Nitsan Bar-Ilan Law Firm


NBI - trusteeships in professional hands

Our firm provides a variety of trusteeship services to a wide array of clients in commercial, private and public sectors.

Adv. Nitsan Bar-Ilan specializes in trust law, and serves as the Chairman of STEP (the Society of Trust and Estate Practitioners) Haifa & North.

STEP is a worldwide professional association for those advising families. We help families with trusteeships and in drafting personal and international legal contracts. Experience and profound understanding of the institution of trust are what makes all the difference.

We provide a broad range of trusteeship services, as follow:

  • Financial trusts for senior officials in the public sector;
  • Trusteeship services where trust assets are held, for the trustee, by a trust asset holding company;
  • The purchase of real estate property and the holding thereof in trust;
  • Trusteeships in the field of finance and banking;
  • Trusteeships created for the performance of a contract and for controlling the performance of mutual obligations;
  • Establishment of companies where the shares are held in trust;
  • Trusteeship services for foreign residents;
  • Trusteeships under a will;
  • Trusteeships for managing endowments and funds;
  • Management of trusts for wealth management purposes;
  • Prenuptial trusts;
  • Charitable trusts.

Trusts - historical background

The institution of trust began during the Roman period, at the latest.

Three main uses:

first, transferring ownership and the right to use assets to another person, in order for them to be managed during the absence of the original owner (departure overseas)

second, transferring ownership of assets to another person in order to protect the assets during times at which the original owner has financial difficulties (asset protection trust).

third, a way of circumventing inheritance and tax laws, which restricted the right of more than one person to inherit, by bequeathing assets to an authorized person acting as a trustee, who later transfers ownership of the assets to those who were not entitled to inherit.

In England (common law)

Under the feudal system, land owner were subject to taxes imposed by virtue of ownership of land (such as estate tax imposed on the inheritance of a person of age, where a minor is exempt), and also to restrictions on the transfer and bequeathing of ownership rights (such as the prohibition of bequeathing to more than one heir). By means of the institution of trust, the property right in the asset was split into ownership, on the one hand, and possession on the other hand.

Ownership would be transferred to one person, while the right to use and enjoy would transfer to one or more other persons, and in that way, both the levies and the restrictions on the transfer of assets would be circumvented.

In Israel

The first trusteeships were imported into our country by the Ottoman Empire.
The Islamic Sharia, according to the Hanafi‘s school (one of the four orthodox schools of the Islamic Sharia), was the law of the Ottoman Empire.
The Islamic trust – the Waqf, was a charitable institution or private, but private Islamic trusts were limited to family trusts.
These trusteeships were managed by a trustee – a mutawali, or Nathar, and supervised by a local judge – a kadi.
Later, the English institution of trust, as developed by common law, was brought to Israel by the British rule, the Trust Law, 5739-1979 was enacted, and recently, the provision of Chapter Four “B” were added to the Income Tax Ordinance [New Version], 5721-1961.

What is a trust

Under the traditional definition in the English common law – a trust is created when a person (the creator of the trust) transfers his ownership of an asset to another person (the trustee), in order for him to control the asset in the interest of a third person (the beneficiary).

  • The creator – separates from ownership and control of the assets.
  • The assets – become trust assets, owned by the trustee, who is bound to act in respect thereof in the interest of the beneficiary.
  • The beneficiary – has no property rights in the trust assets.
  • The trustee - is required to act in accordance with the terms of the trust, stipulated by the creator, in the interest of the beneficiary or for some other purpose.

Is a trusteeship a legal entity?

Under common law, and also under Israeli law, a trusteeship is not a legal entity, LCA 46/94 Ayala Sacks Abramov v. The Registration Commissioner, IsrSC 50(2) 202 – “A public endowment is a type of trust. A trust is a legal relationship, and a legal relationship has no legal competence. An entity that has no legal competence cannot be a legal personality (211d-e). Under continental law, there are quasi-trust entities such as anslat, foundation (stiftung). However, different countries apply different laws to trusts, and the question of whether they are a legal entity is determined accordingly.

How do we create a private trust

A trust is created by means of a document made by the creator, defining the identity of the assets, the identity of the beneficiaries, the identity of the trustee and the manner in which the trustee will act, in respect of the assets, in the interest of the beneficiaries. In principle, upon entering into the contract, the creator expresses his desire to separate himself from the control of the trust assets, and therefore he has no control over the trustee, so long as the trustee acts in accordance with the provisions of the trust.

Tools for control of the trust assets that remain in the hands of the creator

The first, the wish letter. When the trust documents leave broad discretion to the trustees, the creator can give the trustees a wish letter, in which he sets out the manner in which he wishes the trustees would act. The trustees are not obligated to honor the wishes of the creator specified in the wish letter, even though they mostly do.

The second, through the appointment of a protector in the trust documents. The role of the protector of a trust is to supervise the activities of the trustee, in such a manner that will ensure that the trustee does not exceed the powers conferred upon him. The powers of the protector are determined in the settlement documents, and can also include, in unusual circumstances, changing trustees or beneficiaries.

Constructive trust

The courts in Israel do not always make the required distinction between a trust in its classic sense and a trust that only constitutes a trust relationship, and apply the provisions of the Trust Law on a relationship that was never defined by the parties as a trust. Such a trust is a constructive trust, that is applied in retrospect to a particular factual situation.

In CA (Jerusalem) 11344/07 Asraf Esther v. Adv Moshe Mimran, an advocate was authorized by the seller of a residential apartment to receive the consideration for the sale of the apartment and to distribute the consideration amount among various persons, including her son. The Court ruled that the distribution agreement was sufficient in order to create a trust. The advocate was perceived as a trustee of the consideration amount only by virtue of his holding it for the purpose of transferring it to third parties, but the beneficiary of the trust, according to the Court, was the seller of the apartment, i.e. the creator, by virtue of her being his client.

The Trust Law, 5739-1979

Under the Trust Law, the creation of a relationship between the asset and the trustee is sufficient in order for a trust to be created – “A trust is a relationship to any property by virtue of which a trustee is bound to hold the same, or to act in respect thereof, in the interest of a beneficiary or for some other purpose. The rationale for the definition in the Trust Law is the legislator’s wish to give the court a tool to apply to the trustee, in certain cases, the obligations defined in the law, as a constructive trust.

The question of the relationship between the trustee and the trust assets, i.e., does it have to be ‘ownership’ or ‘another relationship’ was not decided in case law, and there are differences of opinion on this issue. There is not dispute that the transfer of ownership to the trustee satisfies the conditions for the existence of the relationship required by the Trust Law.

In practice – usually ownership of the assets is transferred to the trustee:

  1. In the absence of a better control mechanism for the trustee;
  2. In view of the purpose of the trust – to conceal or make less conspicuous the creator’s relationship to the assets;
  3. In view of the foreign law requiring transfer of ownership, and under which a ‘relationship to the asset’ is not sufficient.

The difference between agency and trust

Liability of the principal – in the case of an agency, the acts of the agent bind the principal. In the case of a trust, the acts of the trustee do not bind the creator.

Control and ownership of the asset – in the case of an agency, the asset belongs to the principal. In the case of a trust, the asset is controlled and owned by the trustee (on certain conditions), separately from the creator.

Discretion of the agent – the agent’s discretion is limited to the instructions of the principal, and every act must be within the limits of the authorization and in accordance with the instructions given by the principal. In the case of a trust, the trustee usually has broad discretion in the management of the trust, and in acting to achieve its purposes.

Duties of the agent – the duties of the agent, including fiduciary duties, are owed to the principal, whereas in the case of trust, the duties of the trustee are owed to the beneficiaries. Death (bankruptcy/dissolution) of the agent – the death of the agent results in the end of the agency, whereas in the case of a trust, the trustee’s death does not necessarily result in the cancellation of the trusteeship, and it continues, with another appointed trustee.

A trust is not included in the Bailees Law, 5727-1967

Ownership - the bailee does not own the asset delivered to his possession, under bailment, while a trustee is usually the owner of the trust asset.

Type of assets – a bailee is required to keep tangible assets, while trust assets can also be intangible assets such as contractual rights.

Nature of the act – the bailee’s role is mostly passive (although the law authorizes a bailee to act urgently to prevent damage to the asset the subject of the bailment). A trustee is usually required to perform positive acts, in the management and distribution of the trust assets.

Nature of liability – a bailee is liable to the owner of the assets, who appointed him to act as a one. A trustee is not liable to the creator, but mostly to the beneficiaries, and his liability may be affected by the acts of third parties, such as the protector of the trust, and others.

Period of bailment – in its nature, bailment is for a limited period, at the end of which the asset returns to its owner, the property right remaining in him,. A trust can exist permanently, with the property rights in the assets passing from the creator to the trustee, in the interest of the beneficiaries.

Private trusteeship under the Income Tax Ordinance [Consolidated Version] and ‘tax trusts’

Pursuant to Amendment No. 147 of the Income Tax Ordinance [Consolidated Version] (“the Ordinance”), and entire chapter – Chapter Four “B”: Trusteeships (“Chapter Four”) – was added to the Ordinance. Under Chapter Four, reporting obligations are imposed upon the ‘organs of the trusteeship’. Most of these obligations are applicable to the trustee, being ‘chargeable’ and ‘assessable’.

Definition of trusteeship in the Ordinance

“Trusteeship” –an arrangement, under which the trustee holds the trusteeship assets for the benefit of the beneficiary in Israel or abroad, whether defined as a trusteeship under statutes applicable to it, or defined in some other manner;

“Beneficiary” in a trusteeship - a person entitled to benefit directly or indirectly from the trust assets or trust income is a beneficiary of the trusteeship…”

The Ordinance speaks of an ‘arrangement’ (not necessarily a contract). The trustee ‘holds’ and not necessarily controls or owns. The definition ignores the need for the existence of a ‘creator’, although this legal situation is defined otherwise under another law – i.e., under the Ordinance, ‘trusteeship’ applies to every situation in which a person holds an asset in the interest of another person.

The absence of the creator in the definition is intended to create a very broad definition which includes any arrangement under which a person holds an asset in the interest of another person, in order to make it easier for the tax authorities to determine that a certain arrangement is a trusteeship, without their being required to ascertain the identity of the creator. The ‘burden’ of determining the identity of and classifying the creator is therefore placed upon the assesse, the “creator” being defined separately: “A person who directly or indirectly vested an asset in a trustee is the creator of a trusteeship…”.

“Trustee” - a person in whom assets or income from assets were vested, or who holds assets in trusteeship..”

Types of (private) trusteeships

An irrevocable trusteeship is a trusteeship where upon the creation of the trusteeship, the creator has no influence on the acts of the trustee in respect of the trusteeship. The trustee acts in accordance with the directives of the deed of trust.

A revocable trusteeship is a trusteeship where the creator retains some control over the trust assets or the acts of the trustee.

Under the Ordinance:

"irrevocable trusteeship" – a trusteeship that is not a revocable trusteeship, on condition that a lawfully certified affidavit by the creator of the trusteeship and by the trustee was delivered to the Assessing Officer on a form and at the time prescribed by the Director, stating that it is an irrevocable trusteeship;” (section 75C).

“"revocable trusteeship" – a trusteeship for which at least one of the following holds true:

  1. it is possible to cancel it or to transfer or return the asset or the income to the creator, his spouse, his estate or to a held body of persons, all either directly or indirectly;
  2. the creator or his spouse are one or more of the beneficiaries, or the creator or his spouse can become a beneficiary;
  3. one or more of the beneficiaries is a child of the creator, who in the tax year has not reached age eighteen, or there is a possibility to transfer an asset or income directly or indirectly to his aforesaid child, on condition that the creator or his spouse is still alive;
  4. one or more of the beneficiaries are bodies of persons, which are not public institutions as defined in section 9(2), in which 10% or more of any means of control are held by the creator, by his spouse or by his child who has not yet reached age eighteen if the creator or his spouse is still alive, all either directly or indirectly (in this definition: held body of persons);החזרתי את ההגדרה אחרת לא מבינים תת סעיף הבא
  5. the trustee or the protector of the trusteeship is the creator or a held body of persons; (6) the trustee or the protector of the trusteeship is a relative of the creator, unless it was proven to the Director's satisfaction that there was a special justification for the relative's appointment as trustee, and that the appointment does not demonstrate any ability to direct the trustee's activity or to issue instructions on the matter of the trusteeship…;
  6. the creator or his relative are able to direct the trustee's activity or to give him instructions on the way the trusteeship and its assets are managed, its beneficiaries are changed, or trust assets and trust income are distributed to beneficiaries, or his approval is required for acts of the trustee, or he is able to order the trusteeship to be cancelled or the trustee to be replaced, otherwise than for statutory grounds, all whether directly or indirectly;
  7. the identity of one or more of the beneficiaries is not known, or the identity of a direct or indirect holder of shares in a beneficiary that is a body of persons is not known, unless it is proven to the Assessing Officer's satisfaction that that beneficiary cannot be the creator, his spouse, the creator's child who has not reached age eighteen, or a held body of persons,
  8. the beneficiaries of a trusteeship have been replaced or new ones were added, without instructions to that effect having being included in the trusteeship documents;
  9. no certified affidavit was delivered on the form and at the time prescribed by the Director, as said in the definition of "irrevocable trusteeship";

As a relief with respect to the principle that the assessable and chargeable person is the trustee – in the case of Israel resident beneficiary trusteeships, which is an irrevocable trusteeship, the income can be related to the beneficiary (section 75G(g)), because the assets are no longer controlled by the creator and the ownership thereof had, in practice, passed into the hands of the beneficiary, although legally, the beneficiary is not the owner of the trust assets. Also, the income can be related to the creator (section 75G(h), in the case of a revocable trust. Note: the determination of whether a trusteeship is revocable irrevocable is also relevant with respect to the tax liability in the case of foreign resident trusteeships. A trusteeship under a will is always irrevocable, and therefore, in the case of a trusteeship under a will the income can be related to the beneficiaries and a representative beneficiary can be chosen.

A trusteeship that constitutes an irrevocable trusteeship under the provisions of the Ordinance, is also irrevocable in legal terms. But it cannot be said that a legally irrevocable trusteeship is necessarily an irrevocable trusteeship in terms of the Ordinance.

Types of trusteeships

  • Express trusteeship – a trusteeship that is established under a deed of trust.
  • Implied trusteeship – a trusteeship that arises from the conduct of the parties.
  • Constructive trust – a trust that is imposed by the court.
  • Revocable trusteeship –where the creator has control over the acts of the trustee.
  • Irrevocable trusteeship – where the creator has no control over the acts of the trustee.

Trust asset holding company

“"trust asset holding company" – a body of person that directly or indirectly holds trusteeship assets for the trustee;” (section 75C of the Ordinance). “A trust asset holding company shall not be obligated to submit a return under section 131 or to pay tax in respect of trust income or in respect of trust assets that it holds for a trustee.” (section 75P(b)). This way, in managing the trust assets, the trustee can maintain a clear separation between his personal assets and the trust assets. The company can be an Israeli or foreign company.

Insignificance of the place of residence of the trustee

“The fact that a trustee is an Israel resident does not create a tax liability or an obligation to submit a return in respect of trust income, in addition to the obligations specified in this Chapter, such as would not exist if all the trustees were foreign residents. (section 75P(c)).

Real estate trust/’appreciation tax trust

Under the Land Taxation (Appreciation and Purchase) Law,5723-1963, the sale of a right in land by a trustee to a beneficiary and the transfer of a right in an association from a trustee to a beneficiary are exempt from tax (but not such sale by a beneficiary to a trustee and such transfer from a beneficiary to a trustee – even though there is no unequivocal provision in the law regarding exemption with respect to transfer from a beneficiary to a trustee).

”Trustee” – a person holding a right in land or a right in an association, in his own name, for a certain person. “Beneficiary” – the person for whom the said right is held.

In order to obtain recognition of a trust under the appreciation law, notice must be given at the times fixed therefor in the law.