The Setup: Two Incredible Opportunities That Can Sabotage Each Other
Friends, let’s talk about one of the most elegant, and potentially treacherous, intersections in the entire tax planning universe: Puerto Rico residency under Act 60 and trust-based estate planning.
Here’s the deal: Puerto Rico’s Act 60 Individual Resident Investor program offers bona fide residents a 0% Puerto Rico income tax rate (going to 4% next year) on interest, dividends, and post-relocation capital gains thanks to the magical combination of Puerto Rico’s tax incentives and IRC Section 933, which excludes Puerto Rico source income from U.S. federal income tax for qualifying residents. That’s the income tax side, and it is magnificent .
But then there’s the estate tax side. And if you think your trust is protecting you the way it did back in California or New York, you may be in for a rude awakening. (Cue dramatic organ music.) The rules governing how trusts interact with Puerto Rico residency for both income tax preservation and estate tax management are among the most nuanced, penalty-laden, and misunderstood corners of the tax code.
Let’s walk through it carefully. So, grab an espresso. This is a long one.
Act 38-2026: The Latest Chapter in the Puerto Rico Story
Before we dive into trusts, a quick legislative update for context. As of March 2026, Puerto Rico Governor Jennifer González Colón has signed Act 38-2026 , which extends the Individual Resident Investor program through 2055 and introduces some critical changes:
- Existing decree holders : Retain all current benefits—0% rates on interest, dividends, and post-relocation capital gains until at least January 1, 2036
- Applications submitted by December 31, 2026 : Grandfathered under the 0% structure for the life of the decree (initially 15 years, extendable another 15)
- Applications after January 1, 2027 : Subject to a new 4% preferential rate on interest, dividends, and capital gains. Still better than the mainland, but no longer free money
- New 6-year prior non-residency requirement for post-2026 applicants
- Mandatory primary residence must be registered in the Puerto Rico Property Registry, and can be held in the individual’s name, jointly with a spouse, or in a trust described under Section 2022.07 of the PR Incentives Code
That last bullet is your first hint that Puerto Rico has specifically contemplated trusts within its Act 60 framework. Let’s build from there.
The Trust Landscape for Act 60 Residents: Three Regimes You Must Understand
When a U.S. citizen relocates to Puerto Rico and holds assets in a trust, or wants to create one, they’re navigating three simultaneous and overlapping legal frameworks : Puerto Rico tax law, U.S. federal income tax law, and U.S. federal estate and gift tax law. Get any one of these wrong and the consequences range from “oops, we owe taxes” to “35% penalty on $20 million in trust assets.”
Framework 1: Puerto Rico Tax Law and Act 60 Trust Provisions
Act 60, Section 2022.07, specifically allows Individual Resident Investors to hold assets through revocable or irrevocable trusts treated as grantor trusts for Puerto Rico tax purposes . Puerto Rico also recognizes foreign trusts duly created under foreign laws as valid.
The critical point here: under Puerto Rico’s framework, as long as the trust is structured as a grantor trust with the Act 60 decree holder as grantor, the income of the trust flows through to the grantor who then applies his or her Act 60 exemptions to that income. This is clean, elegant, and exactly how it should work. Grazie mille , Puerto Rico.
Framework 2: U.S. Federal Income Tax and the Foreign Trust Trap
Here’s where things get molto complicato, miei amici. And I cannot stress this enough: this is the landmine that blows up more Act 60 plans than anything else.
Under U.S. federal law (IRC §7701), a trust is classified as either domestic or foreign based on a two-part test:
- The Court Test : A court within the United States must be able to exercise primary supervision over the administration of the trust.
- The Control Test : One or more U.S. persons must control all substantial decisions of the trust.
Here’s the Holy cannoli moment: For purposes of the Court Test, “United States” means only the 50 states and the District of Columbia. Puerto Rico is NOT included.
That means if you move to Puerto Rico and begin administering your revocable living trust from your home in San Juan, you may have inadvertently converted your domestic trust into a foreign trust even though you’re a U.S. citizen living in a U.S. territory.
The penalty exposure is catastrophic:
- Failure to file Form 3520 (foreign trust disclosure): penalty of the greater of $10,000 or 35% of the gross reportable amount
- Failure to file Form 3520-A (annual trust accounting): penalty of the greater of $10,000 or 5% of the trust’s gross assets annually
On a $20 million trust, that’s a potential $7 million penalty on day one—and $1 million per year thereafter if the problem goes unaddressed.
Framework 3: U.S. Federal Estate and Gift Tax — The NRNC Wild Card
Now we need to talk about the aspect of Puerto Rico residency that surprises virtually everyone who hasn’t done deep digging into this: the estate tax treatment of Puerto Rico domiciliaries .
Under IRC §2209 and IRC §2501(c) , individuals born or naturalized in a U.S. territory including Puerto Rico, are treated as “non-residents not citizens” (NRNC) for federal estate and gift tax purposes. This classification carries a stunning set of consequences:
The Bad News: Only a $60,000 Estate Tax Exemption
While mainland U.S. domiciliaries currently enjoy an exemption of approximately $15 million, NRNCs get only $60,000 in estate tax exemption for U.S.-situs assets. On assets above that amount, the estate tax rates top out at 40%.
The Good News: Limited Exposure to U.S. Situs Assets Only
NRNCs are taxed only on U.S.-situs assets not worldwide assets. Assets located in Puerto Rico, foreign real estate, foreign bank accounts, and life insurance proceeds are not subject to U.S. estate tax.
The Critical Nuance: Domicile vs. Residency
For estate and gift tax purposes, the controlling standard is domicile (physical presence + intent to remain indefinitely) not the §937 bona fide residency test used for income tax purposes. This is a crucial distinction. You can be a bona fide resident for income tax purposes while not yet being treated as a Puerto Rico domiciliary for estate tax purposes and vice versa.
The Gift Tax Asymmetry —Use It!
Here’s a planning gem: NRNCs can transfer shares of U.S. corporations by gift during their lifetime without incurring U.S. gift tax (IRC §2501(a)(2)). The same shares held at death would be subject to estate tax as U.S. situs assets. This lifetime-vs-death asymmetry is one of the most valuable and underutilized planning opportunities available to Puerto Rico domiciliaries.
The U.S. Situs Asset Problem: What Gets Hit and What Doesn’t
For any Puerto Rico resident doing estate planning, understanding the situs rules is table stakes. Here’s the breakdown:
Asset Type
U.S. Situs?
Estate Tax Exposure for NRNC
U.S. real estate
✅ Yes
Taxable
Shares in U.S. corporations
✅ Yes
Taxable
U.S. mutual fund shares
✅ Yes
Taxable
Non-bank brokerage cash deposits
✅ Yes
Taxable
Puerto Rico real estate
❌ No
Not taxable
Foreign corporation stock
❌ No
Not taxable
Life insurance proceeds
❌ No
Not taxable
U.S. Treasury bonds/government debt
❌ No
Not taxable
U.S. bank deposits (not ECI)
❌ No
Not taxable
This table tells you exactly where the planning pressure is. That vacation home in Miami, that brokerage account at Fidelity holding S&P 500 ETFs, that closely-held interest in a Florida LLC? All U.S. situs. All exposed.
The Do’s: Trust Structures That Work
✅ DO: Use a Puerto Rico Grantor Trust for Act 60 Income Protection
The cleanest structure for preserving Act 60 benefits within a trust is a revocable or irrevocable trust treated as a grantor trust under Puerto Rico law , as expressly contemplated by Act 60 Section 2022.07. The trust income flows directly to the grantor-decree holder, who applies the Act 60 exemptions on his or her individual return. Clean, simple, IRS-compliant.
Best practice : Draft the trust under Puerto Rico law, designate a Puerto Rico-based trustee (or co-trustee), administer it from Puerto Rico, and explicitly provide that Puerto Rico courts have jurisdiction over trust administration. This simultaneously supports the Act 60 framework and strengthens the argument that the trust passes the foreign trust Court Test—which, for a Puerto Rico-administered trust, means ensuring the Court Test is satisfied either by keeping the trust as a legitimate foreign grantor trust (with proper Form 3520/3520-A filings) or by affirmatively tying administration to a U.S. court’s jurisdiction.
✅ DO: Add Automatic Migration Provisions (Or Carefully Avoid Them)
If your living trust was created in a U.S. state before your Puerto Rico relocation, make sure you address the “migration” question head-on. The IRS’s Court Test regulations ask whether the trust has an automatic migration provision that would move it outside the U.S. if a U.S. court asserts jurisdiction the presence of such a provision disqualifies the trust from the domestic trust safe harbor. If you don’t want your trust to be a foreign trust, remove any automatic migration clauses and take affirmative steps (filing with a U.S. court, keeping administration anchored to the original U.S. state) to maintain domestic trust status.
If you want the trust to be treated as a foreign trust (because you’ve properly planned for it), make that intention explicit, and set up compliant Form 3520 and 3520-A filing procedures from day one.
✅ DO: Use Lifetime Gifting of U.S. Stock to Trusts
Remember that beautiful gift tax asymmetry? NRNCs can gift U.S. corporation shares during their lifetime without gift tax . This means systematically gifting U.S. equities into irrevocable trusts for heirs can permanently remove those assets from the taxable U.S. estate because once gifted, they’re out. The 40% estate tax rate never touches them. Combined with a well-drafted irrevocable trust for heirs domiciled in a U.S. state (where they’d benefit from the full federal exemption amount on trust distributions), this is a powerful multigenerational strategy.
✅ DO: Hold U.S. Real Estate Through Entities, Not Directly
U.S. real estate is U.S. situs property, Full stop! But stock in a foreign corporation is not a U.S. situs asset. So here’s the play: hold U.S. real estate inside a foreign corporation or a Puerto Rico entity , and the stock in that entity, being foreign, is not subject to U.S. estate tax when held by a Puerto Rico domiciliary at death. This is a classic NRNC planning technique, but it requires careful execution (entity choice, substance, operational compliance) and coordination with U.S. income tax analysis for the property’s operating income.
✅ DO: Use Life Insurance in an Irrevocable Life Insurance Trust (ILIT)
Life insurance proceeds are explicitly excluded from U.S.-situs treatment under IRC §2105(a). An ILIT funded with adequate life insurance can provide heirs with liquidity to pay any residual U.S. estate taxes on hard-to-restructure U.S. situs assets, like the family vacation home in the Keys that no one wants to sell. Structure the ILIT under Puerto Rico law with a Puerto Rico trustee, and life insurance proceeds remain completely outside the U.S. estate tax net.
✅ DO: Carefully Document Puerto Rico Domicile—Not Just Residency
For the estate tax benefits of NRNC classification to apply, you must establish domicile in Puerto Rico which requires physical presence and intent to remain indefinitely . The IRS scrutinizes Puerto Rico residents heavily, and non-tax declarations carry more weight than tax-motivated ones. Driver’s license, voter registration, community ties, location of family, professional relationships, social club memberships, charitable commitments. All of this builds the picture. Courts look at where you actually live your life, not where your accountant says you live.
The Don’ts: Trust Planning Mistakes That Torpedo Your Act 60 Benefits
❌ DON’T: Administer Your Pre-Existing U.S. Living Trust from Puerto Rico Without Analysis
This is the #1 mistake. You had a lovely California revocable trust, you moved to Puerto Rico, and you’re now administering it from your office in Dorado. You may have just created a foreign trust without knowing it and the clock is ticking on those Form 3520 and 3520-A penalties.
Every Act 60 resident who holds a pre-existing living trust must have that trust analyzed under the domestic/foreign trust framework before administering it from Puerto Rico. The analysis is fact-specific, involves both the Court Test and Control Test, and the consequences of getting it wrong, the 35% of gross trust value, is not something you want to discover in an audit.
❌ DON’T: Assume Your Puerto Rico Grantor Trust Automatically Preserves Act 60 Benefits for Non-Resident Beneficiaries
The Act 60 income tax exemptions belong to you as the decree holder, not to the trust in the abstract or to future beneficiaries. If you structure an irrevocable trust that distributes income to beneficiaries who are not Puerto Rico bona fide residents, those distributions may be subject to regular U.S. income tax in the hands of the beneficiaries. The Act 60 decree is personal. Plan accordingly.
❌ DON’T: Use a Domestic U.S. Grantor Trust to Hold Puerto Rico-Source Income if You’ve Established Foreign Trust Status
Here’s a trap: if your trust is properly classified as a foreign trust (because you made that decision intentionally), do NOT assume that routing Puerto Rico-source income through it automatically preserves the Section 933 exemption for you personally. The Section 933 exclusion applies to the individual bona fide resident and grantor trust treatment means the income is taxed to you directly, but the characterization of that income as Puerto Rico source must still be established. Keep documentation of income sourcing extremely clean.
❌ DON’T: Ignore the 10-Year Pre-Appreciated Asset Rule
This one catches people off-guard. Capital gains on assets owned before you became a Puerto Rico resident are NOT exempt —unless recognized after you’ve been a bona fide resident for 10 years. Under Treasury Regulation §1.937-2(f), gains attributable to pre-Puerto Rico appreciation on investment property (stocks, bonds, etc.) remain taxable at U.S. federal rates if recognized within 10 years of establishing residency. Putting those assets into a Puerto Rico grantor trust does not change this analysis. The character of the gain follows the asset, not the trust wrapper.
❌ DON’T: Plan as if the $15 Million Estate Tax Exemption Applies to You
If you have established Puerto Rico domicile and qualify as a NRNC, you do not have the $15 million estate tax exemption . You have $60,000. That’s it. Any estate planner who tells you otherwise doesn’t understand the territory-specific estate tax rules. This is the single biggest estate planning blind spot for Act 60 residents who came from the mainland with significant U.S. assets.
❌ DON’T: Ignore the Gift Tax Opportunity on U.S. Equities While Alive
If you have significant U.S. stock holdings and you have established Puerto Rico domicile, every day you wait is a day you’re leaving an estate planning gift on the table. The gift tax exemption on intangible property transfers by NRNCs is one of the most powerful lifetime planning tools available and it disappears at death when those same stocks become U.S.-situs property subject to estate tax at 40%.
❌ DON’T: Use a Qualified Domestic Trust (QDOT) Strategy Without Re-Evaluating It for Puerto Rico Context
QDOT planning is designed for estates with non-U.S. citizen surviving spouses. If your estate planning uses a QDOT but you are now a Puerto Rico domiciliary, the interplay of the NRNC classification, the limited U.S. situs asset exposure, and the marital deduction rules creates a complex picture that requires re-analysis from scratch.
The Strategy Stack: Putting It All Together
For a high-net-worth Act 60 resident, the optimal architecture looks something like this:
- A Puerto Rico grantor trust (revocable or irrevocable under Section 2022.07) as the core holding vehicle for Puerto Rico-source investment income protecting the Act 60 exemption
- Foreign entity structure (Puerto Rico LLC or foreign corp) to hold U.S. real estate, converting U.S. situs real property into non-U.S. situs stock
- Lifetime gifting program using the NRNC intangible property gift tax exclusion to systematically transfer U.S. equities to an irrevocable trust for heirs, removing them from the taxable estate annually
- An ILIT funded with life insurance sized to cover any residual estate tax exposure and provide liquidity for heirs
- Clear domicile documentation protocol, not just the 183-day presence test, but the full lifestyle picture supporting Puerto Rico as the permanent home
- Annual compliance : Form 3520 and 3520-A (if foreign trust), Puerto Rico Form 480.80(F) for grantor trust information reporting, Act 60 decree annual reports and required charitable donations
A Quick Reality Check on IRS Enforcement
Friends, let me be blunt: the IRS is actively auditing Puerto Rico Act 60 residents . The agency has run formal compliance campaigns targeting individuals who claimed Puerto Rico residency and related exemptions. The three-part bona fide residency test (Presence Test, Tax Home Test, and Closer Connection Test) must all be satisfied, and satisfying the Presence Test alone (183+ days) is not sufficient.
Trust structures that lack substance, that are clearly designed to route income without genuine administrative presence in Puerto Rico, or that fail to comply with Form 3520/3520-A filing requirements will attract exactly the kind of attention you don’t want. The IRS will look through the trust to the grantor, examine the substantive facts, and assess penalties that can wipe out years of tax savings in a single audit cycle.
Proper planning, properly documented, with defensible positions at every juncture. That’s how we build wealth that survives scrutiny.
Key Takeaways
- Act 38-2026 extends the Act 60 Individual Resident Investor program to 2055, with 0% rates grandfathered for those who obtain decrees by December 31, 2026, and a new 4% rate for post-2026 applicants
- Trusts held by Act 60 residents must be analyzed under both the U.S. domestic/foreign trust framework and Puerto Rico’s Act 60 trust provisions. These are not the same analysis
- Pre-existing U.S. living trusts administered from Puerto Rico may become foreign trusts , triggering Form 3520/3520-A. Filing requirements with severe penalties
- Puerto Rico domiciliaries classified as NRNCs have only a $60,000 estate tax exemption on U.S. situs assets not the full federal unified credit
- The NRNC gift tax exclusion on intangible property (U.S. stock) is one of the most powerful and underused estate planning tools available to Act 60 residents
- Holding U.S. real estate through foreign entities converts U.S. situs real property exposure into non-U.S. situs stock exposure for estate tax purposes
- IRS enforcement activity targeting Act 60 residents is active and ongoing; documentation and compliance are non-negotiable
This post is for informational purposes only and does not constitute legal or tax advice. Puerto Rico Act 60 planning involves complex, multi-jurisdictional tax issues that require individualized analysis by qualified tax and legal counsel. Rob Cordasco, CPA and Cordasco & Company provide strategic tax planning, advisory, and M&A tax services to high-net-worth individuals and entrepreneurs. Visit cordascocpa.com or robcordasco.com for more information, including Rob’s books “A Framework for Growth” and “The Cordasco Compass.”
