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27 April 2015

Taxation of trusts - part 3, the Relatives Trust

The biggest change in the 2014 amendments to the trust taxation law relate to these types of trust.

This is a trust whereby all of the settlors are not - and have never been since inception of the trust - Israeli resident, but at least one of the beneficiaries is Israeli resident. Further, there is a family relation between settlors and beneficiaries.

The cases are clear where the relationship is that of spouse or (grand)parent. Where the relationship is of other first degree relations, the tax authority must be satisfied that the trust has been set up in good faith and that the beneficiaries did not contribute anything towards the trust assets.

For Israeli assets and income, tax is levied as for any Israeli individual. For overseas assets and income:

The default taxation position is that the beneficiary pays a flat 30% tax on any distribution that they receive. Of this, any principal is not taxable, but the onus to prove this may be on the trustee. Further, it is assumed that profits are distributed before capital.

However, an election can be made to tax the trust income - on an ongoing basis - at a flat 25%. For these purposes, the taxable income is based on the percentage of beneficiaries who are Israeli resident. This election has to be made early on in the life of the trust, and cannot be changed. In this case, the distributions will be tax-free.

It should be noted that where a beneficiary is a new immigrant or (veteran) returning resident, the exemptions available to them also apply to their portion of the incomes during the relevant exemption period.

It is important to know that such a trust ceases to be classified as a Relative Trust when the settlors pass away.

And of course, there are a number of forms and deadlines to meet.

For more information, best to speak to an expert.