Letter:
Dear Attorney,
I hope this letter finds you well. I am writing to seek guidance regarding the inheritance of certain corporate-owned properties left by my late father. He was married to my mother prior to 1988, and I am one of the surviving children along with my siblings. I am concerned about how the inheritance will be distributed. Will my mother automatically receive 50% of the properties, and would the remaining portion be divided equally among me and my siblings? I am unsure how the shares in a corporation and other assets acquired by my parents during their marriage factor into this distribution.
I would greatly appreciate your insights and any clarifications you can provide. Thank you for your time and assistance.
Respectfully,
A Concerned Heir
Legal Article:
Introduction
As a leading practitioner of Philippine law, I will endeavor to provide a meticulous and comprehensive explanation of how inheritance is handled under the legal regime that applies to marriages celebrated in the Philippines before the effectivity of the Family Code in 1988, particularly with regard to property held within corporations. This discussion will cover key concepts such as the property regime applicable to marriages solemnized before August 3, 1988, the classification of corporate shares and assets as part of the conjugal partnership of gains (if applicable), the manner of distribution of the decedent’s estate, and the rights of the surviving spouse and legitimate children. It will also explain how estate settlement procedures, taxation, and relevant jurisprudence come into play. Given the complexity of the matter, one must carefully scrutinize the relevant legal provisions and guiding principles from the Civil Code of the Philippines, the Family Code, corporate law, and Philippine succession law to ensure a correct understanding of how the law applies to a given set of facts.
The Applicable Property Regime for Marriages Before 1988
Prior to the effectivity of the Family Code on August 3, 1988, the default property regime for spouses married without a marriage settlement (i.e., no prenuptial agreement) under Philippine law was generally the Conjugal Partnership of Gains (CPG) as governed by the Civil Code of the Philippines. Under the Conjugal Partnership of Gains, the spouses retain ownership over their respective exclusive properties, which may include properties acquired before the marriage or through inheritance or donation exclusively to one spouse. Meanwhile, the fruits, income, and properties acquired during the marriage by the couple through their joint efforts are ordinarily considered part of the conjugal partnership. Upon the dissolution of the conjugal partnership, whether by death or other causes, the net partnership assets are divided equally between the surviving spouse and the estate of the deceased spouse.
It is crucial to ascertain what constitutes conjugal property under the pre-1988 regime. Under the old Civil Code, properties acquired for value by either spouse during the marriage are generally presumed to be conjugal. This includes income derived from the spouses’ efforts during the marriage, as well as earnings, profits, and increments from existing conjugal or exclusive assets. If a spouse invests in corporate shares or acquires interests in a corporation during the marriage, the value of these shares—provided they were acquired using conjugal funds—will generally form part of the conjugal partnership. Similarly, real property acquired during the marriage that is placed under a corporate entity whose shares are in the name of one or both spouses may be considered conjugal if purchased with conjugal funds.
Determination of the Deceased Spouse’s Share in the Conjugal Partnership
When one spouse dies, the conjugal partnership is liquidated. The law requires that all conjugal debts and obligations be paid first. After settling such obligations, the remainder of the conjugal assets is divided equally between the surviving spouse and the estate of the deceased spouse. This is a critical step: it ensures that the surviving spouse receives her half share of the conjugal partnership before inheritance proper (through succession) comes into play.
For example, if the spouses owned corporate shares or other properties under the conjugal partnership with a total net value of 100 units after liquidation, the surviving spouse is entitled to her 50 units as her share. The remaining 50 units form the estate of the deceased spouse and will be subject to distribution under the rules of succession.
The Rules of Intestate Succession
In cases where the deceased spouse dies without leaving a valid will, Philippine law governs the distribution of the estate according to the rules on intestate succession found in the Civil Code. The surviving spouse and the legitimate children inherit from the deceased spouse under the rules of intestacy. The legitimate children and the surviving spouse are considered compulsory heirs. The law grants them specific shares in the absence of a will.
For marriages governed by the old Civil Code (and the same principles largely carry over under the Family Code in matters of intestate succession), if the deceased leaves a surviving spouse and legitimate children, the surviving spouse is entitled to a share equal to that of each legitimate child. Thus, if there are three children (as in the scenario presented: the deceased is survived by a spouse, the letter writer, and two siblings—making a total of three children), the estate of the deceased (in this case, the deceased husband’s half of the conjugal partnership, plus any exclusive properties he may have owned) is divided into equal shares among the surviving spouse and all three children.
To illustrate this with hypothetical numbers: Suppose the corporate shares and other conjugal assets total 200 units at the time of the husband’s death, and after settling obligations, 200 units remain. Half (100 units) automatically goes to the surviving spouse as her conjugal share. This leaves 100 units as the deceased husband’s estate. This 100 units will be divided equally among the four heirs: the surviving spouse, Child 1, Child 2, and Child 3. Each receives 25 units from this half. Thus, the surviving spouse ends up with a total of 125 units: 100 units as her conjugal share plus 25 units from the deceased’s half. Each child receives 25 units from the deceased’s share. This scenario shows that the surviving spouse does not simply receive 50% of the entire conjugal mass plus no further division. Instead, the spouse first gets her conjugal share, and then shares equally with each child in the deceased spouse’s portion.
Distribution of Corporate Shares and Other Business Interests
Corporate shares owned by the deceased spouse as part of the conjugal assets are included in the estate. For instance, if the deceased spouse held shares in a family corporation or a business entity established during the marriage, these shares would be subject to the same division as other conjugal properties. Initially, determine if those shares are indeed conjugal. If they were acquired during the marriage and not by gratuitous title (such as inheritance or donation to one spouse alone), and if conjugal funds were used to purchase them, they form part of the conjugal partnership. After the surviving spouse gets her half share of the conjugal property, the deceased spouse’s half share of these corporate holdings will be distributed to the heirs under intestate succession rules.
It is important to note that the corporation’s internal bylaws, shareholders’ agreements, and relevant corporate laws might impose certain restrictions on the transfer or division of shares among heirs. While the law on succession determines who inherits the shares, the mode of transferring them might be subject to corporate formalities. Heirs who receive shares as part of their inheritance may need to coordinate with the corporate secretary or the corporation’s board of directors to properly record the transfer of the shares in the corporate stock and transfer book. Taxes, documentary stamp taxes on the share transfer, and other incidental expenses might be involved. Furthermore, any foreign ownership restrictions, if applicable, must be taken into account when the corporate assets are distributed, though typically this is less of an issue for domestic heirs.
Exclusive vs. Conjugal Properties
While the conjugal partnership of gains typically covers properties acquired for value during the marriage, certain properties remain exclusive to each spouse. For example, properties acquired before the marriage, as well as those acquired by a spouse during the marriage by gratuitous title (inheritance or donation), generally remain that spouse’s exclusive property. If the deceased spouse owned exclusive property, such as shares acquired before the marriage or inherited by him alone, these properties would be included entirely in the deceased’s estate and not subject to conjugal division. In that scenario, the entire value of such exclusive property would be divided among the surviving spouse and children following intestate succession rules, without the preliminary halving that applies to conjugal assets.
Hence, if the corporate shares in question were partly exclusive and partly conjugal in nature, the computation becomes more intricate. One must separate the conjugal portion from the exclusive portion. The surviving spouse gets her half of the conjugal portion first, and the exclusive portion plus the deceased’s half of the conjugal portion are then combined to form the net estate for distribution to the compulsory heirs.
Dissolution and Liquidation of the Conjugal Partnership
The dissolution of the conjugal partnership occurs upon the death of one spouse. After dissolution, liquidation of the conjugal assets follows the process outlined in the Civil Code and relevant jurisprudence. The process of liquidation can be done either judicially or extrajudicially. In an extrajudicial settlement (if all heirs are of legal age and agree to the terms, and there is no will), the heirs may distribute the estate among themselves by executing a public instrument (e.g., a deed of extrajudicial settlement) and publishing the settlement in a newspaper of general circulation as required by law. This process can be more cost-effective and time-efficient, provided there is no dispute among the heirs.
Judicial settlement is necessary if there are disagreements, minors involved, or other complications. In a judicial settlement, the court oversees the inventory, appraisal, and distribution of the estate. The court will determine the authenticity, validity, and proper valuation of assets, including corporate shares, and ensure that the shares are distributed in accordance with the law and any applicable corporate bylaws or agreements.
Estate and Tax Considerations
When transferring the deceased’s shares and other assets to the heirs, estate taxes must be considered. Under Philippine law, the estate tax is calculated based on the value of the net estate of the deceased. The current estate tax rate in the Philippines is generally a flat rate of 6% of the net estate, but one must refer to the applicable law at the time of the decedent’s death. For deaths occurring after the passage of the TRAIN Law (Tax Reform for Acceleration and Inclusion), the 6% rate generally applies. Prior to this reform, a graduated rate was in effect. Determining the date of death is crucial, as estate tax laws may have changed over time.
All heirs are collectively responsible for ensuring that the estate tax is paid before the property is divided and transferred. Corporate shares and other intangible assets typically require securing a Certificate Authorizing Registration (CAR) or a tax clearance from the Bureau of Internal Revenue (BIR) before the transfer can be recorded and shares released to the heirs. Failure to settle estate taxes can lead to penalties, interest, and difficulties in transferring or selling the inherited assets.
Additionally, one must consider documentary stamp taxes when transferring shares. The heirs might also need to submit various documents to the BIR, including the estate tax return, proof of payment, and documents evidencing ownership and valuation of the corporate shares. It is also customary to engage an accountant or tax lawyer to ensure compliance with all tax requirements.
The Role of Wills and Testamentary Dispositions
The scenario under discussion seems to involve intestate succession (no will), but if the deceased spouse had executed a valid will, the distribution of estate could follow the testamentary dispositions provided that the will respects the legitimes of the compulsory heirs. The legitime is a portion of the estate that the law reserves for compulsory heirs, including the surviving spouse and children. No will can deprive these heirs of their legitimes. Even with a will, the surviving spouse would be entitled to her share of the conjugal partnership, followed by the distribution of the deceased’s remainder assets subject to the legitimes of the heirs. If there was a will, its provisions might, for instance, leave certain corporate shares to specific heirs, as long as the legitimes remain intact. If the testamentary dispositions are invalid or reduce the compulsory portion of any heir, Philippine law allows for the reduction of these dispositions to ensure compliance with compulsory heirship rights.
Other Considerations and Potential Complications
In some cases, determining the character of the property—whether it is conjugal or exclusive—can be complicated, especially if the acquisition documents, corporate records, or funding sources are not clear. Was the property purchased using funds derived from the spouse’s exclusive property or from conjugal funds? Did the corporation issue shares during the marriage, and how were they paid for? Careful documentary and factual analysis is critical.
Another point of consideration is the possibility of disputes among heirs. If the children and the surviving spouse do not agree on the valuation or distribution of the corporate shares or other assets, the matter may have to be resolved through mediation or litigation. The valuation of closely held corporate shares can be challenging and may require the services of a financial expert or a certified public accountant to establish a fair market value.
Likewise, if some heirs wish to sell their inherited shares while others do not, this can create an additional layer of complexity. The corporation’s restrictions on share transfers, rights of first refusal, or buyback clauses may become relevant. Heirs might agree on a buyout arrangement among themselves or with the corporation to avoid deadlock situations.
Summary and Conclusions
To summarize:
Property Regime: Since the marriage was prior to the effectivity of the Family Code in 1988, the default property regime is generally Conjugal Partnership of Gains (if there was no prenuptial agreement).
Conjugal vs. Exclusive Properties: Determine if the corporate-owned properties or shares are conjugal or exclusive. If conjugal, they form part of the conjugal partnership assets. Half goes to the surviving spouse upon the death of the other spouse, while the other half becomes part of the estate of the deceased.
Succession Rules: In intestate succession, the surviving spouse and the legitimate children inherit from the deceased spouse. They share the deceased’s estate equally, with the surviving spouse receiving the same portion as each legitimate child. Thus, if there are three children plus the surviving spouse, the estate is divided into four equal parts among them.
Practical Computation: If total conjugal property is worth X, the surviving spouse first takes half (X/2). The remaining half (X/2) is then distributed equally among the surviving spouse and the three children. This means the surviving spouse ends up with her conjugal share plus one-fourth of the other half. Each child receives one-fourth of that half.
Corporate Shares: Corporate shares are considered personal property and may form part of the estate if acquired during the marriage. These must be transferred in accordance with both succession laws and corporate formalities.
Estate Settlement: Settlement can be done extrajudicially if all heirs are in agreement and of legal age. Otherwise, judicial settlement may be required.
Tax Considerations: Estate tax and other documentary requirements must be complied with before the transfer of shares and properties is finalized.
Valuation and Disputes: Valuation of corporate shares can be complex and may require professional appraisals. Disputes among heirs over valuation, transfer, or control of the corporation may require legal intervention.
By understanding these principles, one can navigate the complex area of inheritance of corporate-owned properties in the Philippines, especially under the old conjugal partnership regime that applies to marriages entered into before the Family Code’s effectivity in 1988. As always, it is prudent to consult directly with a qualified Philippine attorney who can review the specific facts, determine the character of the assets, advise on compliance with corporate and tax laws, and guide the heirs through either an extrajudicial or judicial settlement process. This approach ensures that the distribution of the estate is handled smoothly, lawfully, and in accordance with the rights and entitlements of the surviving spouse and legitimate heirs.