It is common knowledge that, as a part of the division of land estates, there are opportunities to plan taxation correctly. This is sometimes required and essential in order to reduce the tax burden involved in receiving/dividing and/or selling assets. Over recent years, we have witnessed numerous disputes involving the taxation issues deriving from division of legacies.
In view of the aforementioned, on 21.12.2010, the taxation authorities published the Land Taxation Execution Directive No. 7/2010 that deals with – the division of land estates that are included in legacies amongst heirs (The Execution Directive”).
As a rule, the division of land estates amongst partners, in contrast to heirs is a swap deal, which. Pursuant to the Land Taxation Law is a tax event.
In contrast, Section 5 c(4) of the Lands Taxation Law prescribes that the initial division of land estates amongst heirs – shall not be viewed as a sale under the law, provided that, within the framework of the aforementioned division, no consideration was given in cash or a cash equivalent that is not an asset included within the legacy assets.
It is common knowledge that the issue of land estate division raises numerous questions such as – What is deemed to be an “initial division?” When did this division end? What is the volume of the land estate? The legator’s identity etc.
The Execution Directive attempts to respond to some of these questions and indicate similar instances that have been examined by the institution for taxation decisions in Israel and which form a milestone in the future treatment of these instances.
The Major Points of the Decisions that were Taken
The division of the fruits of assets in a manner different (to the provisions in the inheritance order relating to the division of the assets in favor of one of the parents) – Conduct that does not form a division
Reality has shown that, in many cases, children, that are heirs, enable the surviving parent to benefit from the use of the assets and the fruits of the assets that they have inherited from the deceased parent throughout his/her lifetime, out of concern for the welfare of the living parent and not with any intention of waiving their inheritance.
Thus, the inheriting children, in fact, delay the division of the rights and assets amongst them, until the demise of the second parent. Therefore, as a rule, the taxation authorities do not perceive giving the aforementioned usufruct to the surviving parent alone as an initial division.
A case was debated, in which, on the demise of the father, the inheriting sons were registered as the owners of the rights in land pursuant to the inheritance order together with their mother. However, from the demise of the legator father until the mother’s death, one of the properties was used as the mother’s residence and the remaining properties were rented out in free leases. The rental consideration was transferred solely to the mother.
On the death of the late wife, the sons petitioned to divide the father’s land estate amongst them designating a particular property to each one of them.
It was determined that, when inheriting children gave the property that they inherited and its fruits for the use of the surviving parent, even without transferring their rights for registration into the name of the surviving parent – On its own, this is not sufficient to indicate an absolute waiver of their original rights in favor of the parent, but as delaying their rights and, consequently, the aforementioned shall not be considered as an “initial division” and the inheriting sons can divide the property amongst themselves after the death of the surviving parent and even before this without the concern for the welfare of the parent forming an obstacle for them.
A Division of the Assets to the Heirs in a Manner Different to their Relative Shares According to the Inheritance Order
Pursuant to Section 5 c(4) of the Land Tax Law, there is no requirement to maintain value ratios after the division (in contrast to the directives in Section 67 of the law). However, the tax authorities maintain that an immaterial explained change could indicate an imbalance through assets that are not included in the estate assets. Therefore, in the event of material value gaps that are not explained reasonably, the burden of proof could be imposed on the heirs to prove that the division was executed without consideration extra the estate assets.
Thus, the case was debated of an estate that included two residential apartments and the inheritance order determined that the estate must be divided between two of the legator’s children. The heirs requested a division of the apartments amongst them so that each apartment would be registered in the name of one heir. Pursuant to an appraiser’s assessment, the value of one apartment was three times the value of the second.
Under the circumstances of the same instance, the imbalanced division between the heirs was explained by the fact that, prior to the death of the legator, one of the heirs had lived with his family in the apartment, which he received in the division of the estate, close to his late mother’s residence for many years.
In this instance a reasonable explanation regarding the material value gaps in the division was provided.
Id est, when there is a substantial difference in the value between the heirs, it would be desirable to furnish reasonable explanation according to which no additional consideration was given extra the estate assets.
An Initial Division of the State in a Manner Different to the Legacy after Many Years and after Transactions have been Executed in the Assets
Sometimes, within the frame of reference of an inheritance, the assets are transferred to the heirs without any specific division.
Generally, in an inheritance that is not by virtue of an itemized will, a time period can transpire until the heirs organize themselves regarding an agreed-upon division amongst themselves.
In these instances, the time period, as well as the heirs’ conduct during that period, has crucial implications.
Thus, a case was debated in which an inheritance of two apartment buildings was transferred in the absence of a division to the deceased’s children. Over the years, some of the deceased’s children also died and their rights in the buildings were transferred to their children and even to their grandchildren as an inheritance. All the rent revenue from the buildings was deposited in one bank account (“pool”). the revenue less expenses was distributed amongst the heirs over the years pursuant to their proportional share in the estate and each reported this in their personal files at income tax.
Over the years, transactions in the assets were also executed – gifts were given to children and leasing to one of the heirs, who resides in one of the properties.
After about 40 years from the date of the deaths, the heirs petitioned to register the buildings as a condominium and to assign the apartments in them in the name of each of the heirs and to consider this an initial division.
It was determined that, in view of the prolonged time period, and the heirs’ conduct in pursuance of the inheritance over the decades and in view of the fact that some of the assets were sold or assigned to heirs, it was not possible to apply the directives Section 5 c(4) of the law to the requested division.
Two Estates of Parents that will not be perceived “As One Estate” in that in one of them the Division has been completed
Section 5 c(4) of the Land Tax Law prescribes that the estate of two legators, who are spouses or a child and his parent, shall be perceived as one estate. This provision shall not apply when the division of one of the estates has been completed.
Thus, a case was debated in which two daughters and a mother inherited the father’s estate which included 10 apartments. Pursuant to the inheritance order, the rights were registered in the names of the heirs at the Lands Registration Office. However, despite this, the mother and daughters agreed that the daughters would receive the revenue from rentals of three apartments, while the mother would forgo her share in these revenues (hereinafter: “the apartments distributed to the daughters”). An additional apartment used as the mother’s residence would remain in her possession and the revenues from the remaining apartments would be transferred to the mother.
The mother died and all her estate, pursuant to the inheritance order, went to her two daughters in equal shares. The daughter is requested to a new division all 10 apartments amongst themselves.
The question arose as to whether the apartments that had been bequeathed to the daughters from the father’s estate could be considered as one estate with the mother’s estate assets, therefore making it possible to redistribute all 10 apartments amongst them, without any tax debt, pursuant to Section 5 c(4) of the Land Tax Law.
Under the circumstances of the case, it was decided that, because of the fact that the mother and inheriting daughters had divided the apartments from the father’s estate amongst themselves, the division of the father’s estate had been completed and could no longer be included with the mother’s estate assets.
The Legator’s Identification
The question as to the legator’s identification often arises when there is a chain of bequeathals. Inter alia, the question of the legator’s identification could be relevant for the purposes of examining whether to estates could be perceived as “one estate.”
Thus, a case was debated in which the father of the family died and his wife and daughters were his heirs. A number of years after the father’s death, the father’s aunt died and, in her will, she bequeathed her assets to the father. However, on the date of the aunt’s death, the father (the heir) had already passed away.
The question arose as to whether the aunt’s estate assets could be perceived as the father’s estate and, if so, surely it would be possible to divide the aunt and father’s assets as one estate.
In this instance, it was decided that the assets that the aunt bequeathed could not be perceived as assets in the father’s estate, because the father had never inherited the aunt’s assets and, consequently, on he’s death they could not be transferred to his children within the frame of reference of his estate.
The Inheritance Law prescribes that, in an instance in which the heir pursuant to a will (in this case the father) has died prior to the death of the testator (in this case the aunt), his heirs (of the deceased heir) would be perceived as the heirs of the testator (in this case as the heirs of the aunt).
Id est the daughters will inherit two estates – The father’s estate and the aunt’s estate. Since there was no marital or parent child relationship between the legators (the father and his aunt), these two estates could not be perceived as one estate.
Amending a Division Agreement and Executing a Division in Stages
Like all agreements, a division agreement can be amended. To the extent that the original agreement was not established on the grounds of reality, the amendment will not be deemed to be an additional division.
An initial estate division can be executed in stages, especially when reference is to a large group of assets or a large number of heirs.
Thus, a case was debated in which the heirs prepared a division agreement which was given the force of a court. In the aforementioned division agreement, the estate assets were divided into three asset groups.
The first group – In this group, assets were specifically assigned to certain heirs. In this division a value difference was created in favor of heir A.
The second group – This group remained under the joint ownership of all the heirs.
The third group – it was decided that the assets in this group would be sold by the heirs and, from the consideration of the sale, the balance between the other heirs and heir A would be executed.
The division agreement was reported to the taxation authorities and confirmed as an initial division pursuant to Section 5 c(4) of the Land Tax Law.
After six years, the heirs petitioned to amend the original division agreement so that the division in the third asset group would be in the form of equal shares and not by the sale and distribution of the consideration amongst them as was agreed to be done but had not actually been executed.
Moreover, the heirs petitioned to balance the difference in favor of heir A from the proceeds money received from the sale of the joint asset mentioned in group 2, the proceeds of which had not yet been divided and were deposited in the estate manager’s trust account.
In this instance, the question arose as to whether the new division forms an additional division amongst the heirs. if so, can the cash proceeds from the sale of the group 2 assets, which were intended to balance the difference created in favor of heir A, the perceived as an asset included amongst the estate assets.
It was decided that, since no division agreement had yet been executed in the third group of assets and no use or form of division had been made of them, the amendment to the agreement regarding this group of assets could be deemed to be an initial division.
Regarding the balance payments paid from the cash proceeds from the sale of the asset from the second group, it was determined that, as long as the proceeds had not been divided and had been deposited in the estate manager’s trust account and the asset sold was and remained under the joint ownership of the heirs – the balance from the proceeds of this asset can be perceived as a balance from the estate money.
The Division of Assets that were Received because of the Dissolution of a Company, the Shares of which were Received As an Inheritance
On a number of occasions the question has arisen as to whether heirs, who inherited shares in a “land Association” can dissolve the Association and, then, after receiving the company’s assets without a division following the dissolution, execute a division amongst themselves, which would be covered under the directives in Section 5 c(4) of the law.
The question debated in this context — Whether the instance of a dissolution can, in itself, be perceived as an initial distribution?
Pursuant to the provisions of the Inheritance Law — The estate assets can be divided amongst the heirs according to an agreement amongst them.
Section 109 (b) of the inheritance law prescribes:
”The betterment of assets, their fruits and anything that comes in place of the assets out all of the death of the legators up until the division of the estate – are of the estate and it is the law regarding the depreciation of the assets and the payments imposed on them.”
In view of this, it has been determined that, should a dissolution proceeding be part of a comprehensive process of an agreement to divide an estate amongst heirs, the company’s assets that were received because of the dissolution must be perceived as estate assets instead of the shares. Therefore, under these circumstances, dissolution must not be perceived as an initial division and the division of the company’s assets, received as a result of the dissolution, amongst the heirs shall be perceived as an initial division of the estate assets subject to the provisions in Section 5 c(4) of the law.
To the extent that the heirs to the shares acted as the company’s shareholders for a continuous period, were active in the company and managed it and avoided its dissolution, under these circumstances they will be perceived as an initial division and a later dissolution shall not be deemed an initial division.
For taxation purposes, I reiterate dissolution proceedings form a sale of both the estate assets (shares) by the heirs and of the company’s assets by the company and these instances are taxable pursuant to the Land Tax Law and the Income Tax Order, unless the exemption directives prescribed in Section 71 of the law apply.
Thus, a case was debated in which a person inherited shares in a land association that held a residential apartment from the date of its establishment, from his parents. The apartment was the association’s sole asset and, from the date of its establishment until the time of its dissolution there was no activity in the association or any assets other than the apartment, which served as the heir’s patents’ residence.
On the eve of their deaths, the parents did not hold any other apartment whether directly or indirectly.
The heir petitioned to dissolve the association and receive the apartment and sell it as an apartment received as an inheritance with an exemption pursuant to Section 49 b(5) (i.e. to exploit the legator’s exemption).
It was decided that, subject to the provisions in the law and order regarding taxation on the dissolution and subject to the provisions in Section 72 b of the law, the residential apartment, which was received by the heir because of the dissolution, can be perceived as an estate asset that was received in an inheritance and, therefore, the sale of the apartment must be exempt from tax pursuant to the provisions in Section 49 b(5) of the law.
In another case, a number of heirs inherited shares in a land association that owned a number of land estates that were not adjacent to each other. The land estates were the association’s sole assets and from the date of establishing the association until the time of its dissolution, the association had not undertaken any business transactions.
The heirs petitioned to dissolve the association and, after they receive the land estate without division, a land asset would be assigned to each of them separately.
In this case, after executing the dissolution exempt from tax pursuant to Section 71 of the law, the heirs could not benefit from the provisions in Section 61 of the law for assigning assets to each of them, as the properties did not border on each other.
It was decided that, subject to the directives in the law and the order on the dissolution event, the land estates can be perceived as estate assets that were received as an inheritance and the dissolution proceedings and assignment of the assets to the heirs can be perceived as an initial division, subject to the provisions of Section 5 c(4) of the law.
Conclusion and Deductions
As can be seen, Section 5 c(4) of the Lands Tax Law imparts widespread tax benefits within the framework of the division in land estate inheritance proceedings. However, it also contains numerous traps, which should be avoided timely.
We will be happy to be at your disposal for any queries and/or clarifications regarding this matter or in general.
The aforementioned is not intended as an opinion or as an alternative to legal-taxation counseling in any manner whatsoever.
The aforementioned contains nothing to serve as an opinion and/or an alternative to individual legal taxation advice. We will be happy to be at your disposal for any queries and or explanations regarding this or any general matter. Our office specializes in taxation advice (income tax, betterment tax, VAT) and also accompanies real estate, company and international transactions.
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