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7 Amazing Principles for Estate and Gift Taxation for Israeli-Americans in 2025
Estate taxation is one of the most complex areas of financial planning for Israeli-Americans. With assets spread across two countries and different tax systems, proper planning can save tens and hundreds of thousands of dollars in taxes. In 2025, new laws began to take effect tightening requirements and increasing penalties for inaccurate reporting.
According to data from the U.S. Internal Revenue Service (IRS), over 50% of Americans living abroad do not conduct proper estate planning. This may cost their heirs more than 40% of the estate’s value in taxes and fines. This article reviews the seven essential principles for effective estate tax planning for Israeli-Americans.
Every American living in Israel must understand that they are subject to American taxation on all their worldwide assets, including assets located in Israel. This includes apartments, bank accounts, investments, businesses, and any other property. Misunderstanding tax obligations can lead to severe fines and legal problems.
Principle One: Understanding the Double Tax System
Israeli-Americans face double taxation obligations – both in Israel and in the United States. Estate tax in America applies to all U.S. citizens and green card holders, regardless of their residence. This means even if someone has lived in Israel for decades, their estate will still be subject to American estate tax.
The American estate tax in 2025 is up to 40% for estates exceeding $13.61 million per individual or $27.22 million for married couples. These amounts include all assets worldwide, including real estate in Israel, Israeli bank accounts, and investments in various sectors.
In Israel, there is an inheritance and transfer tax ranging between 10% to 30%, depending on the heir’s relationship and the estate’s value. This creates a scenario where, without proper planning, heirs may pay double taxes on the same assets, once in Israel and once in America.
The double tax treaty between Israel and America provides certain reliefs but does not exempt from reporting obligations or the need for professional planning. It is important to understand that a tax relief does not mean elimination of reporting duties, and failure to report can lead to severe fines.
Principle Two: Strategic Gift Planning
Gift tax is an important tool in estate taxation and property transfer planning. In 2025, the annual gift exemption in America is $18,000 per recipient. This means a person can give up to $18,000 per year to each of their children, grandchildren, or any other person without it being considered a taxable gift.
A married couple can jointly give up to $36,000 per year to each recipient. If a family has three children, they can transfer up to $108,000 per year without tax consequences. Over 10 years, this amounts to more than one million dollars transferred without estate or gift tax.
It is important to remember that for real estate gifts, the asset’s value must be appraised by a certified appraiser. You cannot simply transfer a house worth $500,000 and claim it is an $18,000 gift. The IRS requires professional valuation for all non-cash asset transfers.
Gifts exceeding the annual exemption reduce the overall estate tax exemption. In 2025, the estate tax exemption is $13.61 million, so excess gifts will reduce this amount upon death. This is an important consideration in long-term planning.
Principle Three: Ownership Structure of Assets
The ownership structure of assets significantly affects estate tax liability. Joint ownership with right of survivorship can facilitate asset transfer and avoid estate tax on part of the assets.
When an asset is jointly owned with right of survivorship, upon the death of one owner, the asset automatically passes to the surviving owner without probate. This can save time, legal costs, and in some cases, taxes.
However, joint ownership is not suitable for every case. It creates exposure to the creditors of the second partner and can cause legal problems in cases of divorce or family disputes. Also, transferring an asset into joint ownership is considered a gift and may be subject to gift tax.
Trusts are another tool for planning ownership structure. In a revocable trust, which includes the asset owner both as the settlor of the trust and as the beneficiary, assets can be transferred without immediate tax consequences and upon death will be transferred to beneficiaries according to the trust’s terms.
Conversely, in an irrevocable trust, asset transfer is considered a gift and subject to gift tax, but the assets exit the taxable estate and can grow without future estate tax liability.
Principle Four: Using Exemptions and Deductions
Estate taxation includes several exemptions and deductions that are important to know and utilize. The portability election allows the surviving spouse to use the unused exemption of the deceased spouse. Thus, a married couple can utilize a combined exemption of up to $27.22 million in 2025.
To utilize the portability election, Form 706 must be filed within nine months of the death (an extension of six additional months is possible). This form is mandatory even if the estate is not taxable, just to preserve the exemption rights for the surviving spouse.
Another exemption applies to gifts between spouses. An American can give unlimited gifts to their American spouse without gift tax. However, if the spouse is not American, the exemption is limited to $185,000 in 2025.
Another deduction is the family business deduction. Family businesses meeting certain conditions can receive a deduction of up to $11.7 million from the taxable estate. Conditions include continued business management by family members and maintaining the business for at least ten years.
Another exemption concerns charitable organizations. Gifts to charities are fully exempt from gift and estate taxes. This can be an effective tool for estate tax planning while contributing to good causes.
Principle Five: Effect of Residency and Citizenship
Citizenship status and place of residence significantly impact estate tax liability. U.S. citizens and green card holders are subject to American estate tax on their worldwide assets, regardless of residence.
A non-U.S. citizen and non-permanent resident (Non-Resident Alien) is subject to American estate tax only on assets located in the U.S. The exemption for non-residents is only $60,000, compared to $13.61 million for U.S. citizens.
An Israeli who arrives in America and acquires a green card is considered a permanent resident for tax purposes and is subject to estate tax on their worldwide assets. This includes assets acquired in Israel before obtaining the green card.
Renouncing the green card or U.S. citizenship can solve the estate tax problem but creates other issues like a ban on entering the U.S. and an exit tax on unrealized gains. The tax is 23.8% and calculated as if all assets were sold on the day of renunciation.
Careful planning is required before deciding to renounce citizenship or green card. All legal, tax, and personal implications must be evaluated before making such a decision.
Principle Six: Proper Documentation and Reporting
Accurate documentation and reporting are critical in estate taxation. The IRS requires filing various forms depending on the estate’s value and asset types.
Form 706 (United States Estate Tax Return) must be filed for estates exceeding $13.61 million in 2025. The form must be submitted within nine months of death, with a six-month extension available.
Even for non-taxable estates, Form 706 must sometimes be filed, such as to utilize the portability election or transfer unused GST (Generation-Skipping Transfer) exemption.
Form 3520 is required to report receipt of foreign gifts exceeding $100,000 per year or any single foreign donor gifts exceeding $18,279 in 2025. Failure to file can result in a penalty of 35% of the gift’s value.
For assets in Israel, additional reporting via FBAR (FinCEN Form 114) for foreign bank accounts and Form 8938 for other foreign financial assets is required. Penalties for non-reporting can reach tens of thousands of dollars annually.
Maintaining accurate records of all transfers, gifts, and investments is essential. This includes documenting the money source, transfer dates, valuations, and relevant legal documents.
Principle Seven: Early Planning and Ongoing Updates
Estate tax planning is an ongoing process that requires regular updates, not a one-time action. Laws change, asset values fluctuate, and personal and family circumstances evolve.
Several important changes came into effect in 2025, including updated exemption amounts and increased penalties for non-reporting. It is important to adjust plans accordingly.
An annual review of the plan is recommended, especially after significant events such as the birth of a child, marriage, divorce, purchase of major assets, or changes in citizenship or residency status.
Preparing a valid will in both countries is essential. The American will should address American assets and the Israeli will the Israeli assets. It must be ensured there are no contradictions and that the wills are properly coordinated.
Educating heirs and preparing them to manage assets and tax liabilities is as important as the planning itself. Heirs must understand their tax obligations and how to handle them.
Retirement Assets and Estate Taxation
Retirement assets like 401(k), IRA, and Israeli savings funds require special handling for estate tax purposes. American retirement accounts are included at full value in the taxable estate even if not yet withdrawn.
Israeli savings funds may be considered foreign assets for American tax purposes and require special reporting. It is important to understand the legal structure of the fund and its tax implications in America.
Transferring retirement accounts to heirs allows continued tax benefits on growth but requires careful planning of required withdrawals and possible rolling taxes. Young heirs can stretch withdrawals over their lifetime to minimize tax burden.
Roth IRA and equivalents offer more flexibility in estate planning as withdrawals are tax-exempt and there are no required distributions during the owner’s lifetime. This makes them an attractive tool for wealth transfer to heirs.
Real Estate and Estate Taxation
Real estate constitutes a significant part of many Israeli-American estates. Real estate properties in Israel are fully included in the U.S. taxable estate regardless of their usage.
Valuation of real estate for estate tax purposes must be conducted by a certified appraiser at the date of death or an alternative date six months later. The choice of valuation date can significantly affect tax liability.
Real estate held in joint tenancy with right of survivorship passes directly to the surviving spouse without being included in Form 706, but only if the spouse is a U.S. citizen. If the spouse is not a citizen, a QDOT (Qualified Domestic Trust) must be established to defer estate tax.
Selling real estate assets within the estate may trigger taxable capital gains. However, assets receive a stepped-up basis at fair market value on the date of death, which can reduce capital gains tax.
Businesses and Investments in Estate Planning
Private businesses and investments require special attention in estate tax planning. Valuing a private business is complex and may be subject to disputes with the tax authorities.
Discounts such as discount for lack of marketability and minority interest discount can significantly reduce the business’s valuation for estate tax purposes. These discounts reflect the difficulty in selling a private business interest or minority shares.
Transferring a business to the next generation requires early planning to minimize estate tax impact. Strategies like GRAT (Grantor Retained Annuity Trust) or installment sale of the business can reduce gift value and allow transfer of future appreciation with no additional tax.
Investments in securities require accurate reporting of value on the date of death. Investments in foreign mutual funds or foreign companies may create additional reporting requirements and complex taxes on undistributed income.
Treaties and Estate Taxation
The double tax treaty between Israel and America is important for estate tax planning but does not resolve all issues. The treaty allows credit for tax paid in one country against tax in the other.
In some cases, the treaty can reduce or eliminate estate tax liability in one of the countries. However, it is important to understand that tax credit does not eliminate reporting obligations, and failing to report can lead to fines.
The treaty also includes special provisions for trusts and other complex legal structures. It is important to consult an expert familiar with the treaty to utilize all available benefits.
Changes to the treaty or its interpretation can affect existing estate plans. Ongoing monitoring of treaty changes and tax guidelines is essential to maintain effective planning.
Technology and Digital Estate Tax
Digital assets are becoming an increasing part of modern estates. This includes cryptocurrencies, NFTs, online accounts, and digital businesses.
Cryptocurrencies are considered property for tax purposes and are included at full value in the estate. Determining value can be complicated given the high volatility of these currencies.
Securing access to digital assets is essential for estate planning. Private keys, passwords, and other access details must be transferred to heirs securely to ensure they can access the assets.
Digital inheritance laws vary from state to state and are still evolving. It is important to understand local laws and include detailed instructions in the will regarding digital asset management.
Planning for the Next Generation
Estate tax planning must consider not only the current generation but also the next. Generation-Skipping Transfer Tax (GST) is an additional tax imposed on transfers to grandchildren or later generations.
The GST exemption in 2025 is $13.61 million per person, exactly the same as the estate tax exemption. Proper planning can allow transferring large sums to grandchildren without triggering GST.
Dynasty Trusts are tools that allow wealth transfer across multiple generations while avoiding estate tax at each generation. The trust lasts forever (or according to local legal limits) and assets are not considered part of any generation’s estate.
Educating future generations about taxation and financial planning is an important part of long-term planning. The next generations must understand their tax obligations and how to manage the wealth they inherit.
Frequently Asked Questions
What is the estate tax exemption for Israeli-Americans in 2025?
The estate tax exemption for U.S. citizens and green card holders in 2025 is $13.61 million for individuals and $27.22 million for married couples (when using the portability election). The exemption applies to all worldwide assets.
Are assets in Israel subject to U.S. estate tax?
Yes, U.S. citizens and green card holders are subject to U.S. estate tax on all their worldwide assets, including real estate, bank accounts, and investments in Israel. This is regardless of their residence or length of time living abroad.
How can double taxation be avoided between Israel and America?
The double tax treaty between the countries allows credit for tax paid in one country against tax liability in the other. Additionally, early planning using proper ownership structures, trusts, and gifting can significantly reduce total tax burden.
What is the difference between gift tax and estate tax?
Gift tax is imposed on asset transfers during life, while estate tax is imposed on transfers after death. Both taxes share a combined exemption – gifts above the annual exemption reduce the estate tax exemption. The tax rate is the same – up to 40% in 2025.
Is estate tax form required even if no tax is due?
Yes, in certain cases. Form 706 must be filed for estates exceeding the reporting threshold even if no tax is due. This is to utilize the portability election or transfer unused GST exemption. Failure to file can result in significant loss of tax benefits.
How does renouncing U.S. citizenship affect estate tax?
Renouncing U.S. citizenship exempts from U.S. estate tax on non-U.S. assets. However, it incurs a 23.8% exit tax on unrealized gains and a ban on re-entry to America. Such a decision requires detailed planning and evaluation of all consequences.
What role do trusts play in estate tax planning?
Trusts enable transfer of assets out of the taxable estate while maintaining some control. A revocable trust does not reduce estate tax but expedites asset transfer to heirs. An irrevocable trust removes assets permanently from the estate but is considered a gift at creation.