Intergenerational Transfer

Moshe and Rachel dedicated their entire lives to securing a brighter future for their children and grandchildren. Family values and the bonds among their kin held paramount importance to them. Throughout most of their years, they resided in a charming and spacious garden apartment, but in their later years, they acquired an apartment in one of the modern towers and made it their home. In addition, they invested in a New York apartment utilizing Rachel’s retirement funds. With three adult children—Avi, Benny, and Galit—Moshe and Rachel’s primary objective was to preclude any conflicts or disputes over the inheritance division. In pursuit of this goal, and recognizing Moshe’s declining health, Rachel engaged an appraiser to assess the value of their properties. The assessment attributed a value of six million to each of the apartments. As a testament to their intentions, the couple formulated a will, designating an apartment for each of their children. Ostensibly – it seemed like a fair and equal distribution.!

Following the passing of the couple, the children embarked on the process of selling the properties. To their astonishment, Galit sold her recently acquired tower apartment, amassing NIS 6 million. In contrast, Avi sold the garden apartment purchased in the 1950s and faced a 25% capital gains tax, which ultimately reduced his proceeds to NIS 4.5 million. Benny, in the process of selling the New York apartment, encountered an estate tax obligation of 40%, leaving him with around NIS 3 million after accounting for all the requisite taxes and expenses.

In light of these outcomes, Avi and Benny approached Galit, seeking to compare the considerations outlined in the will. However, her husband raised objections, asserting that the will’s contents were binding. This scenario starkly illustrates the profound significance of tax considerations within the realm of intergenerational transfers.

Ultimately, the testator’s endeavor to pass on both family wealth and the deep relationships nurtured over the years fell short, solely due to the absence of meticulous tax planning.

In the following article we will provide a concise overview of the key points associated with the tax implications of intergenerational transfers.

Intergenerational Transfer – International Tax Implications

In the realm of intergenerational transfers encompassing assets situated abroad, it is vital to recognize that while Israel currently imposes no estate tax, many other countries levy estate or inheritance taxes. For assets or accounts held abroad, strategic tax planning becomes imperative during the will formulation stage to avert unnecessary tax burdens.

In the context of inheriting assets from abroad—particularly real estate or shares—a multitude of distinctive considerations emerge that warrant careful attention. One notable example is the step-up mechanism applicable to foreign-origin assets, enabling the establishment of a fresh cost basis and acquisition date. This mechanism effectively reduces prospective taxes. Moreover, the process encompasses validating fund sources and facilitating their transfer to Israel, simultaneously mitigating tax obligations both in the country of origin and Israel. In cases of inherited shares, meticulous tax planning is pivotal, requiring an adept comprehension of the legal framework and taxation nuances in the country of origin.

Estate Agreement

Frequently, heirs opt for a distinct division of an estate and, as a result, craft an estate settlement agreement. This practice holds significant importance, as an estate agreement grants heirs substantial autonomy and supersedes the will’s directives. Importantly, such an agreement can play a pivotal role in resolving intricate tax-related predicaments.

Gift vs. Inheritance?

When at the crossroads of choosing between gifting an asset or including it within the estate’s assets, comprehending the ramifications of each option is paramount. Opting to transfer an asset as a gift might prove beneficial, especially for strategic purchase tax planning, among other considerations. Additionally, it’s crucial to be mindful of the time constraints linked to the tax exemption for apartments predominantly acquired through gifting. Moreover, it’s vital to recognize that a “gift” that involves reciprocal considerations isn’t classified as such for tax purposes!

Trusts

Among the array of alternatives available during the formulation of a will, the choice of establishing a trust stands as a notable option. A trust, distinct from a legal entity, functions as a legal arrangement driven by contractual consensus. Importantly, a trust empowers parental oversight over the bequeathal of inheritance to descendants, extending beyond their lifetime. This provides a level of control not attainable through standard Inheritance Laws.

The value of a trust is further exemplified by its capacity to incorporate specific conditions within the trust agreement, commencing at the contractual stage. For instance, the inclusion of predetermined provisions—such as limiting the timeframe during which property sale or multi-generational transfer remains restricted—accentuates the trust’s utility.

These conditions further ensure the transfer of the inheritance, allowing for the realization of the legacy only upon the satisfaction of all conditions stipulated in the contract.

Transfer of a business or company shares

The decision to transfer parental business operations or company shares can be influenced by unique circumstances, dictating whether it’s more advantageous to effectuate the transfer during their lifetime or through a will. The intricacies extend further, taking into account distinct forms of incorporation applicable to varied scenarios—ranging from a law firm structured as a partnership to an industrial enterprise or a holding company.

It’s crucial to recognize that losses incurred within a business cannot be passed down through inheritance. Hence, meticulous tax planning in the context of intergenerational transfers becomes paramount, particularly when dealing with intricate portfolios of businesses and assets. Often, strategic transactions within the group, company, or family are established to facilitate more effective tax planning in the foreseeable future.

In conclusion, intergenerational transfer represents a multifaceted endeavor that, when approached with precision and prudence, has the potential to avert conflicts and discord within families. It enables testators to pass down assets and family legacies according to their intentions, benefiting subsequent generations. Notably, this process carries substantial tax implications across its spectrum of considerations.

Our team of experienced accountants and lawyers is dedicated to furnishing comprehensive guidance and strategic planning encompassing the intricate tax dimensions associated with intergenerational transfers. From the inception of will planning and intergenerational strategies to the ultimate realization by heirs, our professionals work diligently to minimize and optimize tax burdens, ensuring that the transition process aligns with your aspirations and safeguards the family’s financial legacy.

Nimrod Yaron & Co. – Israeli and International Taxation: One of Israel’s leading tax firms. Our dedicated team comprises lawyers, accountants, economists, and tax consultants, some of whom are former senior officials from the Tax Authority.

We specialize in serving both private and public companies, both domestic and international, alongside global venture capital funds. We also provide personalized guidance to private clients, offering expert advice from our legal and accounting professionals to foster meaningful discussions. Additionally, our firm plays an integral role in guiding numerous families through intergenerational transfer taxation matters.