Transferring assets during one’s lifetime through a gift is not always the right choice.
The decision to transfer family wealth (real estate, funds, businesses, and rights) from one generation to the next is among the most significant in any family.
It has far-reaching implications for the family’s financial future.
Most asset owners are unaware that this is a complex process. It involves legal, taxation, banking, and family aspects. Every decision – whether a gift, inheritance, or establishing a trust – may substantially affect tax liability and family relationships. Advance planning of asset transfers is crucial to minimize tax exposure and prevent legal complications.
This article reviews the key considerations before deciding to transfer assets as a gift.
It examines when it may be appropriate to consider deferring the transfer until the time of inheritance. It also presents legal tools for executing transfers and alternative methods for assets transfer.
Intergenerational Transfer via Gifting (Without Consideration)
In recent years, the trend of transferring assets during one’s lifetime has been growing.
This stems from a desire to ensure the transfer is executed according to the owner’s wishes and to prevent future conflicts. Gifting an asset enables the donor to see the next generation benefit from it immediately. For example, parents may transfer a residence to their children to help them build their future.
However, it is important to ask: Is it always preferable to make a gift rather than bequeath assets?
The choice between a gift and inheritance depends on the owner’s personal, family, and financial circumstances. A gift allows full control over the process. The transfer occurs immediately, and the assistance is provided in real time. Additionally, a gift provides greater legal certainty. It is less exposed to modifications or contestation, unlike a will, which can be changed or challenged after death.
Alongside these advantages, it is important to remember that once the asset is transferred, control passes to the recipient of the gift. If the donor wishes to continue residing in the property or deriving income from it, this must be secured in a detailed and clear gift agreement. A written, well-drafted, and properly registered gift agreement is essential to prevent future disputes.
The Taxation Aspect – Key Considerations
The method of asset transfer directly affects tax liability.
For example, regarding real estate, a gift given to a “relative” is exempt from capital gains tax. This is under the Land Taxation Law (Appreciation, Sale and Purchase), 1963.
For this matter, ”relative” includes a spouse, parent, grandparent, child, grandchild, great-grandchild, and their spouses. It also includes a sibling when the property was received by inheritance or gift from a parent or grandparent. If the gift is given to someone not considered a ”relative”, no exemption applies and the transfer is taxed as a regular sale.
Regarding purchase tax, certain relief provisions have been established. A gift to a relative is taxed at only one-third of the standard purchase tax. In this context, ”relative” includes a spouse (including one married to the donor for at least six months before the gift), a parent, child and their spouse, grandchild and their spouse and a sibling.
In contrast, inheriting an asset does not involve any tax payment, regardless of the relationship. However, when the heir sells the asset, applicable tax provisions will apply according to the circumstances.
Advantages Comparison
Advantages | Transfer via Gift | Transfer via Inheritance |
Taxation | Exempt from capital gains tax when transferred to a relative. Subject to a reduced purchase tax (one-third of the standard rate). Future sales may incur capital gains tax. | No tax on receiving the inheritance. A future sale may be exempt from capital gains tax if the decedent was entitled to this exemption. |
Asset Control | The asset leaves the owner’s control immediately upon transfer, unless conditions or use rights are established. | The asset owner retains full control until death. |
Family Conflicts | Prevents future disputes through advance planning of asset distribution. | May reduce conflicts during one’s lifetime but requires a clear and precise will. |
Financial Consideration | Enables immediate assistance to the next generation. Allows the owner to see beneficiaries enjoy the asset during the owner’s lifetime. | Allows the asset owner to continue generating income from the asset until death. |
There is no one-size-fits-all answer. Every family and every asset require individualized assessment. It is advisable to consult with experts in estate planning and taxation. This will help develop a tailored plan that ensures proper transfer of family wealth.
Intergenerational transfer is not limited to the choice between a gift and inheritance alone. It is a broad and complex process. Every decision may substantially affect the final outcome.
Today, various legal and financial tools are available for intergenerational transfers. These include trusts, family agreements, enduring powers of attorney, wealth management mechanisms, marital agreements, family mediation, and international tax solutions. A judicious combination of these tools can ensure retention of control, reduce tax exposure, and enable orderly transfer of family wealth to future generations.
Additionally, the type of assets and their geographic location may substantially affect taxation and applicable laws. Foreign assets are often subject to different estate, inheritance, or gift tax laws. This requires early and precise planning. Even in Israel, the tax implications of every action must be carefully examined, including capital gains tax, purchase tax, and income tax.
Before executing any asset transfer – via gift, inheritance, or any other method – it is important to obtain comprehensive legal counsel. Proper planning will preserve the family’s intent and the interests of all parties. It will also ensure long-term economic and intergenerational continuity.
Nimrod Yaron & Co. specialize in personal and professional counsel for clients, families and business owners. We focus on optimal planning and execution of intergenerational transfers, both in Israel and abroad. Our team provides in-depth and personalized legal advice. We tailor creative and efficient solutions to each client’s unique needs.
Clients interested in exploring the options for intergenerational transfer are welcome to contact us for an initial consultation.
To contact us, click here.
FAQ
Can I transfer my residence as a gift to my children and still live in it?
Yes. The gift agreement can stipulate that the donor will continue residing in the property after its transfer. This applies even though ownership will be registered in the recipient’s name.
Is it always advisable to transfer an asset as a gift, or are there cases where it is preferable to bequeath it?
Before deciding whether to transfer an asset as a gift or bequeath it, the legal and tax implications of each option must be examined. Sometimes a gift is preferable with respect to purchase tax or capital gains tax. However, in other cases, inheritance may be more advantageous. When dealing with foreign assets, it is necessary to determine whether inheritance tax or gift tax applies. Remember that a gift transfers the asset immediately, while inheritance takes effect only after death. However, a will may be modified or contested.
What happens if I transferred an asset as a gift to my child who is now undergoing divorce proceedings?
If the divorce occurs after receiving the gift, the asset may be considered part of the marital property. This depends on the circumstances, the timing of the gift, and any marital agreements. To protect the asset, the gift can be given with certain conditions.
Alternatively, family trust can be established, or a suitable marital agreement can be required before giving the gift.
Is there an inheritance tax in Israel?
Israel does not impose an inheritance tax or estate tax. Receiving an asset via inheritance is not subject to tax. However, other taxes may apply upon a future sale of the asset, such as capital gains tax or income tax, depending on the asset type and circumstances.
What happens if I encounter financial difficulties after transferring the asset to my children?
If the asset has already been transferred and registered in the recipient’s names, it cannot be returned except in very exceptional cases. Therefore, it is important to ensure in advance that the donor retains adequate financial security. This is especially critical when dealing with an income-generating asset or primary residence.
Is there a difference between transferring an asset in Israel and transferring an asset abroad?
Absolutely! Foreign assets are subject to different tax laws. In many countries, inheritance tax or gift tax applies. It is important to engage international taxation experts before executing such a transfer. This avoids unnecessary taxation and ensures the process is carried out according to local law.
