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Israeli Shapeless Trust as a perfect estate planning tool
Warren E. Buffett has been quoted as saying, “A very rich person should leave his kids enough to do anything but not enough to do nothing.” The trust is a well-established estate planning tool, however, like many others, you may find yourself hesitant to place your hard-earned assets in the hands of an appointed trustee. The Israeli shapeless trust is an attractive option for those who wish to provide for future generation with a trust without relinquishing title to their assets.
The traditional trust typically involves four main parties: a settlor (who donates the assets), a trustee (who manages the arrangement), a protector (who controls the arrangement) and one or more beneficiaries (who are to receive the funds in future). In a traditional trust, title over the assets is passed to the trustee, who becomes the legal owner; while the beneficiaries or the settlor, or both, can at different times exercise beneficial ownership or control who else gets the money.
The distinguishing feature of a shapeless trust is that it does not require that the trustee become the legal owner of the assets, unlike its U.S., English and Commonwealth counterparts. The shapeless trust was first established by the Israeli Trust Act of 1979. Thus, the Israeli trust allows a settlor to place assets under the control of a trustee, without relinquishing ownership of the assets.
True to its name, an Israeli trust does not have to take a specific form; nor created in a certain way. An Israeli trust can be created - living or on death - by law, public endowment, contract or deed. The only requirement is that assets must be placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. This characteristic is appealing to those who wish to retain ownership of their assets; or those who are hesitant to pass title to a trustee.
The Israeli trust regime also provides flexibility in regards to appointing trustees and their manner of control. A trustee may be any competent individual or legal entity. A trustee may be vested with control over the assets by being empowered to deal with them. The Israeli Trust Act does not require that trustees necessarily administer or dispose of the trust property, or that they do so ‘’in their [the trustees’ name].’’ An Israeli trustee may merely ‘’act in respect of’’ the trust property in, the settlor’s name or in the name of any other person.
The Israeli trust adds a modern twist with its settlor-reserved powers. In a traditional, Anglo-Saxon trust, the settlor has no standing regarding the trust once it has been created and the trust property has been transferred to the trustee. In contrast, however an Israeli trust is created, the settlor may always apply to the court in any matter concerning the trust, unless there is an agreement to the contrary, which may arise in a situation involving a trust created by a contract. Thus, a court may charge, transfer and attach the beneficiary’s rights under the trust to pay off the beneficiary’s obligations. However, this is limited to specific circumstances such as where the beneficiary has outstanding tax or alimony payments.
The Israeli shapeless trust also retains the traditional fiduciary duties owed by trustees to beneficiaries. A fiduciary duty is a legal duty owed by a trustee to act solely in another party's interests. In a traditional trust setting, a fiduciary duty is owed by trustees to beneficiaries since trustees are the legal owners of the trust property. In Israel, the fiduciary duty is also owed by a trustee of shapeless trusts, even in situations where a trustee is not the legal owner of the trust property because the settlor did not pass title to the trustee upon creation of the trust. Israeli courts will apply the fiduciary duty as long as a valid trust exists, even in situations which may be viewed as an agency, nominee-ship, or mandate in a commercial or private law setting. Beneficiaries of Israeli shapeless trusts have the rights and remedies owed by trustees under general fiduciary duties thus preventing the trustee from taking advantage of the legal ownership to use the trust property for their own benefit.
The tax treatment of an Israeli shapeless trust varies, according to the shape the settlor gives it, and several other factors, including the location of the assets and the beneficiaries. In certain cases, distributions of capital are exempt from Israeli tax. Certain contributions are treated as bona fide gifts, which are not taxed in Israel. An underlying holding company may be formed to hold trust assets on behalf of the trustee. It has a flow-through tax structure, which means that assets, and income derived from the assets, are taxed at the trustee’s level. The holding company can be used to benefit from more favorable tax rates in a different jurisdiction. Moreover, an underlying company is not required to submit annual tax returns or open a tax file with the Israel Tax Authority.
The Israeli shapeless trust has developed a reputation as a stable, secure estate planning tool. It combines the tradition and security of a traditional trust, with more flexible features that suit modern, independent needs. This unique investment vehicle is an attractive option for those who wish to provide for future generation with a trust without relinquishing title to their assets. However, expert advice should be sought when forming a trust.
For more information on Israeli trusts, please contact us.
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