A legal commentary made by Oded Dardikman in regards to the new tax initiatives in Israel.
Trusts & Estate Planning
Taxation of trusts – August 2013
Foreign resident settlor trust
Definition – A trust where all the settlors are at the time of settlement and the tax year\ or during the tax year all of its settlors and all of its beneficiaries are foreign residents.
Pre reform – A foreign resident settlor trust is tax exempt as long as the income was produced outside of Israel and is not depended on the residency of the beneficiaries. Due to that definition even when a settlor which was a foreign resident at the time of his death the beneficiaries even if reside in Israel would be tax exempt for any distribution arriving from the trust.
Post reform – A trust with an Israeli resident beneficiary will be taxed ideally on the part designated for the Israeli resident beneficiary (25%) or at the time of the actual distribution to the Israeli Resident (normally 30%). All according to the choice of the trustee. (If the trustee did not choose then the tax will apply at the time of the distribution i.e. 30%.
- If the trustee or the beneficiary can prove that the distribution has funds from the capital (the original settling fund) that part will not be taxed. If there is a mixture between capital and profits in the distribution it will be looked upon as if the distribution arriving first from the profits and only then from the capital.
- At the time of death of one of the settlors, the income of the trustee will be looked as the income of the beneficiaries and the assets of the trustee as the assets of the beneficiaries.
- Should the trust have an Israeli resident beneficiary (even one), the trust will be classified as an Israeli resident trust. (In the death occurrence of one of the foreign settlors).
Foreign resident settlor trust which became an Israeli resident trust due to the immigrating or returning of the settlor to Israel
Pre reform – The trust is entitled for tax benefits (art. 14, 97 to the tax ordinance) even after the passing of the settlors death thus, beneficiaries who are not entitled for the benefits will enjoy them.
Post reform – In an Israeli resident trust, once the last settlor which was entitled for the benefits of art. 14, 97 to the ordinance has passed, the tax benefits will not be succeeded by beneficiaries unless they themselves are entitled for them personally.
In a revocable trust, if the beneficiary received benefits according to the above-mentioned articles, and at the time of the distribution the beneficiary was replaced with a beneficiary who is not entitled for the benefits, the beneficiary will be taxed at the time of distribution with interest.
Reporting duty for beneficiary distribution
Pre reform – An Israeli resident beneficiary is not subject for reporting duties for money distribution. When the trust is a foreign resident settlor trust, the tax authorities do not necessarily know of the existence of the trust and therefore is unable to classify the trust.
Post reform – A reporting duty will apply for any distribution (money or kind) received by an Israeli resident beneficiary starting 2013.
Granting beneficiary funds by the settlor
Pre reform – In a foreign resident settlor trust there is the fear that the settlor will grant the beneficiary funds which belong to him directly or indirectly when there is no family relationship between the settlor and the beneficiary.
Post reform – A reporting duty applies regarding the relationship between the beneficiary and the settlor in a foreign resident settlor trust within 30 days of it settling. When there is no relationship the trust will be classified as Israeli resident trust.
 10 years tax exemption on income deriving outside of Israel
 Tax exemption on capital gain in regards to the selling of Israeli based corporations shares in certain circumstances