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Trusts for Israeli residents – Obligations to report
You have worked all your life and you have created considerable capital – what do you do? Is it right that your children should have to deal with significant capital early in their lives? Or perhaps you would be glad to donate part of the sum? These questions and others arise at different stages during your lifetime, and for that reason it is essential and highly recommended to execute proper and early planning to transfer the family’s capital to future generations. One of the options available for you is to establish a Trust.
What is a Trust?
Trust is a legal tool which was founded about 800 years ago, in which an individual (the creator of the Trust) transfers an asset owned by him to a Trustee, who will hold the property for him. In a Trust, the Trustee holds the actual assets and performs actions with them for the purpose of achieving a particular purpose, or for the benefit of the beneficiary of the Trust, in accordance with instructions defined by the individual who created the Trust. As suggested by the name, the Trust is based on a relationship of “Trust” between the creator of the Trust and the Trustee, to whom the assets of the creator have been transferred. The creator of the Trust is, in effect, separated from direct ownership of his assets, in order that these will be managed by another individual in accordance with the wishes of the creator. From the date on which the assets of the Trust are transferred, the Trustee is required to act within the framework of his authorization; thus the Trustee is responsible for reporting the current income from the assets in the Trust.
It is important to be aware of the fact that any individual is entitled to establish a Trust and to define clear rules relating to it. That same individual is also able to preserve his work and even his family heritage for generations, without having to be dependent on the good will of the beneficiaries who will be entitled to his assets or the profits thereof.
If you have decided that the mechanism of a Trust suits your wishes, it is desirable and even recommended to comprehend the reporting obligations that are involved in the establishment of a Trust and the routine management of it. For the sake of convenience, hereunder a general description of the reporting obligations on the matter of a Trust set up by Israeli residents, by stage:
The stage of establishing the Trust
At the stage of establishing the Trust, the creator is required to report on the establishment of the Trust and the placement of his assets therein. Within the context of this report the creator provides personal details of the parties to the Trust (the creator, the beneficiaries, the Trustee and the Trust Protector who shall be appointed) and the assets that have been placed in Trust, including values.
The creator is required to report on the establishment of the Trust within 90 days from the date of its establishment or the date of the first placement of his assets with the Trustee. The creator is furthermore required to report, within 90 days, with respect to any additional placement made to the Trust throughout the timespan thereof.
In the event that it is decided to establish a holding company for the Trust, notice of its existence must be given within 90 days of the date of incorporation of such company.
It is important to remember that in the event that real estate assets in Israel are placed in Trust, in addition to reporting to income tax, additional reporting is required for real estate taxation on the placement of the property in Trust, including the existence of the Trust and the identity of the beneficiary.
Submission of an annual report on the income of the Trust – generally speaking, the income of a Trust of Israeli residents is considered as the income of the creator of the Trust for the remainder of his lifetime; subsequent to his demise it is considered as being income received by an individual who is a resident of Israel. Accordingly – similar to the reporting obligations applicable to individuals – the Trustee is required to submit an annual report on the income of the Trust just as it would report on the income of an individual who is a resident of Israel.
In addition to the annual report, the Trustee shall attach a report of any change in the classification of the Trust – including whether its life has ended; a report shall be made regarding any distributions which occurred during the tax year; any change in the identity of the beneficiaries or in the identity of any other individual who is deemed to be a party to the Trust.
In addition to the reporting obligations that apply to the Trustee, it is important to be aware of the fact that the beneficiaries of the Trust, too, are obliged to report. In effect any individual who knows that he is the beneficiary of a Trust must report that he is a beneficiary of a Trust when making the annual report on his income.
In conclusion, If you have decided that a Trust is the right tool for you, it is important to remember that beyond the benefits which are inherent in the Trust, there are also obligations on those who are party to it. Therefore, it is desirable and even recommended to comprehend the reporting obligations associated with the establishment of a Trust and its routine management, and consult with experts in the field.
It should be noted – the Income Tax Ordinance enumerates the various types of Trusts that may require rather different reporting obligations than the reporting obligations that apply to some Trusts. Also, the aforesaid is no substitute for individual consultation, where in some cases different reporting obligations may apply to the Trust.