When money is thicker than blood
Before registering property in a family member's name for tax purposes, consider the personal risks.
They say you shouldn't mix family and money, but when it means saving a whole lot of money in real estate taxes, some families decide to take the risk.
In Israel, if you buy a second apartment in your own name, you pay considerably higher purchase tax. So there's a big incentive to register the second apartment in the name of a family member. But that's also a highly risky move, among other reasons because of what it could do to your family.
"One family came to me after registering an apartment in their son's name," recalls attorney Nurit Fish. "The son was getting married, and they wanted his fiance to sign a pre-nup stating she had no rights to the apartment. She refused. It was a huge mess, and the parents were at odds with their son. The father was willing to forgo the pre-nup for their son's sake, but the mother wouldn't. Ultimately the parents divorced and were supposed to split the apartment 50-50 between them, but the son argued that the apartment was his and he didn't want his mother to have it. The court ruled that the mother should have half, since we managed to prove that the parents funded the purchase and that the registration in the son's name was fictitious."
These soap operas can cross borders. Fish tells of another case, a man who registered his second apartment in the name of his brother, who lives in France. In order to protect himself, the man asked his brother to draft a will bequeathing him the apartment. But apparently that wasn't enough.
"The brother in France died unexpectedly in a road accident, and when they went to carry out the will, they discovered that French law mandates that at least half a deceased person's assets has to go to the widow and children," says Fish. That problem was solved when they requested that the will be interpreted under Israeli law, not French law, because the apartment was in Israel, and this is the legally accepted thing to do in such a circumstance, she adds.
"We forget that in most cases things are fine and family members keep the trust placed in them, but on the fringes people wind up needing lawyers," she says.
Huge tax difference
The Tax Authority defines investment apartments as those after the first one registered in an individual's name. For instance, on the first apartment you buy, you pay no purchase tax up to a value of NIS 1.42 million, and the maximal marginal purchase tax rate is 5%. But if you're considered an investor, you pay 5% on the first NIS 1.05 million, and 7% after that.
That's a big difference.
"If your second apartment is worth NIS 2 million, you pay NIS 109,000 in taxes, versus only NIS 25,000 if this were your first apartment," says Fish. "For a NIS 1.5 million apartment, an investor pays NIS 80,000, whereas a home buyer pays NIS 5,250," she pointed out.
She describes another case where a man in the middle of a divorce decided to register an apartment in the name of his mother, a dual citizen who lived in Australia. The mother fell ill with cancer, but could not come to Israel to draft a will. Instead, she wrote one by hand and sent it by mail from Australia.
"When the mother passed away, we wanted to to carry out the will, but it turns out that Australian law does not recognize handwritten wills, unlike Israeli law," recounts Fish. Without a will, the apartment would have been divided equally between the woman's children. But it turns out the woman had an Australian will as well, in which she stated she was bequeathing the apartment to her son. Having that will recognized in Israel involved a long, expensive legal process, but the son ultimately got his apartment back.
Fish always recommends that family members write wills in such situations, or alternatively sign loan agreements, in which the person paying for the apartment gives the person under whose name the apartment is registered a loan, and the latter commits to repay it. She also recommends attaching the apartment to the person who paid for it.
"When someone registers an apartment in someone else's name, he needs to realize that he no longer has full control over the apartment and sometimes that causes difficulties, as in the case of parents who register an apartment in a child's name and need to have that child write a will. It's not simple," she says.
And then there's the legal aspect of it. The Tax Authority isn't blind to the phenomenon. The state is increasingly trying to crack down on tax evasion, notes Attorney David Basson of the Hartavi, Bornstein, Basson & Co. law office.
In the case of income tax evasion, at least, the penalty now includes one to two years in jail and a fine equal to three times the unpaid tax, he notes. Formerly, the penalty was no more than being forced to make good the unpaid tax.
Basson doesn't know of any cases of people being jailed for not paying real estate taxes, but he does know many people who caused family crises.
"We handled one case where a man bought an apartment in Tel Aviv and registered it in his brother's name, since the buyer was a dual American-Israeli citizen, and he didn't want to have to report the apartment in his asset declaration to the U.S. authorities. But the brother ran into financial troubles, and the apartment was confiscated. Plus, the brother insisted the apartment was his, fair and square. I advised the buyer that if he wanted to fight for the apartment, he had to reveal the circumstances of the purchase and registration, and show that the registration was fictitious," says Basson. The case is still in court.
"I had another client who seemed like he was stealing from his workplace, so he didn't want anyone to know that he bought an apartment, and therefore registered it in the name of his older brother," says Basson. "The brother died suddenly, and his will left everything to his wife and children. The wife was honest enough to return her share of the apartment to her brother-in-law, but the children thought the apartment had honestly belonged to their father. It ended as a compromise - they were paid some compensation," he says.
Rich but still unlucky
And then there's the case of one family with lots of money but not much luck.
"The father had three sons, all successfully self-employed, but they didn't want the Tax Authority to know this, and when they filled out their asset declaration every year, each son listed one apartment as belonging to the father. The sons weren't aware that each one was doing this, and the father didn't tell them. One day the father was asked to fill out his own asset declaration as part of a random audit, and it turned out that he had four apartments. That family wound up paying massive penalties," Basson recalls.
Numerous families try to pull these tricks, it seems. Basson notes that the section on penalties is longer than the tax code itself.
"Many people do this, because in most cases it works and they register the assets under the name of a family member they trust. The law recognizes that these kind of things happen within the family, because it exempts someone from paying taxes if he receives an apartment from a sibling," says Basson.
For people considering such a step, Basson recommends registering the apartment in the name of a child and simply trusting him or her.
"We trust them to go to the army, so what's an apartment?" he says. "Many people are afraid to do this because 'they don't want to lose control' over their children. So sometimes they list an apartment in the child's name but with a warning note, or they list the apartment in their own name and let the child live there. The other concern is that the child might marry someone vengeful, but that's not really a problem because the law on pre-nups safeguards assets that people owned before marrying."
Yet that doesn't save all families.
"There's one case that broke my heart," says Basson. "One rich woman's son was engaged, so they asked the fiance to sign a pre-nup. They were very rich and the son had a share of apartments as well as the family business. The fiance was also from a well-off family, although she wasn't as rich as they were. She took the pre-nup to a lawyer and it led to a break-up, because financial considerations entered the relationship and they couldn't agree on the pre-nup. Love took a back seat."