ISRAEL Law and Practice Contributed by: Yaron Mehulal, Nataly Davidai and Shalom Hershkovitz, FISCHER (FBC & Co.)
wealth and control to younger generations. Some - times, a trust is combined with strategies originating in the Israeli Companies Law, 5759-1999. In particular, the transferring owners would create a holding enti - ty (company or partnership) distinguishing between property rights and control rights; while the property rights are settled into a trust, the controlling interests are either left with the transferring owners or grant - ed to the more suitable next-generation member(s), thereby retaining equality among the beneficiaries of the property rights. 4.3 Transfer of Partial Interest Property transferred as a tax-free gift among Israeli tax resident individuals, or upon inheritance, retains its original tax cost basis for the purposes of taxing future sale as well as for depreciation purposes, regard - less of the portion actually transferred. However, if an Israeli tax resident receives (whether as a gift or inheritance) a property from abroad, whether whole or in part, a pre-ruling can be requested from the Israel Tax Authority to allow a step-up of the original cost to the fair market value of the property transferred. The Israel Tax Authority would most likely impose cer - tain conditions on the step-up, including limiting the set-off of depreciation, losses, and foreign gifts and inheritance taxes. Being a relatively young country, the Israeli judicial system does not see a great number of substantial wealth disputes (other than in the case of divorce proceedings or challenges to the validity of wills, as further described below). There are few known pub - lic disputes regarding trusts, foundations or similar entities conducted under Israeli law in Israeli courts. However, in recent years, as the country matures, the Israeli judicial system is seeing an increase in the number of disputes that come before it, which can be categorised into three types. 5. Wealth Disputes 5.1 Trends Driving Disputes The first type of dispute relates to the validity of wills: wills made at an advanced age or by an unhealthy testator are sometimes challenged as being staged by interested parties while not representing the testa -
tor’s true wishes due to their lack of mental capacity at such time or as a result of undue influence. In order to reduce interested party claims, the Israeli legislature strictly stated in the Inheritance Law, 5725- 1965 that any provision of a will that benefits a party who has been a witness to, or has participated in any way in, the making of (including merely co-ordinating travel arrangement) is void; hence, this provision of law is used as grounds for abundant disputes seeking to invalidate wills. The second type of dispute deals with the issue of the scope of the estate’s assets. Recent years have seen an increase in claims by spouses and children of deceased persons claiming that property that is allegedly part of the estate does not in fact belong to it. In particular, spouses who are not the sole heirs often claim that they are entitled to half of the property under the “property equalisation” regime, while chil - dren and other interested third parties may argue that parts of the deceased’s property were given to them as a gift prior to the deceased’s death. The third type of dispute focuses on international and cross-border inheritance disagreements, mainly due to the demise of wealthy Jews who held property both in Israel and abroad. More sophisticated families often seek to minimise the risk of public and protracted disputes by requir - ing members of the younger generation to enter into a family constitution providing that family wealth dis - putes are to be resolved through private arbitration rather than through the courts. This approach helps preserve the family’s privacy while also enabling a quicker and more efficient resolution of disputes. 5.2 Mechanism for Compensation Under Israel’s Trust Law, if damage is caused to assets or beneficiaries of a trust as a result of an act, omis - sion or negligence of a trustee, the trustee is person - ally liable to monetarily compensate for the decrease in value of an asset, as well as for any lost profit (in the amount equalling the difference between the val - ue of the asset on the date of compensation and the value the asset would have had had the trustee not breached their duty).
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