Can heirs living abroad agree between themselves to divide an Israeli estate differently from the will, and is that taxed?

Yes, and it is one of the few points in Israeli succession practice where the heirs, not the court, hold the pen. Section 110(a) of the Succession Law 1965 provides that estate assets are distributed among the heirs by agreement between them or by order of the court, which puts a properly drafted agreement on the same footing as an order. The family in Sydney that wants the Jerusalem apartment to go to the sibling who lives closest, in exchange for the whole of the securities portfolio going to the other two, can do exactly that. The discipline sits in the tax rule rather than the succession rule. Keep the swap inside the estate and it is not a sale for Israeli real estate tax purposes. Reach into a personal bank account to even things up and you have created a purchase.

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Detailed Answer

Section 5(c)(4) of the Land Taxation (Appreciation and Acquisition) Law 5723-1963 is the provision that makes the whole arrangement work. It removes the distribution of estate assets among heirs from the definition of a sale, so no betterment tax falls on the heir who gives up their share of the apartment and no purchase tax falls on the heir who takes it, notwithstanding that ownership has plainly moved between two living people. The condition attached is narrow and it is the one every practitioner watches: the distribution must not involve consideration in money or money's worth that is not itself an estate asset. The Israel Tax Authority also treats the relief as available to the first distribution of the estate, so heirs who register the shares in Tabu and later decide to reshuffle have usually spent the exemption. In practice that means the agreement should be signed and the tax position settled before the succession order is used to register anything, not afterwards.

The number that concentrates minds is the purchase tax. Where an heir pays a balancing sum from their own funds, the Tax Authority treats the value acquired with that outside money as a purchase from the co-heirs. A non-resident buyer pays purchase tax at 8% on the price up to NIS 6,055,070 and 10% above it, from the first shekel, with none of the graduated relief an Israeli buying a single home receives. A sibling who pays NIS 1,200,000 out of pocket to keep an inherited Netanya apartment is therefore looking at roughly NIS 96,000 of purchase tax on that slice alone, and the co-heirs receiving the money face betterment tax on the corresponding disposal. The alternative that costs nothing is to find the balancing value inside the estate itself, which is why the order in which you value the assets matters: an estate containing an apartment, a provident fund and a portfolio has more internal currency to work with than an estate that is simply one flat. Our answer on purchase tax on inherited Israeli property sets out how the charge behaves when the transfer is a straightforward inheritance rather than a swap.

Executing this from three time zones is mechanical rather than difficult, but it is unforgiving of loose drafting. Every heir must be a party, including the one who is receiving nothing under the reshuffle, and a minor heir or an heir under guardianship pulls the Family Court back in because a guardian cannot simply sign away a ward's share. Signatures collected abroad need authentication that Israeli institutions will accept, which for most heirs means signing before an Israeli consul or before a local notary with an apostille, and the agreement itself should be in Hebrew or accompanied by a notarial translation because the Land Registry and the Tax Authority work in Hebrew. Where an heir signs through an attorney under a power of attorney, the power has to be specific enough to cover disposing of an interest in land, since a general power is routinely rejected at the Tabu counter. Build all of that into the timetable, because the real estate tax declaration has its own filing deadline once a transaction is treated as having occurred.

In Practice: The agreement rests on Section 110(a) of the Succession Law 1965 and needs no court approval, while the exemption from betterment and purchase tax comes from Section 5(c)(4) of the Land Taxation (Appreciation and Acquisition) Law 5723-1963 and survives only if no money from outside the estate changes hands. The Israel Tax Authority real estate taxation office reviews the declaration, and registration of the agreed shares at the Land Registry (Tabu) typically completes 6 to 12 weeks after the succession order and tax clearances are in hand. Where outside money is used, a non-resident heir pays purchase tax at 8% up to NIS 6,055,070, so a NIS 1,200,000 balancing payment costs about NIS 96,000 in tax that a purely internal swap would not have triggered.

When to Consult a Lawyer

• One heir wants a specific asset and the estate does not contain enough other value to balance the deal, where the choice between an outside payment and a different structure is worth tens of thousands of shekels in purchase and betterment tax.
• An heir is a minor, lacks capacity, or is represented by an attorney under a foreign power of attorney, since the agreement will be examined by the Family Court or refused at the Land Registry if the authority to sign is not watertight.
• Assets have already been registered in the heirs' names, because the first-distribution position means a later reshuffle is likely to be assessed as an ordinary sale between co-owners rather than as a distribution of an estate.

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Speak With an Israeli Attorney

An Israeli lawyer can structure the distribution so the balancing value stays inside the estate, draft the agreement to the standard the Land Registry and the Tax Authority accept, and coordinate authenticated signatures from heirs in several countries.

Contact us for a confidential initial consultation.