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When is a trust a bad idea??

Leon Harris

Amazingly, the Israeli Tax Authority (ITA) has just clarified how to get round a negative Supreme Court judgement relating to trusts, in a tax ruling (3399/22 of August 9, 2022). Instead of a trust, consider a nomineeship if Israeli real estate is involved.

The issue:

Israeli real estate gains are taxed and administered completely differently from other capital gains.

The income tax law says that contributing assets (e.g. securities) to a trust for the benefit of Israeli residents may be exempt.

The real estate taxation law says the exact opposite, contributing assets to a trust is taxable for the seller (generally 28%) and the purchaser (up to 10%).

So which is it? The Israeli Supreme Court ruled this year in the Galis Case that in the case of Israeli real estate, the real estate taxation law prevails – pay the tax. Now the ITA has upset the apple cart….

The Israeli Supreme Court:

In the Galis case, a Canadian resident couple settled an irrevocable Trust and contributed two Israeli apartments for the benefit of their granddaughter, an Israeli resident beneficiary. The granddaughter did not know about the trust or that she was a beneficiary. The trust documents provided that the Canadian settlors did not control the Trust assets, the Trustee did. The Settlors retained some influence by means of a non-binding Letter of Wishes and the use of a Protector who could make changes regarding the Trustees and Beneficiary(ies).

The Supreme Court ruled that the income tax law exemption expressly did not apply to Israeli real estate.

Instead, under the real estate law, a transfer of a right to Israeli real estate to anyone, including a trust or trustee, is taxable.

If the Trust later sells the property, another dollop of Israeli tax will be due.

If the trust distributes the property to a beneficiary, exemption from Israeli double taxation is possible according to the Court if timely trust notifications are filed within 30 days of each act.

Non-Israeli parties also need to check the foreign tax situation.

The US-Israel tax treaty and other tax treaties do not help much. So maximum care is needed to avoid double or triple taxation. Even quadruple taxation is possible if any of the parties are in business and liable to VAT….

The tax ruling:

In the tax ruling case, a couple owned apartments in Israel used by the family. The couple wished to transfer registration of title to their Israeli lawyer who served as a trustee holding the apartments for the benefit of the couple. The Trustee was not authorized to perform any act or transfer of the homes or exercise discretion concerning them, except an act for the benefit of the couple pursuant to express written instruction from them. Full responsibility for the apartments rested with the couple, and registration of ownership of the apartments in the name of the Trustee wouldn’t result in any responsibility for the Trustee.

The ITA ruling says that a trust may not exist and all taxes may be avoided on the contribution of Israeli real estate to a trust if certain conditions are met. This may be the case where: (1) the couple are settlors and beneficiaries; (2) the couple retain material ownership of the apartments, despite ownership being registered in the name of the trustee, (3) if the trustee is serving merely as a “nominee/power of attorney holder”, (4) the Trustee puts into effect what the couple want as beneficiaries, but he has no discretion in this regard.

If the Trustee later sells the real estate, it is the couple who must report and pay tax on that sale, or the heirs must if they sell inherited real estate.

So this is essentially a nomineeship (“bare trust”) rather than a full trust.

What can go wrong? If additions and changes to the beneficiaries are allowed in the trust agreement, transfers in and out the trust are taxable per this ruling.

More changes ahead?

On September 21, 2022 at the STEP tax conference in Tel-Aviv, ITA officials admitted the tax ruling is restrictive e.g. it doesn’t apply if Trustees have discretion, which is often the case. Therefore, the ITA indicated that the ruling conditions may perhaps be amended in the next few months.


To sum up, when doing succession planning for Israeli real estate, the choices may include using a trust, a nomineeship, an entity, or direct bequests to the heirs. Each has pros and cons.

Multinational families and their advisors should check when tax arises in each country concerned and whether Israeli tax can be credited against foreign tax. And stand by for further developments.

As always, consult experienced legal and tax advisors in each country at an early stage in specific cases.

Leon Harris is an accountant specializing in international taxation for businesses, families and trusts. He heads the tax advisory department at Harris Horoviz Consulting & Tax Ltd, an accounting-tax firm based in Ramat Gan and Petach Tikva. He sits on the Israeli CPA Institute Tax Committee and writes the weekly tax column in the Jerusalem Post. Email:, Tel: +972-54-6449398.

© Leon Harris 27.9.22