Taxation of trusts – part 7, the Israeli Resident Trust

An Israeli Resident Trust is a trust that doesn’t meet any of the other definitions of trust types, described in the previous posts. As such, it includes situations whereby:

• The settlor was Israeli resident when the trust was settled and remains so, and there is at least one Israeli resident beneficiary in the year in question.
• There are Israeli resident beneficiaries, but the settlor – who was not Israeli resident – has passed away.

Such a trust is deemed to be Israeli resident for taxation purposes, and the trust income – as a whole – is fully taxable. The taxation options are as discussed in a prior post (here), including the situations whereby the settlor or beneficiaries can be taxed on the income, rather than the trust itself.

For any trusts settled by an oleh prior to their aliyah, the rules are as follows:

• If the settlor made Aliyah prior to 31 July 2013 (when the laws were enacted), the trust is exempt from taxation for 10 years from the date of Aliyah – provided that there is no income in Israel.
• If the settlor made Aliyah after the above-mentioned date, the trust will be exempt from taxation until the end of the 10-year exemption period of the settlor or any of the beneficiaries; whichever is earlier. As such, anyone considering Aliyah now who has previously settled a trust should ensure that they are aware of the taxation implications, even within their 10-year period.

As you will have noticed over the last few posts, the area of taxation of trust income is fairly complicated. If this is a situation that you think may affect you (be it for an existing trust, or a trust that is intended to be set up) please contact me to set up a meeting to discuss your particular situation.