On June 29, 2015, the Israeli Tax Authority extended the deadline for registration of Family Trusts (sometimes referred to as Relatives Trusts), which are trusts created by a non-Israeli grantor for the benefit of one or more Israeli resident beneficiaries, from June 30, 2015, to December 31, 2015.

The Israeli Knesset enacted tax reform legislation effective January 1, 2014, which subjected many trusts to Israeli income taxation that were previously tax-exempt. Under the legislation, a trust that has a non-Israeli grantor, no assets located in Israel, and no trustees in Israel will still be subject to income tax in Israel if one or more beneficiaries of the trust are resident in Israel. For any trust where the grantor is a parent, grandparent, spouse, child or grandchild of an Israeli resident beneficiary, the trustees must notify the Israeli Tax Authority by December 31, 2015 (or within 60 days of the creation of the trust), of the existence of the trust and they must also select one of two possible tax regimes to apply to the trust. Under the Deferred Tax Regime, while there is no tax at the trust level, the Israeli resident beneficiary is taxed at a 30 percent rate on all trust income distributed when received. Under the Alternative Regime, a 25 percent tax is imposed at the trust level with respect to the portion of the trust income allocated to Israeli resident beneficiaries. Tax returns for 2014 (the first year required under the new law) for these trusts are also due (by extension) on December 31, 2015.

Upon the death of the grantor (or in many cases the grantor’s surviving spouse) the trust becomes an Israeli Resident Trust, subject to Israeli taxes on the portion of its worldwide income allocable to Israeli beneficiaries.

U.S. individuals who have created trusts for an Israeli resident spouse, child or grandchild need to be aware of the new Israeli reporting and income tax obligations of the trusts or the beneficiaries. Difficult decisions will need to be made as to how these trusts should be taxed in Israel before the end of this year. Further guidance and regulations regarding important issues such as relief from double taxation (imposed by Israel, the United States or other countries) is hopefully (but not necessarily) forthcoming.