Deed of Donation vs. Last Will and Testament: Tax Implications and Legal Considerations

Dear Attorney,

I hope this message finds you well. I am seeking legal advice regarding the difference between executing a deed of donation versus drafting a last will and testament, particularly in terms of tax implications. Would the tax rates for the transfer of assets under these two instruments be the same or different? Additionally, I would appreciate your professional opinion on which legal approach might be more advantageous depending on the circumstances, both for the donor and the heirs.

Your guidance on this matter would be invaluable as I navigate these important decisions.

Sincerely,
A Concerned Individual Preparing for Estate Planning

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Insights

1. Nature of Deed of Donation: A deed of donation is a legal instrument by which a person (the donor) voluntarily transfers ownership of property or assets to another person (the donee) during the donor’s lifetime. The donation must be accepted by the donee for it to take effect. Under Philippine law, donations are considered irrevocable once made unless specified otherwise, which differs from a will, where the testator retains the ability to modify or revoke the will until their passing.

2. Nature of a Last Will and Testament: A last will and testament outlines how a person’s assets will be distributed upon their death. It takes effect only after the testator passes away and must go through probate, a legal process that validates the will. Wills can be changed or revoked at any time during the testator’s life.

3. Taxation:

   • Deed of Donation: Transfers via a deed of donation are subject to the donor’s tax, which, under the Tax Reform for Acceleration and Inclusion (TRAIN) law, is imposed at a fixed rate of 6% of the total net gifts, if they exceed a certain threshold. The donor bears the responsibility for paying this tax.
   • Last Will and Testament: Transfers of assets through a will are subject to the estate tax, which is also taxed at 6% of the net estate (total assets less allowable deductions) as per the TRAIN law. The estate tax is paid after the death of the testator and before the distribution of the assets to the heirs.

4. Which is Better?: Whether a deed of donation or a will is more advantageous depends on various factors:

   • Timing of transfer: A deed of donation transfers assets immediately, which may be useful for estate planning to reduce the size of the estate and, consequently, estate taxes. However, the donor must consider the immediate payment of donor’s tax and the potential loss of control over the donated assets.
   • Control over assets: A will allows the testator to retain control of the assets during their lifetime and can provide for more flexibility, as it can be altered or revoked if the testator’s circumstances or wishes change.
   • Tax implications: Since both instruments incur a 6% tax rate, the main difference lies in the timing of when the tax is paid (during the donor’s lifetime for donations, or after death for estate tax).
   • Probate process: Wills must undergo probate, which can be a lengthy and costly process. Donations, on the other hand, take effect immediately and do not require probate, offering a potentially simpler process.

5. Other Considerations:

   • Forced Heirship: Philippine law protects the rights of compulsory heirs, and both donations and wills must respect the legitimate share of these heirs. Any donation that violates this could be reduced or invalidated.
   • Succession Laws: Even with a will or a donation, Philippine laws on succession, including the reservation of the legitime for heirs, must be observed.

In conclusion, both instruments serve distinct purposes and have their advantages, but the choice will depend on the specific needs and circumstances of the individual.