Israeli Tax on Foreign Trusts: A Non-Resident Guide

A retired couple in Florida set up a family trust years ago to pass their assets cleanly to their three children. One of those children moves to Jerusalem, takes citizenship, and settles in for good. Nothing about the trust changes. The parents never set foot in Israel, the trustee is American, and the trust deed says nothing about the Middle East. Yet from the day that child becomes an Israeli resident, the Israel Tax Authority has a potential interest in the trust, and the family has reporting duties almost nobody warned them about.

This is the quiet trap in cross-border trust planning. Trusts are creatures of the country where they were created, but Israel taxes by connection, not by paperwork. A trust set up entirely under foreign law, administered abroad, and funded with foreign assets can still fall inside Israel's tax rules if a settlor or a beneficiary has the wrong kind of Israeli link at the wrong time.

Israel only brought trusts into its tax code in 2006, through Amendment 147 to the Income Tax Ordinance. A second wave, Amendment 197, reshaped the rules from 2014 and closed several of the gaps that foreign families had been using. The result is a system that classifies every relevant trust into one of a handful of categories, and the category decides everything: whether Israel taxes the income, at what rate, and who has to file. If you are a non-resident with any Israeli thread running through your trust, the classification is where you start.

Israel Taxes the Connection, Not the Trust Document

There is no Israeli trust register and no Israeli "trust tax" as such. What the Income Tax Ordinance does instead, in Chapter Fourth-1 (Sections 75C to 75T), is look through the trust and ask two questions. Who created it, and who benefits from it? The residency of those people, measured under Israel's ordinary tax-residency tests, determines the trust's tax category.

That is a very different logic from the one most foreign advisers work with. A US estate planner thinks about the trust's situs, its governing law, and whether it is a grantor trust for IRS purposes. None of that controls the Israeli answer. Israel asks whether the settlor is an Israeli resident, whether any beneficiary is, and when each of those facts became true.

Because the test turns on people rather than documents, the classification can change over the life of a trust without anyone touching the deed. A child's aliyah, a parent's return to Israel after years abroad, or the death of a settlor can all flip a trust from one category to another, and with it the tax and reporting picture. Residency itself is decided under Israel's center-of-life and 183-day tests, which is why so many of these problems begin with a family member who quietly became an Israeli resident.

The Categories That Matter for Non-Residents

For families based abroad, three categories come up again and again.

A Foreign Resident Settlor Trust is the cleanest case. The settlor is a foreign resident when the trust is created and stays that way, and the beneficiaries are foreign residents too. Israel treats the trust as a foreign resident for tax purposes. Its non-Israeli income is outside the Israeli net entirely, even if a distribution later reaches an Israeli resident, provided the Israeli beneficiary has no real control over the trust.

A Foreign Resident Beneficiary Trust is the category for a trust that benefits only foreign residents, used where the settlor's own status is mixed or uncertain. It keeps foreign-source income out of Israeli tax as long as every beneficiary stays non-resident. Add one Israeli beneficiary and the protection falls away.

A Relatives Trust is the one that catches families by surprise. It typically arises where a foreign-resident parent or grandparent sets up a trust for an Israeli-resident child or grandchild. Amendment 197 carved out a special regime for these, precisely because the old foreign-settlor exemption was being used to funnel value to Israeli residents tax-free. Here, Israel wants its share, but offers the trustee a choice in how to pay it.

In Practice: A Foreign Resident Settlor Trust is exempt from Israeli tax on its non-Israeli income under Section 75T of the Income Tax Ordinance 1961, but any Israeli-source income is fully taxable. If the trust owns a Tel Aviv apartment producing NIS 90,000 a year in rent, the trustee must report that income to the Israel Tax Authority (Rashut HaMasim) and file an annual return for the trust. Opening the trust's tax file and appointing an Israeli representative usually takes 4 to 6 weeks, and the first return is due by 30 April of the year after the income arises.

How a Relatives Trust Actually Gets Taxed

Say the Florida parents from the opening fund a trust that pays out to their Jerusalem-resident daughter. Once she is an Israeli resident, the structure is most likely a Relatives Trust. The trustee then chooses between two ways of settling the Israeli tax.

The first option is a flat tax on distributions. When the trust pays the Israeli beneficiary, the income portion of that distribution is taxed at 30%. Capital that the settlor originally put in is generally not taxed again on the way out, but separating capital from income takes proper trust accounting, and the burden of proving the split sits with the family.

The second option is current taxation. The trustee elects to have the trust's income taxed in Israel each year as it arises, at 25%, regardless of whether anything is distributed. Families with steady distributions and clean records sometimes prefer this, because it avoids a 30% hit on lumpy payouts later. The election is made in the trust's return and is hard to undo, so it deserves real thought rather than a default.

In Practice: Under the Relatives Trust regime added by Amendment 197 to the Income Tax Ordinance, a trustee who elects the distribution route pays 30% on the income element of each payment to the Israeli beneficiary, reported to the Israel Tax Authority. On a NIS 400,000 distribution where NIS 250,000 represents accumulated trust income, the Israeli tax is NIS 75,000. The election is locked into the annual return and cannot be reversed retroactively, and the assessing officer's review of a first-year filing commonly runs 3 to 6 months.

What This Means From Outside Israel

Every one of these duties has to be handled by people who, by definition, may not be in Israel. The trustee is usually abroad. The settlor is abroad. Even the Israeli beneficiary often spends part of the year overseas. That creates friction the rules themselves do not mention.

Israel will not deal with a foreign trustee informally. The trust needs an Israeli tax file and, in practice, an Israeli representative or accountant authorised to file on its behalf and to receive correspondence from the assessing officer. Setting that up means a power of attorney, often signed before a notary abroad and apostilled, so the Israeli professional can act without the trustee flying in.

There is also a home-country layer that Israel does not coordinate for you. A US settlor still has IRS reporting on a foreign or domestic trust. A Canadian beneficiary still answers to the CRA. The double-tax treaties Israel has signed can relieve actual double taxation on the same income, but they do nothing to merge two separate reporting systems. You file in both, and the two filings have to tell a consistent story, because tax authorities now exchange information automatically under the Common Reporting Standard.

For families using a trust to hold the estate rather than to save tax, it is worth remembering that a trust is only one of several tools. Where the goal is an orderly succession of Israeli assets, a properly drafted separate Israeli will sometimes does the job with far less ongoing compliance than a cross-border trust.

Where Foreign Families Go Wrong

The mistakes here are rarely about rates. They are about timing and reporting, and they tend to surface years after the trigger event, when the Israel Tax Authority asks why a distribution was never declared.

Common Mistake: Treating a US revocable living trust as irrelevant to Israel because the settlor never lived there. The moment an Israeli-resident relative becomes a beneficiary and receives value, distributions can become reportable under Section 131 of the Income Tax Ordinance. Israeli beneficiaries who fail to file face penalties that start at roughly NIS 5,000 per unreported year, plus interest and inflation linkage on any tax due, and the assessing officer can reach back several years. Voluntarily correcting the record before the Authority asks is almost always cheaper than waiting to be found.

Two other errors recur. The first is assuming the foreign-settlor exemption is permanent. It is conditional on the people staying non-resident, and a single aliyah can recharacterise the trust. The second is poor record-keeping on the capital-versus-income split. When the family cannot prove how much of a distribution was original capital, the Authority is entitled to treat more of it as taxable income, and the 30% bites harder than it should.

Practical Checklist

• Map who the settlor and every beneficiary are, and confirm each person's Israeli tax-residency status and the date it changed
• Identify the trust's category before any distribution: foreign settlor, foreign beneficiary, or relatives trust
• Open an Israeli tax file and appoint a local representative if the trust has any Israeli income or any Israeli beneficiary
• Keep clean accounts separating original capital from accumulated income, so distributions can be split correctly
• Decide deliberately between the 30% distribution route and the 25% current-taxation election, and document the choice
• Coordinate the Israeli filing with the settlor's and beneficiary's home-country reporting so the two are consistent

Speak With an Israeli Attorney

Cross-border trusts reward families who classify correctly and report early, and they punish those who assume foreign law shields them from Israeli tax. If a settlor or beneficiary in your trust has any Israeli link, an Israeli tax lawyer can pin down the category, set up the local filing, and choose the taxation route that costs least over time.

Contact us for a confidential initial consultation.