Israeli law defines a trust as the duty imposed by one party to hold or deal with assets under their control for the benefit of another party. Trusts have existed in Israel since 1923, when the Charitable Trusts Ordinance established public trusts for charitable purposes. Private trusts were not regulated by statutes until the 1979 Trust Law, although the Israeli Supreme Court ruled that private trusts had retroactively existed before that date whenever one party was asked to manage property or financial assets for the benefit of another.

Under Israel law, whether a trust was actually formed or not is not under the control of the parties involved, but automatically arises whenever two or more parties are placed in a trust relationship. In a trust relationship, the trustee is endowed with control over the trust assets, either through the title or through an application of the Law of Agency, and can determine how the assets will be distributed, invested or exchanged. Anyone may be a trustee, including a corporation, as long as they are capable of carrying out the duties of the trust.

Israeli trusts may be created in three different ways: by Contract, by Deed, and by the Court. A Contractual Trust is created under the Law of Contract, where the rights and duties of the trustee and beneficiaries are set out in an agreement. A Deed Trust is created in writing, either in a notarized statement or in a last will and testament, and is initiated when the trustee gains control of the trust assets. Finally, the Israeli courts may declare the existence of a trust when they determine that a trust relationship exists, even if the settlor (the creator of the trust) never expressed a specific intention to create one.

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The main difference between a trust created by Contract and a trust created by Deed is that the former is like any other contract in that it may be amended at any time if all the parties agree, while the latter may not be amended except by an agreement between the settlor and beneficiaries or by an order of the court. Generally, courts will not intervene in the execution of Contractual trust, except to redress the injured party in a "breach of contract" situation. Yet, courts are given a broad authority to intervene in Deed trusts, particularly when the settlor's instructions have been vague or unclear, and may even take on the role of the settlor, amending the trust to reflect major circumstantial changes, such as the sudden bankruptcy of one of the parties.

In any form of trust, the trustee is responsible for safekeeping the trust assets and faithfully managing them for the purpose of fulfilling the trust. Trustees may hire others to assist them in their trust duties, such as account keeping and reporting, but may not transfer control of the trust assets over to them. If trustees are simultaneously serving multiple trusts, they may not combine their assets or otherwise perform any action between them. Trust funds not needed for the day-to-day upkeep of the trust should be saved or invested. Trustees are not entitled to remuneration for the performance of their trust duties, unless this reward is specified in the trust deed or contract, although the court may choose to award them payment out of the trust funds.

Trustees must keep trust funds separate from other funds at their disposal, and may not mix them. Creditors may not take possession of trust fees as payment for the trustee's debts, unless they are related to the investment of the trust funds. Nor may creditors repossess trust funds to pay the debts of the beneficiary, unless the court permits. Unless otherwise stated, the beneficiaries have no proprietary right to the trust assets, but only to the benefits due them.

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One of the most common uses of trust in Israel is to register shares traded on the stock exchange in the name of a holding company, to avoid the taxation bureaucracy involved in the transfer of these shares. The holding company holds the shares in "wholesale" trust for the banks, which divide the rights to the shares among the individual purchasers. Another common Israeli trust scenario is when a trustee purchases property for a beneficiary and holds it in trust. This does not need to be registered as a trust unless the owners want to retain their rights to transfer it into their name tax-free, or sell it tax-free if the property in questions is a residential apartment. Lawyers may act as trustees in certain kinds of agreements, where they are asked to keep a document and then sign it, or perform another action, when a certain event occurs. (Such as the classic "If anything happens to me, this letter goes straight to the cops" situation in gangster movies.)

The issue of Express Trusts and Implied Trusts was discussed in two recent Israeli Supreme Court cases, which questioned whether private trusts had retroactively existed before 1979. Express trusts were covered in the 1992 case of "The Assessing Officer for Large Concerns vs. The Company for the Development of Kiryat Nordau Ltd," where a company was attempting to establish that a trust had existed in 1978. Chief Justice Shamgar ruled that it was not sufficient to base the recognition of a prior trust on the principle of freedom of contract. Looking to English Common Law, and the principle of equity, he ruled that an Express Trust could be applied to any asset where the owner had given legal ownership to the trustee or had personally declared trusteeship. However, the owner would need to declare an intention to form a trust in order for the trust to be valid. Vague or abstract intention would not be good enough - the intent to declare a trust would have to be clearly inferred from the facts of the matter.

Implied Trusts occur when the parties' behavior and actions suggest a strong intention to form a trust relationship but this intent is not expressed clearly, such as when one party purchases an asset for another but temporarily registers it under their own name. Implied Trusts were covered in the 1994 case of "Wallace vs. Gat and Shachar", in which one of a group of siblings, whom had joint ownership in a house in Jerusalem although most lived outside of Israel, wanted a share of the proceeds when the daughter of the sibling who actually took care of the house sold it to a third party. Chief Justice Shamgar ruled that the daughter was a trustee since she managed the asset (the house) for the benefit of others (her uncles and aunts) whom had no problem with this arrangement even though it was never formalized. As a trustee, the daughter had the right to dispose of the assets as she saw fit, but this did not infringe on the rights of the beneficiaries to the proceeds from the sale.

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Finally, a Public Endowment is a type of trust where the beneficiary is not an individual or corporation, but is dedicated to education, culture, religion, scholarship, art, science, social welfare, health, sports and recreation, or some other public purpose. The trustee must register the public endowment with the Registrar of Endowments within three months. As with any other kind of trust, it may be created by Contract or Deed or its existence may be inferred by the court, even if there was no specifically expressed intention to create a trust.

Law of Agency

Israel’s Law of Agency is an important component, and legal antecedent, of Israel’ Law of Trusts. Prior to the Agency Law of 1965, the law of agency in Israel combined elements of Ottoman Law and English Common Law. The 1965 Agency Law was a new law independent of this tradition. It was a unique synthesis, incorporating elements of German law, American law, English Common Law, and even traditional Jewish Law, the latter in Sections 2 and 16. Central to the Law of Agency is Section 1(a), which establishes that an agency is formed when a principal authorizes an agent with the power to perform lawful acts in their name with a third party. For example, a foreign investor may wish to purchase a residential apartment in Israel and will appoint a lawyer, a family member, or other person familiar with the Israeli real estate market to perform the transaction for them. Section 1(b) states that any lawful action may be performed by an agent, except one which must be performed in person, so the principal would probably not be able to sign the title deeds through an agent.

Section 2 of the Agency Law provides that the agent has the same legal status of the principal and that any action performed by the agent will bind or entitle the principal. Section 3 provides that power of agency is conveyed by a written or oral authorization by the principal, setting out the agent’s role and authority. Section 4 states that any person may act as an agent, although their rights and obligations will be limited by general rules of legal capacity. Although an agent is given a broad authority, Section 5 limits the agency to activities reasonably required for the performance of their object and does not allow them to act for the principal in a court, tribunal, or arbitration without express authority.

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The Law of Agency does not specifically provide guidance for agents to receive compensation for their actions. In some cases, as when the agent is a relative of the principal, the agent may agree to work without payment. Usually, the parties will agree to the terms of the agent’s remuneration in advance. The Israeli Bar Association lists recommended minimum legal fees for various types of legal work, and lawyers who act as agents will usually expect to receive their standard fee for that assignment. Still, fees must be decided on a case-by-case basis, taking a variety of factors into account.

The duties of agents toward principals, and their obligations to protect their interests, are summarized in Section 8 of the Agency Law. The agent must be loyal to the principal and disclose all documents and information that pertains to their agency. An agent may not represent different principals in the same object, without previous consent. Agents may not carry out transactions with themselves, nor may they receive any benefit from the agency without the principal’s consent. Finally, agents should do their best to avoid conflicts of interest between themselves and their principal and they may not use any information that comes into their possession against their principal.

Section 9 allows the principal to sue the agent for “Breach of Contract” and to collect damages if the agent fails to fulfill his or her side of the bargain. Section 10 provides that all the benefits of the agency go to the principal and any property acquired by the agent during the course of agency is held in trust for the principal. If the agent becomes insolvent, creditors may not collect on this property.

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Section 11 provides that the principal will compensate agents for reasonable expenses and liabilities occurred in the pursuit of their object. For example, an agent purchasing an Israeli apartment for a foreign investor will have to pay real estate fees and taxes. This is usually part of an agreement between the agent and the principal, but in the event that it is not, Section 11 will automatically activate to protect the agent. Section 12 provides that if the principal fails to pay the agent or compensate the agent for reasonable expenses incurred, the agent will have a lien on the principal’s property until the principal pays the agent.

The principle and agent generally negotiate an agency agreement that begins when the power of attorney is given to the agent. Section 14 provides the framework for terminating the agency. Either party may cancel, but if one party terminates the agency without permission, the other party has grounds to sue for breach of contract. Section 14(a) states that the agency may also terminate from an external event, such as the death, incapacitation, or bankruptcy of either party. Still, Section 15 of the Law of Agency declares that both the agent and the third party may assume the agency relationship continues until they are told otherwise.

The Law of Agency does have other clauses to protect a third party from disputes between the principal and the agent. If an agent act’s without the principal’s authorization, the third party may choose to regard the agent as party to the act or may withdraw from the act and claim damages against the agent. If the agent injures the third party after the termination of the agency, the third party may continue to hold the principal responsible if he or she did not know the agency relationship had ended.

One interesting use of the Law of Agency is when a foreign investor wishes to arrange certain business matters prior to incorporation. An agent may be authorized to carry on transactions between the company-to-be and its future customers, which will be binding upon the actual company once it is formed. Finally, Section 16 defines the agency as a personal relationship between the principal and the agent. The agent may not appoint a “sub-agent” without express permission from the principal.

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