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Will the Survivorship Agreement survive?

(Article published in the Nov 26,2004 issue of TODAY, Business Section)

If only for its sheer simplicity, the survivorship agreement stands out as an ideal estate planning tool.  A survivorship agreement, in its bare essentials, is a contract whereby the parties, usually only two, agree that (a) certain properties, usually money in a bank account, are theirs in common and (b) upon the death of either of them, the said properties shall belong to the surviving party.

Since it is a contract, not a donation nor a will, it is not subject to tedious formalities.  No need to institute court proceedings, like probate, to make it effective.  Unless the property is real estate, there is no need to register.  All that is required is for the entity in possession of the property to respect the agreement and treat the survivor as the absolute owner effective the demise of the first to die.

Since 1937, the Philippine Supreme Court has recognized the validity of survivorship agreements.  In the early case of Macam v. Gatmaitan, 36 O.G. 2175, the Supreme Court  considered a survivorship agreement as an aleatory contract, valid under Section 1790 of the old Civil Code.  It was no more than an agreement  whereby the “parties reciprocally bind themselves to give or do something as an equivalent for that which the other party is to give or do in case of the occurrence of an event which is uncertain or will happen at an indeterminable time.”  Macam v. Gatmaitam involved a house of strong materials bought with the money of Leonarda Macam and a Buick automobile and certain furnitures which belonged to Juana Gatmaitan.  When Macam died, the house belonged to Gatmaitan. 
  










In 1942, in Ana Rivera v. People’s Bank and Trust Company (73 Phil 546), the Supreme Court, with Justice Ozaeta as ponente, extended the same blessings to what is popularly known as the “and/or” account with a survivorship feature.  In that case, the parties opened a bank account and stipulated that the moneys in the account, without consideration of their previous ownership, shall be the property of both of them as joint tenants, payable to either of them during their joint lives, and, upon the death of one, belong to and be the sole property of the survivor. 

Justice Ozaeta rejected the argument that the arrangement was invalid because it was in fact a donation mortis causa which had to follow the requirements of a will.  He observed that such a contention is premised on the assumption that only one of the parties owned the monies in the account.  Since the facts showed that both of them contributed to the account, then notion of a gift, albeit mortis causa, could not be pursued any further.

Almost fifty years later, the Supreme Court strengthed the case for an “and/or” account with a survivorship agreement.  The case of Vitug v. Court of Appeals (183 SCRA 755) involved the question of whether the money  of a couple in an “and/or” account with survivorship stipulation is to form part of the decedent’s estate for purposes of dividing his property among his heirs or whether it belonged to the survivor and not part of the decedent’s inheritance.

To include the account in the estate, the claimants argued that the agreement was a donation either mortis causa or inter vivos.  If the former, it was assailed as invalid because it did not follow the formalities of a will; if the latter, it was claimed to be void, for being between husband and wife. 

Following Justice Ozaeta, ponente Justice Sarmiento, in maintained that stipulation of survivorship in the “and/or account”  the agreement was not a donation mortis causa because to be considered as a donation mortis causa, the property must  pertain only to the giver, or testator.  The money in account was conjugal.

At the same time, the provision on survivorship could not be considered a donation inter vivos, because the vesting of full ownership in one of the parties was clearly intended, not to take effect during the parties’ lifetime, but instead to occur upon the other’s death. The “survivor-take-all” feature of the account, the Supreme Court observed., was “a mere obligation with a term, the term being death”  that determined what was to be done upon its happening.

This type of agreement, the Supreme Court reiterated, was permitted under Article 2010 of the new Civil Code.

With Vitug, the “and/or” account with survivorship because a popular tool for the transfer of money from the first to die to the survivor.  It seemed such a facile method of circumventing the rule in the Tax Code that prohibited the withdrawal of a decedent’s money from the bank, until the estate tax had been paid.  The argument seems flawless: since the funds, when the decedent died, by such death became owned by the survivor and did not form part of the decedent’s estate for inheritance purposes, then the money is not part of the decedent’s taxable estate, i.e., not subject to the estate tax, and therefore free from the no-withdrawal rule in the Tax Code.

But not it did take long for water was be doused on the arrangement. A ruling issued by the Bureau of Internal Revenue in the second quarter last year, Rev. Ruling No. 010-2003, exposed the flaw of solving tax issues with civil law concepts.  The Commissioner ruled that while the transfer is considered valid for civil law purposes, it is nevertheless to be considered as a “transfer in contemplation of death” for tax purposes and is subject to the estate tax under Section 85(B) of the Tax Code.

The logical consequence is that the funds in the “and/or” account with survivorship, pursuant to Section 97,  cannot be withdrawn by the survivor unless the Commissioner has certified that the proper estate taxes have been paid thereon.  Only Php 20,000 may be withdrawn without such certification, but still, only upon authorization by the Commissioner.

Unless the ruling is reversed, by the Commissioner himself (which is unlikely) or by the courts, an “and/or” account with survivorship stands in the same footing, estate tax-wise, as an “and/or” account without a survivorship feature.

If so, who would want to bother with it?

 

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