Dr. Alon Kaplan, Advocate & Notary, TEP
Meytal Liberman, Advocate, TEP
This article was first published in Step Journal
Abstract
The Succession Law and the Trust Law in Israel have certain provisions which may turn a trust ineffective when the settlor of the trust wishes to avoid inheritance procedure. The article will discuss problems and solutions.
What is the issue for STEP members? Special care should be given when drafting a trust deed and to its management after creation.
What does it mean for STEP members? Understanding the risk of inheritance procedure which may invalidate trust.
What can I take away? Understanding possible conflict between the trust law and the succession law.
Introduction
The concept of a trust is well-established in Israel throughout its history. In the ottoman
period, the Muslim Waqf was widely used by both Jewish and Muslim people. One of the
well-known Waqfs was that of Hürrem Sultan, which was known as the “Miri Mukafah Waqf
Haski Sultany”, meaning the real estate trust of Haski Sultany. 1 Waqfs exist until today, and
are governed by the Sharia laws and the Muslim Sharia courts in Israel. The trusts continued
to form a part of the land’s economic and legal culture under the British Mandate as well
under the English Common Law, as evident in the Charitable Trusts Ordinance of 1924-
- 2 This tradition was later drawn into the Israeli legal system through different legal
arrangements and case law, and was finally formally implemented into the Israeli law upon
the legislation of the Israeli Trust Law in 1979. 3
The Israeli Succession Law 4 was enacted in 1965 and comprises the core of the inheritance
law in Israel, together with case law and other relevant legislation.
This article will focus on the relationship between the trust law and the inheritance law in
Israel, while specifically addressing the transfer of assets upon death under each of these
laws.
1 Different Appeal (Jerusalem) 2/97 Machmed and Ibrahim Abed Rabu v. Administrator General Jerusalem, par. 42
(13 Sep. 2006), Nevo Legal Database (by subscription) (Isr.)
2 Charitable Trusts Ordinance 1924, Official Gazett of the Government of Palestine, issue no. 116 of 1 June, 1924,
at pages 672-680; Charitable Trusts (Amendment) Ordinance 1925, Official Gazett of the Government of
Palestine, issue no. 142 of 1 July, 1925, at Pages 343-345 (the “Charitable Trusts Ordinance”).
3 Trust Law, 5739-1979, 33 LSI 41 (1966–1967) (Isr.) (the “Trust Law”).
4 Succession Law, 5725-1965, 19 LSI 215 (1964–1965) (Isr.) (the “Succession Law”).
2
Inheritance Law in Israel
All inheritance proceedings in Israel are governed by the Succession Law, which provides in
Section 2 that the lawful heirs of a deceased are the beneficiaries under his or her will, and
in the absence of a will – the heirs under law, as determined in accordance with the
mechanism detailed in Sections 10-17.
Another cornerstone of the inheritance law in Israel is the principle of Freedom of Testation.
This principle manifests in Section 27, which provides in sub-section (a) that “an undertaking
to make a will, to change it, to cancel it, or to refrain from doing any of the same – is
invalid”, and in sub-section (b) that “a provision in a will the negates or limits the right of the
testator to change the will or to cancel it – is invalid”.
The Succession Law also provides in Section 8(a) that “an agreement regarding a person’s
inheritance or a waiver of his inheritance, made during the lifetime of that person, is void”.
Subsection (b) states that “[a] gift made by a person, such that it shall be granted to the
recipient only following the death of the donor, shall have no validity, unless made in a will
pursuant to the provisions of this law”.
It therefore follows that if a person wishes to grant a gift, he or she must do so during their
lifetime, or under a will; any gift that is to become effective upon demise is void. Given the
principle of Freedom of Testation, there is no limitation on the gift itself, i.e. there is no
forced heirship under the Succession Law.
It should also be noted that under Section 39, a will become effective only upon the issuance
of a probate order with respect to it. The probate process may take several months, up to a
year. During which time, limitations are usually imposed on the deceased’s assets.
The creation of trust under the Trust Law
The Israeli Trust Law defines a trust in Section 1 as the duty imposed on a person to hold or
to otherwise deal with assets under his or her control for the benefit of another or for some
other purpose.
Under the Trust Law, trust may be created by a contract, by a deed or by a testament, as set
out below:
a) A trust created by contract requires an agreement between the settlor and the
trustee with no specific procedure necessary for its creation.
b) A Trust created by a deed must be in writing and signed in the presence of an Israeli
notary. This Trust is known as hekdesh (i.e., inter vivos trust). It becomes operative
during the lifetime of the settlor upon the transfer of the assets of the settlor to the
control of the trustee.
c) A testamentary trust, also referred to under the Trust Law as a testamentary
hekdesh, refers to a trust which is created by way of probate proceedings under the
Succession Law. Accordingly, a testamentary trust must comply with the formal
requirements under the Succession Law for executing a will. These include signing
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the will in the presence of two witnesses or an Israeli notary. A testamentary trust
becomes valid only upon the issuance of a probate order with respect to it.
The invalidation of trust under the Succession Law
Due to the limitations set by Section 8 of the Succession Law mentioned above, a trust
contract between the settlor and the trustee, under which control of the trust’s assets
passes to the trustee only upon the death of the settlor, is ineffective. The control must be
granted during the lifetime of the settlor, or alternatively, the trust must be a hekdesh (i.e.,
inter vivos trust) with assets effectively transferred to the control of the trustee during the
lifetime of the settlor, or a testamentary trust, which becomes effective upon the issuance
of a probate order with respect thereof.
It therefore follows, that if trust is created pursuant to a contract, the death of one of the
parties to the contract will terminate the trust relationship and require a succession
procedure to transfer the rights of the deceased to his or her heirs.
It should also be noted that the choice of the form of trust, as mentioned above, requires
consideration of personal and family circumstances, as well as tax planning considerations.
This article focuses on the transfer of assets upon death, but reality shows that legal capacity
issues should also be considered during the lifetime of a person. To deal with such issues,
new legislation was recently implemented: Amendment 18 of the Legal Capacity and
Guardianship Law, 5 which regulates the creation and use of an enduring power of attorney.
This power of attorney allows a competent person (the “Appointer”) to appoint another
person (the “Delegate”) to attend to his or her personal, and/or medical, and/or property
affairs, when the Appointer is no longer able to properly understand the matter and attend
to these affairs.
Conclusion
The interrelationship between the law of succession and the law of trust is complex and
challenging.
If a person wishes to create a trust that would prevail after his or her demise, special care
should be given to the form of the trust, i.e. a trust contract, an inter-vivos trust (hekdesh),
or a testamentary trust, as well as to its drafting and subsequent management. Other factors
should also be considered, such as tax and family circumstances.
Once an inter-vivo trust (hekdesh) is created, the settlement of assets into the trust and
under the control of the trustee should be made and completed during the lifetime of the
settlor irrevocably. Otherwise, the settlement of the assets into the trust may be contested
by potential heirs of the settlor after his or her demise, which may result in costly and
cumbersome litigation in court.
.
5 Legal Capacity and Guardianship Law (Amendment 18), 5776-2016, 2550 SH 798 (2016) (Isr.) (“Amendment
18”).