Put your trust in property – but put your property in trust

The (slightly misquoted) saying of Oliver Wendell Holmes in the headline precisely reflects the opportunity afforded to foreigners who are buying properties in Israel, which is due to the mini-reform of the trust legislation in this country.

But what is a trust, and why would you need one to buy a home in Israel?

A trust is the relationship whereby property is held by one party for the benefit of another. A trust usually arises when a property is transferred by one party to be held by another party for the benefit of a third party, although it is possible for an owner to create a trust of a property for himself.

A trust is created by a settlor or a grantor who transfers some or all of his property to a trustee who holds that trust property for the benefit of beneficiaries. The settlor relinquishes control and ownership of the property to the trust, which is controlled by the trustees.

For the purpose of privacy

The trustees have legal title to the trust property but owe a duty to the beneficiaries, and this duty is usually governed by a letter of wishes that is put in place at the time of the granting of the property to the trust. This dictates how the trustees deal with the asset and the duties they have toward the named beneficiaries.

It should be noted that the settlor himself can be a beneficiary of the trust. In the British legal system, trusts have held a time-honored place for the past 1,000 years, and even before then, Roman law had well-developed concepts of trust.

The intention of a trust is for the purpose of privacy. It can also be used to protect beneficiaries (for example, one’s children) against their own inability to handle money. Naturally, a trust is often created as part of legitimate tax planning and can be used, completely legally, to avoid taxes and regulation; for example, if the settlor is living in a jurisdiction that heavily taxes inheritance.

Acquiring the property through a trust – which is a completely separate legal entity and possibly resident in a different jurisdiction that does not tax inheritance – allows the legal avoidance (not evasion, which is illegal) of taxation.

It is worth noting that 5 percent of all property bought in Israel is purchased by foreign residents. This is translated into thousands of apartments every year and, over the past decades, constitutes billions of dollars of foreign investment in real estate, mainly residential.

Private trusts were not regulated in Israel until 1979

In the past, most, if not all, of this property was registered directly in the names of the foreign buyers. There were enquiries by purchasers wishing to place title of these properties in the name of trusts or trustees, as is commonly done throughout the world, but this was not possible.

Not until the reform of the trust legislation in Israel was it possible for such registration to take place. Although the Israeli legal system has recognized public trusts since the British legislation in the 1920s, private trusts were not regulated by legislation until the Trust Law was enacted in 1979.

However, the 1979 law did not meet the requirements that were usually needed in a trust. For example, the concept of trusts surviving generation after generation, which is usually the main point of a trust, was not recognized by Israeli law. The recent mini-income-tax reform that impacted directly the concept of trusts has changed all that. It is now possible to establish a foreign-resident trust created by foreigners and which can hold real estate in the hands of an underlying company wholly owned by the trust itself.

Incentives to place the property on the rental market

The trust is controlled by Israeli trustees, and the trust, trustees and the underlying Israeli holding company incur no Israeli tax consequences.

Most importantly, the property is not owned or registered in the Land Registry in the name of a foreign resident but by a company that is a legal entity of its own, which in turn is controlled by the trustees.

Under the new reform the underlying company is regarded for tax purposes as a “see-through entity,” and the property is treated as if it is held by the trustee, although for registration purposes it is the company that is the owner of the property and appears as such on the title deed.

Another advantage to such a structure is that the rent emanating from the property – if it is under $1,400 per month – is tax free. This is part of the Israeli government’s incentive to owners to place their property on the rental market.

Note: The above describes the possibilities in general terms only, and detailed advice must be obtained prior to any action taken.

israelaw@netvision.net.il

Dr. Haim Katz is a senior partner in a law firm with offices in Tel Aviv and Jerusalem specializing in real estate, inheritance, international trusts and family law. Sam Katz is a jurist living in Jerusalem.

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