Last week, the Director of the Tax Authority Eran Ya’akov announced that the Tax Authority sent hundreds of letters to Israelis with accounts abroad who did not report the account and the funds they had accumulated and warned that those who do not report are subject to sanctions. The said information was received by the Tax Authority last September as part of the information exchange agreements with the US And European countries, and the IRS keep an eye on the “Israeli” funds that circulate around the world and have remained under the radar to this day, free from reporting and tax.
On the other side of those agreements is, among others, the USA, which receives the same financial information from Israel about Israelis who hold assets and investments in the United States, and the IRS has also begun to scrutinize Israeli money.
● The former minister defeated the tax authority: will pay a reduced tax on the apartment in the tower in Tel Aviv
● The court ruled that there is no VAT on Nostro, but the tax authority continues to collect
What about the American tax authority and the assets and income of the Israelis, who are already taxed on their income by the tax authority in Israel? This is where, among other things, the American estate tax comes into play, considered by many to be one of the most aggressive tax collection and wealth distribution tools in the IRS arsenal. It does not only apply to individuals who are US residents or US citizens, but also to individuals who are not US residents and are not even US citizens, who held real estate, securities, certain types of bonds and other investments in the US on the day of their death.
Many Israelis who invest in real estate and other assets in the US are not always aware of the fact that they are subject to the foreign estate tax, especially against the background of the fact that there is no inheritance tax or estate tax in Israel.
The problem: lack of knowledge
“The real estate market in the USA has been for several decades (especially in the last 20 years) an attractive market for Israeli investors mainly thanks to the fact that in a large number of countries in the USA the amount of investment required to purchase an investment property is significantly lower compared to the State of Israel and thanks to the relatively high yields to the market in Israel,” says attorney Keren Admoni from the office of GBK, Glazer, Bacher Klinbaum & Co. “Unfortunately, we repeatedly encounter a lack of knowledge and lack of awareness of investors regarding the issue of the estate tax and the consequences this has on their investments after their death.”
Attorney Keren Admoni / Photo: Erez Steiner
Estate tax in the USA is imposed on the estate of a person who is not an American citizen and who owns and in his name assets in the USA which, at the time of his death, exceed a total value of 60 thousand dollars (only on his assets in the USA). This, in contrast to an American citizen , whose estate tax will apply to his estate when its value exceeds $12 million (as of 2022). “This is a very significant difference, mainly because most of the investments of Israelis in properties in the United States exceed a value of $60,000,” explains Attorney Admoni “The estate tax is calculated according to tax rates of 18%-40% according to the real market value of the property at the time of death. If an estate tax applies according to these conditions, the report to the income tax must be made within nine months of the date of death. Failure to meet the deadlines will result in significant fines.”
Aside from the tax charge, Attorney Admoni explains, there are also exemptions, including a $60,000 exemption from estate tax and an exemption for transfers as a gift. per year (as of 2022). That is, in the case where a couple who own property worth $250,000 and during 2022 and before the death of one of the spouses transferred the property as a gift to the other spouse, at the time of the death of the transferring spouse, an exemption of $224,000 will be granted ($60,000 exemption from inheritance tax and 164 One thousand dollars exempt from gift tax)”.
The options for the investor
According to Attorney Admoni, the solution to exposure to the American estate tax begins with the initial investment in real estate or other assets in the USA. “There are several legal tools that are important to consider when investing in the USA and proper planning ahead of time can minimize exposure to estate tax or even eliminate it Absolutely, including the use of a foreign company for the purpose of maintaining ownership of the property. Maintenance through an Israeli or foreign limited liability company is not considered an entity exposed to estate tax in the event of death. This option does involve considerable costs (company opening fee, attorney’s fees, annual fee) but it can suit those who own a large portfolio of expensive properties.”
Another solution is holding the property through a partnership interest. Admoni: “Within the framework of joint ownership in a partnership, it is possible to transfer a part of the partnership as a gift (a transfer that is exempt from gift or estate tax), to offset the partner’s debts and the partnership’s obligation (such as non-recourse loans – ALO) according to the partner’s relative share and thus achieve tax exemption – (When the total liabilities are higher than the value, it can be said that the value of the investment is negative and thus be exempt from estate tax).
Admoni also recommends considering the establishment of a trust which is a separate entity from the testator. According to her, “Death is not an event for estate tax purposes in the case of a fund – the fund’s assets pass directly to the fund’s nominees upon death, and therefore no estate tax applies. There are limitations to establishing such a fund, the main one being that as soon as assets are transferred to the fund’s ownership, the assets are essentially ‘locked’ inside it And this cannot be changed. This limits the investor’s flexibility and does not allow him to sell or purchase additional assets with the fund.”