Israeli Court Ruling Opens Door for Real Estate Transfers Into Trusts

Finance, Real Estate

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

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A July 24 ruling from an Israeli court concerning the tax consequences for transferring real estate assets into trusts could ease the burden on taxpayers, including those with overseas assets or who are beneficiaries of foreign trusts. ‍ The decision could exempt the transfer of real estate into trusts from accruing capital gains taxes. The ruling from the Tel Aviv District Court spares individuals who create trusts in Israel, as well as any Israeli beneficiaries of trusts created by relatives abroad from such taxes. ‍ The verdict contradicts a long-standing policy from the Israel Tax Authority that says the transfer of real estate into trusts is a taxable event. In its decision, the court noted that the country’s existing trust law does not specifically refer to the treatment of real estate and admonished the authority for filling that regulatory gap with taxes. In effect, the court held, the agency essentially created the legislation for those taxes without proper authority. ‍ The ruling, which was in response to an appeal of a Tax Authority decision by a Canadian couple who disputed a capital gains tax assessment on the transfer of two Israeli properties into a trust, sets a precedent that has the potential to alter trust formation and how domestic and overseas assets are included. ‍ The Tax Authority argued that even though the transfer of assets into a trust isn’t normally taxable, Israel’s separate law on real estate taxation should take precedence over trust law. According to the Tax Authority, the transfer should be considered a taxable event upon which capital gains tax was due. The court disagreed with that argument and cited Section 75 of the Israel Tax Ordinance, which governs trusts but does not specifically mention real estate. Section 75 includes a special provision that determines the granting of an asset to a trustee does not constitute a sale and, according to the court’s ruling, “overrides the general provision in the Real Estate Law.” The court also said in its ruling that this means the granting of a real estate asset will not be considered a “sale” for purposes of the Real Estate Law. ‍ The decision could have a significant impact on the way tax professionals offer advice to clients with assets in Israel. Since the country doesn’t have an inheritance tax, trusts are not as common in Israel as they are in other nations. However, the recent expiration of a 10-year tax and reporting exemption for new immigrants, as well as a growing number of citizens becoming beneficiaries of trusts created by foreign family members, could see them begin to rise in popularity. The decision is being lauded by some experts, but it isn’t binding quite yet, as the Tax Authority is expected to appeal the decision, which will then bring the case before Israel’s supreme court. ‍ Does the outcome of this ruling have an impact on your financial picture? Talk to a qualified tax professional today to find out if these potential changes could have a bearing on your current or future plans.