When examining tax issues, the trust institution has three major factors to consider:
- Whoever that established the trust is the person who has allocated the trustee with assets
- The trustee is the person who received the assets
- The beneficiary is the person who directly or indirectly has gains and/or income stream from these assets.
For tax purposes, the trustee is required to report the assets and is liable for income taxes. Depending on the particular type of the trust it is determined who carries the tax liability – the trustee, the person who has established the trust or the beneficiary.
A trust is considered to be taxable in Israel if any one of the parties involved is an Israeli national.
Trust will also apply in case, where the trustee’s income is seen as the creator’s income and also his assets as the creator’s assets. In this kind of trust, if all the creators have passed away, the trustee’s income will be considered as income of an individual and his income as joint assets of a resident of Israel.
Trusts Taxation – Israeli resident trust
In case of a trust in which the beneficiary is an Israeli resident, two types of trusts are recognized for tax purposes – a non-related and a related trust.
A non-related trust in which any of the participants is an Israeli national, carries a tax liability based on the Israeli tax regulations
A related trust is a trust in which its creators are related to the beneficiary. For example – a trust is established by parents, for their children. This type of trust requires declaring that the creator received no benefits from the beneficiary for becoming one in the trust.
In the case of related trust, there is a 30% tax liability on trust assets and income, unless the beneficiary can establish that he would have received these assets, with no tax liability, if the trust was not established. In this case, there will be no tax liability.
There is an additional option for related trust taxation – The participants may choose to pay a 25% tax liability, thus the part on which this tax is payable, will be exempt at the time of the actual trust assets distribution. This taxation method cannot be revered unless the trust status was altered to a non-related trust.
Due to the complexity of trust related tax issues, it is highly desirable to consult with trust taxation expert.