How a US Family Trust Was Regularised After a Daughter's Aliyah

Result: The trust was accepted as a relatives trust under Section 75H1(b) of the Income Tax Ordinance and the Israeli charge closed at NIS 186,000 · Timeline: 11 months from the first Israel Tax Authority letter to a signed assessment · Challenge: Twelve years of missing trust notifications after a beneficiary's aliyah · Authority: Israel Tax Authority (Rashut HaMisim) · Financial Impact: NIS 186,000 paid against an exposure costed at about NIS 1.05M

Background

A retired couple outside Boston settled a family trust in 2011. Both are US citizens. Neither has lived in Israel, held Israeli status, or owned an Israeli asset at any point in their lives. The trust holds US listed securities and a small private equity interest, it was worth a little over USD 4M when the file reached us, and the beneficiaries are their three children. The eldest daughter made aliyah in 2012 at the age of 29, married, and settled in Modi'in. Between 2022 and 2025 the corporate trustee, the trust department of a US bank, wired her four distributions worth NIS 1,040,000 in total. In all that time nobody in the chain had filed a single form in Israel about the trust, because nobody had told them there was anything to file.

The letter that opened the file was two paragraphs long. The Israel Tax Authority wrote to the daughter in September 2025 asking her to explain foreign credits into her Israeli account, and asking whether she was the beneficiary of a trust. Her parents were 7,000 kilometres away. The trustee was a bank that had never opened an Israeli file in its institutional life. None of the three of them could walk into a tax office.

The Challenge

Israel does not tax trusts as a separate species. Chapter Fourth-1 of the Income Tax Ordinance, Sections 75C to 75T, looks through the arrangement and asks two questions instead: who settled it, and who benefits from it. The answers decide the category, and the category decides everything else. While every settlor and every beneficiary was a foreign resident, this was a foreign resident settlor trust, exempt from Israeli tax on its non-Israeli income under Section 75T. The daughter's flight to Ben Gurion in 2012 changed the answer to the second question.

The provision that caught this family is Section 75H1, which defines an Israeli Resident Beneficiary Trust: every settlor was a foreign resident from the date the trust was created, and at least one beneficiary is an Israeli resident during the tax year. That describes the Boston trust exactly. Amendment 197 to the Ordinance, enacted in August 2013 and effective from 1 January 2014, built the regime, so the trust became an Israeli Resident Beneficiary Trust on the day the amendment came into force, with the daughter already living in Israel. The trustee had 60 days from that date to notify the Israel Tax Authority. It notified nobody, for twelve years.

Then comes the fork that mattered more than any other fact in the file. Section 75H1 splits into two. A trust that fails the family relationship test in Section 75H1(b) is treated as an Israeli Residents' Trust, which means Israel taxes the trust's worldwide income as though the trustee were an Israeli resident, whether or not a shekel is ever distributed. A trust that meets the test is a relatives trust, and the trustee chooses between two rates. This trust produced roughly NIS 900,000 a year. Taxed as an Israeli Residents' Trust across the four exposed years, with interest and linkage, we costed the downside at about NIS 1.05M and growing annually. Taxed as a relatives trust on the distributions actually made, the number was a fraction of that.

One more piece of timing worked in the family's favour, and it is the piece most people misread. Section 14 of the Ordinance exempts a new immigrant's foreign income and gains for ten years from the date of aliyah. The daughter arrived in 2012, so distributions of foreign source trust income reaching her before 2022 sat inside that shelter. What the exemption never did was excuse the trustee's notification. Reporting and taxation are separate duties in this chapter, and the family had confused a decade of nothing being payable with a decade of nothing being required.

In Practice: Section 75H1 of the Income Tax Ordinance treats a trust as an Israeli Resident Beneficiary Trust where all settlors were foreign residents from creation and at least one beneficiary is an Israeli resident in the tax year. Where the settlor is the parent, grandparent, spouse, child or grandchild of that beneficiary, Section 75H1(b) makes it a relatives trust, and the trustee notifies the Israel Tax Authority (Rashut HaMisim) on Form 147, with the rate election on Form 154, within 60 days of the trust being created or becoming such a trust. The default charge is 30 per cent on the income element of each distribution to the Israeli beneficiary, against an alternative election of 25 per cent on trust income as it arises. On the income element of NIS 620,000 inside NIS 1,040,000 of distributions, the 30 per cent route produced NIS 186,000.

What We Did

The first job was documentary rather than legal. We had to prove that both settlors were foreign residents on the day the trust was created in 2011 and had remained so, because that single fact is what keeps a trust inside Section 75H1 instead of inside the Israeli Residents' Trust rules. The couple supplied Massachusetts property records, US federal returns for 2010 and 2011, passports showing no Israeli entries in the relevant period, and a signed declaration. Everything was apostilled in Massachusetts under the Hague Convention and translated by an Israeli notary, at NIS 251 for the first 100 words of each document and NIS 197 for each further 100.

The second job was the family relationship. A relatives trust under Section 75H1(b) requires the settlor to stand in a defined relationship to the Israeli beneficiary, and a parent qualifies at the first degree, so no argument about good faith or absence of consideration was needed. The daughter's teudat zehut (Israeli identity card), her US birth certificate with an apostille, and the trust deed naming her were enough to close that point in one submission.

Third, we dealt with the lateness head on rather than hoping the assessing officer would not count the years. We filed Form 147 and Form 154 together, twelve years after the deadline, with a covering disclosure setting out the 2012 aliyah, the Section 14 exemption running to 2022, the four distributions from 2022 to 2025 with bank confirmations for each, and a schedule splitting every distribution between capital and its income element from the trustee's own accounting records. Presenting that split before the assessing officer asked for it is what kept the discussion technical instead of adversarial.

Fourth, we chose the track. The 25 per cent current taxation election looked cheaper on a one year view of the daughter's notional share of trust income, at roughly NIS 75,000 a year on a third of NIS 900,000. It was still the wrong answer for this family. The parents intend to reduce distributions to occasional support payments, the trust reinvests almost everything it earns, and a current taxation election would have taxed her annually on income she may never receive, for as long as she lives in Israel. The distributions track charges tax only when money actually crosses. The trustee signed the election on Form 154 and it is now locked in.

Everything ran remotely. The parents signed powers of attorney before a notary in Boston, with an apostille from the Secretary of the Commonwealth. The trustee's compliance officer joined two conference calls at 09:00 Boston time, which is 16:00 in Israel, and the meetings with the assessing officer were held by video with our office presenting. Neither settlor set foot in Israel at any stage. For the general framework rather than this file's particulars, our guide to the Israeli taxation of foreign trusts sets out each category in turn.

In Practice: The exposure avoided was the reclassification, not the rate. A trust that fails the Section 75H1(b) relationship test is taxed as an Israeli Residents' Trust on its worldwide income, so on annual trust income of NIS 900,000 the Israeli charge would have run at roughly NIS 225,000 a year before interest and linkage, whether or not anything was distributed. Note what has changed for later arrivals: Amendment 272 removed the Section 134B reporting exemption for anyone becoming an Israeli resident on or after 1 January 2026, so an oleh today reports foreign assets and trust interests from year one even while the Section 14 ten year exemption still shelters the income from tax. A first year filing of this kind takes the Israel Tax Authority assessing officer roughly 3 to 6 months to review.

The Outcome

The assessment was signed in August 2026, eleven months after the first letter. The trust now sits on record as a relatives trust under Section 75H1(b), the distributions election stands, and the Israeli tax on the four historic distributions came to NIS 186,000, paid with interest and linkage on the older years. Set against the reclassification risk we had costed at about NIS 1.05M, the family treated the result as a rounding error, which is roughly the right reaction. No penalty was imposed for the missing notifications. In our experience the voluntary schedule of the capital and income split is the reason for that.

The US side did not resolve as neatly, and clients should hear this in advance. The trust is a US trust taxed to the grantors, so the parents report its income annually on their US returns. The Israeli tax was borne by their daughter, a different taxpayer in a different country in different years, so the parents had no US credit to claim against it. The daughter, who holds US citizenship alongside her Israeli status, took a foreign tax credit position on the portion of the distributions treated as foreign source income, worked through by her US accountant with our schedule in hand. Two governments, one pot of money, and no automatic mechanism to line them up.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. A child's aliyah reclassifies your trust on the day it happens. No form arrives, no regulator writes, and nobody in your home country tells you. If a beneficiary of your trust has moved to Israel, the classification question is already live.
2. The ten year exemption under Section 14 of the Income Tax Ordinance suspends tax, not reporting. The trustee's 60 day notification on Forms 147 and 154 fell due in 2014, while the daughter still had eight exempt years in front of her.
3. The relationship between settlor and beneficiary is worth more than any step taken afterwards. A parent, grandparent, spouse, child or grandchild settlor puts the trust inside Section 75H1(b) and gives the trustee a choice of rates. A settlor outside that circle hands Israel the trust's entire worldwide income.
4. Choose the track on the family's actual distribution pattern, not on one year of arithmetic. The 25 per cent current election taxes income the Israeli beneficiary may never see, permanently. The 30 per cent distributions track charges only what crosses.
5. Anyone making aliyah from 1 January 2026 onward should assume reporting starts immediately. Amendment 272 removed the reporting exemption earlier arrivals relied on, so the pattern that produced this case cannot repeat itself for a new oleh.

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Facing a Similar Situation?

If a beneficiary of your family trust lives in Israel, or is about to, the classification and the 60 day notification turn on facts you already hold rather than on anything you still need to arrange.

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