Inheritance tax and inheritance law in Puerto Rico

Taxation Researcher | December 05, 2020

The Global Property Guide looks at inheritance from two angles: taxation, and what inheritance laws apply to foreigners leaving property in Puerto Rico : what restrictions there are and whether making a will is advisable.

INHERITANCE TAX


How high is income tax on residents in Puerto Rico?


ESTATE TAX

Puerto Rico levies estate and gift taxes on the net taxable value of the property transferred at death or by gift at rates ranging from 18% to 50%.

Nonresidents are subject to estate tax only on property located in Puerto Rico. Residents are subject to estate tax on all their property.

The taxable estate is the gross estate value less debts of the decedent, funeral expenses, charitable bequests, and fixed exemption depending on citizenship status of the decedent:

  • US$30,000 for a nonresident US citizen
  • US$10,000 for a nonresident alien (non-US citizen)
  • US$400,000 for residents

INHERITANCE LAW


What inheritance laws apply in Puerto Rico?


Puerto Rico´s inheritance laws affect everyone who owns real estate in Puerto Rico

The main law regarding estate succession and real property rights is the Puerto Rico Civil Code. A foreign property owner is not treated differently, nor is any distinction made under Puerto Rico law between foreigners of different nationalities or religions.

The general principles governing jurisdiction over inherited property are:

  • Real property located in Puerto Rico is regulated by the laws of Puerto Rico. If the foreign law states that the applicable law for real property located in Puerto Rico is the law of the jurisdiction where the owner resides, such disposition is not valid under Puerto Rico law. The Registry of the Property for Puerto Rico will not register a real property transfer ordered by a foreign court without going through Puerto Rico courts.
  • Personal property (i.e., all property except real estate) is governed by the law of the jurisdiction where the deceased person resided or was domiciled. If the foreigner´s national law states that the applicable law is Puerto Rico law, the judge must apply Puerto Rico substantive law. Puerto Rico courts recognize foreign judicial decisions and if an inheritance process was handled by a foreign competent judge, then the decision regarding property ownership must be executed by a Puerto Rico court.

Inheritance issues in Puerto Rico are handled by a civil court which applies formal written procedures. Any court decisions rendered in the deceased´s last domicile outside Puerto Rico must pass through Puerto Rico courts for execution. This process can be long, even if there are no conflicting issues, and includes the request and issuance of an inheritance tax lien release issued by the Puerto Rico Treasury Department. All the property of the deceased located in Puerto Rico, real or personal, is subject to this tax lien created, by operation of law, immediately upon the person´s death. The estate tax lien release lifts the lien and allows the transfer or conveyance of the encumbered property.

An inheritance procedure without conflicting interests between the heirs may last from twelve to eighteen months.

Puerto Rico inheritance law includes forced heirship.

Puerto Rico laws grant rights of forced heirship to the children of the deceased. In the absence of children, or other descendants of such children, then to the parents of the deceased. In the absence of children, grandchildren or other direct descendants, the parents are considered forced heirs. Foreigners cannot avoid the rules of "forced heirship" concerning an estate consisting of real property located in Puerto Rico, because the inheritance of such property is regulated by the laws of Puerto Rico.

In inheritances concerning children and a will (testate successions) the forced heirs are entitled, in equal proportions, to one-third of the Puerto Rico Estate (the "legitimate portion"). Another third of the Puerto Rico Estate (the "betterment portion") is distributed in proportions determined by the testator in the will. The testator is free to bequeath the remaining third of the Puerto Rico Estate (the "free disposition portion"). In the absence of a specific testamentary disposition, however, the remaining third goes to the forced heirs. Thus, the forced heirs share equally in the Puerto Rico Estate, except to the extent any heirs are preferred through the will in the betterment or free disposition portions. In the absence of a will, the forced heirs inherit the entire estate in equal proportions.

In inheritances where there are no children, but either one or both parents of the deceased are alive, then the parents are forced heirs. If there is a will, the forced heirs are entitled, in equal proportions, to one-half of the Puerto Rico Estate (the "legitimate portion"). The testator is free to bequeath the other half of the Puerto Rico Estate (the "free disposition portion") as he/she desires. In the absence of a specific testamentary disposition, however, the remaining half goes to the forced heirs. In the absence of a will, the forced heirs inherit the entire estate in equal proportions.

The surving spouse of the testator also has benefits; under both testate and intestate succession, namely, a usufruct over a portion of the estate. The usufruct grants the surviving spouse the right to receive the income, rents and dividends derived from a portion of the estate.

In the absence of children, grandchildren or direct descendants of such grandchildren, then the estate goes to the parents of the deceased. In the absence of parents then the estate goes to the closest blood relatives (brothers and sisters, nephews and nieces). In the absence of these relatives, the estate goes to the spouse of the deceased. In the absence of a spouse, the estate goes to any other living relative. In the absence of all the aforesaid heirs, then the estate goes to the Commonwealth of Puerto Rico for the benefit of a "Fund for the University of Puerto Rico".

It is uncommon for foreigners to write wills in Puerto Rico.

Even in instances where the foreigner owns real estate in Puerto Rico, he/she usually writes a will in the jurisdiction where he/she resides. Advice is normally obtained from a Puerto Rico lawyer to ensure a foreign will complies with Puerto Rico law in the disposition of real estate e.g. the will must obey the rules of forced heirship.

If a foreigner wants to make a local will, his/her presence in Puerto Rico is required, with the intervention of a notary public. The notary advises the testator of the legal formalities the will.

The Puerto Rico Civil Code also recognizes the validity of a holographic will executed in the handwriting of the testator. A holographic will can be written by a foreigner in his or her own language outside Puerto Rico. It must comply with the formalities and substantive laws in the Puerto Rico Civil Code.

If a person dies without a will, a lawyer in Puerto Rico must file an action in court to have the heirs of the deceased person declared as such. During the inheritance process in Puerto Rico, heirs will not be able to sell, convey or transfer the property located in Puerto Rico. Foreign heirs must present birth certificates (with all the legal formalities and legalizations needed to be effective in Puerto Rico), among other documents.

Gifts of property prior to death must take forced heirship into account.

Puerto Rico law prohibits the gift or donation of any property that deprives a forced heir of his/her rights to an estate (i.e., the legitimate or betterment portions).

Ownership of property in Puerto Rico is determined by registered rights.

Puerto Rico law looks at registered ownership and registered rights to determine the ownership of real property. Ownership rights of personal property are governed, generally, by the contracts which grant such rights.

The owner of the real estate is the person or persons registered in the Property Register of Puerto Rico. If the person is married but the spouse does not appear as joint owner in the register, then the registered owner may transfer, sell or give the land to anyone. If the spouse appears as the joint owner in the register, the presumption in Puerto Rico is that the property is community property and may be sold or conveyed only with the consent of the registered owners.

A guardian must be appointed to manage the inheritance of children.

If property (or part of it) is inherited by a minor, or children not of legal age, or others not deemed an adult for legal purposes, and such person is not under the guardianship of a parent, grandparent or a legally appointed guardian, then a guardian must be appointed to manage the property. A guardian may be appointed in the will to manage the property. In any event, the sale of the real estate where a minor has a participation must be authorized by a civil court in Puerto Rico and such court must be persuaded of the advisability of such sale and must approve how the proceeds of the minor´s participation in such real estate will be applied or disbursed.