Dollar bills 370.
(photo credit: Steve Marcus / Reuters)
In 1981 Israel abolished its estate tax because it failed to collect adequate
taxes and was costing too much to enforce. Since then, proposals to bring estate
tax back have consistently been rejected or dropped for similar reasons, most
recently by the Trajtenberg Commission in 2011. Trajtenberg was concerned that
any estate tax would deter potential Olim, immigrants, from making
All that seems about to change. The 2013-2014 budget of the
Israeli government now passing the Knesset intends to introduce a back-door
estate tax for trusts commonly found in families with its members living in
Israel and elsewhere. That must affect much of the Jewish world.
is an arrangement whereby someone holds assets for someone else. This is
commonly used to make sure the family fortune amassed by Dad isn’t frittered
away by the children.
What’s planned? In a nutshell, trusts are currently
exempt from Israeli tax on foreign income and gains if they were set up by
foreign residents for the benefit of beneficiaries living in Israel or abroad.
This assumes certain conditions are met – in particular the beneficiaries don’t
exercise control or influence over the trust.
This type of trust is
referred to as a “Foreign Residents’ Trusts.”
Commencing January 2014,
Israel is to tax the worldwide income of such trusts if they have an Israeli
The taxpayer will usually be the trustee, even if
he is based abroad.
These are referred to as “Israeli Resident
How much trust will an IBRT pay? The trustee can
choose how much tax to pay and when, but it will apparently work like Russian
roulette. If the settlor (grantor) is still alive and related to the
beneficiary, the Trustee would choose between: (1) 25 percent tax on trust
income in the year it is earned if it is attributed to Israeli resident
beneficiaries, or (2) 30% tax if and when trust income is actually distributed
to Israeli resident beneficiaries.
But when the settlor dies, the Trustee
must start paying tax at regular Israeli tax rates (25%-50% expected) on
worldwide trust income in the year it is earned unless all the beneficiaries
reside outside Israel. This is because upon death of the settlor, the trust is
reclassified for Israeli tax purposes as an “Israeli Residents’
All these trust name changes may sound technical, but they add up
to a death tax aimed mainly at immigrants.
Will it work? Probably not.
According to Israel’s Central Bureau of Statistics, transfers from abroad to
private individuals in Israel amounted to: $3.068 billion in 2009, $3.026b. in
in 2011 and $3.071b. in 2012. Much of this money is
thought to be channeled into Israel via family trusts. These inflows into the
economy seem likely to stop if there is an tax impediment.
This is not a
prediction, this is déjà vu. Around 11 – 12 years ago, billions of dollars
stopped flowing into hi-tech when Israel tried to tax the capital gains derived
by venture capital funds that were the usual channel for such investments. In
2003, the then Finance Minister, Binyamin Netanyahu, realized the damage being
done and stopped taxing the venture capital funds on high tech
Just to put the figures into perspective they are more than US
foreign aid to Israel: $2.089b. in 2009, $2.774b. in 2010, $2.964b.
2011 and $3.003b. in 2012 Is it right? The new law is tax discrimination against
immigrant families, but it isn’t illegal if the Knesset allows it.
should affected families do? Affected families should of course obtain
professional advice. Following are a few general non-exhaustive tips to
First, check whether the trust is documented in writing and
what are the terms. Verbal trusts are still trusts, but it may be prudent to
carefully document them to avoid unintended tax consequences in one country or
Second, find out whether the trust needs to be discretionary,
i.e. the beneficiaries and their entitlement are at the discretion of the
Third, see whether it would be prudent to hive off foreign
resident beneficiaries to a separate trust with separate assets outside the
sights of the Israeli Tax Authority.
Fourth, the new rules may tax past
income – consider what action to take before the new rules take
Fifth, the new rules provide a strong tax incentive for potential
trust beneficiaries to make yerida (emigration) from Israel, not aliya
(immigration) to Israel. That is indeed a sad fact.
As always, consult
experienced tax advisers in each country at an early stage in specific
firstname.lastname@example.org Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.