Trusts can be an effective tool for wealth preservation, tax and estate planning
and privacy and asset protection.
A trust is a contractual arrangement
between the settlor, who founds the trust, and the trustee(s), in whom ownership
and control over assets transferred to, or settled on the trust are
Beneficiaries of the trust can include spouses, children, even
charities and the settlor himself.
The culture of trusts in Israel
remains at an embryonic stage. Although many aspects of law are based on English
common law, as applied during the British Mandate, the equitable doctrines of
trust were not imported into Palestine since they were not considered suitable
for application in local situations.
In addition, since 1981, there has
been no inheritance tax in Israel, so Israelis did not feel the need to turn to
trusts as a way to protect their assets and engage in estate planning. The low
profile of trusts in Israel remained until recently.
With the recent
increase of resident and domiciled high net worth families, however, there is
now a demand for effective wealth preservation and estate planning.
possible to form an “Israeli law” trust, and indeed there is trust legislation –
the Trust Law 5739-1979 – governing powers, duties, rights and conduct of
Israeli law trusts are, however, often deferred in favor of
foreign law trusts, for a number of reasons.
Section 8(b) of the
Succession Law 5725-1965 states that a lifetime gift granted by the donor, but
which will only be given to the donee after the donor’s death, will be void.
Some academics and professionals are of the opinion that Israeli law trusts can
be compatible with this law by ensuring that the settlor fully transfers the
assets and ceases to retain any control.
Others argue that the two laws
may conflict, and if so, an Israeli law trust becomes void on the settlor’s
death, with the trust assets reverting to the settlor’s estate and passing to
the settlor’s heirs in accordance with his will or the laws of intestacy, as the
case may be. This would undermine a fundamental principle of trusts, being that
once the settlor transfers property to his trustees to hold the same upon trust,
the settlor is no longer considered the owner.
It is true that a trust
can be revocable, but in the absence of the trust being revoked, the settlor has
no rights or ownership over the assets.
The uncertainty caused by the
Succession Law gives significant importance to foreign trusts in Israel, since
foreign trusts are not governed by Israeli law and need not revert to the
This coupled with the Trust Law 5739-1979, which is
somewhat primitive and weak, contributes to make Israel a less attractive
jurisdiction of proper law for more complex trusts and means that foreign trusts
are more commonly used. Israeli trusts tend to be simpler, outright and
When weighing up the option of a trust versus a will, one
should note some of the advantages of a trust. Under the Succession Law 5725-
1965, if a testator wanted to gift assets in his will for the benefit of his
descendants, the gift would be limited to benefit either (a) living descendants
or those born within 300 days of the testator’s death; or (b) a descendant born
more than 300 days after the testator’s death, where the testator leaves a
bequest to a beneficiary and specifies that whatever remains after that
beneficiary’s death shall be carried over to a second beneficiary.
contrast, assets can be left in trust for the benefit of a greater number of
future descendants, as the perpetuity period will be much longer. In certain
jurisdictions there is no perpetuity period, so the trust will continue without
an end date.
There can also be administrative advantages to using trusts;
a good example is in relation to probate. Assets held in trust are registered in
the names of the trustees and not the settlor, which means that if the settlor
dies there is no need to obtain Grants of Probate in any
This can be especially helpful to families with global
It is also advantageous in terms of privacy protection since the
Grant of Probate is usually a public document.
It is a common
misconception that trusts are just tax planning vehicles; in truth, trusts are
most effectively used for wealth structuring and planning. That said, there can
be tax advantages associated with the use of trusts and this is a further reason
for the increased use of trusts in Israel. For example, in 2006, Amendment 147
to the Income Tax Ordinance- New Version 5721- 1961 (2005) (“Amendment 147”)
became effective. This sets out the tests for determining the basis of Israeli
taxation of trusts. Under .
ordinance, a trust structured to benefit
“non-Israeli” beneficiaries may be classified as an “Israeli Settlor Foreign
Beneficiary Trust” and will not automatically be taxed in Israel on foreign
income if certain conditions are met.
Amendment 147 also provides for the
exemption from Israeli income tax and capital gains tax of trust assets settled
by a non-Israeli resident settlor in favor of Israeli resident beneficiaries of
foreign income if certain conditions are met. This is a useful tax planning
opportunity for nonresidents who can opt to settle assets on trust, rather than
bequeath them outright to Israeli beneficiaries.
Trusts can also be used
to safeguard rights. Starting in 2007, new immigrants and returning residents to
Israel became entitled to favorable tax treatment on income from abroad for a
period of 10 years following aliya. If the individual were to die before the end
of the 10 years, the remaining period of entitlement is lost; however, a trust
vehicle can be used to guarantee that the full 10- year entitlement is preserved
even after the settlor dies.
Do tax treaties help? Hardly ever, as most
make no mention of trusts. Israel’s tax treaties with the US and Canada
Most Israeli residents are not familiar with the concepts of trusts,
and for them it will be disconcerting to transfer control of their assets to a
trust. A solution is available under Amendment 147, which allows for Israeli
residents to act as trustees without negative tax consequences both in Israel
and abroad on foreign income if certain conditions are met.
This makes it
possible to establish a private trust company for the benefit of one specific
family, where the family members will act as directors and retain control, while
still benefiting from holding the assets in a trust.
Although trusts do
not yet have strong roots in Israel and the culture of trusts has a long way to
develop, Israeli families are becoming increasingly interested in trust vehicles
and family office services which are being established more and more due to the
increase in high net worth families.
As always, consult experienced tax
advisers in each country at an early stage in specific
cases.Shira@shinelaw.com, Trevor Silverman Trevor@shinelaw.com,
email@example.com Shira Shine is a senior partner at Michael Shine & Partners and
managing director of MSA Shine Global Family Office.
Trevor Silverman is
a nonpracticing UK solicitor and intern at Michael Shine &
Leon Harris is a certified public accountant and tax specialist
at Harris Consulting & Tax Ltd.