US estate tax, inheritance and family planning
US estate tax can affect not only US citizens living in Israel but also Israelis who hold shares, exchange-traded funds or property in the United States. This page explains who may be exposed, which assets count as US assets and how sound planning of investments, accounts and inheritance can help protect family wealth.
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Before you begin
When building an investment portfolio or planning your family's financial future, most people focus on familiar variables: returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested. potential, risk level, geographic diversification and management fees. For US citizens living in Israel—and, to a large extent, for "ordinary" Israeli investors who hold US assets—there is another critical variable that is often forgotten: US estate tax.
Israel is one of the few countries in the Western world that currently has no inheritance tax or estate tax. When a person dies in Israel, their assets pass to the next generation without a tax eventAn action in an investment portfolio (such as selling at a profit) that triggers an immediate tax payment to the state., apart from possible future consequences involving Mas Shevach (מס שבח)A tax imposed on the seller on the gain created by the increase in the property’s value between purchase and sale., or betterment tax, or capital gains when the heirs sell the assets. In the United States, the picture is entirely different: the US government treats death as a tax event and imposes substantial tax obligations on assets transferred to heirs.
This means that the types of assets you choose to buy during your lifetime, and even the way your bank or brokerage account is registered, may determine whether your children will have to give up a significant portion of their inheritance to the IRS. This page explains how the mechanism works, who is at risk and how sound family planning can protect your family's wealth.
What is US estate tax?
Estate tax is a federal US tax imposed on the market value of all assets a person leaves at death, before they are distributed to the person's legal heirs.
Exposure to this tax is determined by two central factors:
- The taxpayer's status: whether the deceased was a US citizen or resident, or a non-resident alien.
- The location of the asset: where the asset is considered physically or legally located under US tax law.
Unlike an ordinary "inheritance tax" used in some European countries, where the tax is imposed on the heir according to their relationship with the deceased, US estate tax is collected directly from the deceased person's estate. Only after the estate settles its liability with the IRS is the remainder distributed among the family members.
When might estate tax be relevant?
US law divides people into two groups, and the difference between them is dramatic.
Why can US investments create estate-tax exposure?
To understand the risk level, you must distinguish between what you buy and how you hold the asset. US law defines certain assets as clearly US assets for estate-tax purposes, even if they are held through an Israeli bank or a local investment house in the heart of Tel Aviv.
Assets exposed to estate tax versus assets generally protected from it
| Assets considered US-situs assets—exposed to estate tax above $60,000 for foreign residents | Assets not considered US-situs assets—generally protected from estate tax for foreign residents |
|---|---|
| Direct shares in US companies, such as Apple, Microsoft, Tesla and Nvidia. | Shares in Israeli or European companies. |
| US-registered exchange-traded funds, such as SPY, IVV and QQQ, or funds managed by firms such as Vanguard and BlackRock. Physical US real estate, including investment apartments, houses or land registered in your personal name in the United States. | Foreign mutual fundsAn investment vehicle that allows many investors to pool their money into a shared portfolio of assets managed by a professional. and exchange-traded fundsA security traded on an exchange that tracks a particular index, allowing an investor to buy a "basket" of assets in a single transaction., such as funds that track US indexes but are registered in Ireland—Irish funds—or in Israel. Because the issuing entity is foreign, the IRS does not treat them as direct US assets for estate-tax purposes. |
Mixed-citizenship couples: what should you notice?
A very common family structure in Israel is a "mixed couple": one spouse is a US citizen while the other is only an Israeli citizen. This creates a unique challenge in family inheritance planning.
Marital Deduction: A full spousal exemption that allows assets of unlimited value to pass between spouses without estate tax.
But there is a catch: this automatic exemption applies only when the receiving spouse is a US citizen.
Action plan: what should you do in practice?
To protect your family's wealth and ensure that your heirs do not become caught in a legal tangle, it is advisable to take the following steps:
Next steps
- Map the family's assets: Prepare an orderly list of all your assets and classify them. Identify which are Israeli or other foreign assets and which are direct US assets, such as US shares or ETFs.
- Check the portfolio value if you are not a US person: If you are not a US citizen but directly hold US shares or ETFs, for example through Vanguard or Interactive Brokers, make sure the value of those components does not exceed the $60,000 threshold without suitable protection.
- Consider investment alternatives, such as Irish funds: Israeli investors who want exposure to the US stock market but are concerned about estate tax can consider exchange-traded funds registered in Ireland and traded on the London Stock Exchange or directly in Tel Aviv, which remove the estate-tax risk.
- Arrange joint accounts properly: Check how your accounts in Israel and abroad are registered. Make sure Arichut Yamim (אריכות ימים), the "between lives" survivorship clause, is defined correctly and understand the consequences if one of the account holders dies.
- Obtain professional estate planning for mixed couples: If you are a mixed-citizenship couple with significant wealth, do not rely only on a standard Israeli will. Consult a lawyer or accountant who specializes in international taxation to consider trusts or protected holding structures.
The bottom line
- The IRS taxes assets transferred through an estate
- For US citizens, the tax applies to all their assets worldwide. For other Israelis, it applies to assets located in the United States.
- The $60,000 trap for foreign residents
- Israelis who are not US citizens and directly hold US shares or US ETFs are exposed to estate tax of up to 40% on the value above $60,000.
- Why US citizens must keep track
- Although US citizens benefit from a very high exemption threshold of millions of dollars, the legislation is dynamic and may change. Careful planning is especially important for significant amounts.
- Mixed couples face greater risk
- An inheritance transferred from a US citizen to a spouse who is not a US citizen does not receive the automatic marital exemption and may trigger a severe tax event without advance legal planning.
Frequently asked questions
I am a US citizen. Will my heirs pay estate tax?
Not necessarily. Very high exemption thresholds generally apply, so in most cases there is no actual tax, but it is important to check the current situation.
I am Israeli, not a US citizen, and I invest in Apple and Google shares through an Israeli bank. Am I really exposed to estate tax?
Yes. The location of your bank account in Tel Aviv does not protect you. The US government classifies shares in companies registered in the United States as US assets. If the total value of those shares at death exceeds $60,000, your estate will be subject to federal estate tax on the balance.
Does buying an S&P 500 tracker on the Tel Aviv Stock Exchange solve the estate-tax problem for non-US investors?
Yes. If the product is issued by an Israeli company, such as Kesem (קסם), Tachlit (תכלית) or Migdal (מגדל), or is an Irish fund traded in Israel, the legal entity you hold is Israeli or European rather than American. The IRS does not treat it as a direct holding of a US asset, so it is protected from estate tax for foreign residents.
Will a spouse who is not a US citizen automatically inherit our joint brokerage account without tax?
Only if the account and its assets are managed and registered correctly under the applicable exemption rules. As explained, US tax law does not provide an automatic marital exemption at death when the surviving spouse is not a US citizen, so joint accounts held by mixed-citizenship couples require defined legal planning in advance.
When should I examine this issue?
When you have a significant investment portfolio, US assets, dual citizenship or a family inheritance plan.
In summary
US estate tax is one of the most complex and least discussed subjects in Israeli financial planning, but its effect on your family's future can be dramatic. The goal is not to panic or avoid investing in the world's central and powerful market, but to act with awareness and an understanding of the rules.
By choosing suitable investment instruments, such as preferring Irish funds for foreign investors, accurately defining the structure of your accounts and carrying out international estate planning for mixed-citizenship couples, you can help ensure that the wealth you worked to build over the years remains protected and passes in full to the right people.