Israeli Beneficiaries Subject to New Tax

November 25, 2014Articles Trusts & Estates

For the first time, U.S. (and other) foreign trusts with Israeli beneficiaries will be liable for a substantial income tax. Trust settlors face an array of decisions, some with deadlines as early as year-end.

Until 2014, Israel generally exempted from its income tax any trust that had been created by a foreign person, even if there were Israeli resident beneficiaries and, similarly, didn’t seek to tax such Israeli resident beneficiaries on any distributions. But, under a new tax law that took effect on Jan. 1, 2014, many of these previously tax-exempt trusts and/or their Israeli resident beneficiaries have become subject to significant Israeli income-tax liabilities and reporting obligations. U.S. clients who’ve established trusts for Israeli-resident descendants need to be aware of these new reporting requirements and tax liabilities.

Because the law imposes imminent reporting deadlines, it’s essential for all trustees and trusts subject to its provisions to develop an appropriate plan of action in the coming weeks. Unfortunately, the Israel Tax Authority (ITA) is issuing needed guidance on the law slowly, and sometimes informally, which means that advisors must cope with considerable uncertainty in trying to give timely advice. A case study prepared by Bernstein Global Wealth Management, gives some guidance on obtaining a favorable tax result within the confines of the new law, as currently understood.

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Click here to view the case study.