A Trust is a legal structure in which the creator of the trust (Settlor) transfers ownership of assets to a Trustee, who manages the assets for the benefit of Beneficiaries designated by the Settlor.
Unlike an agency relationship, the Trustee holds the assets for the beneficiaries and not for the original Settlor (although the Settlor can be one of the beneficiaries). The unique feature of a trust is the ability to change beneficiaries over time and predetermine who will replace a deceased beneficiary—without the need for complex probate or inheritance proceedings.
Occasionally, the Settlor also prepares a “Letter of Wishes” guiding the Trustee on how to manage the assets. Although this document is not legally binding, Trustees generally take it into account. Furthermore, a mechanism can be established (such as appointing a “Protector”) to ensure the fulfillment of these wishes, as explained below.
How are the assets held?
In most countries, a trust is not a separate legal entity. Therefore, Trustees often establish a “Trust Asset Holding Company” managed by them. This company opens bank accounts and holds the trust’s assets. From the bank’s perspective, the company is the client, and information regarding the individual behind the company is kept confidential.
Why establish a trust?
The trust is an established and legitimate tool used for a variety of purposes:
A. Care for children with disabilities A trust enables:
Separation of the child’s funds from the rest of the inheritance.
Safeguarding property against waste or theft.
Detailed instructions for the use of funds (institutions, treatments, caregivers).
Relieving family members from the day-to-day management of the child’s finances.
Appointing a family Protector as an advisor to the Trustee.
B. Care for family members who struggle to maintain wealth In cases of a family member who is a compulsive gambler, substance abuser, or subject to negative influences—the trust preserves a principal fund for their welfare, protected from squandering, lawsuits, and business failures.
C. An alternative solution to prenuptial agreements A trust can protect assets received through inheritance or as a gift prior to marriage.
D. Family business management A trust allows for the efficient organization of family business management and an orderly transfer between generations.
E. Intergenerational transfer of family assets When an individual wishes to provide not only for their children but also for their grandchildren or great-grandchildren, a trust allows them to determine in advance how much money each generation will receive, ensuring the preservation of a sufficient fund for future generations.
F. Asset protection from creditors A trust can protect property from future claims—provided it was established in good faith and before the occurrence of the event that created the cause of action.
G. Preparation for the “Golden Age” An individual, while still in full capacity, can establish a trust to provide for their welfare after retirement, with the security that their assets will be preserved and allocated according to their instructions—without placing a burden on their family members.
H. Dealing with diverse inheritance laws in different countries Many countries have different inheritance laws. As noted above, conflicts may arise between inheritance laws in Israel and other countries. Holding assets in a trust provides solutions to such issues.
Summary
The trust is an important and effective legal tool for caring for family members, protecting assets, managing family wealth, and the intergenerational transfer of property. Trusts established in foreign countries are legally recognized in Israel following Amendment 147 to the Income Tax Ordinance.
Philanthropy
Israel is a country where philanthropy is “almost an industry.” (In the Jewish people, acts of kindness are part of our culture—see the biblical instruction to give a “tithe”).
In the worlds of business, academia, and especially trusts, there are many philanthropic activities. The technical term is “Public Benefit Trusts or Donations.” The Israel Tax Authority also contributes to this through Section 46 of the Ordinance, which allows tax benefits for businesses donating to public causes.