Does your trust have any Israeli beneficiaries?

Major tax changes affect U.S. trusts which are “foreign trusts” for Israeli tax purposes. Since January 1, 2014, trusts with a Non-Israeli grantor that have an Israeli tax resident beneficiary are subject to Israeli taxation and reporting. The Israeli Beneficiary Trust (IBT) is subject to the reporting and taxation “portion” to be attributed to the Israeli beneficiaries; trusts are required to report their underlying companies (as defined in the law) which are taxable at trust tax rates.

There are two types of IBTs:

Family/Relatives Trust – where the grantor or his/her spouse are alive, and in which settlor/grantor and beneficiaries are close family relatives, may elect to be taxed annually at 25% of taxable income or on distributions at a 30% rate (capital portion exempt).

Non Family/Relatives Trusts – in which settlor/grantor and beneficiaries are not relatives, will be taxed annually at regular individual rates.

Trustees of IBTs are now required to:

  • Open a tax file for each IBT and disclose its assets
  • Elect the preferred tax route (annual/upon distribution)
  • Sign and submit annual tax returns (annual tax route)
  • Report and pay taxes upon distributions (distribution tax route)

Important notes for trustees:

Trustees should obtain documentation as to the value of the trust’s assets at registration.

Where possible trustees should prepare a schedule with a breakdown of the original trust capital and the profits.

Obtain a schedule (and documentation) of taxes paid on trust income (by trust, beneficiaries, and underlying companies).

All distributions as of August 1, 2013, are reportable by recipients