Decree Succession Planning: What Happens to Your Act 60 Benefits When You Die?

You have spent years building wealth under your Act 60 decree. Capital gains, interest, and dividends have compounded largely free of Puerto Rico tax. The financial results have been significant. But here is the question your CPA may have raised without being able to answer: what happens to all of it when you die?

The answer is more complicated than most decree holders expect, and it exposes a gap that only legal planning can close.

Act 60 Decrees Are Personal and Non-Transferable

This is the foundational fact that drives everything else in this analysis. Your Act 60 decree was granted to you as an individual. It is personal. It does not transfer to your spouse, your children, your trust, or your estate upon your death.

What this means in practice:

• The tax exemptions you enjoyed during your lifetime end at your death
• Your heirs do not inherit the right to exempt income from Puerto Rico taxation
• Assets that were shielded from taxation while you were alive become subject to the normal tax regime after your death
• Any unrealized gains in your portfolio lose the protection of the decree at the moment of your death

This is not a flaw in the law — it is a feature of how Act 60 was designed. The incentive is meant to attract living, contributing residents to Puerto Rico, not to create perpetual tax-exempt dynasties. Understanding this limitation is essential to planning around it.

What Happens to Decree Benefits at Death

When an Act 60 decree holder dies, several things happen simultaneously from a tax and legal perspective:

The decree terminates. No further income can be sheltered under its terms. Any income earned by the estate or trust after the date of death is subject to ordinary tax rules.

Unrealized appreciation is frozen. Assets that appreciated during the decree holder's lifetime retain their basis. The question of whether a step-up in basis applies depends on federal tax law and how the assets are held. For assets held personally, the general rule under federal law provides a step-up in basis at death — meaning heirs receive the assets at fair market value and the unrealized gain disappears for income tax purposes. However, for assets held in certain trust structures, the step-up rules are more complex.

Federal estate tax applies. This is where many decree holders are caught off guard. Act 60 provides income tax exemptions. It does not provide estate tax exemptions. Your estate is subject to federal estate tax on the full fair market value of your worldwide assets above the exemption amount.

The current federal estate tax exemption is approximately $15 million (indexed for inflation), made permanent by the One Big Beautiful Bill Act. For married couples who plan properly, this means up to $30 million can pass estate-tax-free. But for high-net-worth decree holders whose wealth has grown significantly under Act 60 exemptions, the estate tax exposure can still be substantial.

Puerto Rico forced heirship rules apply. Under the Civil Code of 2020, your children are forced heirs entitled to a legally protected share of your estate. This applies regardless of what your will says and regardless of where your assets are located (for assets subject to Puerto Rico law).

Estate Tax Exposure on Appreciated Assets

Here is the scenario that keeps estate planners up at night:

You relocate to Puerto Rico with a $10 million investment portfolio. Over the next 15 years, under your Act 60 decree, that portfolio grows to $40 million — largely tax-free on the capital gains, interest, and dividends along the way. The tax savings during your lifetime are extraordinary.

But at your death, the full $40 million is included in your taxable estate for federal estate tax purposes. If you are single, approximately $25 million is subject to estate tax at rates up to 40%. That is a potential estate tax bill of $10 million.

The wealth you accumulated tax-free during your lifetime could be significantly diminished in a single estate tax event.

The takeaway: Act 60 is an income tax strategy, not an estate tax strategy. Without proper planning, the estate tax can recapture a significant portion of the income tax savings you enjoyed during your lifetime.

How Trusts Can Preserve Wealth Accumulated Under a Decree

Trusts are the primary legal tool for addressing the gap between Act 60 income tax benefits and estate tax exposure. Properly structured trusts can:

Remove assets from your taxable estate. Irrevocable trusts, when properly funded and administered, remove the transferred assets from your estate for federal estate tax purposes. The assets and their future appreciation are outside your estate, reducing or eliminating estate tax exposure.

Preserve wealth for future generations. A dynastic trust structure can hold assets for multiple generations, protecting them from estate tax at each generational transfer. Puerto Rico's Law 219-2012 provides a flexible framework for long-term trust planning.

Provide asset protection. Trust assets, once properly transferred, are generally protected from the grantor's creditors, lawsuits, and other claims. For Act 60 holders who are building significant wealth, asset protection is an important secondary benefit.

Satisfy forced heirship requirements. A well-drafted trust can be structured to comply with Puerto Rico's forced heirship rules while still achieving your wealth transfer objectives. The trust can ensure that forced heirs receive their legally required share while controlling the timing, manner, and conditions of distribution.

Coordinate with your Act 60 decree during your lifetime. The trust structure must be designed so that it does not interfere with your decree benefits while you are alive. This requires careful analysis of the trust's tax status (grantor vs. non-grantor), the timing of asset transfers, and the income sourcing implications.

Trust Strategies for Decree Holders

Several trust-based strategies are particularly relevant for Act 60 decree holders:

Irrevocable Life Insurance Trust (ILIT)

An ILIT holds life insurance policies outside your estate. The death benefit passes to the trust beneficiaries free of estate tax. For decree holders, an ILIT can provide liquidity to pay estate taxes on other assets without reducing the wealth available to heirs.

Grantor Retained Annuity Trust (GRAT)

A GRAT allows you to transfer appreciating assets to a trust while retaining an annuity payment for a fixed term. If the assets outperform the IRS assumed rate of return, the excess appreciation passes to beneficiaries free of gift and estate tax. For decree holders with rapidly appreciating assets, GRATs can be particularly effective.

Spousal Lifetime Access Trust (SLAT)

A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse and descendants. It removes assets from both spouses' estates while allowing the beneficiary spouse to access trust funds if needed. For married decree holders, a SLAT provides estate tax savings with a safety valve.

Dynasty Trust Under Law 219-2012

Puerto Rico's trust law allows for long-term trusts that can span multiple generations. A dynasty trust can hold wealth accumulated under an Act 60 decree and distribute it over time, potentially avoiding estate tax at each generational level.

Forced Heirship Rules and Decree Succession

Puerto Rico's forced heirship rules add a layer of complexity to decree succession planning that does not exist on the mainland.

Who are forced heirs? Under the Civil Code of 2020, your children (and in some cases, your parents) are forced heirs. They are entitled to the legitima — a reserved portion of your estate that you cannot direct away from them by will.

How forced heirship interacts with trusts: If you transfer assets to a trust during your lifetime, forced heirs may have claims against those assets if the transfer is deemed to impair their legitimate rights. The timing and structure of trust funding must account for this risk.

Second marriages and blended families: If you have children from a prior relationship and are remarried, forced heirship creates particular tension. Your children from the prior relationship have forced heirship rights that limit how much of your estate you can leave to your current spouse. This scenario requires especially careful planning.

Planning around forced heirship: It is possible to satisfy forced heirship requirements while still achieving your succession planning goals. Strategies include:

• Funding the legitima with specific assets while directing other assets through trusts
• Using life insurance to satisfy forced heirship claims without distributing business or investment assets
• Structuring trusts so that forced heirs are beneficiaries of the trust on terms you specify
• Coordinating gifts during your lifetime with testamentary dispositions

Planning Strategies to Maximize Intergenerational Wealth Transfer

The best decree succession plans combine multiple strategies:

Lifetime gifting. Transferring assets during your lifetime, either directly or to trusts, reduces your taxable estate. The current lifetime gift tax exemption mirrors the estate tax exemption. Gifting appreciating assets early in your Act 60 tenure removes both the current value and all future appreciation from your estate.

Basis planning. Understanding when a step-up in basis applies and when it does not is critical. Some assets may be better held personally (to receive a step-up at death), while others may be better transferred to irrevocable trusts (to remove appreciation from the estate). This analysis requires coordination between your attorney and CPA.

Business succession planning. If you own a business in Puerto Rico under an Act 60 export services decree, the business itself may be your most valuable asset. Succession planning for the business involves both ownership transfer (who gets the equity) and operational transfer (who runs the company). A buy-sell agreement, funded by life insurance and structured within a trust framework, can address both.

Charitable planning. Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) can provide current income tax deductions, reduce estate tax exposure, and fulfill philanthropic objectives. For decree holders who have accumulated significant wealth, charitable planning offers both financial and personal benefits.

Annual compliance and review. Decree succession planning is not a one-time event. Your plan should be reviewed annually and updated whenever there is a significant change in your financial situation, family circumstances, or the law.

The Role of Your CPA and Your Attorney

Your CPA models the financial outcomes: the tax projections, the estate tax exposure calculations, the cash flow analysis for trust funding. This work is essential.

Your attorney designs the legal structures: the trust instruments, the wills, the business succession agreements, the domicile documentation. The attorney ensures that the structures comply with Puerto Rico law, account for forced heirship, and integrate with your Act 60 decree.

The best results come when both professionals work together from the beginning. If your CPA has raised the issue of what happens to your decree benefits at death, they have identified a real and significant planning need. The next step is to engage an attorney who can build the legal framework to address it.

Schedule a Free Strategy Call

Your Act 60 decree created wealth. A succession plan preserves it. The time to plan is while the decree is active and your options are widest.

Hans E. Riefkohl advises Act 60 decree holders on trust formation, estate planning, and intergenerational wealth transfer under Puerto Rico law.

Call (787) 236-1657 or email hans@riefkohllaw.com to schedule a free strategy call.

We will review your current decree, estimate your estate tax exposure, and outline a succession plan that protects what your Act 60 benefits helped you build.

Learn more: - Act 60 Tax Incentives - Puerto Rico Trusts - Estate Planning