Transfer of Real Property Under a Revocable Trust Agreement Exempt from Transfer Tax

August 16, 2005 BIR RULING NO. 013-05 000-00 Mr. Antonio P. Salvador 43 Maria Eva St., Tierra Pura Homes Tandang Sora Avenue Quezon City S i r : This refers to your letter dated February 25, 2002 requesting in effect for a ruling on whether or not the proposed transfer of your real property under a revocable trust agreement is exempt from transfer tax. Documents show that Spouses Antonio P. Salvador and Patricia C. Salvador, Trustors, are the owners of a certain real estate property, located at 43 Maria Eva St., Tierra Pura Homes, Tandang Sora Avenue, Quezon City covered by TCT No. 49054, containing an area of 640 sq.m., more or less, registered with the Register of Deeds of Quezon City; that Spouses Salvador intends to change and register the Trust Property with the Register of Deeds of Quezon City, to A. & P. Salvador Living Trust with Antonio P. Salvador as the Trustee and Patricia C. Salvador as the Successor Trustee in case Antonio P. Salvador dies ahead of his spouse; that should Patricia C. Salvador die ahead of Antonio P. Salvador, Antonio P. Salvador shall remain the Trustee for and in behalf of his children who are identified as Surviving Trustees under the Revocable Living Trust Agreement of Spouses Antonio and Patricia Salvador, viz. : Alexander, Benjamin, J. Cesar, Dana, Edwin, Ferdinand and Gemma, all surnamed Salvador (in the order of their seniority and age); that whoever is the eldest will act as the First Surviving Trustee for as long as he lives, and as soon as he/she passes away, the next eldest, will act as the next Second Surviving Trustee who shall take over the control and management of the Trust Property, and so on and so forth until the turn of the youngest Surviving Trustee comes, who shall then act as the last Surviving Trustee for and in behalf of the grandchildren who are living and born from Spouses Salvador's Surviving Trustees; that should Antonio P. Salvador become incapacitated due to physical or mental disability, the Successor Trustor-Trustee (Patricia C. Salvador) shall manage and administer the Trust Property by renting out, mortgaging or selling the same as she shall deem wise and appropriate, by paying to Antonio P. Salvador or distributing the proceeds, on his behalf, such sum or income from such transactions for his comfort and welfare; that upon Antonio P. Salvador's death, the procedure of transfer of authority above described shall be followed; that after Antonio P. Salvador's demise, if Successor Trustor-Trustee (Patricia C. Salvador) decides to rent out the Trust Property, she shall equally distribute the income derived therefrom to the Surviving Trustees and if she decides to sell the same, the proceeds shall be equally distributed to the seven (7) Surviving Trustees after deducting her one-half (1/2) share of the rental income or proceeds of the sale, as the case may be; that should the Successor Trustor-Trustee (Patricia C. Salvador) pass away while performing her duties as such, the First Surviving Trustee (Alexander C. Salvador) shall automatically take over her functions and duties; that should the First Surviving Trustee decide to sell the Trust Property, he is authorized to distribute the whole proceeds of the sale on a share-and-share-alike basis among the Trustees; that the same procedure or scheme shall be followed in the transfer of the Trust Property, its corresponding rights and benefits in case of the death of the Surviving Trustee while managing and administering said property; that the sale of the Trust Property during Antonio P. Salvador's term as Trustor-Trustee or that of the term of his wife as Successor Trustor-Trustee or that of his children as Surviving Trustees, shall terminate the Revocable Living Trust Agreement; that the Trustor-Trustee, the Successor Trustor-Trustee and all the Surviving Trustees shall serve without bonds; and that the Declaration of Trust of A.P. Salvador Revocable Living Trust shall extend to and be binding upon the heirs, creditors and assigns of the Trustor-Trustee, Successor Trustor-Trustee and the Surviving Trustees. In reply, please be informed that under Section 24 (D) (1) of the Tax Code of 1997, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts shall be taxed at the rate of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6 (E) of the same Code, whichever is higher. aTcIAS Such being the case, and considering that there is no actual transfer of ownership over the aforementioned property, as a result of the transfer of the property to A & P Salvador Living Trust from Spouses Salvador, the said transfer is not subject to the 6% capital gains tax under Section 24(D)(1) of the Tax Code of 1997. (BIR Ruling No. DA-299-08-11-00 and BIR Ruling No. DA-143-03-09-00) Also, no donor's tax shall be imposed since there is no transfer of ownership in this instance. Moreover, the deed covering the transfer of the aforementioned property to A & P Salvador Living Trust by Spouses Salvador, as trustors, is not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997. (BIR Ruling No. DA-299-08-11-00 and BIR Ruling No. DA-143-03-09-00) However, the notarial acknowledgment of said deed is subject to the documentary stamp tax imposed under Section 188 of the Tax Code of 1997. On the other hand, Section 85 (C) of the Tax Code of 1997 provides that interest in the property of which the decedent has at any time made a transfer by trust or otherwise is included in decedent's gross estate. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all properties, real or personal, tangible or intangible, wherever situated to the extent of any interest therein, of which the decedent has at any time made a transfer by trust, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power by the decedent to alter, amend, revoke or terminate, or where any such power is relinquished in contemplation of the decedent's death. In a revocable transfer of property, such as in this case, the property continues to be owned by the transferor during his lifetime notwithstanding the transfer, as he still retains beneficial ownership. The rationale for taxing such transfer in trust at the time of death of the trustor is to reach transfers which are really substitutes for testamentary disposition and thus prevent evasion of estate tax. To be exempt from estate tax, the transfer by inter vivos must be absolute and outright with no strings attached whatsoever by the transferor, which is not the case here. HScCEa In other words, all properties covered by the Revocable Living Trust Agreement of Spouses Antonio P. Salvador and Patricia C. Salvador shall be considered as forming part of the decedent's gross estate subject to estate tax pursuant to Section 85 of the Tax Code of 1997 upon the death of the owner of the property. Thus, contrary to your observation, the transfer of the aforesaid property during your lifetime and that of your spouse's, as trustors, does not preclude the imposition of the estate tax prescribed under Section 84 of the Tax Code of 1997 upon the death of the owner of the property. In view of the foregoing, in case of your death or that of your spouse, the proposed transfer of your real property under the Revocable Trust Agreement shall be subject to estate tax to the extent of either your or your spouse's interest therein, as the case may be, at the time of death pursuant to Section 85 (C) of the Tax Code of 1997. Furthermore, in the event of your death or that of your spouse, and if either you or your spouse, as the case may be, decide/s to sell the Trust Property and shall then equally distribute the proceeds of the same to your children after deducting your or your spouse's one-half (1/2) conjugal share, you or your spouse, in effect, shall be considered to have waived your or your spouse's share in the estate of the decedent spouse in favor of your children. Such waiver of inheritance tantamount to a donation of property subject to the donor's tax imposed under Section 98 of the Tax Code of 1997. The donor's tax shall be based on the total fair market value of the property comprising the share of the surviving spouse in the estate of the decedent spouse. The fair market value of the property shall be determined in accordance with Section 6 (E) of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. DCASEc Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue