Puerto Rico is a territory of the United States. Those born in Puerto Rico carry U.S. passports. But, from an estate planning perspective, they hold a unique place.
If a Puerto Rican is living in the United States, they are estate taxed just like other U.S. citizens. In other words, their taxable estate includes their worldwide assets, no matter where their assets are located. They also have the same estate tax exclusion as other U.S. citizens and residents, $11.58 million in 2020.
However, if they are living in Puerto Rico and if they only have U.S. citizenship due to their birth in Puerto Rico, then they are taxed as non-resident aliens. In other words, they are taxed only on their U.S.-situs assets, like real estate in the U.S. However, they would have a dramatically lower exclusion of only $60,000. This is the same as those who are non-resident aliens. By comparison, someone born in the United States, even if they live outside the United States, is taxed on their worldwide assets and gets an exclusion of $11.58 million.
Let’s look at an example:
Maria was born in Puerto Rico and it’s only due to this that she has a U.S. passport. Maria lives in Puerto Rico and does well for herself. Maria buys a vacation home in Miami worth $1 million. Maria has assets in Puerto Rico and elsewhere outside the United States worth $4 million, as well. If Maria dies under these circumstances, Maria will owe a federal estate tax on $940,000, the value of her vacation home in Miami, less her $60,000 exclusion.
Maria decides to move to Miami and live in what had been her vacation home. If Maria dies after the move, she would owe federal estate tax on $5 million, the value of all of her property worldwide. However, she would have an exclusion of $11.58 million. So, she’d owe no estate tax.
Puerto Ricans are special. They are estate taxed in a unique way, depending upon whether they are living in the United States or living in Puerto Rico. While living in the United States, they are treated just like any other American citizen. But, while they are living in Puerto Rico, they are treated differently. Puerto Ricans should be mindful of this difference and the estate tax burden they might owe by owning U.S.-situs assets (such as real estate in the U.S.) while they are living in Puerto Rico.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128