Proper planning for Asset Transfer, Preserving Family Relationships, and Minimizing Unnecessary Tax Payments.
What is Intergenerational Transfer?
If you own capital and assets and now wish to provide for your children optimally, intergenerational transfer addresses exactly that. It refers to transferring family wealth (real estate, cash, businesses, and rights) from one generation to the next. Intergenerational transfer is a crucial component of family wealth planning, retirement planning, and business succession management. It requires comprehensive professional guidance combining expertise in taxation, inheritance law, and international banking. This is done while considering that the primary goal of intergenerational transfer is first and foremost to preserve family unity, and only then to provide financially for the next generation.
Most asset owners are unaware that this is a complex process with legal, tax, banking and family aspects. Every decision or action related to asset transfer- whether a gift, inheritance, or establishing a trust, may carry extensive tax implications. Therefore, it is important to plan asset transfers to minimize tax liability. Early planning of asset transfers, with comprehensive examination of all relevant aspects and use of legal tools, can prevent tax surprises and future disputes among family members.
Methods of Intergenerational Asset Transfer
- Inheritance – Asset transfers in Israel are mostly carried out through inheritance. This is because inheritance in most cases is not considered a taxable event in Israel. However, it should be noted that in certain cases the Israel Tax Authority (ITA) can impose tax on the full value of the received inheritance. For example, capital gains tax upon sale of the asset, if a formal and legal tax ruling process is not conducted with the ITA. Conducting such a process can prevent taxation on the total value of the inheritance. Instead, tax would be imposed on the profit, for example from selling the inherited asset.
- Gift – Asset transfers during the decedent’s lifetime are usually carried out through gifts. However, according to Israeli tax law, not every gift is tax-exempt. For example, a gift of real estate may be subject to capital gains tax and acquisition tax in certain cases. Therefore, it should be examined whether it is preferable to transfer the asset this way, whether alternative methods should be considered, or if the asset should remain as part of the future estate. One of the most significant advantages of transferring an asset as a gift is certainty. In other words, the transfer is completed immediately and is not exposed to changes and objections as in the case of inheritance. With inheritance, the will can be subject to changes, interpretations, disputes and more. However, a significant disadvantage of transferring assets during one’s lifetime is that the transferor immediately loses control over the asset. This is unless arrangements were made to limit this through agreements and conditions. For example, if the transferor wishes to continue residing in the property, this must be stipulated as a condition of the gift.
- Trusts – One effective way to transfer property to future generations is through establishing a trust. A trust is a legal arrangement – a contractual agreement – that allows the decedent to maintain certain control over asset management even after death. In other words, the decedent may set specific conditions, such as restricting the sale of the asset for a certain period, or limiting the transfer of the asset beyond two generations and so on. These conditions ensure that the inheritance transfer will occur only when all conditions written in the contract are met. This way, the decedent can ensure that asset transfer is done according to their wishes.
- Beneficiaries – Asset transfer can also be carried out by designating beneficiaries. In certain cases, it is preferable to update beneficiaries on all financial assets, including life insurance policies, pension funds and advanced training funds. Designating beneficiaries in most cases bypasses the will and allows direct transfer of assets to beneficiaries.
Intergenerational Transfer – Special Aspects
Foreign Assets and International Taxation
When asset transfer involves foreign assets, it’s important to remember that while Israel currently has no estate tax, many other countries impose estate tax or inheritance tax on assets. For example, in the UK, estate tax of up to 40% is imposed (under certain conditions there is exemption from estate tax payment). In the United States, estate tax of up to 40% applies above certain exemptions (depending on citizenship status).
In such cases, the most appropriate way to transfer assets must be examined, considering the tax amount and the legal provisions in that country (exemptions, reliefs, etc.). This includes examining when it is advisable to realize the inheritance and whether to realize it in the country of origin or in Israel. Sometimes, these decisions will have a decisive impact on offsetting losses or on the authority where tax will be collected.
Additionally, it should be considered that in various countries worldwide, there is forced succession policy in inheritance management. This imposes restrictions on how the estate is divided and even requirements for transferring inheritance to family members.
For more information on this topic, read the article “Receiving Inheritance From Abroad- A Guide For Israelis.”
Additionally, there are quite a few unique issues that are important to address. For example- the STEP-UP mechanism for assets originating abroad, to establish a new cost basis and new acquisition date, thereby dramatically reducing future tax. There are also considerations regarding verification of the source of funds and assistance in transferring them to Israel, while minimizing tax both in the country where the real estate is located and in Israel. In the case of inheriting shares, it is critical to properly plan the tax while understanding the legal structure and taxation in the country of origin.
For more information on inheritance realization planning, see the article “How to Properly Plan the Realization of Foreign Inheritance and Avoid Unnecessary Taxation.”
Family Businesses
When dealing with family business, unique challenges must be addressed. The most appropriate and efficient way to transfer the business must be examined, who will manage the business and under what conditions, drafting a shareholder’s agreement, or even selling the business to a third party and fair distribution of profit among heirs.
Banking and Family Wealth Management
Examining investment structures, managing trust accounts and fund transfers according to local and international law. Often, people do not understand tax planning sufficiently to consider these options, which significantly affect the value of transferred capital.
Legal Tools for Asset Transfer and Dispute Prevention
- Drafting a Will – Inheritance does not always pass smoothly. Sometimes complex procedural steps are needed to obtain a succession order or permit for realizing assets. Drafting a proper will is not just a matter of personal wishes. It is an integral part of estate taxation. A detailed will formulated in precise legal language can ensure that assets pass smoothly and efficiently to heirs in a way that leaves no room for different interpretations. The will should include the decedent’s wishes, but must also be adapted to legal requirements so its validity is not compromised.
- Enduring Power of Attorney – An enduring power of attorney is a legal document that allows appointment of an attorney who will continue to act even in case of mental or physical incapacity of the appointer. Unlike the regular power of attorney that ends with loss of capacity, an enduring power of attorney is designed specifically for such situations. An enduring power of attorney ensures managerial and financial continuity of asset transfer in case of incapacity or death.
- Estate Distribution Agreement – An estate distribution agreement allows heirs to divide the estate assets among themselves differently than specified in the will.
- Mediation in Intergenerational Transfer Processes – Intergenerational transfer may lead to family disputes. Family mediation is an effective and recommended tool for resolving conflicts while preserving family unity and preventing lengthy and expensive legal proceedings. Unlike legal proceedings, mediation allows parties to maintain control over the final outcome and develop creative solutions tailored to the family’s unique needs.
- Prenuptial Agreements and Family Charters – Creating internal legal agreements that prevent future disputes and regulate asset distribution among family members. For example, in intergenerational transfer in family businesses, it is important to conduct strategic planning for business continuity, valuation and arrangement of management mechanisms and control transfer.
Intergenerational transfer requires early planning and thorough examination of all aspects and possible tax implications.
Our firm has extensive experience in accompanying intergenerational transfers in Israel and worldwide, and in the unique processes for realizing inheritance in different countries and methods of action with various authorities on this matter. We would be happy to assist you in optimal planning of asset transfer through professional consultation combining expertise in international taxation, inheritance law and family law. Our goal is to ensure that asset transfer is carried out legally, efficiently, and optimally from an economic perspective, while protecting the interests of all family members.
For personal consultation on this matter, contact us.
Questions and Answers
Can I transfer my residential apartment as a gift to my son and still live in it?
Yes. Most asset owners who wish to transfer assets during their lifetime through a gift stipulate that the gift donor will continue to reside in it, even though ownership of the apartment will transfer to the recipient.
What is the difference between inheritance and an estate distribution agreement?
Inheritance determines who the heirs are and asset distribution according to the will or legal provisions. An estate distribution agreement is an agreement among heirs after the decedent’s death, in which they may determine how to divide assets among themselves, even if this division is completely different from the division specified in the will.
What is the difference between intergenerational transfer and enduring power of attorney?
Intergenerational transfer deals with transferring ownership of property. Enduring power of attorney deals with transferring decision-making authority in case of loss of capacity. Power of attorney ensures managerial and financial continuity in case of incapacity or death.
Is it better to transfer an asset as a gift or bequeath it?
Before deciding whether to transfer an asset as a gift or bequeath it as part of inheritance, the legal and tax implications of each option must be examined. Sometimes a gift is preferable regarding acquisition tax or capital gains tax. Also, if it involves a foreign asset, it must be examined whether estate tax or gift tax applies to the asset. Additionally, as mentioned above, a gift will transfer the asset immediately, unlike inheritance which postpones asset transfer until after death. However, there is no certainty that the asset will be transferred according to the decedent’s wishes.
What are the advantages of establishing a trust?
A trust is a legal arrangement or contractual agreement that allows the decedent to maintain certain control over asset management even after death. In other words, the decedent may set specific conditions- such as restricting the sale of the asset for a certain period or limiting the transfer of the asset beyond two generations. These conditions ensure inheritance transfer only when all conditions written in the contract are met. This way, the decedent can ensure that asset transfer is done according to their wishes.
