Puerto Ricans: Non-U.S. Persons With A Lower Tax Exemption

by Estate Planning Attorney Nydia Menendez

Our great forefather, Benjamin Franklin warned that “in this world nothing can be said to be certain, except death and taxes.” One good example is the Estate Tax.

The Estate Tax is levied on the value of a person’s worldwide assets at the time of death. Currently the Estate Tax has a $10 million exemption; adjusted for inflation the exemption is $11.7 million in 2021 (which is set to be reduced to $5 million by 2026, if not sooner). But, as is the case with all tax exemptions, exemptions have exceptions. A good illustration of this is the application of Estate Taxes to Puerto Ricans.

As most people know, Puerto Rico is an unincorporated U.S. Territory located in the Caribbean Sea. People born in Puerto Rico are United States citizens; they carry U.S. passports, the same as anyone born in the U.S. mainland. However, when we look at Puerto Ricans from an Estate Tax standpoint, citizenship hardly matters.

For example, if a person born in Puerto Rico resides in the United States, the application of the Estate Tax is the same as for any other U.S. citizen. This means a Puerto Rican born in Puerto Rico will enjoy the benefit of the Estate Tax exemption as any other American citizens – $10 Million, together with adjustments for inflation.

This is in stark contrast, however, to what happens when the person is residing in Puerto Rico and the only reason why they have their U.S. citizenship is because they were born in Puerto Rico. In this case, they are considered and taxed as non-resident aliens. Meaning that the Estate Tax will only be levied on the assets they own within the United States (“U.S. situs” assets), such as real estate.  But, just like non-U.S. citizens, they will have a considerably lower Estate Tax exclusion, only $60,000.

In other words, for persons born in Puerto Rico, to enjoy the enhanced Estate Tax exemption, they must also reside in the U.S. mainland.

Let’s look at the following scenario: Ana was born and raised in Puerto Rico; therefore, she is a U.S. citizen. She has lived in San Juan, Puerto Rico for 45 years of her life; she even owns a restaurant there. She decides to invest and buy a property in Orlando, Florida, valued at $1 million. She also has assets in Puerto Rico and in two other countries around the globe worth $6 million total. If Ana passes away under these circumstances, she will owe federal Estate Taxes on $940,000 – the value of her property in Orlando, minus her $60,000 exclusion.

However, if Ana had relocated to Florida, and died as a Florida resident (instead of a Puerto Rico resident), she would owe federal Estate Tax on $7 Million, the value of all her property worldwide. But she would have an exclusion of $11.7 million (as of 2021). Therefore, she will not owe any Estate Tax.

Hence, for Puerto Ricans the Estate Tax impact will depend on whether they are residents in the United States or in Puerto Rico. If they are residing in the United States, for purposes of Estate Tax they will be treated just like any other U.S. citizen. But, if their residence is in Puerto Rico, their U.S. citizenship will not shield them from being taxed like a non-U.S. person.

How Can You Get Started with Your Estate Plan?

If you want to learn more about how to plan for your future to make sure you remain in control of your decisions while leaving a lasting legacy for your family, then we invite you to call our office at (954) 963-7220 to speak with a member of the Menéndez Law Firm. You may also want to watch the video series on our YouTube channel where we talk about Estate Planning in detail. Or if you would like to join us for the next live Wills, Trusts and Estate Planning webinar on Zoom you can register at no charge on our website www.menendezlawfirm.com

Nydia Menedez Nydia Menéndez
Estate Planning Attorney
Menéndez Law Firm
2699 Stirling Road, Suite B200
Fort Lauderdale, FL 33312
Tel.: (954) 963-7220
Fax:  (954) 963-7232
menedez law firm

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