Why Waiving Your Inheritance Might Cost You (The Hidden Donor’s Tax Trap)
An Extrajudicial Settlement of Estate (EJS) is a common way to divide inherited property without going through lengthy court proceedings. However, many heirs unwittingly trigger unexpected tax liabilities, commonly referred to as an "accidental" donor's tax, during this process.
Understanding how and why this happens is critical, without careful drafting, an EJS can suddenly be reclassified by tax authorities as a deed of donation, exposing the estate or the heirs to steep financial penalties and unexpected tax bills. If you wish to consult with us, click HERE to schedule a session.
Background & Legal Basis: What Triggers the "Accidental" Donor's Tax?
Under Section 98 of the National Internal Revenue Code of 1997, donor’s tax applies to any transfer of property by gift, whether direct or indirect. Receiving an inheritance through succession is not a donation and is not subject to donor's tax. However, the tax consequence depends on the true economic substance of the EJS, rather than its title or whether the word "renunciation" is used. Under Section 100 of the Tax Code, transferring property for less than full and adequate consideration is legally treated as a gift.
Depending on how the settlement is arranged, the tax implications vary significantly. In a general renunciation, an heir renounces their entire inheritance without identifying or favoring particular heirs, which generally results in no donor’s tax. Conversely, in a specific waiver or unequal distribution where an heir renounces in favor of identified heirs or claims specific properties while waiving others, causing another heir to receive more than their hereditary share, donor’s tax may be imposed on the excess value gratuitously transferred. If you wish to consult with us, click HERE to schedule a session.
How the Law Applies in Real Life
To see how courts and tax authorities evaluate these agreements, consider how these principles unfold in practical scenarios:
The Case of Partitioning Specific Properties (Anita Dela Vega Lacambacal v. CIR, 2026): Imagine five siblings inheriting several real estate properties. To simplify ownership, they draft an EJS where each sibling takes one specific property and signs a "general waiver" for the rest. Although the document uses the phrase "general renunciation," the actual outcome assigns properties of varying monetary values to individual heirs. Because the agreement results in some siblings taking a larger overall share than their equal 1/5 statutory entitlement, the court looks past the label "general waiver". The excess value shifting to the favored siblings is legally classified as a partial renunciation and treated as a taxable donation.
The Case of Waiving Shares for a Specific Heir (Lorenzo Eng Chong J. Ong et al. v. Pasay City et al., 2026): Consider a family where multiple co-heirs decide they do not want to hold title to the family estate. Instead of walking away unconditionally, they execute an EJS explicitly stating that they repudiate their shares in favor of one specific sibling, Wilson. Because the waiver directly directs their inheritance to a designated individual, it is no longer a neutral refusal of rights. The court treats this targeted waiver as a donation to Wilson. Importantly, however, the donor's tax base is strictly limited to the undivided actual shares transferred to him, rather than the total value of the entire estate.
Numerical Illustration: Imagine three heirs (A, B, and C) who are each legally entitled to an equal 1/3 share (₱3 million) of a ₱9 million estate:
No Donor's Tax: Heir A receives ₱3M, Heir B receives ₱3M, and Heir C receives ₱3M.
Triggers Donor's Tax: Heir A agrees to take only ₱1 million while Heir B takes ₱5 million. The ₱2 million excess shifted to Heir B is legally treated as a gratuitous, taxable gift from Heir A. If you wish to consult with us, click HERE to schedule a session.
Frequently Asked Questions (FAQ)
Why is the donor's tax imposed if we already filed an EJS? Donor’s tax is not imposed because you executed an EJS, but because the agreement structurally functions as a deed of donation, assignment, or waiver.
Can we avoid donor's tax by calling our agreement a "General Renunciation"? No. Courts look beyond document titles and labels; they examine the actual mathematical distribution produced by the EJS. If you wish to consult with us, click HERE to schedule a session.
Ensure Your Settlement Is Tax-Efficient
The practical rule is simple: inheriting property is not a donation, but a gratuitous reallocation of inheritance often is. Structuring an estate settlement without proper review can turn a routine inheritance into an unnecessary tax burden. If you wish to consult with us, click HERE to schedule a session.
Disclaimer: This newsletter is for general informational and educational purposes only and does not constitute formal legal advice. For specific estate planning matters, please consult an attorney.
