Court: Transfer of Israeli real estate into trust can be taxed - comment

The Supreme Court’s ruling affects anyone who transferred or is considering transferring real property in Israel into a trust, or in the event he is a beneficiary in such a trust.

 Illustrative image of doing taxes. (photo credit: PXHERE)
Illustrative image of doing taxes.
(photo credit: PXHERE)

In a dramatic ruling, The Supreme Court has accepted the Israel Tax Authority’s (ITA) position that a transfer of real property from a settlor to a trust constitutes a “sale” of the property from the settlor to the beneficiaries of the trust, and is subject to real estate tax. 

Who should be concerned?

The Supreme Court’s ruling affects anyone who transferred or is considering transferring real property in Israel into a trust, or in the event he is a beneficiary in such a trust. In many cases, transferring real property to trusts is advisable for foreign residents, or US persons living in Israel who are holding real property in Israel and wish to exclude said property from their future estate, without providing control or ownership to their future lineal descendants.

Why might the Supreme Court’s decision be troubling?

The consequences of the court’s ruling may be dramatic. The court has asserted the ITA’s position that the trust is disregarded for purposes of real estate taxes. This means that upon a transfer of the real property into the trust, in the eyes of the ITA, the ownership of the property passes on to the beneficiary(ies) of the trust.

This causes many unresolved issues that the ITA has yet to address publicly. It is currently unclear what would be the tax consequence of a change in the identity of the original beneficiaries (for example, upon the death of one of the original beneficiaries), and it is possible that such an occurrence may be considered a taxable event.

What should I do now?

If you are planning to transfer real property in Israel into a trust, if you’ve already transferred real property into a trust, or if you are a beneficiary of such a trust, we recommend you consult with a tax professional in order to better understand the tax exposures that you may be facing amidst the Supreme Court’s decision.

Real Estate (credit: JPOST STAFF)Real Estate (credit: JPOST STAFF)

It would be best if you consult someone with extensive experience in consulting and representing individuals regarding issues related to private wealth and taxation of trusts and estates in Israel.

The writer is a leading partner in the field of tax law at Yigal Arnon-Tadmor Levy law firm.