Rethinking our relocation to Puerto Rico because of forced heirship

mrwetzel wrote:

My husband and I are in Puerto Rico now (our third trip this year) on a house hunting trip.  We thought we would be moving to Puerto Rico within the next year. That was until we learned about the forced heirship laws.  We both have children from previous marriages.  My understanding of forced heirship is that if my husband were to die, then his children would get 1/3 of our estate, his parents would get 1/3 of our estate, and I would get 1/3 of our estate.  This is unacceptable to both of us.  Does anybody know a way around this?  This will definitely be a deal breaker for us.  We have dealt with several realtors here in Puerto Rico, real estate attorneys, and tax planning people, and nobody ever mentioned this to us.  We just happened to read about it on the web. We have spent a lot of time and money here trying to find our new home.  We hate to give it up, but looks like we might have to.   Thanks to anyone here who might have some insight into this.

My wife and I just went to an attorney, in San Juan, who went over these laws to us. In the event of the death of your spouse: yes, there are three "3rds", indeed, but if there is only one son, he gets 15%, not 33%. The wife gets 81%. If there are more children, then that cuts into that last 33%. If you want the name of the attorney we spoke to, I'd be happy to give you his contact information.

frogrock wrote:

You need an attorney in Puerto Rico to write your wills. I recently did this.

Listen to her, she's a smart lady!

NomadLawyer wrote:

What many wealthy people do in civil law (forced heirship) jurisdictions is set up an offshore grantor trust in, for example, the Cayman Islands. They then “settle” the trust by placing the assets they don’t want to be subject to forced heirship into the trust and physically outside of the forced heirship jurisdiction. This requires, at a minimum, an offshore custodian. There are thousands and thousands of Cayman Islands trusts “settled” by Venezuelans, for example.

This method doesn’t work so well for PR, however, because if the beneficiaries of the offshore trust are mandatory (as opposed to discretionary), or are spouses of the grantor (whether manadatory or discretionary), and are US citizens or reside in the US, then they are subject to the US Grantor Trust Rules and obligated to make certain tax filings and pay tax concerning the offshore trust. Criminal and civil penalties are steep for non-compliance.

Regarding PR’s forced heirship rules, only a portion of the estate can be placed in a will outside the forced heirship rules. Likewise, most gifts made by the decedent (the one who died and left property) to beneficiaries are also captured by the forced heirship allocation rules, meaning you can’t get around the allocation rules by gifting assets to Beneficiary A (but not B) before you die so that the pie to be divided between A and B upon your death is smaller than it otherwise would have been.

I believe that forced heirship is what contributes to having so many derelict properties in PR, even high value properties in Old San Juan, for a host of reasons.

My comments above are for general educational purposes. See a Puerto Rican attorney for actual legal advice.

Great contribution from a qualified person.  Can you expand on a couple of points:

- The testamentary intent of most married couples of ordinary means would be that their property pass exclusively to their surviving spouse (e.g., the homestead).  Is my understanding correct that there is no exact specified percentage of the decedent's assets that must go to children / heirs?  How much discretion does the court have to determine whether heirs have been adequately provided for?

- Can heirs/children waive in advance any forced rights to avoid muckig up their parents' estate?

- Does PR have a developed trust law that would permit holding of assets in a PR trust (for simplicity of tax reporting and administration)?  Does it have an LLC body of law as an alternate owner of property to avoid forced heir rights?

I totally understand that no two situations are the same and that you are providing general, not specific advice to any particular situation, least of which mine.

mrwetzel wrote:

Thanks all for your input. We have consulted an attorney in San Juan and an attorney in Mayaguez with the question, "Is there any way that our PR property could be transferred 100% to my surviving spouse upon my death?"   Both answers were absolutely not.  For us, this is unacceptable.  Guess we'll look elsewhere for our retirement home. Good luck to all of you lucky dogs getting live here in beautiful Puerto Rico.

mrwetzel wrote:

Thanks all for your input. We have consulted an attorney in San Juan and an attorney in Mayaguez with the question, "Is there any way that our PR property could be transferred 100% to my surviving spouse upon my death?"   Both answers were absolutely not.  For us, this is unacceptable.  Guess we'll look elsewhere for our retirement home. Good luck to all of you lucky dogs getting live here in beautiful Puerto Rico.

Not that my agreement matters or carries any weight, but everyone seems to agree that this advice is undoubtedly correct. 

But, I am wondering as I have in the past why the advice stops there.  Did they not recommend or propose establishing a PR trust?  Clearly this moves the price from $100 for a couple of simple Wills to maybe a $1,000 to create and register a proper irrevocable trust. Frankly, (other than perhaps the irrevocable part) this is standard estate planning these days in the states.  (Apparently PR does not recognize revocable trusts the way the states do as a means of avoiding transfers at death.)

Anyway, I found this article from a PR law firm.  They state:

"As a community property and forced heirship jurisdiction, individuals domiciled in Puerto Rico are limited to how they may distribute their  estates. Working within these limitations, we provide clients with solutions that fulfill their goals for their assets – and plans for the future."   

That's certainly a bold statement!  This is a link to PR trusts from their website: 
http://www.mcvpr.com/media/site_files/1 … %20Act.pdf

I would like to clarify this statement from the article:

A testamentary trust may be created over the one third legal (“legítima estricta”) and the one third improvement (“mejora”) portions of an estate belonging to heirs who are minors or disabled, as long as they are designated as the sole beneficiaries and the trust does not extend beyond the majority age of the heirs or the termination of the disability, respectively.

I read this as only applying to a "testamentary" trust, that is, a trust established by the decedent through his or her Will upon death.  In other words, the trust has to be set up during the couples' lifetime and not upon their deaths.  You cannot wait until you die to get around forced heirship in your Will.

So, I would not give up on PR as your retirement destination without determining the ease and suitability of a trust set up in your lifetime to own the real property.  Maybe you have.  Good luck

frogrock wrote:

Have you compared how much will be taken by the Federal and State government for inheritance taxes, as opposed to the inheritance taxes in Puerto Rico?

Here's a thought from someone (me) who will probably eventually die and chooses to live in Puerto Rico.  Forgive me for the somewhat sarcastic tone, but  I will not  try to control  what happens on earth after I have moved  to the Great Beyond.  I will live where I want to live.  My heirs are free to do the same.

These days with the federal estate tax at over $10 million and MANY states having no estate tax at all or very high exemptions, this is only a concern for folks that frankly have long ago seen the need for estate tax avoidance.

The problem here is that the simple approach of Wills transferring property to the surviving spouse (or, more commonly, a pour over provision to their revocable trust) upon death of the first to die just doesn't work in PR.

mrwetzel wrote:

My husband and I are in Puerto Rico now (our third trip this year) on a house hunting trip.  We thought we would be moving to Puerto Rico within the next year. That was until we learned about the forced heirship laws.  We both have children from previous marriages.  My understanding of forced heirship is that if my husband were to die, then his children would get 1/3 of our estate, his parents would get 1/3 of our estate, and I would get 1/3 of our estate.  This is unacceptable to both of us.  Does anybody know a way around this?  Thanks to anyone here who might have some insight into this.

Yes... there is an easy way around it... keep your money invested and rent a place.  You can still enjoy your dream and you never know, you may want to move somewhere else and not be tied down by having to sell a home...