Threatened With Estate Tax, Israel's Rich Are Taking Precautions

Efrat Neuman
Efrat Neuman
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Moshe Kahlon, January 8, 2015.Credit: Moti Milrod
Efrat Neuman
Efrat Neuman

Moshe Kahlon, the presumed finance minister in Prime Minister Benjamin Netanyahu’s next government, is at best weeks away from starting work, but already Israel’s wealthiest are taking precautions in case Kahlon makes good on his promise to impose an estate tax.

Faced with a large part of their estates ending up with the tax authorities, many have already begun approaching lawyers and accountants to find ways of circumventing any new tax.

“There are a lot of rumors and noise circulating about an inheritance tax. No one really know what will be and when but the pressure is already starting,” said Yair Benjamini, a tax attorney. “People already want to start transferring assets to their children today on the assumption that it’s the best way not to pay tax when they die.”

Kahlon gave the rich cause for concern in February at the height of his Kualanu party’s campaign, when he said in an interview with TheMarker that he would favor imposing a tax of 20% to 25% on estates worth 10 million shekels ($2.5 million) or more. “That’s a just tax that shows solidarity,” he said. “I think it’s good to both give and receive.”

“Some people won’t do anything even if they see that it’s going to happen, but that’s not the general rule: Most want to know what can be done with the time that’s left,” said Ziv Neufeld, who heads the tax practice at the Tel Aviv law firm Naschitz Brandes Amir. “Once an inheritance tax is in place, if that is what happens, it will be hard to avoid it.”

The Trajtenberg committee, formed in the wake of the 2011 social protest, rejected the idea of an estate tax, but Shelly Yacimovich, then the Labor Party leader, proposed a tax of 5% to 12.5% on estates of 15 million shekels or more.

“People took this less seriously than they are now,” said Yaron Mehulal, senior partner in the Herzliya law office Eitan, Mehulal & Sadot. “Everyone is much more alert. Clients are asking for advice and weighing options.”

The problem is that Kahlon has spoken about an estate tax only in the most general terms. No one can say with certainty what will be the minimum threshold for the tax or what the tax rate would be, whether it will be imposed on the estate or on the heir, or what kind of assets it will encompass.

Some experts warn it could be imposed retroactively or that it could apply to gifts parents give their children while they are still alive. Many experts say refraining from imposing a tax on gifts would make it too easy to avoid the inheritance tax.

But in many ways a gift tax would be more traumatic than an estate tax, said Pinhas Rubin, an attorney with Gornitzky & Company in Tel Aviv who opposes the estate tax. “A gift tax will have a major social impact because it will change social and financial practices beyond recognition,” he said.

Until 1981, Israel did have an estate tax without a gift tax. At the time, Rubin said, the government avoided floods of tax-free gifts by exempting estates from tax as long as the assets were transferred to the heir (or heirs) within three years of the owner’s death.

If the tax is imposed again, it will be much harder to evade than it was in the past, warned Benjamini. There’s much more banking transparency, making it easier for tax authorizes to identify assets and collect tax on them.

Netanyahu has not favored an estate tax, but Benjamini said he thought odds are pretty good Kahlon would succeed in passing an estate tax law anyway. “There will be immense political pressure [against such a law], but I wouldn’t be surprised if it happens,” he said.

In any event, Rubin said it would take months of study before a law governing estate taxes could be written and that it would be even more complicated — and controversial — if it included a gift tax.

If that were to happen, the Israel Tax Authority would have to set up a special mechanism to impose the tax and hire staff, which would take more time, Benjamini said.

“I would recommend to Kahlon that he deal with other, more urgent, things first,” Rubin said.

Mehulal said winning Knesset approval for a gift tax won’t be easy, adding that if lawmakers do back an estate tax, it will probably be imposed only on estates worth far more than 10 million shekels. In the United States, the minimum is $5 million.

“It will be easy for the wealthy to transfer their money. The most widespread way is through a trust — in the U.S. there’s a whole industry built around it,” he said. “It’s hard to plan when there isn’t any law, but in most countries family trusts aren’t considered part of an estate.”

Mehulal recommends that people prepare but not actually create a trust. “Setting up a sophisticated trust is an undertaking,” he warned.

Benjamini adds that transferring assets now, before an estate tax is enacted, isn’t so simple either.

“You need to make a lot of arrangements around the transfer, such as agreements with your children’s spouses,” he said. “You can transfer assets to a trustee who will act in the children’s interests, but there is some risk, because legislators may decide that an estate includes assets given to a trustee.”