ISRAEL Law and Practice Contributed by: Yaron Mehulal, Nataly Davidai and Shalom Hershkovitz, FISCHER (FBC & Co.)
3. Trusts, Foundations and Similar Entities 3.1 Types of Trusts, Foundations or Similar Entities Israel, as a common law country based on the Eng - lish legal system, recognises the validity of trusts and foundations. Israel’s Trust Law, 5739-1979, which is the principal law regulating trusts, recognises four main types of trusts: • a private trust dedicated by a contract; • a private trust dedicated by deed in favour of one or more third-party beneficiaries (also known as a private hekdesh ); • a testamentary trust dedicated by a will; and • a charitable trust called a public hekdesh dedicat - ed by deed or a will. For estate planning purposes, Israelis tend to use either a very detailed private trust for the benefit of third parties – a private hekdesh – or a comprehen - sive testamentary trust, each of which is regulated by Israel’s Trust Law. Nonetheless, due to the fact that the legal structures available under Israel’s Trust Law are insufficient, 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 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions 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,
younger generation are not Israeli tax residents, taxes are not a factor in choosing the most suitable mechanism, as there are currently no gift, estate or generation-skipping taxes in Israel. 2.7 Transfer of Assets: Digital Assets Israel has not legally addressed the issue of digital assets inheritance. Therefore, it is claimed that the Israeli Inheritance Law, 5725-1965 does not apply to digital assets lacking real monetary value, such as email accounts, unless such assets are specifically addressed in a valid will. Hence, if the deceased has not left a will or has left a will without mentioning their digital assets, it is questionable whether they will be subject to or affected by an order of probate. In 2012, in the case of Schwartzman v Psagot Pension Funds , the Tel Aviv District Court recognised that the ownership rights of the deceased’s heirs override the deceased’s right to privacy. It is therefore thought that the courts would most likely uphold the heirs’ rights to receive control over digital assets, if such a case were brought before the courts. Accordingly, in prac - tice, certain Israeli communication companies allowed the heirs access to the deceased’s email accounts, subject to their internal procedures, while others requested the heirs to obtain a court order. To clarify the legal situation, in July 2024, the Israeli legislature passed the Access to Digital Content Upon a Person’s Death Law, 5784-2024, which regulates the access to the deceased’s digital assets and allows individuals to determine, during their lifetime, what will happen to their personal digital content after their death. As for cryptocurrency assets, the Lod District Court in the case of Kopel v Rehovot Income Tax Asses- sor recognised Bitcoin as a financial asset, subject to capital gains tax on profits derived from its sale. Hence, the Israeli Inheritance Law should apply to cryptocurrency, as it does to any other valuable asset. In any case, it is recommended that any digital and cryptocurrency assets, including usernames and passwords, be detailed in the will (or at least in an annex to the will).
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