Michael Shine & Partners

The Culture Of Trusts In Israel

Shira Shine, Senior Partner at Michael Shine & Partners and Managing Director of Shine Group and Trevor Silverman, Partner Michael Shine & Paretners


The law of trusts derives historically from the English medieval property tool called “the use”, which gave English land owners the ability during their lifetime to convey land for the benefit of whoever they wanted and thus avoiding the default position under the law that land automatically passed to the eldest son on death.

This legal concept later developed into the trust, following the abolition of “uses” by King Henry VIII.

A trust is a contractual arrangement between the settlor, who founds the trust, and the trustee or trustees, in whom ownership and control over assets transferred to, or settled on the trust are conferred. Trusts are set up for beneficiaries, to include spouses, children, even charities and the settlor himself.

Specific potential beneficiaries can likewise be excluded. A protector can be appointed to effectively supervise the trustees, particularly, to appoint and dismiss them, appoint or exclude beneficiaries and approve awards to beneficiaries.


In the modern era trusts are an extremely effective tool for wealth preservation, tax and estate planning (especially inheritance tax), privacy and asset protection and there are a number of jurisdictions that have adopted sophisticated and intuitive trust legislation, which gives settlors greater flexibility and control over the trust assets and allows for increased confidentiality.

Such jurisdictions include, Channel Islands, Isle of Man, BVI and Cayman Islands, but there are many other similar jurisdictions which vie with each other for lucrative trust business.

These jurisdictions have made a purposeful effort to attract trust business by tweaking their trust legislation in a way that makes them more desirable, as they see the economic benefit of being known as a premier trust jurisdiction.


In contrast the culture of trusts in Israel remains at an embryonic stage. This is due to the fact that the State of Israel is only 75 years old and although many key aspects of Israeli law are based on English common law as applied during the British mandate of Palestine from 1920-1948, the equitable doctrines of trust were not imported into Palestine since they were not considered suitable for application in local situations. In addition, as of 1981, there is no inheritance tax in Israel, so most people did not feel the need to turn to trusts as a way to protect their assets and engage in estate planning.

The low profile of trusts in Israel remained until recent times and it was not long ago that the word ‘trust’ was still being confused with the word ‘escrow’ as the two are the same word in Hebrew (נאמנות), however with the recent increase of Israeli resident and domiciled High Net Worth families, the need for a trust regime has become more relevant as there is now a demand for effective wealth preservation and estate planning and for these purposes the use of trust vehicles in Israel is already tried, tested and proven to be extremely effective.


It is possible to form an “Israeli law” trust and indeed there is Israeli trust legislation – the Trust Law 5739-1979 – governing powers, duties, rights and conduct of trustees.

However Israeli trusts are usually deferred in favour of foreign law trusts, which are significantly more appealing to Israeli resident and domiciled High Net Worth families for a number of key reasons.

Section 8 of the Succession Law 5725-1965 states that if one were to create a trust under Israeli law, the trust would become void on the settlor’s death and revert to the settlor’s estate and the trust assets would pass to the settlor’s heirs in accordance with his Will or the laws of intestacy, as the case may be.

This law undermines one of the fundamental principles of a trust, being that once the settlor transfers property to his trustees to hold the same upon trust, the settlor is no longer viewed as the owner of the property.

It is true that there is a concept of a revocable trust, but in the absence of the trust being revoked, the settlor has no rights or ownership over the assets.

The difficulty caused by the Succession Law gives significant importance to foreign trusts in Israel, since foreign trusts are not governed by Israeli law and will, therefore, not revert to the settlor’s estate. This coupled with the Trust Law 5739-1979, which is somewhat primitive and weak, contributes to make Israel an unattractive jurisdiction of proper law for a trust and means that foreign trusts are more likely to be utilised.


When weighing up the option of a trust versus a Will, one should note some of the advantages of a trust; under the Succession Law 5725-1965, if a testator wanted to gift assets in his Will for the benefit of his descendants, the gift would be limited to benefit either (a) living descendants or those born within 300 days of the testator’s death; or (b) a descendant who is born more than 300 days after the testator’s death, in circumstances where the testator leaves a bequest to a beneficiary and specifies that anything that remains after that beneficiary’s death is to be carried over to a second beneficiary (who must be alive at the date of the first beneficiary’s death).  Contrary to this, assets can be left in trust for the benefit of a greater number of future generations and remoter issue, as the perpetuity period will be much longer and in certain jurisdictions there is even no perpetuity period so the trust will continue without an end date. There can also be administrative advantages to using trusts and a good example is in relation to Probate. If assets are held in trust, they are registered in the names of the trustees and not the settlor, which means that if the settlor dies there is no need to obtain Grants of Probate in any jurisdiction. This can be especially helpful to families with global assets. It is also advantageous in terms of privacy protection since the Grant of Probate is usually a public document.


It is a common misconception that trusts are just vehicles for tax planning; in truth trusts are most effectively used for wealth structuring and estate planning for inheritance tax purposes, which is how they are commonly employed in other countries. That said, there can be tax advantages associated with the use of trusts and a further reason for the increased use of trusts in Israel is the favourable tax planning that can be done. For example, in 2005, Amendment 147 to the Income Tax Ordinance-New Version 5721-1961 (2005) (“Amendment 147”) was passed by the Knesset which sets out the tests for determining the basis of taxation of trusts.  Under the Ordinance it is possible to structure a trust in such a way as to benefit ‘non-Israeli’ beneficiaries and the trust will be classified as an ‘Israeli Settlor Foreign Beneficiary Trust’ and will not automatically be taxed in Israel. In addition, Israel has signed up to a number of international tax treaties which means that other countries are bound to accept the Israel Tax Authority’s position and they will not be able to tax the trust either. The ability to utilise trusts for effective tax planning is therefore very appealing to Israeli residents with family abroad whom they want to support.


Although it is clear that the use of trusts can be advantageous in many situations, it can be disconcerting to Israeli residents – who are not familiar with the concepts of trusts – to transfer control of their assets. A solution is available under Amendment 147, which allows for Israeli residents to act as trustees or protectors thus having elements of control within the Trust without negative tax consequences (as the trust is pierced through for tax purposes) both in Israel and abroad in accordance with international tax treaties with other countries. This, therefore, makes it possible to establish a private trust company for the benefit of one specific family, where the family members will act as directors and retain control whilst still benefiting from holding the assets in a trust.

Although trusts do not yet have strong roots in Israel and the culture of trusts in Israel has a long way to develop, Israeli families are becoming ever increasingly interested in trust vehicles and family office services which are being established more and more due to the increase in High Net Worth families, the recent discussions of considering reintroducing inheritance taxes in Israel and so there is a bright future for this industry in Israel. 


Whoever aspires to advise in Israel on the formation and administration of trusts must first understand the culture of the trust so that they can adjust their advice to the family’s needs and address the intricate legal and taxation implications.