By: Steven D. Hamilton, Principal, Steven D. Hamilton, CPA

December 15, 2014 1:19 pm EST
The Knesset, the legislative branch of the Israeli government (December 2012) Photo: Fotosearch (c) Flik47

Have you settled (that is, funded) a trust with an Israeli beneficiary?

I have not, but many have.

If this is you: heads up. The tax rules have changed, and they have changed from the Israeli side, not the U.S.

Until this year, Israel has not taxed a trust set up by a foreign person, even if there were Israeli beneficiaries. It also did not bother to tax the beneficiaries themselves. This was a sweet deal.

The deal changed this year. The Israel Tax Authority (ITA) now says that many trusts previously exempt will henceforth be taxable.

Israel is looking for a beneficiary trust, meaning that all settlors are foreign persons and at least one beneficiary is a resident Israeli.

EXAMPLE: The grandparents live in Cincinnati; the son moves to Israel, marries and has children; the grandparents fund a grandchildren’s trust.

A beneficiary trust can be either:

  • A “relatives trust,” meaning the settlor is still alive and related (as defined) to the beneficiary
  • A “non-relatives trust,” meaning the settlor is not alive or not related (as defined) to the beneficiary

EXAMPLE: The grandparents in the above trust pass away.

The tax will work as follows:

A relatives trust:

  • Pay tax currently at 25% on the portion allocable to Israeli beneficiaries, or
  • Delay the tax until distributed to an Israeli beneficiary, at which time the tax will be 30%.

A non-relatives trust:

  • Pay tax on income allocable to Israeli beneficiaries at regular tax rates (meaning up to 52%)

If one does nothing by the end of 2014, a relatives trust is presumed to have elected the “pay currently” regime.

The ITA has indicated verbally that any U.S. tax paid will be accepted as a tax credit against the Israeli tax, whether the tax was paid by the settlor (think grantor trust), the trust itself or the beneficiary.

The retroactive part of the tax goes back to 2006, and the ITA is allowing two ways for beneficiary trusts to settle up:

  • The trust can pay a portion of its regular tax liability, depending upon the influence on the trust by the Israeli beneficiary.
  • The trust can pay tax on the value of the trust as of December 31, 2013.

Again, the rules have changed, and – if this is you – please contact your attorney or other advisor immediately.

The views and opinions expressed herein are those of the author(s). Core Compass’s Terms Of Use applies.

About the author

Steven D. Hamilton is a career CPA, with extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.

IsraelIsrael Tax Authoritybeneficiary trust
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