Don't Let Your Heir Down.pdf

Have you been left in charge of settling the estate of a deceased loved one? I'm sure it can be overwhelming. That's why we created this report to help you make sense of things and create a plan for moving forward. It's the first 3 chapters of our book which will launch soon. This guide is a compilation of the common questions we get from clients when they consult us on estate settlements for the first time. Imagine setting up a coffee meeting with lawyers and asking us questions. The book will probably cover most of the things you wanted to ask. Hopefully, it will give you a better idea of what goals need to be achieved and the work involved with estate settlement.

But before we get started. This book provides general legal information, and not legal advice, about estate settlement. The material is offered without any warranties or guarantees about its accuracy and applied results. We disclaim any liability for the decisions you make based on the information presented. It would be best if you consult a lawyer before taking any action based on this book.

If you’re reading this, there's a good chance that we’ve been through the same challenge. A family member or loved one has died and we’re left to pick up the pieces. Hello, I’m Atty. Erwin Zagala and in 2009, my dad passed. A few years later in 2014, my mother followed suit. These 2 incidents were the hardest things I’ve had to go through as a son. What made it harder was the fact that I was an only child so I had no siblings to turn to. Yes, I had my wife, my kids, my cousins and other relatives supporting me though the experience. But it was still a lonely experience. What you may not know is that I am a practicing lawyer, and I settle other people’s estates for a living. Mentally, I knew what to do. I studied these procedures in law school and I apply them to actual client work. But when I started to work on my own family's things, I got paralyzed. I couldn’t understand why I couldn't open the word processor and start it. Good thing I had friends and a good team to handle things for me when I couldn’t move on it. Settling my parents’ estates was too painful. I had to take the back seat and be the client that time. It's been a few years since those challenging instances. Looking back, I've figured out why I had trouble applying the same procedures on our own family.

Why does it feel so difficult?

When you are picking up the pieces when it comes to estate matters, you are actually fighting 2 wars. The emotional and the legal aspects of death in the family. On one level, you are grieving. When a person is this distraught, it’s not fair to expect them to make the right decisions or to make the right calls. Your life is being turned upside down. Yes, this is painful, and yet, this process is something we all have to go through.

On another level, you’re tackling is the legal aspect. The world waits for no one. While you’re grieving, there are legal requirements demanding your attention. You have to make a call on what estate rules are applicable and how to explain these to relatives. Finally, you have to reflect these in the chain of legal paperwork that's required. In case you haven't figured it out yet, let me verbalize things for you. Here's your problem: you are getting tag teamed by emotional and legal demands.

How the book can help you

I know how confusing this time could be for you. I convinced my law firm partner, Atty. Ramon Ramirez to write this book with me so we can help you understand the second level of your struggle. Let's get the legal concerns out of the way so you have less to worry about. That way, you have more energy to devote to dealing with the emotional battle. This guide will cover the following topics for you: What happens when a Filipino dies? What is an estate? What you should do about an estate? What are the bad things which can happen if you wait too long before acting? Our recommended 3 phase framework you can use to settle estates in the Philippines. Where you can get help if you want a team to assist you.

At the end of the book, I’ll share some resources for you. You can get access to more materials or get help from a legal team in case you need someone to assist you. Let’s start off with the fundamentals of what you need to know.

What happens when a Filipino dies?

When a person dies, it's obvious that they stop existing. But things aren't as simple as they look. Lawyers see death in a different way. Death changes the person's capacity to be part of legal relations. This is what we call a person's “juridical capacity”. Under the law, you lose Juridical Capacity through death (Art. 3, Civil Code). Dead people cannot be a participant in legal relationships.

You may be asking why this is important. Well, one of the most important legal relations we have in life is the ability to own things. This is "ownership", or your legal relationship with assets or things. Let's summarize. Death strips you of judicial capacity. You need Juridical capacity to own things. Conclusion is you can't own things if you're dead. This leads into the first problem I want to talk about: who owns the properties of a dead person? So let’s say Johnny has a 2 properties located in Quezon City. That’s where he lives with his family. If Johnny dies, here’s something to think about... who owns the piece of land after the moment of death? Would it be his wife, his children? These family members that the dead person leaves behind are "heirs". Later on, I will teach you how to identify who the heirs are. But for now, let's go back to the question of who owns the property. The ownership in the piece of land passes to the heirs at the moment of death. Yet, the heirs own it as a group, not as individuals. The property still needs to go through a specific process to be able to pass to them separately. To illustrate, "everyone" has an interest in property 1. "Everyone" has an interest in property 2. Does the eldest son own property 1? Can he take over property 1 and exclude everyone else from using it? Using our framework, the answer is no because everyone has an interest in it at that point. "Everyone" owns the property and has a legal interest in it. Later on, they need to decide how they will distribute the property. That way, they can put it to use in the way each deems proper. If the heirs decide that property 1 goes to the eldest son, then he gets to use it in whatever way he wants. But before then, they all have to play nice and share because they are all co-owners. But for now, let's talk about how the law treats the property while they own it as a group.

Who Holds Properties?

The law hates uncertainty and confusion. So it created rules around the handling of properties of a person who passed.

The law creates a fictional “person” which will own the properties in the meantime. This allows the heirs to sort out what to do with the properties. The legal term for this make-believe person is a “juridical person”. It’s an entity created by the law to achieve specific purposes. You already know Juridical persons by other names. Some examples of juridical persons include the Government and the State itself. It also includes Corporations, Partnerships and Cooperatives. You see these “entities” everywhere and you had no idea they were creatures of the law. It’s as if the law gave birth to a fictional entity that can perform legal actions in the real world. Let's apply the concept to our topic. Juridical persons that own dead people's assets are “estate”. To make it easier to understand, imagine that when Johnny died, a hologram of him appeared. That’s Johnny’s “estate”. This hologram now owns Johnny’s properties.

What can an Estate Do?

Johnny’s “Estate” has a function. This character can actually do things in the real world with legal effect. Here are some examples: If you owed Johnny money when he was still alive, his estate can chase you down and demand that you pay your debts. If Johnny owed you money when he was still alive, his estate can be a gentleman about it and pay you. If Johnny owned rental apartments when he was alive, you don't get a free pass once Johnny dies. His estate can come and collect your rent payment at the end of the month. If Johnny has been giving allowances to kids and family, his estate can handle that in the meantime. The government recognizes this estate. The BIR issues it it’s own Tax Identification Number. This is apart from Johnny's tin. Yes, it has its own records.

So as you can see, the law made provisions so that the world doesn’t stop when a person dies. With regard to the properties of the dead, life goes on. And the friendly “hologram” version of the dead person ensures that things go on as normal.

How long can it help me?

You may be thinking, “Attorney, if the “hologram” is so useful, then there’s nothing left to do. We can have the hologram take care of things moving forward. So we’re all good, right?” I wish things were that easy. The hologram is there to help you sort things out, but only temporarily. It is a stop gap measure so that things don’t get confusing or turn to chaos while the family is grieving.

Your mission as an heir

As much as the hologram has been helping you bring order to the properties, do not rely on it too much. You need to understand that the law intended estate to be a temporary measure. A stopgap or band aid. As you will see later, there is a deadline for the estate’s existence. You may be thinking, “Attorney, didn’t you tell me that the estate was there to help me? Why get rid of something that's good for me?” Think of the estate like medicine. When you take medicine in the right doses, it’s good for you. But if you exceed the recommended dosage, it can be dangerous. What was designed to help you can kill you down the line. The medicine turns to poison at some point. It’s exactly the same thing with estate. Accept the help the estate provides at the beginning. But at the same time, take action to move beyond the need for it. Moral of the story, don’t overdose on "estate reliance".

Why you should settle the estate as soon as possible?

The heirs should start acting to settle the estate as soon as possible. If not, there are 3 big threats looming on the horizon:

Threat 1: The Estate itself is a threat to you The law gave the estate a lifespan of 6 months. The lawmakers thought that 6 months was enough to put the deceased person’s affairs in order. What happens after the 6 month period? Since you've now gone past the deadline, the government should get compensation. Any payments due to the government will start to gain interest in favor of the government. “Well, that doesn’t sound too bad, Attorney. We can handle teeny weeny penalties.” Don’t be too sure. Interest payments may not sound like a big deal, but it is proportionate to how big the estate is. Big inheritance means more penalties. The BIR imposes 3 basic types of penalties, interest, surcharge and compromise penalties. The interest rate on unpaid estate taxes is 20% per annum until December 31, 2017. For unpaid taxes from January 1, 2018 will be 12% per annum under the new TRAIN law. The TRAIN law imposes twice the interest rate set by the Bangko Sentral ng Pilipinas. BSP rate is set at 6%, while the new TRAIN rate is 12%. The scary thing about interest is that there is no cap to it. It goes on and on and stops only until you settle the tax and its penalties. BIR can also impose surcharges. Generally surcharges are 25% of the estate tax. If we involve fraud into the mix, you’re looking at the increased amount of 50%. Also, the BIR may impose Compromise Penalties. These can further complicate things and add to your expenses if not managed. The BIR has the option to treate a violation of tax laws as criminal offenses. Once they get upgraded to that, it may involve imprisonment. But, the BIR treats that remedy as a last resort. Instead of having to go to criminal court, the BIR prefers Compromise Penalties. These are amounts set by the BIR, which you can pay so that the BIR will no longer pursue any criminal proceedings. As you can see, there will come a point that the penalties can become overwhemling. There have even been cases where the penalties exceeded the value of the estate itself.

When clients engage us, this is one of the first things we need to get out of the way. We help them handle the issue of penalties. Then then we find ways to bring these down through exemptions and deductions. I had a client named Mike who had no idea that his grandparents estate remained unsettled. When Mike brought the papers to our office, I explained how settlement works. Then, we did a preliminary computation. “Mike, don’t panic, but here’s what I have.” I slipped the yellow pad with the computations to him.

Can’t use the property

While the estate holds the properties instead of the heirs, it’s very difficult to move on. Imagine, your dad dies and leaves you with farmlands in the province. You live in Manila. Someone comes up to you and says, “Hey, we wanna put up a factory on your land. You interested in selling?” Of course you say yes! You have no intention of moving to the province, nor any plans of developing this plot of land in the future. But here’s the problem. You can’t transfer ownership to the new buyers until you settle the estate. You have to wrest the property from the estate before you can do anything with it. Like Mike in the last chapter, this is one big obstacle that we need addressed before the buyer pays. Or let’s take another scenario. You and your siblings stand to inherit a big lot in Quezon City. Your sister has friends who are successful restaurateurs. Their group now wants to put up a small commercial stall in the front. If you were to ask me if this is a good idea at that point, I would say no. Putting up the restaurant may lead to ownership issues down the line. For instance, who owns the restaurant? Would it be your sister and her friends, or your entire family and their friends? What are the shares? Who shoulders real estate taxes on the property then? The best solution in this case is to settle the property first. Next, you distribute the property to the designated heirs. Finally, everyone can move on.

Maintenance issues

Here’s another way the overdue estate can harm you. Somebody has to keep paying for its upkeep without it distributed in their name.

Supposing your dad dies, leaving you and your siblings several properties. Now, you and your siblings haven’t decided how you will be dealing with the properties. “Who gets the house in Manila? How about the farmland in Cavite? How about the beach house?” The law waits for no one. Even if you haven’t decided what to do with the properties, taxes and permits keep getting paid. For land particularly, that means annual real estate taxes, or amilyar. Next question among the siblings is of course, who shoulders that running expense? You? Your brother? Your sister? Your mom? Many family fights have erupted from this very question. Someone in the family has to take one for the team. The government doesn’t care, as long as it gets paid one way or the other. The real property tax is one among many expense needed to maintain assets. Also keep in mind business permits, business income taxes, and license renewal fees. Hope that you can see how the overextended estate can be demanding. It will definitely need resources to maintain.

Threat 2: Other People

The next threat you need to address is other people who may have an interest in the properties and assets. Let me share with you some nightmare scenarios we’ve seen from our past clients.

Stolen money or jewelries.

The easiest way the estate “bleeds” or loses some of the assets is when movable things get stolen. Cash, jewelries, keepsakes. Since they can move them anytime and it is hard to keep track, they are especially vulnerable. Settling the estate can save you from these things falling away. When you take inventory of everything and discuss who you want to distribute it to. By paying attention to the assets, you protect and safekeep it.

Titles mortgaged without your knowledge

I once had a client who had a tita who was fraught with integrity issues. When my client’s dad died, the tita sneaked into the house. Once inside, she opened the vault (she know the combination from the dad) and took all the titles. She then used the titles as collateral to secure personal loans. The kids took their time before they decided to settle the estate. As a result, it was years before this tita’s actions came to light. We had a hard time addressing these issues when the client asked for our help. This is because we needed to account for the titles to be able to proceed. The lesson here is that the more you delay, the more you risk losing or misusing the titles. Speaking of misuse, here’s the next threat…

Rental unit abuse

Another client held a string of apartment buildings. The parents let some caretakers occupy one of the units while they took care of the rest. When the parents died, this apartment row fell into disrepair. It got dropped from the radar of the heirs because they had bigger properties to mind. Here’s where it gets crazy. The family stopped receiving rent from the apartment rows. When asked, the caretakers said that the lessees moved out. The family says, “Caretakers, please help us find new renters in the area.” Caretaker assures them that he would. So the family sits content to wait. But years go by, with no remitted rentals. The family decides to visit the site. Approaching the site, they see that the property has fallen into disrepair. Paint was peeling off, and general signs of mismanagement are present. But the more shocking thing is that they they find people living in the rental units. They thought the property was empty all this time! They interviewed the current residents to see what was going on. It appears that they moved in right after the caretaker evicted the previous renters . The caretaker took out all the renters who were there when the parents were alive. He then replaced them with renters that the caretaker’s friends had referred. And they have been paying rent from day one. Problem was they were paying caretaker, and none of it reached the heirs.

Please note 2 things. First, the caretakers have been living rent free in one of the units there. Next, they have failed to remit any of the rentals for the last few years. The caretaker has been stealing rental income from the family for years. What's the lesson? Failure to deal with the estate when the time was right led to lost income. As a result, the family lost large income and risked losing possession of the property.

Illegal settlers

Another issue which may come up if you delay is squatters. You are vulnerable if the estate includes vacant lots in places which you don't get to see often. Most filipinos buy properties all over, with no immediate plans of making use of them. When these parents die, there is no proper turnover and some properties get forgotten. It is only when an issue crops up that the kids find out that their parents owned lots. When they go to see, they find out that the lots have squatters on them. Let me share something with you… as a lawyer, one of the hardest cases to handle we handle is eviction. You may have the legal right to evict, but implementing that in the real world isn’t that simple. I stay away from such cases as much as possible. Too much work for little results. You can avoid this problem altogether by settling the estate as soon as you can. Make a decision on how to use the property (or whether to sell it). In either case, make a decision to keep things intact and accounted for.

Threat 3: Biggest estate enemy is yourself

You now understand that the estate itself will eat you up alive if left unattended. Other people may take advantage of your confusion to use the properties themselves. Now, I’m about to tell you about the worst hindrance you have towards settling the estate. It’s yourself and your own family. There are plenty of reasons why you may be the biggest hindrance for the settlement of the estate.

First, you don’t have momentum

Settling the estate is a serious undertaking that you should allot time to. As a surviving heir, you are particularly positioned to do something about it. It’s your family’s estate, and family members should handle it. Well-meaning relatives or friends may want to help at the start. But they can be reluctant to because other may judge their actions as having an interest in the estate. “You’re doing this so you get a share!”, they may say. Nobody wants that, so family members should take the lead. Yes, there is a time to grieve, to be sad, and to recover, but it is your responsibility to come out of that at some point. The sooner, the better since your inaction will affect a lot of people.

Heirs are not immortal

In the natural scheme of things, we will all have to face our mortality at some point. What happens when another death compounds a previous unsettled death? The previous estate should be settled before the next estate could be processed. Why? Consider this for the second estate. We have no idea what properties to inventory because the previous estate hasn’t transferred anything yet. We need to know what assets we are considering as part of the estate before we can proceed to the next phases. Your vulnerability as a living, human being works against you. Any future death in the family will complicate previous unsettled estates. The wise thing to do is to wrap up estate matters when you are able so they don't pile up. Finally, there’s the confusion on what your loved one wanted your family to do with the assets in the first place. Memory is a fragile thing. As time goes by, you find it difficult to remember what your departed loved one intended. You hear stuff like, “what about the property in Cavite? Is that for Junior? What about the commercial unit in Manila? Your sister said she wanted to continue that. But I’m not sure if it was for your kuya.” Chances are, if not all the siblings get what they are expecting, that would be a cause for heated discussion.

Besides, circumstances change. Supposing that when your dad died, your brother was doing well. A few years later, his business goes bankrupt. Now, he wants a monster share of the inheritance to pay off his creditors. You resist. Now you guys are in a deadlock. The situation would have been different if you completed the settlement on time. You are then responsible for being custodians of your own shares. You are not relegated to being vultures intent on getting more. That’s not how it works.

What are the 2 kinds of settlement of estate?

Now let’s talk about the 2 kinds of ways you can settle an estate. There is the judicial or extrajudicial settlement of estates. Judicial means that you settle the estate “in the court” or with the help of a judge. Extrajudicial means “out of court” or without the intervention of a judge. When do you use each? When the heirs cannot come to an agreement on how to distribute or settle the estate, they have to go to court. The judge will serve as a referee among them. The judge would take a look at the evidence and apply the law in distributing the assets. Compare this with the extrajudicial method. The distribution of the deceased’s assets are done “out of court” . Why out of court? Because they heirs do not need a referee between them. They are able to come to an understanding on how they want the assets distributed. There is no conflict, and everyone is cooperating with each other. As much as possible, we always encourage our clients to pursue this method.

How to move beyond estates?

This leads to the next question, "What action should I take? How do I move beyond the estate?" As a responsible survivor or heir, your main job is not only to disengage with the estate. Your ultimate aim is to “kill” the estate as soon as possible. You need to take out the hologram. And how do you "kill" an estate? The legal term is "settling the estate of the deceased".

When you settle an estate, there are several things that happen. First, you determine what properties the deceased left behind. Third, you decide who gets them. Finally, you process the paperwork to transferring ownership to the heirs you identify.

Our own process for helping clients settle estates extrajudicially

After helping many families settle estates extrajudicially, we’ve noticed a certain pattern in the flow of work. We decided to document these patterns to make a roadmap towards the settlement. The framework also makes it easy for others to follow along and understand the process. We call this the 3D method for extrajudicial estate settlement because we have to hit 3 milestones that start with the letter D:

Phase 1: Determine

In this phase, we work with the client to draw the boundary lines of the estate. It has 3 sub-levels. The first boundary we help clients determine is the extent of the estate. It’s the composition. What stuff did the deceased leave? Land? Buildings? Cash? We go thru a checklist to identify what kinds of properties the deceased had. We use trigger words to help the heirs account for everything the deceased owned. If you want to transfer the property to the rightful heirs, you have to account for them. The next boundary is who exactly the heirs are. Under the law, there are specific rules on how to identify who the heirs are. I have this learning aid for my clients that I used back in law school. I used it to remind myself on how inheritance flows within the family tree. Imagine that you have a ball in your hand. When you let it go, that’s how the the inheritance flows. It falls down, it bounces up, then goes sideways. In the family tree:

First you hold the ball - you look at the same level. That corresponds to the spouse. Then you drop the ball - this corresponds to the descendants or the kids. Then the ball bounces upwards - this corresponds to the ascendants. If the deceased did not have a spouse and kids, then their parents get to inherit because they’re next on the list. Then the ball bounces sideways - if there are no surviving parents as well, then the deceased’s brothers and sisters stand to inherit. Then the ball bounces further away from you - If there are no immediate brothers or sisters, then the law considers more distant relatives.

The spouse and the kids exclude any of the other possible heirs. Again, these rules are general rules. There are many other considerations that we look at to come to a determination on who the heirs will be. We recommend you consult your lawyer to help you apply the succession provisions. They can be complicated. Furthermore, there are dire consequences if you exclude any proper heir. You may end up getting sued. If you need help sorting out the properties or identifying the heirs in your particular case, we can help. We offer a free estate readiness checkup which we describe at the end of this report. Set a free appointment at www.legalguide.ph/estate and get help.

Phase 2: Decide

We've laid out the boundaries of the estate and the identity of the heirs. Thenext phase is to decide how to distribute. In this phase, you gather all the heirs and decide how you want the property distributed. The heirs should understand what their default share is. They can then make informed choices about how they will distribute the estate among them. You may be asking, “Attorney, did I hear you right? You mean we have a say in how to distribute things?” Yes, you have a say in this. Here’s how it works. The law provides default rules on how to give to the heirs. But if all the heirs agree on a modified distribution scheme, they are allowed to do that by the law. For example, the law states that the estate will be equally distributed among 4 heirs. 3 of the heirs are doing financially well and they want to help out the 4th sibling who is struggling.

They have a choice here. They can opt to give everything to the struggling sibling. Or they can opt to get only half of what they’re entitled to and give half to the sibling. The possibilities are endless. The only requisite is that they agree. The most important thing we remind clients at this point is that: 1. If you decide to change the distribution, everyone understands what they are doing. Nobody should be taking advantage of any other heir. 2. Any modification should have legal documentation for smooth processing later on.

This is where a legal advisor will be invaluable. A lawyer will be the referee who helps explain the default distribution. He will also document any modifications. You can reach out if you need help understanding the default distribution under the law. We offer a free estate readiness checkup which we describe at the end of this report. Set a free appointment at www.legalguide.ph/estate and we’d be happy to clarify things with you.

Phase 3: Distribute

At this point, we’ve determined the extent of the estate and decided how to divide it. Our job is now to carry out the actual paperwork which will bring our plan to life. We now deal with the relevant government agencies to transfer the titles. Again, this is where an experienced legal team becomes invaluable. We do this for a living. We move within the system. We know how to format the paperwork to make it easy for the evaluators to approve and how to support the process. You can outsource this to our team. Set an appointment at www.legalguide.ph/estate so we can create a plan for you.

What to expect once the estate is settled

Once we’re done with the settlement of the estate, we compile all the documents and send them over to the client. We give instructions on maintaining the newly issued titles and certificates. You should do the same if you intend to do this on your own.

Estate settlement can be complicated and costly if you don’t know what you’re doing.  But it doesn’t have to be. Reach out and ask people around you who have gone through the process to assist you. It can be friends or family who have experience in the process.

If you need more guidance

1. Read our articles on www.legalguide.ph 2. If you want to ask my team for help, set a free initial consultation by going to: www.legalguide.ph/estate and setting an appointment thru on that page. We have you go thru a quick assessment and help you create an action plan to move forward with estate settlement. Hope to talk to you soon! - Atty. Zag and Atty. Ramon

BOOK YOUR CONSULTATION