Introduction
The topic of charity is very developed in Israel and finds its origins in Biblical orders and long-standing traditions. Israel’s current population is around 9 million people, and it has around 45,000 registered nonprofit organizations, public benefit companies and public trusts. Public trust is the name chosen by legislators to charity trusts and is one of the most effective tools for donations and community activities. In Hebrew, charity trusts are usually referred to as “Hekdesh”, which means dedicating something to a cause. The Israeli Trusts Act, signed in 1979, sets the rules according to which a charity trust should operate. In this article I will use the legal term “public trust” as defined by law, rather than the term “charity trust”, since public trust includes both charity trusts and trusts with other public goals.
What is a Public Trust?
A public trust is the legal definition of an arrangement in which a settlor designates assets to the pursuit of public goals, and a appoints a trustee to accomplish said goals. The Trusts Act of 1979 describes the orders of the law which will apply to such trusts. Since the property and the fruits it bears are designated for public use, and usually for many years, the state oversees public trusts and ensure they act to accomplish the goals set by their creators. The authority charged with overseeing public trusts is called “Rasham Ahekdeshot” (The Registrar of Public Trusts). The Trusts Act does not describe what is considered a public goal, but details regarding such goals can be found in other laws and it is very rare to encounter a disagreement on whether a certain goal is considered public or not. Common goals include education, welfare, health, religion and culture. One of the latest cases in this field was tried in 2012, where the court ruled that an activity to promote vipassana (a form of meditation) will not be considered a public goal.
Public Trust Registration Duty
The Trusts Act of 1979 mandates that a public trust be registered with the Registrar of Public Trusts within three months since its conception and should include the creator’s details, the properties assigned to the trust, the trust’s goals and the details of the trustee. The day the first property is transferred to the trustee will be considered as the trust creation date. The law also mandates that failing to register a public trust in time will be considered a felony, and the trustee shall face jail time or fine. In addition, and this is relatively unique, should the Registrar suffer expenses due to investigation of a public trust or for the purpose of proving it is indeed public, it can claim these expenses back and will be reimbursed by the trustee from the trustee’s private assets, in addition to jail time and/or fine.
Mixed Trust Registration Duty
A trust which pursues both public and private goals is required to be registered with the Registrar of Public Trusts as well. A common example of a mixed trust is one which was created for the benefit of the creator’s children, but also works to help other causes. Even if the different goals are not being pursued simultaneously, the trust should still be registered. A common example of such a case is a trust which uses its assets to the benefit of the creator’s child but is also ordered to use the assets for public benefits after the death of said child. The Registrar already stated, in the past, that in cases where difficulties and conflicts of interests arise between the trust’s public and private activity, a split into two separate trusts will be positively considered.
Figures
At the beginning of 2022, the Registrar had more than 3,336 registered public trusts, which managed 6.5 billion NIS and 1,130 real estate assets in Israel. All trusts are managed by trustees appointed by the creator or a court of law and are subject to the oversight of the Registrar of Public Trusts. The details of all public trusts, as opposed to private trusts, are open to the public, including creation date, trustee’s name and contact details, formal goals, field of activity and monetary and real estate assets.
The different fields of activity of registered public trusts include education and professional training (60% of all public trusts in Israel), welfare services (15.3%), religion (6.9%), art and culture (4.2%), science and research (3.7%), health (2.2%) and commemoration (1.8%). The remaining trusts are active in other fields not listed here.
Creation of a Public Trust
A public trust is created via a written document – a trust deed, a will confirmed in a court of law or an agreement between the creator and a trustee. A public trust will be created even if it is not specifically stated in the document, and even if the creator explicitly states that he does not want a public trust to be created. This issue has been ruled on by the Supreme Court in a case where a will mandated the creation of a trust, but specifically stated that it should not be a public trust (meaning – expressed objection to the state overseeing the trustee). Despite the tradition of Israeli courts to follow the will of testators, in this case the Supreme Court ordered the creation and registration of a public trust.
In order to know if a trust exists, the Registrar shall investigate the following things: The purpose of the transfer and whether it is public, whether any meaning or importance was stated for a specific use of the transferred assets, the scope of the transferred assets, the trust’s lifespan, the estimated lifespan of the assets, the beneficiaries and of course the wording of the transferrer’s request.
In some cases, the exact wording used in the creator’s will is critical to the Registrar’s decision. For example, if the transferrer requested a certain amount to be transferred to existing non-profit organization which acts to help impoverished families, and the transfer did not include any other stipulations, the Registrar will most likely not see it as a creation of a trust but as a donation. On the other hand, if the transferrer requests that the assets he transfers be used to support impoverished families, it is likely that the Registrar demands registration of a public trust. In cases of unclarity the trustee can turn to the Registrar and ask for its opinion regarding the registration duty.
Accounting and Reporting
The Trusts Act mandates that trustees must file annual reports with the trustee statement, bank balance and other details. If the yearly turnover of a certain trust is higher than 80,000 NIS ($25,000), the report must be audited by an accountant and include a balance, reports on changes in assets and more. In addition, public trusts must manage a complete record of their financial activities.
The Trustee’s Obligations
Trustees must act to achieve the goals of the public trust and avoid damaging or mismanaging the assets. They are also obligated to develop the assets, invest them in accordance with the law, and to work towards receiving tax benefits that apply to the trust. A public trust trustee’s role includes:
- The duty to file reports to the Registrar of Public Trusts.
- Setting clear criteria for distributions, if not clearly stated in the trust documents.
- Managing and conserving the trust’s assets.
- Promoting the trust’s goals directly. For example, if the trust’s goals are to assist hospitals in purchasing equipment, the trustee must directly contact hospitals rather than donate to other organizations that deal with donations to hospitals.
- Insuring the trust’s assets. For example, if some of the assets include real estate, the trustee must ensure it for weather damage, fires etc.
- Creating a clear distinction between the trustee’s private assets and the trust’s assets. It is strictly forbidden to keep the trust’s funds in a private account. In addition, in any donation from the trust it should be pointed out clearly that the donation came from the trust, not from the trustee.
The Trustee’s Responsibility
Trustees are responsible for any damage caused to the trust’s assets by not fulfilling the trustee’s role, acting illegally or avoiding taking action when required. That being said, trustees who act reasonably and actively will not be charged with damages to the trust’s assets. A court of law can clear a trustee from responsibility if they acted innocently and in good will, but also order trustees to reimburse the trust if it determines they did not. When a trustee is unsure about taking an action related to the trust (for example, if the trust is allowed to donate to a certain organization), they can turn to the district court for advice and instructions. If the trustee acts in accordance with the court’s instructions, they will not bear any responsibility even in case of damage.
Trustee Salary and Expenses
The Trusts Act mandates that trustees are not allowed to accept pay for their role, except in cases where they act as part of their profession (lawyers, accountants, etc.) That being said, a court of law can decide to allow a trustee to receive pay in cases where the scope of their work demands it. In addition, all trustees are eligible for reimbursement of their expenses from the trust’s funds.
If the trust’s documents do not clearly state the trustee’s pay, the trustee, professional or not, must report to the Registrar of Public Trusts with the pay he demands. The regular salary for a trustee in Israel is around 4-5% of the trust’s annual revenue. The request for a salary is examined by Registrar of Public Trusts based on the following criteria:
- The scope of the trustee’s work.
- The difficulties and risks involved.
- The level of expertise required.
- The trustee’s efficiency and lawful conduct.
If the requested amount matches the normal rates (i.e. up to 5% of the trust’s revenue), it can be approved by the Registrar. In other cases, the pay would need to be approved by a district court, where the Registrar can object the requested salary.
Investments
One of the biggest challenges for trustees in public trusts is finance management. The Public Trusts Act mandates that the trustee invests the trust’s funds in accordance with the trust’s deed or the creator’s will. In cases where the trust documents do not include such specific instructions, the trustee should invest in accordance to the investment regulations mandated by the Trusts Act.
The list of approved investment options is short and includes low risk financial vehicles with low returns. The list includes government bonds, bank savings plans and highly rated bonds.
The trustee can form an investment committee which will be allowed to pick other options listed in the Act or turn to a court of law to approve a different investment channel. Such an investment option should be conservative in order to get approved by the court. It should be noted that an investment that doesn’t follow regulations can be seen as a felony and the trustee would be subject to criminal and civil lawsuits.
Real Estate
Since a public trust is not a legal entity in Israel, no real estate can be registered on its name. All real estate must be registered with the Land Registry Office on the trustee’s name, with a notice mentioning the existence of the trust.
Public Trust Taxation
The Income Tax Ordinance exempts public trusts from income tax but demands the trust to act towards a public goal and use its finances and assets solely to achieve those goals. Mixed trusts which also include private goals are not exempt, even though they must be registered with the Registrar of Public Trusts and be regulated with accordance to the Trust Act of 1979. Unlike the Trusts Act, the Income Tax Ordinance includes a finite list of public goals, thought this list is quite long and all usual activities by public trusts are included. For tax purposes, public goals include religion, culture, education, science, health, welfare, sports or any other goal approved by the Minister of Finance.
There is no need for a permit in order to be exempt from tax. The trustee should report the income as exempt when filing an annual tax return. However, the state can reject the exemption if it decides the trust does not meet one or more of the conditions. A trust’s eligibility can be ensured by contacting the tax authorities to receive pre-approval that the conditions are met (such an approval is called Section 46 Approval, in accordance with the section that regulates it). In addition to confirmation of the trust’s eligibility for tax exemption, this approval also allows any transfer to the trust’s funds be considered a donation and get a tax relief of 35% of the transferred amount. The maximum donated sum per year that can enjoy said tax relief is the lower of either 30% of the donator’s revenue or 9 million NIS ($2.5 million). This means that Section 46 Approval allows the creator to receive back 35% of the funds transferred to the trust in the form of tax relief. Public trusts are also exempt from VAT on their activities and enjoy other meaningful exemptions on real estate sales.
Conclusion and Recommendations
The Trusts Act of 1979 regulates the activities of public trusts in Israel, and together with the Income Tax Ordinance created a clear outline of the conduct of public trusts in Israel. The State of Israel encourages the creation of public trusts and has even created tax exemptions on their income but also closely monitors the trustee’s actions to make sure the trusts are working towards the goals they were created for. Public trusts must be registered with the Public Trusts Registrar, follow financial management regulations, provide annual reports and more. Mixed trusts, which apart from the family/private goals also include instructions for donations and support of other public goals, should make sure they are free from registration duty.