Second Marriage, a Planned Lifetime Gift, and a Family Home Promised to the Widow
Federico Villanueva, 74, is married to Marta, 66, his second wife. He has two children, Ana (48) and Ben (46), from his first marriage, and one child, Carlo (24), with Marta. The conjugal properties are a family home worth PHP 9 million, a rented commercial lot worth PHP 12 million, bank deposits of PHP 4 million, and shares worth PHP 3 million. He also owns a PHP 6 million life policy naming Marta as irrevocable beneficiary. He has no will and has stage 3 chronic kidney disease. He wants to transfer the commercial lot to Ben now by deed of donation, leave the family home to Marta, and let Ana and Carlo 'divide whatever is left'. Marta is willing to sign anything he asks. Ana has been estranged for years and has hinted at contesting the estate. He asks whether the plan works and what it will cost in tax.
1. Test the plan against succession law and compute the legitimes and free portion if he dies today.
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The estate. The conjugal properties total PHP 28 million, so his estate is his half, PHP 14 million. The insurance is excluded because the beneficiary is irrevocable; it never enters the estate or the legitime computation.
Legitimes. With three legitimate children and a surviving spouse: the children take one-half of the estate, PHP 7 million, or about PHP 2.33 million each; Marta takes one-fourth, PHP 3.5 million; the free portion is the remaining PHP 3.5 million.
Why the plan fails. (1) The family home: his interest is PHP 4.5 million, which exceeds the PHP 3.5 million free portion. Devising all of it to Marta impairs the children's legitime by about PHP 1 million. Marta already owns her conjugal half, so she can keep the house only if the children agree in the settlement or she buys their shares. (2) The donation to Ben: his half of the lot is PHP 6 million, well beyond the free portion, so the gift is inofficious to the extent of the excess, and it is collatable, meaning it is brought back into the computation at death. (3) Donating conjugal property also requires Marta's consent; her consent is not a substitute for the children's legitimes. (4) The insurance cannot be used to 'top up' the children, because the irrevocable designation removes it from the estate.
2. Compute the estate tax if he dies today with no donation, and explain the treatment of the insurance and the family home.
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Gross estate. PHP 14 million, being his half of the conjugal properties. The PHP 6 million policy is excluded because Marta is an irrevocable beneficiary; had he retained the right to change the beneficiary, the proceeds would be included.
Deductions. Standard deduction of PHP 5 million. The family home deduction is limited to his interest actually included in the gross estate, PHP 4.5 million, and sits under the PHP 10 million cap.
Net estate and tax. PHP 14 million less PHP 9.5 million = PHP 4.5 million. Estate tax at 6% = PHP 270,000.
Points to explain. (1) The family home deduction is not the whole PHP 9 million house; only his half is in the estate, and only that half is deducted. (2) The tax is a transfer tax on his share, not on the whole conjugal mass. (3) If he makes the donation to Ben first, the estate shrinks, but the donor's tax is due now: 6% of PHP 6 million less the PHP 250,000 annual exemption, about PHP 345,000, plus documentary stamp tax, and the gift is still collated at death. Having Marta join in donating her half doubles the gift to PHP 12 million but allows two PHP 250,000 exemptions, about PHP 690,000 in donor's tax. (4) The tax return and payment must be completed before titles can be transferred, so liquidity must be planned.
3. Recommend a concrete structure and the steps to implement it.
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Do not donate the whole lot. Limit lifetime giving to what the free portion can absorb, or accept that the excess will be collated and reduced at death. A gift of PHP 2 million to PHP 3 million to Ben now, documented at zonal value, achieves the intent without an inofficious transfer.
Use a will for the free portion. A will lets him direct the PHP 3.5 million free portion, for example to Marta, and it can carry a written explanation of his intentions, which lowers the risk of an Ana-contest. Confirm capacity formally given his illness; capacity at execution is the first thing a contesting heir will attack.
The family home. He cannot give it to Marta by donation because donations between spouses during the marriage are void. The workable route is a will leaving his free portion to her, with the children's extrajudicial settlement after death transferring the home to her, or a buy-out of the children's shares funded by insurance.
Liquidity and implementation. Keep the irrevocable insurance as the liquidity source; it pays outside the estate and can fund the PHP 270,000 estate tax and any buy-out. Arrange a family meeting or a written memorandum, secure Marta's consent on any conjugal disposition, keep valuations and receipts, and have counsel draft the will and the deed so the documentation matches the tax treatment.