Have you
settled (that is, funded) a trust with an Israeli beneficiary?
I have not,
but many have.
If this is
you: heads up. The tax rules have changed, and they have changed from the Israeli
side, not the U.S.
Until this
year, Israel has not taxed a trust set up by a foreign
person, even if there were Israeli beneficiaries. It also did not bother to tax
the beneficiaries themselves. This was a sweet deal.
The deal
changed this year. The Israel Tax Authority (ITA) now says that many trusts previously exempt will henceforth be taxable.
Israel is
looking for a beneficiary trust, meaning that all settlors are foreign persons
and at least one beneficiary is a resident Israeli.
EXAMPLE: The grandparents live in Cincinnati; the son moves
to Israel, marries and has children; the grandparents fund a grandchildren’s
trust.
A
beneficiary trust can be either
·
A
“relatives trust,” meaning the settlor is still alive and related (as defined)
to the beneficiary
·
A
“non-relatives trust,” meaning the settlor is not alive or not related (as
defined) to the beneficiary
EXAMPLE: The grandparents in the above trust pass away.
The tax will
work as follows:
·
A
relatives trust
o
Pay
tax currently at 25% on the portion allocable to Israeli beneficiaries, or
o
Delay
the tax until distributed to an Israeli beneficiary, at which time the tax will
be 30%.
·
A
non-relatives trust
o
Pay
tax on income allocable to Israeli beneficiaries at regular tax rates (meaning up
to 52%)
If one does
nothing by the end of 2014, a relatives trust is presumed to have elected the “pay currently”
regime.
The ITA has
indicated verbally that any U.S. tax paid will be accepted as a tax credit
against the Israeli tax, whether the tax was paid by the settlor (think grantor
trust), the trust itself or the beneficiary.
The
retroactive part of the tax goes back to 2006, and the ITA is allowing two ways
for beneficiary trusts to settle up:
·
The
trust can pay a portion of its regular tax liability, depending upon the influence
on the trust by the Israeli beneficiary.
·
The
trust can pay tax on the value of the trust as of December 31, 2013.
Again, the
rules have changed, and – if this is you –
please contact your attorney or other advisor immediately.
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