Trust Taxation and Family Trusts

Trust taxation is set out in Chapter Four-2 of Part D of the Income Tax Ordinance and depends primarily on the residency of the settlor and the beneficiaries. In a trust where both the settlor and the beneficiary are Israeli residents, the trustee's income is attributed to the settlor, so the trust itself does not reduce the tax burden. When the settlor is a foreign resident and the beneficiary is Israeli, different tax tracks apply, and the window for choosing between them is limited. Send us the trust deed or a description of the family structure, and we will review the classification and reporting obligations.

• Parents or grandparents living abroad want to establish a trust for the benefit of children or grandchildren in Israel.

• You are considering transferring assets or shares to a trust for the benefit of your children and want to know whether the transfer is subject to tax.

• A beneficiary of an existing trust made Aliyah or returned to Israel in 2026, and it is unclear what must be reported.

• You are Israeli-resident trustees of a trust that does not file an annual return in Israel.

• A beneficiary of an Israeli trust is about to relocate abroad.

• You received a distribution from a foreign trust and it is unclear whether it is taxable.

• The Israel Tax Authority has requested information about a trust in which you are a settlor, trustee, or beneficiary.

The trusts chapter was added to the Ordinance by Amendment 147 in 2006, and Amendment 197 revised it in 2013. It classifies trusts into categories based on the residency of the settlor and the beneficiaries, and each category is taxed differently. When the residency of any party changes, the classification may also change — and sometimes that change itself constitutes a tax event.

Israeli-Resident Trust

This is a trust in which, at the time of its creation, at least one settlor and at least one beneficiary were Israeli residents (Section 75G). The trustee's income is attributed to the settlor and the trustee's assets are treated as the settlor's assets, whether the trust is revocable or irrevocable. A transfer of an asset to such a trust by an individual, without consideration, is not treated as a sale. A distribution to a beneficiary is taxed as if the settlor had transferred the asset directly to the beneficiary.

Relatives' Trust

This is a trust in which the settlor is a foreign resident, there is an Israeli-resident beneficiary, and the settlor is a relative of the beneficiary — such as a parent, grandparent, spouse, or child (Section 75H1). Two tax tracks apply to the trust's income sourced outside Israel:

• A current tax of 25% on the income allocated to the Israeli beneficiary, if the trustee elected this track by notifying the assessing officer within 60 days of the trust's establishment or from the date it became a relatives' trust. The election is irrevocable for as long as the trust remains a relatives' trust.

• A tax of 30% on the distribution to the beneficiary, at the time the distribution is made.

Foreign-Resident Trust and Testamentary Trust

A trust in which both the settlors and the beneficiaries are foreign residents is treated as a foreign resident, and its income is taxed like the income of a foreign-resident individual (Section 75T). In a testamentary trust that has an Israeli-resident beneficiary, the trust is treated as an Israeli resident, and the trustee's income is attributed to the beneficiary. The transfer to the trustee and the distribution to the beneficiary are not treated as sales.

Notices and Reporting

• An Israeli-resident settlor who created a trust, or transferred an asset or income from an asset to a trust, must notify the Director within 90 days (Section 75TZ1).

• Amendment 272 eliminated the reporting exemption for trusts in which the settlor or beneficiary became a new immigrant (Oleh) or a veteran returning resident from 1 January 2026. The tax exemption on foreign-source income of new immigrants and veteran returning residents was not abolished.

• An Israeli-resident trustee of a trust that does not file an annual return in Israel must report the trust's existence and the identity of its controlling persons.

1. You bring the trust deed (if one already exists), a list of assets, and the residency details of the settlor, the trustee, and every beneficiary.

2. We classify the trust under the Ordinance and examine how the classification would change if any of the parties relocates to another country.

3. For a relatives' trust, we calculate both tax tracks based on projected distributions before the 60-day election window expires.

4. We draft the trust deed and the instructions to the trustee, and when the settlor is an Israeli resident we file the notice with the Israel Tax Authority within 90 days.

5. Going forward, we assist with the trustee's annual returns and with reporting distributions and changes in residency.

Cases in this field are handled by Adv. and CPA Shlomi Vaknin and his team. Shlomi, the firm's founder, has been a certified public accountant since 2000 and an attorney since 2008, and served for nearly a decade as a national supervisor in the professional division of VAT at the Israel Tax Authority. In trust matters the accounting background is essential, because much of the work involves calculating the tax under each track and ongoing reporting.

We draft trust deeds and handle the regulatory process with the Israel Tax Authority, including trusts established abroad. We advise trustees as well as those appointed by the settlor to supervise them (a "protector"), who is not a trustee himself.