Israeli Inheritance — No Estate Tax
Israel abolished its estate and inheritance tax in 1981. There is no Israeli tax on the inheritance itself, regardless of estate size, residence of deceased, or relationship between heirs.
This sounds simple, but inheriting Israeli assets creates several Israeli tax obligations:
- Income tax going forward — heirs inherit the assets, including any future income (rental, dividends) which is taxable normally
- Capital gains tax on sale — heirs inherit the deceased's tax basis (no step-up). When sold, mas shevach applies on the gain
- Real estate transfer fees — minimal fees for registration changes (not a tax)
- VAT registration changes — for inherited business activities
- Annual reporting — heirs become responsible for annual Israeli filings if assets generate income
Probate (Tzav Kiyum)
Israeli probate (tzav kiyum yerusha or tzav kiyum tzava'ah) is required to transfer ownership of Israeli assets. Documents are filed with the Registrar of Inheritances or Rabbinical Court. The process typically takes 3-9 months and requires Israeli legal representation.
US Rules — More Complicated
Even though Israel doesn't tax the inheritance, the US imposes several requirements on Americans receiving inheritance from non-US persons.
Step-up in basis (good news)
The US allows heirs to "step up" the cost basis of inherited assets to fair market value as of the date of death. This means future US capital gains tax is calculated only on appreciation after you inherit, not from the deceased's original purchase price. This can be a massive benefit.
However: Israel does not give you a corresponding step-up. So when you sell inherited Israeli property, you'll owe Israeli mas shevach on the entire gain (since 1981 perhaps), but only US capital gains on the post-inheritance gain. Foreign Tax Credit can usually balance these out.
US estate tax — for the deceased's estate
If the deceased was a US citizen or US-domiciled, their entire worldwide estate (including Israeli assets) is subject to US estate tax. The 2025 exemption is $13.99M per individual. Estates above this owe 40% on the excess.
If the deceased was a non-US resident foreigner, only their US-situs assets are subject to US estate tax (with a much lower $60,000 exemption).
Form 3520 — The Most Common Mistake
If you receive an inheritance or gift from a foreign person (including an Israeli relative), you may need to file Form 3520 with the IRS.
Filing thresholds
- $100,000+ in a year from any individual (or related individuals, like husband + wife)
- $19,570 in 2024 from any foreign corporation or partnership (indexed annually)
- Any amount from a foreign trust
It's an informational form — but penalties are severe
No tax is owed on the gift/inheritance itself (assuming proper basis). But if you don't file:
- 5% per month of the gift value, up to 25% of the gift
- So a $400,000 inheritance unreported = $100,000 penalty
- The IRS has been aggressively assessing these penalties since 2017
How we help
If you've recently received an Israeli inheritance, we work with US tax counsel to ensure Form 3520 is filed correctly. If you're behind on filings, we coordinate "delinquent international information return submission" procedures to minimize penalties.
US-Israel Trust Structures
Trusts are powerful tools for cross-border families — but extraordinarily complex from a US tax perspective. The US has detailed rules for "foreign trusts" that can create traps for the unwary.
Common scenarios we handle
- Israeli parents establishing a trust for US grandchildren — to fund Yeshiva, university, or future Aliyah
- US person as trustee of Israeli family trust — automatically converts the trust to a US-domestic trust under Section 7701(a)(30)(E)
- Israeli trust holding Israeli real estate or business — US beneficiaries face complex annual reporting
- Special needs trusts — for special needs heirs in Israel or US
- Charitable trusts — for Israeli charitable purposes from US donors
The reporting burden
For a foreign trust with US beneficiaries:
- Form 3520-A — filed annually by the trustee (or by US owner if grantor)
- Form 3520 — filed by US beneficiaries each year
- Penalties for non-filing — 5% of trust assets, per year
Many Israeli families have set up trusts decades ago without realizing they have US beneficiaries who require ongoing reporting. We help diagnose the situation and bring everything into compliance.
Probate — When Two Systems Collide
If the deceased had both US and Israeli assets, both systems' probate processes apply:
- US probate in the deceased's state of residence (varies by state — California, NY, Florida, etc.)
- Israeli probate in Israel for Israeli assets (Registrar of Inheritances or Rabbinical Court)
How we help
- Coordinate Israeli probate with US executor/lawyer
- Translate documents officially (notary + apostille)
- Handle Israeli tax filings for the estate
- Manage Israeli assets during probate
- File the necessary US forms (Form 3520, etc.)
- Distribute assets to heirs efficiently
Estate Planning for Dual Citizens
If you're an American with Israeli assets — or an Israeli with American family — proactive estate planning can save heirs hundreds of thousands of dollars and years of headaches.
Common strategies
- Holding Israeli real estate in Israeli LLC (Chevra Be'am) — simplifies US estate process but creates GILTI/PFIC exposure during life
- Cross-jurisdictional trusts — properly structured to be efficient on both sides
- Lifetime gifting — using US gift tax exemption to transfer Israeli assets to children before death
- Pension and life insurance optimization — different products in each country
- Specific bequests vs. unified estate — strategic planning of what passes through which jurisdiction
- Charitable bequests — to Israeli charities by US donors with proper documentation
Estate planning is highly individual. We work with the family, US estate attorneys, Israeli legal counsel, and the personal CPA to create an integrated plan.