ISRAEL Law and Practice Contributed by: Yaron Mehulal, Nataly Davidai and Shalom Hershkovitz, FISCHER (FBC & Co.)
4. Family Business Planning 4.1 Asset Protection
underdeveloped and underprotected from creditors’ and beneficiaries’ claims, wealthy Israeli families prefer to use foreign common law trust structures to ensure asset protection. 3.2 Recognition of Trusts Israel’s Trust Law legally recognises and regulates the establishment and administration of trusts, whereas the Israeli Income Tax Ordinance (New Version), 5721- 1961 regulates the taxation of trusts, including foun - dations and establishments settled under foreign laws. 3.3 Tax Considerations: Fiduciary or Beneficiary Designation While a trustee’s tax residency is irrelevant to the question of a trust’s taxation under the Israeli Income Tax Ordinance, the location of tax residency of each of the trust’s beneficiaries and settlors is crucial. Even one Israeli tax resident beneficiary is sufficient for levying Israeli taxes on the trust’s worldwide income, regardless of other foreign laws that may govern the establishment and taxation of the same trust. Further - more, if a trust’s settlor, who is an Israeli tax resident, also serves as the trustee and/or the protector of that same trust, the trust shall be deemed a revocable trust for purpose of the Israeli Income Tax Ordinance and shall thus be subject to full Israeli taxation, even if all its beneficiaries are foreign tax residents. A trust shall also be deemed a revocable trust for purposes of the Israeli Income Tax Ordinance if the settlor is also a beneficiary. 3.4 Exercising Control Over Irrevocable Planning Vehicles The Israeli legislature has not taken any steps to amend Israel’s Trust Law and/or the Israeli Income Tax Ordinance to allow settlors to retain extensive pow - ers. In fact, in a trust dedicated in favour of a third- party beneficiary (ie, a private hekdesh ), unless the trust deed specifically permits changes to be made (regardless of whether by settlor, trustee or benefi - ciary), a change can be made only if all beneficiaries have consented or a court order has been issued, thus resulting in the trust being deemed revocable for tax purposes.
Israeli businesses’ main asset protection method is the use of a corporate shield, namely, limited compa - nies and limited partnerships that protect the share - holders/limited partners from the risks related to the underlying business or asset. Protecting the ownership of businesses from credi - tors’ risks can also be achieved using irrevocable and discretionary trusts, preferably under non-Israeli jurisdiction. If the owner of the business is reluctant to hand over control to an independent trustee, it is common to use offshore holding structures that make it difficult (although not impossible in today’s transpar - ent legal environment) for creditors to locate and track the assets and link them to the ultimate owner. 4.2 Succession Planning As Israel has no estate taxes, inheritance taxes or even a gift tax (other than a partial purchase tax on gifts of real estate, and unless the donee is a non- Israeli tax resident), straightforward gifts are the most common means of transfer of wealth and control to younger generations. Second in popularity would be to transfer only upon death, by way of a well-planned and structured will accompanied by a family constitu - tion, which is a valid contract that governs the family’s younger generations’ decision-making process when they gain control over the family business. The family constitution can be drawn during the lifetime of the founding generation, or alternatively be added as an appendix to the will, thus conditioning the receipt of the inheritance, with the execution of the family con - stitution. Many wealthy families use a combination of both methods, thus allowing training as shareholders or as directors to the younger generation, while maintaining the control of the family business within the older and more experienced generation. As an intermediate step, some families choose to sep - arate voting rights from property rights, thus bestow - ing wealth in the hands of the younger generation without burdening them with the responsibility of man - aging a business, with the aim of passing on control
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