ISRAEL Law and Practice Contributed by: Yaron Mehulal, Nataly Davidai and Shalom Hershkovitz, FISCHER (FBC & Co.)
6. Roles and Responsibilities of Fiduciaries 6.1 Prevalence of Corporate Fiduciaries While Israeli law does recognise the concept of a trust, trusts are not recognised in Israel as a separate legal entity, and all rights and liabilities of the trust rest with its trustee(s). As a trust is not recognised as a separate legal entity, it is common practice to use either a corporate trus - tee or a “trust holding company”, a tax-pass-through designated legal entity wholly owned by the trust and acting on behalf of the trustee, to hold all or part of the trust’s assets. This structure operates to facilitate the administration of the trust and its assets and activi - ties, and to protect the trustee’s personal assets from blending into the trust. 6.2 Fiduciary Liabilities In Israel, a trustee is personally liable for any damage caused to the trust’s assets and/or beneficiaries as a result of a breach of their fiduciary duty as trustee (see 5.2 Mechanism for Compensation ). Hence, a trustee that acted as per the trust’s terms will normally not be personally liable if they acted in good faith and with the diligence that a reasonable person would have exercised under similar circumstances. The trust’s terms cannot discharge a trustee from liability, including from the obligation to act in good faith and exercise diligence as a reasonable person, nor provide for an exemption from liability due to neg - ligence. However, a trustee may request the court to exempt them from liability, provided that the trustee acted in good faith and, in performing their act or omission, the trustee had meant to fulfil their rule as trustee. As the trustee’s liability for damages means that the trustee is personally liable to compensate for the damages caused to the trust’s assets and/or to the beneficiaries as a result of a breach of their duty as trustee, it is highly recommended to insure the risks associated with the activity of trustees, or at the very least to receive an indemnification obligation from the settlor and/or beneficiaries.
The aforesaid provisions of Israel’s Trust Law are clearly very conservative and underdeveloped, and pose significant exposure to liability and other risks for trustees acting under them. Therefore, more sophisti - cated trusts use other legal systems as the governing law of the trust. 6.3 Fiduciary Regulation Israel’s Trust Law requires a trustee to efficiently invest funds that are not required for the day-to-day needs of the trust, to preserve the capital of the trust and to produce income for the trust. “Efficiently invest” is interpreted as investing in a manner that does not entail unnecessary risk, allows quick realisation if and when funds are required by the trust, and ensures either monetary income or an increase in the invest - ment’s value, all while using the “reasonable person” test as a standard. Nonetheless, if the trust’s terms specifically state how funds should be invested, the trustee is required to act accordingly. As a result, wealthy Israeli families tend to regulate the desired investment policy within the framework of the trust deed. 6.4 Fiduciary Investment The Israeli investment standard relies upon the “rea - sonable person” test. As a result, and unless the terms of the trust state otherwise, diversification is custom - ary in the industry as it is the conduct expected by a reasonable person. In contrast, acquiring or holding an active business not only brings with it an intrinsic risk, but also does not necessarily allow for the quick realisation of funds when required by the trust. Therefore, although tech - nically permitted, holding an active business is not common practice for a trustee of a trust governed by Israeli law. The trustee would, however, not be at risk of being found to have breached their duties where a trust was originally been created with the purpose of holding an active business and ensuring its smooth succession. In such cases, it is strongly recommended to specifi - cally state this purpose of the trust in the trust deed or – if this is not possible – in the settlor’s letter of wishes.
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