Disclaimer: The following article provides general legal information on extrajudicial settlements in estate property sales and inheritance distribution within the Philippine context. This is not legal advice. For any specific questions or concerns, you are encouraged to consult a qualified attorney.

Overview

When a person (the “decedent”) passes away, their estate—which comprises all their assets and properties—must be settled among their rightful heirs. In the Philippines, there are generally two ways to settle an estate:

Judicial Settlement – A court proceeding is required when there is a dispute among heirs, when a will is contested, or when the estate’s value or circumstances demand judicial intervention.
Extrajudicial Settlement – An out-of-court settlement typically allowed when the decedent died without a will (intestate), left no debts, or when all the heirs agree on the distribution of the estate.

This article focuses on the extrajudicial settlement of estate property and the related processes for property sale and inheritance distribution, as governed by Philippine laws.

Legal Basis

Civil Code of the Philippines: Governs intestate succession (when a person dies without leaving a will) and provides the general rules on distribution of the decedent’s properties.
Rule 74 of the Rules of Court: Lays down the procedure for extrajudicial settlement of estates in the Philippines.
Relevant Revenue Regulations: The Bureau of Internal Revenue (BIR) issues regulations (e.g., on estate taxes, documentary stamp taxes, and capital gains taxes) that directly impact estate settlements.
Local Government Requirements: There may be local ordinances or procedures, such as the necessity for a Barangay Clearance or the publication requirement, that must also be observed.

Requirements for Extrajudicial Settlement

Before executing an extrajudicial settlement, certain prerequisites must be met:

No Will: Generally, extrajudicial settlement applies when the deceased has not left a will (i.e., intestate succession). If a valid will exists, it usually must be probated.
No Outstanding Debts: The decedent must not have unpaid debts or liabilities, or if there are debts, they must already be settled or arranged in writing with creditors (to avoid claims against the estate later).
All Heirs Agree: All the heirs must be of legal age and must agree on how to divide the estate. If any heir is a minor, a legal representative or guardian must represent them, and the court may need to approve the settlement on the minor’s behalf.
Publication of Notice: Rule 74 requires publication in a newspaper of general circulation once a week for three consecutive weeks to inform the public (e.g., potential creditors) that the estate is being settled extrajudicially.
Execution of a Public Instrument: The heirs must execute a notarized instrument or deed (commonly called “Deed of Extrajudicial Settlement”) indicating how the properties will be divided or assigned.

Step-by-Step Process

Below is a general outline of how extrajudicial settlement is typically done in the Philippines:

Gather the Required Documents
- Death Certificate of the decedent.
- Proof of kinship: Birth certificates, marriage certificates, and any other records showing the relationship between the decedent and the heirs.
- Certificate of No Records of Debt (not officially required in all cases, but an affidavit from the heirs declaring there are no debts or stating how existing debts will be settled is typically included).
- List and valuations of the decedent’s real and personal properties.
Draft the Deed of Extrajudicial Settlement
- This document outlines how each heir will receive their share of the estate.
- All the legal heirs must be named.
- Must include a statement regarding the decedent’s debts (if any) and how they are resolved or otherwise do not exist.
Notarization
- The deed must be signed by all the heirs (and/or representatives) in the presence of a notary public.
- The notarial stamp and acknowledgment ensure the instrument’s authenticity and legality.
Publication
- Pursuant to Rule 74, the deed must be published in a newspaper of general circulation once a week for three consecutive weeks.
- Proof of publication (affidavit of publication) will be issued by the newspaper and must be kept on file.
Payment of Taxes
- Estate Tax: File the Estate Tax Return (BIR Form 1801) and pay the corresponding estate tax within the prescribed period. The Tax Reform for Acceleration and Inclusion (TRAIN) Law introduced some changes to the estate tax rates, typically 6% of the net estate above certain thresholds.
- Other Taxes and Fees: Depending on the property type, you may need to settle other obligations such as transfer taxes and documentary stamp taxes. If the property will be sold, capital gains tax (usually 6% on real property) or other applicable taxes may apply.
- Upon payment, the BIR will issue a Certificate Authorizing Registration (CAR) or Electronic Certificate Authorizing Registration (eCAR).
Transfer of Title and Other Registrations
- Present the notarized deed, CAR/eCAR, proof of payment of taxes, and other required documents to the Registry of Deeds where the property is located.
- The Registry of Deeds will then transfer the title to the names of the heirs or to the buyer, if the property is being sold simultaneously.
Extra Steps for Real Property Sale
- If the heirs have agreed to sell the property immediately upon settlement, the buyer may be listed as the transferee in the Deed of Extrajudicial Settlement with Sale, combining the process of estate settlement and conveyance to the buyer in one instrument.
- Corresponding capital gains tax, documentary stamp tax, and local transfer tax must be settled.
- For real properties involving a subdivision of a parcel of land, additional documentation (e.g., approved subdivision plan) may be necessary.

Common Pitfalls

Excluding or Overlooking an Heir
- Failing to include a legitimate heir can void the extrajudicial settlement and result in legal complications. All heirs must be included, regardless of whether they are legitimate, illegitimate, or compulsory heirs.
Failure to Publish
- Non-compliance with the publication requirement under Rule 74 may render the settlement void or legally questionable, exposing the heirs to claims.
Unpaid Debts
- If outstanding debts exist and are not properly addressed, creditors may challenge the extrajudicial settlement, potentially leading to costly litigation or the reopening of the estate.
Late Filing of Estate Tax
- Delays in filing and paying the estate tax can lead to surcharges, penalties, and interest. Under the TRAIN law, heirs are required to file the return and pay the tax within one year from the date of the decedent’s death (extendable in certain cases).
Mistakes in Execution of Deed
- Inaccuracies in describing the property, not properly identifying the heirs, or incomplete signatures can stall the registration process.

Extrajudicial Settlement with Sale

When the heirs agree not only on the distribution of the property but also on an immediate sale to a third party, the heirs often opt to execute a “Deed of Extrajudicial Settlement with Sale”. This single instrument accomplishes two main objectives:

Settles the Estate: Confirms the heirs’ respective rights and shares.
Sells the Property: Conveys the property from the estate directly to the buyer.

Advantages

Efficiency: Streamlines the process by combining settlement and transfer of ownership.
Reduced Costs: Minimizes notarial fees, publication costs, and potential duplicative paperwork since the sale is included in one deed.

Caveats

Immediate Buyer: A bona fide purchaser must already be identified, and payment terms should be agreed upon.
Same Legal Requirements: Publication, notarization, and payment of all necessary taxes still apply.

Tax Considerations

Estate Tax: Under the TRAIN law, the rate is typically 6% of the net estate over certain exempt thresholds.
Capital Gains Tax (CGT): On the sale of real property, also typically 6% of the gross selling price or zonal value, whichever is higher.
Documentary Stamp Tax (DST): 1.5% on the selling price or fair market value, whichever is higher, for the sale of real estate.
Transfer Tax: A local government tax (rate varies by province or city).
Deadlines: Estate tax must be paid within one year from the decedent’s date of death, unless an extension is granted. CGT and DST for property sales are normally due within 30 days from execution of the deed.

Frequently Asked Questions

Can an extrajudicial settlement be used if the decedent left a will?
- Generally, no. If a will exists, it must be submitted for probate unless the will is invalid or it exclusively bequeaths properties outside the Philippines (rare, special circumstances). Always consult a lawyer if a will exists.
What if one heir refuses to sign?
- Extrajudicial settlement requires unanimous consent. A non-consenting heir means you cannot proceed extrajudicially. A judicial settlement is typically the solution in that scenario.
Is publication always required even if the property is small?
- Yes, under Rule 74, publication is a statutory requirement to protect potential creditors and third parties, even for a modest estate.
What if a hidden or unlisted property later emerges?
- Under Rule 74, any omitted property not included in the extrajudicial settlement can be subject to a separate proceeding or agreement. Creditors or other parties may contest or reopen the settlement if assets are discovered later.
How do we handle minors or incapacitated heirs?
- A judicial approval of the settlement may be required, or a guardian may represent the minor’s interests, subject to court supervision.

Practical Tips

Consult a Lawyer Early: While extrajudicial settlements are usually straightforward, each estate has unique nuances—especially if properties are in multiple localities or if there are minor heirs.
Complete Documentation: Begin by carefully listing all assets, securing property titles, and clarifying heirship through birth certificates, marriage certificates, etc.
Coordinate with the BIR: Properly file estate tax returns and secure the Certificate Authorizing Registration (CAR) to avoid future disputes with the tax authorities.
Keep Records Organized: Maintain photocopies or scanned files of all documents (e.g., the Deed of Extrajudicial Settlement, notarized instrument, proof of publication, tax clearances).
Plan for Potential Disputes: An out-of-court settlement only works smoothly if all heirs are cooperative and transparent. Clarify all potential issues, including liabilities or “hidden” properties, before finalizing.

Conclusion

Extrajudicial settlement offers a quicker and more cost-effective pathway for heirs in the Philippines to distribute a decedent’s estate—especially when there is consensus, no debts, and no will to probate. By diligently following the steps prescribed by law—preparing the Deed of Extrajudicial Settlement, publishing notice, paying the necessary estate taxes, and registering the transfer—the heirs can settle the estate smoothly.

However, any oversight or omission in the process (e.g., failing to identify an heir or not satisfying all tax obligations) may lead to legal complications. Therefore, it is always advisable to seek the guidance of a reputable lawyer and coordinate closely with the relevant government agencies (Registry of Deeds, BIR, local government, etc.) to ensure a valid and binding extrajudicial settlement.

Disclaimer: The information provided in this article is intended for general informational purposes only and does not constitute legal advice. Laws and regulations may change over time, and specific facts can significantly affect legal results. For personalized advice, please consult a qualified attorney experienced in Philippine estate law.