An article by an authority on the country examines family business transfer examples, and uses of trust laws, as they apply in Israel.

This news service likes to delve from time to time into those jurisdictions that might not at first grab attention as wealth management hubs, but which do have lucrative potential, and complexities that industry professionals should grasp. One such country is Israel. This article, by Dr Alon Kaplan, an authority on the nation’s wealth management sector and a senior figure in groups such as the Society of Trust and Estate Practitioners, throws light on developments. 

This article originally appeared in the spring, 2017 edition of Family Office Magazine, and is republished here with permission by the author. 

This publication is grateful to Dr Kaplan for this article and insights; it does not necessarily endorse the views of outside contributors and invites readers to respond. Email tom.burroughes@wealthbrieing.com 

(More details on the author are at the bottom of this article.)

Israel is a small country, about the same size as Belgium in Europe or New Jersey in North America. It is located on the eastern shore of the Mediterranean Sea and has excellent access by air and sea to Europe, Africa, Asia, and North America.

Recent statistics show that Israel’s population of 8,5000,000 is comprised of 75 per cent Jews and 25 per cent non-Jews all of whom enjoy equal legal rights in all areas of life. Israel is a country of immigration. More than 40 per cent of residents in Israel were not born in the country. Some wealthy immigrant families relocate with their assets to Israel and others may keep part of their wealth in the country of origin.

There are no formal statistics available regarding the number of high net worth individuals in Israel. A millionaire is defined, generally, as a person with more than $1 million in liquid assets. An ultra-high net worth individual (UHNWI) is defined as one with over $30 million.

According to the report of Berkshire Hathaway Company: 
1. There were 79,186 HNWIs in Israel in 2015, which collectively held $447 billion in wealth.
2. The Israeli HNWI population rose by 2.9 per cent in 2015, following a 3.0 per cent increase in 2014. 
3. The Israeli HNWI population is forecast to grow by 17.7 per cent to reach 96,790 in 2020, while HNWI wealth is projected to grow by 24.3 per cent to reach $579.7 billion.

1. Family business in Israel
How do Family Businesses cope with their present and future ownership and management of the business? 

The following stories of family businesses in Israel will demonstrate this: Iscar family business - Stef and Eitan Wertheimer. Iscar was founded in 1952 by Stef Wertheimer in the Western Galilee town of Nahariya and moved in 1982 to the Tefen Industrial Zone, about 20 kilometers away. In 1984 Stef, the father, handed over the reins to his son Eitan. In 1995 Eitan Wertheimer passed the CEO’s seat to Jacob Harpaz (a non -family executive) and went on to serve as chairman and later president. Iscar is headquartered in the northern Israeli community of Tefen and is now formally known as International Metalworking, or IMC. 

In 2006 Berkshire Hathaway bought an 80 per cent stake in Iscar for $4 billion. At a later stage, the son Eitan, sold to Berkshire Hathaway his 20 per cent share for $2 billion. The deal gave Iscar a total value of about $10 billion, about double its valuation when Berkshire Hathaway bought its initial stake for $4 billion.

In an interview to the Israel economist newspaper Eitan was quoted: “it was important for us to sell the business before family problems arise. We see what is happening in other family businesses and there is no need to wait for problems. … It is preferable that each generation will start his new own business.”

1.2. Keter Plastic company, another “happy end”.
Sami Sagol developed the Keter Plastic company founded by his father in 1948 .The company is the world’s leading manufacturer of plastic consumer products. Keter Plastic develops, manufactures, and distributes throughout the world a broad range of plastic consumer products. The group has over 25,000 sales points around the world, 18 manufacturing plants, and two distribution centers. The company has 4, 000 workers, including nearly 2, 000 in Israel, and its products are sold in 100 countries. Keter Plastic signed an agreement for the purchase of 80 per cent of the company by a London based investment fund, BC Partners. The Sagol family would continue to own 20 per cent of the company. Israeli media estimate the acquisition to be at a company value of $1.3 billion. Keter Plastic’s 2015 sales totaled €800 million.

According to Forbes magazine Sagol decided to sell the business since the third and fourth generation of the family, four daughters and grandchildren developed other careers and did not intend to continue the family business.

1.3. Strauss family business -The successful story of Strauss family.
The Strauss family business was established 70 years ago by Richard and Hilda Strauss new immigrants from Germany. A small yard with two cows started a business which today is a national and public company working with international business partners PepsiCo, San Miguel, DANONE, Unilever and others. It is the 4th company in the world for coffee production and trade employing 14,000 people worldwide with an annual turnover of USA $2 Billion. 39 years after the establishment of the business the founders transferred the ownership and management to their son.

In the year 2000 the family business was passed on to the third generation who is running the business today together with professional executives who are members of the board of directors and not members of the family. According to Ofra Strauss the granddaughter and president of the business today “This was implemented pursuant to a well prepared organizational program which included members of the family committed to the original business vision of the family founders.”

2. Transfer of family business to future generations.
There are 3 possible ways to transfer family business to future generations:

2.1. A lifetime gift.
There is no gift tax in Israel between members of the family. The law of gift 1965 governs this procedure. The founders of the family business may transfer ownership of the business at the time they choose to do so.

 2.2. Succession
The Succession Law 1965, governs individuals who were residents of Israel or owned assets in Israel at the time of their death. The fundamental principle guiding this legislation is that of testamentary freedom based on a last will and testament, made under the Succession Law. The freedom of succession enables the founder of the family business to name in his testament who will be the leaders continuing the business and what would be the share of the other members of the family.

Succession procedure has its perils. The heirs, members of the family, may challenge the testament and a court battle may arise. This happened in the famous case of the Offer family: The late Y. Offer had owned a company which controlled substantial holdings in a bank and a real estate company with ownership of some of the largest shopping centres in Israel. The late Y. Offer bequeathed most of his assets to his daughter ( 51.7 per cent of shares in Offer investment company) and 15 per cent shares to his son. The son contested the validity of the will, and after a long trial the will was declared valid, and a probate order confirmed the wishes of the late Y. Offer’s will.

2.3. Transfer of the family business to future generations by creating a trust.

The trust law
A trust structure is recognized in many countries as a good way to hold assets under a central management and regulate its activities according to the wishes of the head of the family business who would be the settlor of the trust.

In Israel, the trust has been in part of the society for many years even before the establishment of the state in 1948.The Israel trust law 1979 defines a trust as the duty imposed on a trustee to hold or to otherwise deal with assets under its control for the benefit of another or for some other purpose.

Creation of a trust
A trust may be created either by contract or by deed: 

1. A trust created by contract requires an agreement between the settlor and the trustee with no specific procedure necessary for its validity.
2. A Trust created by deed must be in writing and signed in the presence of a notary.
3. This Trust is named: “Hekdesh” and becomes operative during the lifetime of the settlor upon transfer of the assets of the trust to the control of the trustee.
 4. A valid testamentary trust must comply with the formal requirements under the Succession Law for executing a will. These include signing the will in the presence of 2 witnesses or a notary.
A Testamentary Trust will become valid after probate of the will which contains the instructions to create a trust. 

Conclusion
Family business in Israel is an interesting arena for family offices, asset managers and trust and estate practitioners “According to a recent report by the Institute for Family Business, the family business sector in the UK accounts for a quarter of the nation’s gross domestic product , employing nearly 12 million people. However, numerous studies suggest that, despite their economic importance, family business’ intergenerational longevity can be very limited, with as few as 10 percent remaining in family ownership by the third generation”(Step Journal February 2017).
It remains to be seen if Israel will follow the UK trend.

About the author
Dr. Alon Kaplan, LLM (Jerusalem), PhD (Zurich), TEP practices law in Tel Aviv specializing in Trusts and Estates. He is General Editor of Trusts in Prime Jurisdictions (4th edition, April 2016), the Israel Country Correspondent for Oxford Journals’ Trusts and Trustees , author of Trusts in Israel: Development and current practice (2015 Helbing Lichtenhahn Verlag) and Trusts and Estate planning in Israel (Oct. 2016, Juris Publishing) . He may be contacted at: alon@alonkaplan-law.com