Creating a trust for future generations

No one knows exactly when he or she will die. But people can prepare for the inevitable.

Adv. Tali Yaron-Eldar. Founder of the law firm Yaron-Eldar, Paller, Schwartz & Co. Partner, former income tax commissioner (photo credit: TOMER YAKOVSON)
Adv. Tali Yaron-Eldar. Founder of the law firm Yaron-Eldar, Paller, Schwartz & Co. Partner, former income tax commissioner
(photo credit: TOMER YAKOVSON)

Some people make a will in order to determine and control the manner in which their assets will be distributed and who the heirs will be. Others do not make a will. Those people have no control over who the heirs will be, as their identity is fixed as a default by law.

A will that is prepared as part of a well-considered thought process is a highly recommended thing. However, the power of a will as an effective tool for transferring assets to future generations is sometimes rather limited. The most patent limitation of a will is that it applies to the manner in which a person’s assets will be treated only after death, and not when he/she is still alive, although his/her authority may already be limited due to age or illness. The power of a will is also limited in determining the identity of the heirs. For example, a person cannot bequeath assets to an unborn grandchild. In addition, the power of a will is limited in its ability to order the transfer of assets from one heir to another.

The current reality is that life expectancy is increasing. Although this rise is not necessarily relative to a rise in the level of quality of life, experience has taught us that it is necessary to find additional tools for people with assets to implement while they have their full mental capacity. This will enable them to maintain their business even after they die but also when their capacity is impaired. These tools will allow for the preservation of assets, the continued operation of assets, the efficient distribution of income, and the protection of the interests of family members and other relevant persons. But as explained above, a will is not a solution to all these issues.

In recent years, against the background of changes in Israeli law and the need to find suitable tools, the field of trusteeship has developed in this country. It allows a person to establish a trust to which certain assets will be allocated and will act in accordance with the instructions given by the trustor. Such a trust is managed by a trustee chosen by the trustor. The trustee, who can be a professional (a lawyer, for example) or another person, is obliged to act according to an express letter of instruction and always for the trust for which he or she acts.

Adv. Amit Gottlieb Partner in the firm Yaron-Eldar, Paller, Schwartz & Co: Lawyers specializing in taxation of trusts and tax planning for high net worth individuals
(photo credit: TOMER YAKOVSON)

What is a trust?

A trust is a legal instrument by which a person (the settlor of the trust) transfers an asset that he/she owns to a trustee, who will hold the property for him/her for the purpose of realizing a certain purpose or hold it in trust for the benefit of another person (the beneficiary of the trust).

The use of a trust is becoming more and more common. Trusts are no longer exclusive to the wealthy but also serve business owners and established families who want to plan the future of their family in the best possible way.

A trust, unlike a will, is not necessarily related to death. The trust can be established during a person’s lifetime so that he/she can examine whether it meets his/her wishes and thus conduct a “fast-forward” in which he/she will examine whether changes or adjustments should be made to the trust provisions or perhaps even have it be terminated.

In a trust, it is possible to set definite rules and criticize the manner in which family capital is distributed. Under the trust agreement, rules can be set for how the trust assets will be invested, how they will be distributed to future generations with quality control and determining conditions, and the dates when the beneficiaries will receive the trust assets (for example, as a wedding gift, tuition, or reaching a certain age).

Unlike a will, the trust continues to exist until the time when all the assets have been distributed in accordance with the provisions of the trust agreement. In fact, a trust can continue to exist for generations as long as assets remain in it.

A trust can be used as a tool to commemorate and preserve the family heritage. Thus, in addition to determining the identity of the beneficiaries of the trust, some of the funds can be allocated as donations to, say, nonprofit organizations and institutions, scholarships, or commemorative and heritage events.

Trusts are not subject to the provisions of the Inheritance Law. This means that the restrictions that apply to wills are not relevant when establishing a trust, even though it may continue to exist after the death of the trustor or the beneficiary.

Along with the benefits mentioned, a trust is often used as a legal solution for tax planning in countries where estate tax or inheritance tax is imposed, such as the US and the UK.

All in all, future planning is a vital thing. The more assets one has, the better it is to invest thought and time into planning the transfer of assets to future generations. Making a will and examining other options such as creating a trust have the power to preserve the capital that the family has worked hard to build up over the years.

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