Various governments of Israel have enacted legislation benefiting foreign investments, including, most recently, tax reforms for new immigrants and returning citizens. Several advantages accrue to a family that immigrates, especially concerning trust structures employed in financial planning.
Legislation
The three most important laws in this regard are the Trust Law 1979, the Taxation of Trusts Law 2005 and the New Immigrants (Oleh Chadash) Legislation 2007.
The Trust Law 1979 permits the establishment of a trust either by contract (inter vivos), by deed (hekdesh), by testament or by law, such as a fiduciary arrangement of a liquidator in winding- up proceedings. The Taxation of Trusts Law 2005 categorises trusts based on the country of residence of the settlor and the beneficiaries:
- Foreign settlor trusts are established by a non-resident of Israel for the benefit of Israeli- or foreign-resident beneficiaries. Such trusts are not taxable in Israel on foreign-source income.
- Israeli-resident trusts are established by Israeli residents for the benefit of Israeli-resident beneficiaries. These trusts are taxed in Israel, as are private individuals, on their worldwide income.
- Foreign beneficiary trusts are established by Israeli residents for the benefit of non-Israeli-resident beneficiaries. Such trusts are not taxable in Israel on foreign-source income.
- Testamentary trusts are established under wills following these categories, and taxed accordingly.
The Taxation of Trusts Law 2005 also provides for use of an underlying company by the trustee, whether incorporated in Israel or abroad, to hold assets on behalf of the trustee. Liability is limited within a corporate entity, while for tax purposes this underlying company is a pass-through entity and is not taxed independently. Rather, the trust, via the trustee, is the taxpayer, in accordance with the above categorisations of the trusts.
Immigrating with trusts
Trusts are established for many reasons, including asset protection, estate planning and tax planning.
The New Immigrants (Oleh Chadash) Legislation provides, as a general rule, that individuals who immigrate to Israel are not taxed in Israel for ten years on their foreign source income. Nonetheless, when an individual dies within the ten-year term, the benefits are not transferred to the individual’s heirs. Rather, the exemption period terminates on death. If individuals immigrate together with trust structures, or establish trusts soon after immigrating to Israel, the benefits remain valid for the trust’s assets for ten years regardless of the demise of the settlor.
While the New Immigrants (Oleh Chadash) Legislation 2007 may be favourable for tax purposes, it does not address liability issues. For example, a physician from the US could immigrate to Israel while maintaining a medical practice abroad and travelling occasionally to serve patients abroad. While he may not be taxed on his foreign-source income in Israel, if a malpractice claim is filed in the country in which the business activities are conducted, the distance between the practice and the physician’s residence may be irrelevant and the physician may be a party to the lawsuit and possibly ultimately liable for damages. In such circumstances, the establishment of an asset-protection trust and the settling of assets into the trust may help to protect the individual’s assets.
Estate planning and the creation of trust structures on immigration may also be important for reasons such as avoiding public probate proceedings in Israel. There is no ancillary probate process in Israel and such proceedings begin regardless of any proceedings abroad. The Supreme Court case of Attorney General v Agam1 established the principle that foreign judgments on inheritance are not enforceable in Israel. The filing requires original documentation and may take one year to process. In addition, the establishment of inter vivos trust structures may prevent litigation among heirs.
Conclusion
Trusts are important for planning in various areas. They are sometimes viewed solely as tax-planning tools, but that is not the case. They may be used in the same way companies use their limited liability, and may help to avoid many issues that arise where adequate planning is lacking.2