What to remember for inheritance and gift planning for Israeli-US citizens

We are quickly approaching a deadline that will increase US inheritance taxes if not planned right. The impending sunset of exemptions in 2025 heralds significant changes, making it imperative for individuals to prepare for the future for US (and non-US) persons.

The current US Estate and Gift Tax

There is currently no inheritance or estate tax in Israel. If an Israeli passes away, they can pass most of their wealth to their children or others free of Israeli tax. Lifetime gifts are sometimes problematic.

The US tax situation for citizens living in Israel is a very different situation. When someone passes away, if their net worth is over certain amounts, the US will levy a tax on them of 40% over certain thresholds. Additionally, when gifting assets to family or friends, there may be tax implications. One is allowed to gift tax-free up to certain thresholds, but there is a lifetime amount before taxes will apply to their gifts and net worth upon reaching 120 years old (metaphorically).

In 2017, then president Donald Trump passed the TCJA, dramatically transforming the federal estate and gift tax framework, nearly doubling the lifetime exemption amounts. For 2023, US individuals enjoy an exemption of $12.92 million, while married couples benefit from a $25.84 million threshold. These figures represent a substantial increase from the pre-TCJA levels – but not forever.

The 2025 sunset

As the clock ticks towards December 31, 2025, the generous exemptions provided under the Tax Cuts and Jobs Act (TCJA) of 2017 are set to undergo a significant transformation. This looming change is not just a minor adjustment but a substantial shift that will change the current estate and gift tax thresholds, reverting to pre-TCJA levels adjusted for inflation.

This reversion means that the estate and gift tax exemption for US taxes, which stands at $13.61 million for individuals in 2024, is projected to fall to around $7 million per individual in 2026.

Keeping Israel in mind when planning for US Estate Tax

For US citizens living in Israel, the complexity of estate planning is compounded by the need to navigate both US and Israeli tax laws. Transferring assets or establishing trusts not only has implications under US tax regulations, but can also trigger tax consequences in Israel. One can avoid potential US taxes but enter into a heavy Israeli tax problem. For example, if you move real estate over to a family member, while it might be exempt in the US, you could end up with a heavy Israeli purchase tax. It’s crucial to adopt a holistic planning approach, incorporating expertise in both jurisdictions to optimize tax outcomes and avoid unintended liabilities.

Practical steps to take now

The reduction of exemption thresholds from $13.61 million to an estimated $7 million, say, for individuals post-2025, presents a pivotal moment for strategic estate planning. This shift not only necessitates a thorough review of existing plans, but also beckons the implementation of forward-thinking strategies to mitigate the impending impact on wealth transfer.

What about trusts?

As trusts tend to be flexible but simultaneously complex regarding the different parties that may get taxed in each country, there are many things to consider.

First, aligning the type of trust with the goals intended. For example, a QTIP Trust or Qualified Terminable Interest Property Trust allows your spouse to receive benefits during their life but still ensures that the assets flow to your children.

If you are more charitably inclined, you can use a CRAT or Charitable Remainder Annuity Trust. You would want to make sure it is set up properly though to benefit the most from your giving both in the US and Israel. With trusts, the possibilities can be vast but need to be planned properly.

Second, make sure that trust is the right solution. Many may be able to get a US-compliant life insurance policy which eases the burden of estate tax without as much complicated trust planning. Using insurance will not stop the estate tax from taking place, but it will give your loved ones the liquidity to pay the estate tax off.

Third, for Israelis who are not US citizens and are only estate-tax protected up to $60,000 of value at the time of death, is it time to partly switch out of US investments? There may be other possibilities. Many are surprised to learn that the estate tax limit for non-US citizens is so small and includes US stocks held in Israeli banks.

Always consult experienced advisers in each country at an early stage in specific cases.

Yaacov Jacob Yaacov@pstein.com. Senior Manager – Individual & Partnership Department, Philip Stein & Associates, US CPAs in Jerusalem.