Before determining how your assets will be transferred to future generations, it is crucial to analyze the legal and tax implications of each decision.
Moshe and Rachel saved throughout their lives to secure a better future for their children and grandchildren. Family and relationships between family members were their highest priority.
For most of their lives, Moshe and Rachel resided in a spacious garden apartment. In their later years, they purchased an apartment in a newly constructed tower and relocated there. Additionally, they acquired an apartment in New York using Rachel’s retirement funds.
Moshe and Rachel have three adult children: Avi, Benny, and Galit. Their primary concern was to prevent friction and disputes in the division of their estate. To this end, given Moshe’s deteriorating health, Rachel engaged an appraiser to assess the value of the apartments. The appraiser valued each apartment at 6 million NIS.
The couple executed a will bequeathing one apartment to each child. This appeared to constitute an equal distribution among all children.
Following the couple’s death, the children proceeded to sell the properties. They subsequently discovered significant disparities in their net proceeds. Galit sold the tower apartment, purchased approximately two years earlier, and retained the full 6 million NIS. Avi sold the garden apartment, originally purchased in the 1950s, and paid 25% capital gains tax. His net proceeds amounted to only 4.5 million NIS.
Benny sold the New York apartment. He was required to pay estate tax at a rate of 40%. After tax payments and associated costs, his net proceeds totaled approximately 3 million NIS.
The brothers approached Galit requesting equalization of the proceeds received from the estate. However, her husband objected, asserting that they must adhere to the will’s provisions.
This example demonstrates how taxation can substantially impact the actual value of inherited assets. Therefore, early planning of intergenerational transfer, including comprehensive examination of tax aspects, asset types, and their location, can prevent unnecessary tax liabilities and preserve family relationships.
Intergenerational Transfer of Foreign Assets – International Tax Aspects
Israel currently imposes no estate tax. However, many other countries impose estate or inheritance taxes. For example, in the United States and the United Kingdom, tax rates may reach up to 40%.
Therefore, owners of assets or bank accounts outside Israel are strongly advised to conduct tax planning during the will drafting stage. This prevents unnecessary tax liabilities for heirs.
If you hold foreign assets- whether real estate, securities, or other investments, it is essential to thoroughly examine all legal and tax aspects of transferring assets from abroad to Israel.
You may consider utilizing the STEP-UP mechanism. This allows establishing a new cost basis and acquisition date for assets bequeathed by a foreign resident. This can significantly reduce future tax liability.
Additionally, attention must be paid to verification of the source of funds, assistance in transferring them to Israel, and understanding the tax structure in the country of origin. Such planning helps prevent double taxation.
Estate Distribution Agreement
Sometimes heirs choose to divide the estate differently from what was stipulated in the will. They accomplish this through an estate distribution agreement. This agreement allows considerable flexibility and grants heirs broad discretion. It may even override the will’s provisions. Such an agreement may help resolve disputes and prevent inequitable distribution of the estate.
Gift or Inheritance – Which Is Preferable?
Before deciding whether to transfer an asset as a gift or bequeath it as part of the estate, you must examine the legal and tax implications of each option.
Sometimes a gift is preferable regarding purchase tax or capital gains tax. However, remember that the law imposes time limitations on tax exemptions for apartments transferred as gifts. Additionally, a gift for which consideration is provided in return does not constitute a gift for tax purposes.
Trusts
One effective method for transferring wealth to future generations is establishing trust. A trust is a legal arrangement- a contractual agreement, allowing the testator to retain limited control over asset management even after death.
Specific conditions may be established. These include restricting the sale of an asset for a defined period or transferring the asset only after certain conditions are satisfied. This ensures that asset transfer is executed according to the testator’s wishes.
Transfer of a Business or Company Shares
The decision whether to transfer a business or company shares during the testator’s lifetime or as part of a will depends on the family’s personal and business circumstances.
You must examine who will manage the business, under what conditions, and whether there is a need to draft a shareholders’ agreement or establish control mechanisms.
Business losses cannot be transferred through inheritance. Therefore, early tax planning is critically important, particularly when dealing with a complex portfolio of businesses and assets. In many cases, intra-group or intra-family transactions can be executed for optimal future tax planning.
In Summary, Intergenerational transfer is a complex process. It requires early planning, thorough examination of legal and tax aspects, and utilization of legal tools such as trusts, estate distribution agreements and enduring powers of attorney. Proper planning can prevent family conflicts, ensure equitable distribution of assets, and reduce unnecessary tax liabilities.
The team of attorneys and accountants at our firm provides comprehensive advisory and representation services to clients. This ranges from the asset transfer planning stage and will drafting to their realization by heirs. We emphasize customized solutions and optimal tax reduction.
Nimrod Yaron & Co. specializes in intergenerational asset transfer planning and provides personalized and professional counsel.
For an initial consultation – contact us.
Questions and Answers
Why do I need to examine tax considerations when planning asset transfer to my children?
Tax considerations critically affect heirs’ actual proceeds. As illustrated in our example, three children received seemingly equal inheritances but ultimately retained substantially different amounts due to varying tax liabilities on each asset.
Does it matter if the asset transfer includes foreign assets?
Yes. While Israel imposes no estate tax, other countries do. You must determine tax obligations in that country and examine fund transfer issues. Foreign assets require tax planning during will drafting.
What is the difference between inheritance and an estate distribution agreement?
Inheritance determines heirs and asset division per the will or statutory provisions. An estate distribution agreement allows heirs to divide assets differently after the testator’s death, even overriding the will’s provisions.
Is it preferable to transfer an asset as a gift or bequeath it?
Each option has different legal and tax implications. Gifts may be preferable for purchase or capital gains tax. Gifts transfer assets immediately; inheritance postpones transfer until death without certainty of testator’s wishes.
What are the advantages of establishing a trust?
A trust allows the testator to retain limited control over asset management after death. Specific conditions may be established, such as restricting asset sale or transfer, ensuring assets are distributed according to testator’s wishes.
Can tax liability be reduced in intergenerational transfer?
Yes. Methods include early asset transfer planning, trusts, gifts under certain conditions, utilizing tax exemptions, and employing mechanisms like step-up for foreign assets. Consult a tax expert for optimal planning.
