Your Taxes: The culture of trusts in Israel

Trusts can be an effective tool for wealth preservation, tax and estate planning and privacy and asset protection.

By SHIRA SHINE, TREVOR SILVERMAN, LEON HARRIS
An accountant calculator taxes 370 (photo credit: Ivan Alvarado / Reuters)
An accountant calculator taxes 370
(photo credit: Ivan Alvarado / Reuters)
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 conferred.
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.
It is 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 trustees.
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 settlor’s estate.
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 irrevocable.
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.
In 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 jurisdiction.
This can be especially helpful to families with global assets.
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 do.
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, leon@hcat.co
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 & Partners.
Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.