Shira Shine, Senior Partner and Trevor Silverman, Partner at Michael Shine & Partners.
Trusts are an extremely effective vehicle for asset protection, wealth preservation, tax and estate planning and privacy.
The culture of trusts in Israel is slowly evolving from a state of unfamiliarity. With the influx of new immigrants (already familiar with trusts) and the dramatic increase in Israeli High Net Worth (“HNW”) families, there is now a demand in Israel for effective asset protection and estate planning, and for these purposes, trusts are unrivalled.
A trust provides significant advantages in estate/succession planning. Under the Succession Law 5725-1965, a testator can leave assets in his Will for the benefit of either (a) living descendants (or those born within 300 days of the testator’s death); or (b) unborn descendants who will receive whatever remains following the demise of the primary named heir. In contrast, assets can be left in trust for the benefit of future generations, as the perpetuity period will be much longer, and in certain jurisdictions there is even no perpetuity period at all. There are also administrative advantages of using trusts; assets held in trust are registered in the name of the trustee, which means that if a settlor or beneficiary dies, the ownership of the trust assets will remain unaffected and there is no need to obtain Grants of Probate in any jurisdiction. It is also advantageous in terms of privacy protection since the Grant of Probate is usually a public document.
Holding assets within trusts can also provide some tax efficiencies, and every jurisdiction has its own tax rules relating to trusts, including Israel. In accordance with Israeli law (Amendment 147 to the Income Tax Ordinance), a trust correctly structured to benefit ‘non-Israeli’ beneficiaries only, will be classified as a ‘Foreign Beneficiary Trust’ and will be exempt from taxes in Israel. This is a useful tax planning opportunity for Israelis with non-resident children or grandchildren, who can benefit from a long-term tax-free growth in those assets for their eventual benefit.
In 2007, Amendment 168 to the Income Tax Ordinance was enacted, offering a package of benefits for new immigrants and returning residents, including a tax and reporting exemption for a period of 10 years in respect of foreign passive income (including where held within trusts). Upon expiry of the 10 years, the new immigrants/returning residents must enter the Israeli tax net for the first time and report their assets/income, which includes trusts settled by them or of which they are beneficiaries. In some cases, this will create sensitivities where the assets were not declared in the country of origin on the eve of immigration to Israel. The recently introduced Common Reporting Standard or CRS (automatic exchange of information between countries) will add to the sensitivities. The application of these rules to trusts is often unknown or overlooked and can lead to dramatic complications.
There is a bright future for trusts in Israel. With the increasing local interest in trusts and their unique advantages, the culture of trusts is growing and becoming more established within Israeli society, but it still has a long way to go.