An Israeli trust is a legal arrangement in which a settlor transfers assets to a trustee for the benefit of specified beneficiaries. Settling an Israeli trust can offer several benefits, depending on the settlor’s objectives, tax planning, and asset protection needs. Here are some potential advantages of settling an Israeli trust:
1. Tax Benefits
Tax exemptions for New Immigrants and Returning residents:
New immigrants (olim) and “veteran returning residents” (those who have been abroad for over 10 years) can benefit from a 10-year tax exemption on foreign-source income, including income earned by an Israeli trust that is classified as a “foreign settlor trust.”
Tax-Deferred Structure:
Trusts can provide a deferral of taxes until the income is distributed to beneficiaries, allowing for potentially favourable tax treatment depending on the beneficiaries’ tax status and location.
2. Asset Protection
Trusts in Israel can be structured to offer a high level of asset protection, safeguarding assets from creditors, lawsuits, and potential marital disputes. Assets placed in a trust are generally considered separate from the settlor’s estate, which can be advantageous in shielding them from personal liabilities.
3. Estate and Succession Planning
Israeli trusts provide a flexible mechanism for transferring wealth across generations while minimizing the risk of inheritance disputes. Trusts allow for specific terms regarding how and when assets are distributed, which can be particularly useful in family wealth preservation and planning for future generations.
4. Control and Flexibility
Israeli trusts can be highly customized to suit the settlor’s needs. The settlor can retain a certain level of control over the trust or appoint a protector who oversees the trustee’s actions, ensuring that the settlor’s wishes are respected.
Revocable and Irrevocable Trusts:
The choice between revocable and irrevocable trusts allows for different levels of flexibility and control, with irrevocable trusts often providing stronger asset protection.
5. Privacy
Trusts offer a greater degree of privacy compared to other legal structures, as the assets in the trust are managed by the trustee and are not necessarily disclosed in public records. This confidentiality can be beneficial for high-net-worth individuals looking to manage wealth discreetly.
6. Multi-Jurisdictional Planning
Israeli trusts are particularly useful for individuals with cross-border interests. They provide a legal and tax-efficient framework for managing assets in multiple jurisdictions, especially for families or individuals with connections to Israel and other countries.
7. Reduced Probate Costs and Delays
When assets are held in a trust, they typically do not go through probate upon the death of the settlor, which can reduce legal costs and avoid lengthy delays in asset distribution.
Important Considerations for 2024:
The Israeli Tax Authority (ITA) is becoming more stringent in its reporting requirements for trusts. Trusts with foreign elements, in particular, are under greater scrutiny to ensure compliance with international tax standards and anti-money laundering (AML) regulations.
There is a growing trend for the ITA to examine the substance over form when it comes to trusts, meaning that the actual management, control, and activities of the trust are more closely scrutinized.
Reporting duty for New Immigrants and Returning Residents
- Background and Recent Changes:
Previously, new immigrants and returning residents were granted a 10-year tax exemption on their foreign income, which included a broad exemption from reporting such income to the Israeli Tax Authority (ITA). However, recent regulations have introduced a reporting duty from 1.1.2026 in order to increase transparency and ensure compliance with international standards, such as the Common Reporting Standard (CRS) and anti-money laundering (AML) efforts. - What the reporting duty entails:
> Declaration of Assets and Income: New immigrants and returning residents now must declare their global assets and foreign income, even if these are exempt from Israeli taxes. This requirement is intended to help the ITA track financial activities and ensure that the exemption benefits are not abused.
> Annual reporting: While the income may still be tax-exempt, beneficiaries must file an annual report detailing their foreign income, such as dividends, interest, royalties, capital gains, and income from foreign trusts.
> Foreign trusts and structures: Reporting is particularly crucial if the new immigrant or returning resident is involved in foreign trusts, companies, or other entities that might hold or manage assets. The ITA has been focusing on the transparency of these structures to prevent potential tax avoidance. - Rationale behind the new requirements:
The Israeli government implemented these reporting duties to comply with global standards for tax transparency and combat international tax evasion. These changes align with Israel’s commitment to the OECD’s Base Erosion and Profit Shifting (BEPS) initiative and the Common Reporting Standard (CRS). - Impact on New Immigrants Trusts and Estate planning:
> Increased Compliance Burden: New immigrants and returning residents planning to set up Israeli trusts or use foreign trusts to manage their wealth must comply with these new reporting requirements. This means a higher compliance burden, including maintaining accurate records and possibly engaging with tax professionals more frequently.
> No Change in Exemption: The 10-year exemption on foreign income remains intact; however, the mandatory reporting adds a layer of compliance without changing the tax benefits themselves. - Penalties for non-compliance:
Failure to comply with the new reporting requirements can lead to penalties and fines. The ITA has the authority to impose sanctions on individuals who do not report their foreign assets and income accurately and on time.
