Both donor's tax and estate tax are transfer taxes at a flat 6% rate under the TRAIN Law, but they apply at different times. Donor's tax applies to gifts made during the donor's lifetime, computed at 6% on total net gifts during the year exceeding 250,000 pesos. Estate tax applies to the transfer of property at death, computed at 6% of the net estate after deductions like the 5,000,000-peso standard deduction and the family home. Deciding whether to give during life or pass property at death depends on the exemptions, deductions, and control you want to keep, and it is a planning choice worth analyzing.
A common estate-planning question: should I give my property to my children now, or let them inherit it when I die? The tax answer involves comparing donor’s tax (giving now) and estate tax (transferring at death).
Same Rate, Different Timing
Under the TRAIN Law, both are transfer taxes at a flat 6% rate — the reform deliberately aligned the two rates so the choice is less about the headline rate and more about the exemptions, deductions, and timing. The difference is when the transfer happens:
- Donor’s tax — on gifts made during the donor’s lifetime; and
- Estate tax — on the transfer of property at death.
Donor’s Tax
Donor’s tax is computed at 6% on the total net gifts made during the calendar year in excess of 250,000 pesos. So the first 250,000 pesos of net gifts each year is exempt, and the 6% applies to the excess. The rate is the same whether the donee is a relative or a stranger (TRAIN removed the old distinction). The donor files and pays the donor’s tax within the period after the gift, and for real property, the donation must observe the form requirements (a public instrument) and the transfer taxes and registration follow.
Estate Tax
Estate tax is computed at 6% of the net estate — the gross estate minus allowable deductions, notably the 5,000,000-peso standard deduction, the family home deduction (up to the statutory cap), claims against the estate, and the surviving spouse’s share. Because of these deductions, many modest estates owe little or no estate tax. The estate tax return is filed within one year from death, with installment options.
The Trade-offs: Give Now or Later?
Neither is automatically cheaper; it depends on the numbers and goals:
- Annual donor’s-tax exemption: spreading gifts over several years uses the 250,000 yearly exemption repeatedly, which can transfer significant value over time at low or no donor’s tax.
- Estate deductions: the 5,000,000 standard deduction and the family home can shelter a large part of an estate from estate tax at death — an advantage of waiting.
- Control: a donation now gives up ownership and control immediately; passing property at death keeps control during life — a major non-tax consideration.
- Collation and legitimes: lifetime gifts to compulsory heirs may be collated and cannot impair the legitimes of the others — so gifting is not a way to disinherit.
- Appreciation: giving an appreciating asset now transfers its future growth to the donee, out of your estate.
Watch for a Donation Disguised as a Sale
The BIR scrutinizes transfers to the family. A “sale” at a grossly inadequate price to a relative may be treated as a donation for the difference and taxed as such. And in an estate settlement, an heir taking less than their share so another takes more can be treated as a donation between heirs, triggering donor’s tax on top of estate tax. Structure transfers honestly.
Practical Advice
- Because both taxes are 6%, focus on the exemptions and deductions and on control — not the headline rate.
- Spreading gifts over years uses the annual donor’s-tax exemption; waiting uses the estate’s large deductions — run both scenarios.
- Get advice to avoid disguised-donation pitfalls and to respect legitimes and collation.
Frequently Asked Questions
What is the difference between donor's tax and estate tax? Both are 6% transfer taxes under the TRAIN Law, but donor's tax applies to gifts made during life while estate tax applies to the transfer of property at death.
How much is donor's tax? 6% on the total net gifts made during the calendar year in excess of 250,000 pesos, so the first 250,000 pesos of net gifts each year is exempt. The rate is the same for relatives and strangers.
Is it cheaper to give now or let them inherit? It depends. Spreading gifts uses the 250,000 annual donor's-tax exemption, while waiting uses the estate's large deductions like the 5,000,000 standard deduction and family home. Control and asset appreciation also matter, so analyze both.
Can I use a cheap sale to avoid the tax? No. A sale at a grossly inadequate price to a relative may be treated as a donation and taxed, and an heir taking less so another takes more can be treated as a donation between heirs. Structure transfers honestly.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
If you are deciding whether to gift property now or pass it at death, our firm can run the tax comparison and plan it. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.