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Trusts in estate planning: when they are the right instrument, and how one is created

A will transfers an asset in full, in a single moment. A trust allows it to pass on conditions, over time, and under management. That difference matters where the beneficiary is a minor, needs protection, or where an asset is meant to stay in the family.

"A trust is not a luxury product. In many cases it is simply the only way to give someone an asset without giving them all of it on the day they turn eighteen."

Adv. and Notary Igal Mor · Estate planning and wills
Wooden figures of family members beside a jar of coins, illustrating assets held for beneficiaries
Adv. and Notary Igal Mor
By Adv. and Notary Igal Mor
Updated · About an 8-minute read
Book a consultation02-5953322

What a trust is

The Trust Law defines a trust as a relationship to an asset under which a trustee is bound to hold it or deal with it for the benefit of a beneficiary or for another purpose. Put simply: the asset passes into the hands of a person or body who holds it for someone else, according to rules fixed in advance.

Three roles make up every trust:

  • The creator. The person who provides the assets and defines the rules.
  • The trustee. The person who holds and manages, and who is not the owner for their own benefit. They are subject to fiduciary duties and to the rules laid down.
  • The beneficiary. The person for whose benefit the asset is held. Several beneficiaries may be named, including future beneficiaries not yet born.

The important distinction is that the trustee holds the asset but does not benefit from it. That is what allows formal ownership to be separated from economic enjoyment, and it is the source of the instrument's flexibility.

How a trust is created

The statute provides three routes: by law, by contract with a trustee, or by a trust deed. In estate planning the last two are the relevant ones.

  • A trust contract. An agreement between the creator and the trustee defining the assets, the beneficiaries and the rules. Flexible, and suited to a trust operating during the creator's lifetime.
  • A trust deed. The more formal route. It is made by a document signed before a notary, or in a will, other than an oral will. A trust created in a will begins to operate after the death.

A practical point many miss: a trust deed takes effect on the transfer of control over the assets to the trustee. Signature alone is not enough. For as long as the assets have not actually been transferred, the trust is not operating.

A trust is therefore not a document but a sequence: a document, a transfer of assets, and sometimes registration with the institutions that hold them.

Variation and revocation

This is the most important decision in designing a trust, and it should be taken deliberately rather than discovered later.

Once a trust deed has taken effect, the creator may no longer vary its terms, withdraw assets from it, or revoke it. There are three exceptions:

  • A right reserved in advance in the trust deed. The simple and common way to preserve flexibility.
  • The beneficiaries' consent. Possible, but dependent on them, and there may be minor or future beneficiaries.
  • The court's approval. A possible route, but a slow one.

The implication: anyone who wants the ability to change things later must say so in the original document. Conversely, the very inability to change is sometimes the advantage sought, where the arrangement is meant to be protected against future pressure.

Assets can also be added to a trust after it has taken effect, and that is worth providing for expressly.

When it is the right instrument

A trust is not a substitute for a will but an addition to it. These are the situations in which it does what a will cannot.

  • A beneficiary with special needs. A direct inheritance may affect entitlement to benefits and impose the burden of managing money. A trust can meet their needs without transferring ownership.
  • Minors. A minor's inheritance passes to them in full at 18. A trust allows it to be spread: studies, a first home, a later age.
  • A beneficiary who struggles with money. Addiction, debts, or simply inexperience.
  • Keeping an asset in the family. A flat or a business the family wants to retain across generations.
  • A second spouse alongside children from an earlier relationship. A trust lets the spouse enjoy the asset during their lifetime and passes it to the children afterwards.
  • Separating income from capital. Giving a beneficiary the fruits without giving them the asset.

Choosing the trustee

The trustee is the person who will actually carry the arrangement for years. A wrong choice here cancels out the advantage of the instrument.

  • A family member. Knows the picture and charges nothing, but may find themselves in a conflict of interest, particularly if they are also a beneficiary or close to one.
  • A professional. A lawyer, an accountant or a trust company. More expensive, but neutral, and continuous over the years.
  • A combination. A professional trustee alongside a family member as supervisor, or the reverse.

In every case, provide expressly for: who replaces the trustee if they cannot continue; what they are paid; which decisions require consultation or consent; and what reports they file and to whom.

A question worth asking before signing: if the trustee refuses a beneficiary's request, does the mechanism we have drafted resolve that without going to court. If the answer is no, the document is not complete.

What the trust deed should say

A good trust document decides in advance the questions that will be asked in twenty years, when the creator can no longer explain what was intended.

  • The assets. What is settled into the trust, and how further assets are added.
  • The beneficiaries. Who they are, including future beneficiaries, and what happens if a beneficiary dies before distribution.
  • The purpose of the trust. Substantive rather than general drafting. "For the beneficiary's welfare" is not enough. Education, housing, health, maintenance - each produces different decisions.
  • Criteria for distribution. When distributions are made, how much, and in what circumstances a departure is permitted.
  • An end date. An event, an age or a date, and what happens on termination.
  • The trustee's powers. To invest, sell, let, borrow, and what is prohibited.
  • Transparency and supervision. Who receives reports, how often, and who may seek the trustee's replacement.
  • A reserved power of variation if the creator wants future flexibility.

Tax and reporting

A trust is not a tax shelter. The Income Tax Ordinance regulates the taxation of trusts in a dedicated chapter, which classifies trusts by the residence of the creator and the beneficiaries and fixes who is liable to tax and to report.

  • Classification of the trust. A trust all of whose creators and beneficiaries are Israeli residents is treated differently from one with a foreign-resident creator or beneficiary, and differently again from a trust created under a will.
  • Reporting duties. Reporting obligations to the tax authority fall on the trustee, and sometimes on the creator or the beneficiary. Failure to report is the common failure, and an expensive one.
  • Settling the assets. Transferring an asset into a trust may itself be a taxable event, particularly with real property. That should be examined before the transfer, not after.
  • A trust under a will. Comes into being on the death, and is subject to rules of its own.

The conclusion: designing a trust calls for a tax adviser alongside the lawyer, from the design stage. A trust that works beautifully in family terms but was never checked for tax can cost more than it saves.

The recurring mistakes

These are the defects we see in trusts drawn up elsewhere and brought to us for review or repair.

  • The assets were never transferred. A trust deed was signed and the assets stayed in the creator's name. The trust never began.
  • No power of variation was reserved. The creator discovered five years later that nothing could be changed.
  • A purpose drafted in general terms. "For the beneficiary's welfare" leaves the trustee without a standard and the family with an argument.
  • No substitute trustee. The trustee died or resigned, and there is no replacement mechanism.
  • No report to the tax authority. The most expensive failure, and it comes to light late.
  • A conflict between the trust and the will. Two documents dealing with the same asset in different ways.
  • A trustee who is also a beneficiary, unaddressed. A built-in conflict of interest the document never dealt with.

In summary

A trust is the instrument that allows an asset to pass on conditions and over time, instead of passing in full in a single moment.

  • The statute defines a trust as a relationship to an asset in which the trustee holds it for a beneficiary or for a purpose.
  • It is created by contract with a trustee or by a trust deed, signed before a notary or contained in a will.
  • A trust deed takes effect on the transfer of control over the assets to the trustee. Without a transfer there is no trust.
  • After it takes effect it cannot be varied, unless a power was reserved in advance, the beneficiaries consent, or the court approves.
  • Tax and reporting are part of the planning, not an appendix to it.

We advise on designing a trust, draft the trust deed, settle the assets and coordinate with the tax adviser, and also review existing trusts. See also estate planning and wills and inheritance.

Questions and answers

What people ask most often

What is a trust, in plain terms?
An arrangement in which an asset is held by a trustee for a beneficiary, according to rules fixed in advance. The statute defines it as a relationship to an asset under which the trustee is bound to hold it or deal with it for the benefit of a beneficiary or for another purpose.
How is a trust created?
Under the statute, by law, by contract with a trustee, or by a trust deed. In estate planning the main routes are a trust contract and a trust deed, made by a document signed before a notary or contained in a will, other than an oral will.
When does the trust start operating?
A trust deed takes effect on the transfer of control over the assets to the trustee. Signing the document is not enough: for as long as the assets have not actually been transferred, the trust is not operating.
Can a trust be varied or revoked after it is set up?
Once the trust deed has taken effect, the creator may not vary its terms, withdraw assets or revoke it, unless a power to do so was reserved in the deed, the beneficiaries consent, or the court approves. Anyone wanting flexibility must say so in the original document.
Can assets be added to an existing trust?
Yes, and it can be provided for expressly in the trust deed. It is one of the provisions worth including from the outset.
When is a trust better than a will alone?
Where assets are to pass on conditions and over time: a beneficiary with special needs, minors who should not receive everything at 18, a beneficiary who struggles with money, keeping an asset in the family across generations, or an arrangement letting a spouse enjoy an asset and then passing it to the children.
Why does a trust suit a child with special needs?
A direct inheritance may affect entitlement to benefits and impose the burden of managing money. A trust allows their needs to be met over time without transferring ownership of assets into their hands.
Who can serve as trustee?
A family member, a professional such as a lawyer or accountant, a trust company, or a combination. Provide expressly for who replaces the trustee if they cannot continue, what they are paid, which decisions require consent, and what reports they file.
What if the trustee is also a beneficiary?
That is a built-in conflict of interest. It can be addressed in the document, for example by requiring the consent of a supervisor or another beneficiary for certain decisions, but it should not be ignored.
Does a trust save tax?
Not necessarily, and that is not its purpose. The Income Tax Ordinance regulates the taxation of trusts in a dedicated chapter and imposes reporting duties on the trustee and sometimes on the creator or beneficiary. Settling an asset into a trust may itself be a taxable event.
What must the trust deed contain?
The assets and how further ones are added, the beneficiaries and what happens if one dies, the purpose of the trust in substantive terms, criteria for distribution, an end date, the trustee's powers and limits, and reporting and supervision mechanisms.
What is the most common mistake?
That the assets were never actually transferred to the trustee. A trust deed was signed, the assets remained registered in the creator's name, and the trust never began.

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Family and Inheritance Department

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