowed a personal exemption of P20,000. This is regardless of the number of trust a beneficiary may receive income from. Aside from the personal exemption of 20,000 allowed, income of trust and estate may be deductible from gross income.
Income which is to be distributed currently by the fiduciary to the beneficiaries; and income collected by a guardian of an infant which is to be held or distributed as the court may direct, are deductible from gross income of the fiduciary. This is so because such income is taxable directly to the beneficiary, whether distributed or not.
Income received by estates of deceased persons during the period of administration or settlement of the estate; and income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated, are taxable either to the fiduciary or beneficiary, depending on the amounts paid or credited to the legatee, heir or beneficiary.
If taxable to the fiduciary (meaning no income has been distributed to the beneficiary) the income is not deductible from the gross income of the fiduciary. But if taxable to the beneficiary, such income shall form part of the gross of the fiduciary and is deductible from such gross income. The income thus distributed is to be included in the gross income of the beneficiary.
The deductions just discussed shall not be allowed in the case of a trust administered in a foreign country.
Consolidation
When two or more trust are created by the same grantor and the beneficiary in both trusts is the same, the taxable income of all the trusts shall be consolidated and the tax computed on such consolidated income.
Less: consolidated deductions xxx
Consolidated taxable income xxx
Less personal exemptions xxx
Taxable income xxx
Multiply by tax rate in sec 24A x%
Amount of income tax on consolidated
Taxable income xxx
Each trustee shall compute his share of the income tax on the consolidated taxable income based on the formula:
Taxable income of a trust
Before exemption X income tax on = income tax payable
Consolidated taxable income of consolidated income by each trustee
All trust before exemption
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