Estate division agreements between heirs: how they work and what they do to tax
An order fixes shares, not assets. An agreement between heirs turns three undivided thirds in a flat, an account and a business into a division each of them can live with. Done properly, it is also not a taxable event.
"The difference between an agreement that costs nothing and one that costs a great deal in tax usually comes down to a single clause: where the money that equalises the division came from."
Adv. and Notary Igal Mor · Estate planning and wills
What an agreement between heirs is
An inheritance or probate order fixes proportionate shares in the estate, not who receives which asset. If a flat, a bank account and a car are left to three children, each of them owns a third of each. An agreement between heirs, also called an estate division agreement, converts that position into a division in specie.
The Succession Law permits the heirs to divide the assets of the estate between them, in whole or in part, by agreement. Three points follow:
- The consent of all the heirs is required. There is no majority and no casting vote. One heir who does not agree prevents the agreement.
- A partial division is possible. The agreement can deal with the flat and leave the rest in common ownership.
- It applies to estate assets only. It is not a vehicle for transferring an heir's own private property.
Why one is made
Joint ownership between siblings is a recipe for friction. The agreement exists to end it while everyone is still on speaking terms.
- To avoid forced co-ownership. Three co-owners of a flat must agree on letting it, on renovating it and on selling it. One refusal is enough to block everything.
- To fit the division to reality. One heir lives in the flat, another needs liquidity, a third runs the family business. A division in specie gives each of them what suits them.
- To end a dispute. An agreement is sometimes the way to conclude an objection to a will without a judgment. See contesting a will.
- To save tax. A first division made correctly is not treated as a sale, and so does not create a liability to betterment tax or purchase tax.
The last point is usually the one that surprises. Without the agreement, the identical outcome is reached by a transfer between siblings after the division, and that is a transaction liable to tax.
The first division and tax
The Land Taxation Law provides that inheritance itself is not a sale, so receiving an asset by inheritance is not a taxable event. It further provides that the division of estate assets between heirs is not to be treated as a sale.
That rule is known in practice as the first division, and it is an opportunity best not missed:
- What it covers. Assets from the estate may be moved between the heirs, and the proportionate division fixed by the order altered, without that being treated as a sale.
- When it is available. The first division may be made after the order has issued, and even after the rights have been registered in the heirs' names, so long as it remains a first division of the estate assets.
- What it does not cover. A transfer between heirs made after a division has already taken place is no longer a first division. It is a transaction like any other.
The practical implication: where the estate includes real property, it is worth pausing before taking any steps and examining the structure of the division. Correcting it afterwards costs far more.
When money comes from outside
Here lies the one qualification that really matters, and it is a source of expensive mistakes. The relief is conditional on the consideration given as part of the division coming from the assets of the estate.
Take two siblings and an estate consisting only of a flat. One wants the whole flat, and therefore pays the other, out of his own pocket, the value of half of it:
- The money came from outside the estate. The portion in respect of which that consideration was given is treated as a sale, and tax is payable on it.
- Had the estate also held a bank account from which the difference was equalised, the very same division would not have been treated as a sale.
The question is therefore not what each sibling receives, but where the money that equalises them comes from. That is the difference that justifies advice before signing, and sometimes a change in the order of steps: first realising an asset from within the estate, and only then dividing.
This rule concerns real property. For other assets, such as securities or accounts, the tax position has to be examined separately.
Disclaimer, and how it differs
Alongside the agreement there is another, simpler instrument, which is sometimes the better fit: disclaiming from the estate. An heir may disclaim their share, in whole or in part, for as long as the estate has not been divided.
Two substantive differences between a disclaimer and a division agreement:
- In whose favour. A specific disclaimer is possible only in favour of the deceased's spouse, child or sibling. A general disclaimer divides the share among the remaining heirs. One cannot disclaim in favour of anyone outside that group.
- What remains. A person who disclaims is treated as never having been an heir. Under a division agreement, by contrast, all of them are heirs and they settle the division between themselves.
A disclaimer has its own tax logic, and it is not treated as a sale. Choosing between the instruments is not a technicality: it depends on who the parties are, on the kinds of assets involved and on the intended outcome, and the choice is best made before anything is filed.
What the agreement should contain
An estate division agreement is not a form. These are the elements that recur in every proper one:
- A full identification of the estate. A list of the assets, rights and debts, including those that are not real property.
- The order under which the division is made, and its number.
- The division itself. Who receives what, and at what agreed value.
- The source of any equalising payments. An express statement that the equalisation is made from the assets of the estate, where that is the case. This is the single most important tax clause.
- Debts and taxes. Who bears the deceased's debts, the taxes, and the costs of administering the estate.
- A timetable and implementation mechanism. Registration dates, payment dates, and any powers of attorney required.
- A mechanism for resolving disagreement. Mediation before proceedings, or an agreed valuation mechanism.
- Finality. A statement that the agreement concludes the mutual claims relating to the estate.
Where real property is involved, the agreement must be coordinated with registration and with the report to the tax authority. An agreement signed without establishing how registration will be effected creates double work.
When to make it
There is no single right moment, but there is an order that avoids harm.
- Before applying for the order. Possible, and it allows an application that already reflects the agreement. Particularly useful where a disclaimer is involved.
- After the order and before any step is taken. This is the most common and most convenient moment. The order is in hand, the extent of the estate is known, and the division can be made on facts.
- After the rights have been registered in the heirs' names. Still possible, so long as it remains a first division of the estate assets.
- After a division has already been carried out. At that point it is an ordinary transaction between siblings, with all that follows.
The conclusion: do not rush to deal with assets before the question of division has been examined. Selling a flat or transferring funds may close a door that was open.
The recurring mistakes
These are the defects we see in agreements made without advice, and in all of them the price emerges late.
- Equalisation from a private pocket. One sibling pays another from his own funds in order to take the flat. The portion paid for is treated as a sale.
- No statement about the source of the consideration. Even where the equalisation came from the estate, the absence of an express statement invites a question.
- Steps taken before the agreement. The flat was sold, the funds distributed, and only then is an arrangement attempted. Some of the options no longer exist.
- One heir did not sign. The consent of all is required. An agreement with some of the heirs is not a division agreement.
- Debts were not addressed. The agreement divides assets and says nothing about the deceased's debts, which continue to burden the estate.
- A disclaimer was never considered. Sometimes a simple disclaimer achieves the same outcome by a shorter route.
In summary
An agreement between heirs is the instrument that converts proportionate shares into a division people can live with, and in the right conditions does so without a taxable event.
- The consent of all the heirs is required. There is no majority.
- The division of estate assets between heirs is not treated as a sale, provided the equalising consideration comes from the assets of the estate.
- Money from a private pocket turns the portion paid for into a taxable transaction.
- The agreement can be made after the order and after registration, so long as it is the first division.
- A disclaimer is an alternative instrument, limited to those the statute permits, and sometimes simpler.
We draft estate division agreements, examine the tax position before signing, and handle registration and reporting. See also probate order and wills and inheritance.
What people ask most often
What does the agreement do that the order does not?
Is the consent of all the heirs required?
Is a division between heirs taxable?
What if one sibling pays another from his own funds?
Can the agreement be made after the rights have been registered?
What is a disclaimer from the estate?
Which is better, a disclaimer or a division agreement?
What must appear in the agreement?
Does the agreement need court approval?
What about the deceased's debts?
Can only part of the estate be divided?
What if the siblings cannot agree?
All pages in the Family and Inheritance department
The separation itself
The divorce processLeaving home before divorceReconciliation or divorceRequest for dispute resolutionDissolution of marriageEconomic abuseRestraining orderThe children
Child supportChild support claimIncreasing or reducing supportSupport for a child born outside marriageCollecting support through National InsuranceSpreading a maintenance debtCustody and parenting timeShared parentingThe tender years presumptionChanging a custody arrangementRelocating abroad with the childrenParental alienationDealing with an alienating parentGuardian ad litemSurrogacyPaternity claimThe Youth (Care and Supervision) LawVisual parenting plan builderProperty and agreements
Prenuptial agreementSame sex prenuptial agreementSame-sex marriageNotarised prenuptial agreementDissolution of joint ownershipCareer assets and goodwillSelling the apartment on divorceCommon law partnersInheritance and estate planning
Wills and inheritanceInheritance between same-sex partnersEstate planningWills in estate planningIntergenerational transfer in estate planningTrustsDynasty trustSpecial needs trustProbate orderAgreements between heirsContesting a willNo-contest clause in a willCheck the tax before signing
A short diagnostic conversation on how to structure the division, where the equalisation will come from, and whether a disclaimer is preferable to an agreement.