If you’re an American living in Israel with U.S. investments, you face unique financial challenges: handling investments across the ocean and balancing two complex tax systems. Both the IRS and the Israeli Tax Authority may have claims on your assets, particularly when it comes to inheritances and investment income. Fortunately, with strategic planning, you can reduce or even avoid these tax burdens. This guide, informed by insights from Douglas Goldstein, CFP® and Ron Zalben, CPA from their latest virtual event offers a clear path to keeping your wealth protected.
Why Should You Care?
Managing cross-border finances isn’t just complicated—it can be costly if mishandled. Without a coordinated plan, you risk significant tax exposure from two sides. For example, if you inherit assets from the U.S., you may face U.S. estate taxes on the transfer of wealth. Later, when you sell those assets in Israel, capital gains tax could take an additional bite. Since these taxes don’t neatly overlap, the same wealth can be taxed twice.
This risk isn’t limited to high-net-worth individuals. Even moderate estates can face tax complications under changing U.S. exemption limits and Israeli regulations. Without preparation, families can lose substantial portions of their assets to taxes they didn’t expect.
However, you’re not powerless in this situation. With tools like trusts, donor-advised funds, and cross-border tax planning, you can build a solid strategy to minimize tax liabilities and protect your legacy. This guide will offer some perspective on the steps you can take to secure your family’s financial future and navigate the complexities of international taxation with confidence.
Let’s get started.
U.S. Estate Taxes: The Tax Monster Waiting in the Shadows
You’ve spent years—maybe decades—building your wealth through investments, real estate, or even a successful business. You want to pass it on to your family, ensuring they’re taken care of for generations. But without proper planning, the U.S. estate tax could take a significant portion of those assets. This tax can reach rates of up to 40% on the value of your estate that exceeds the exemption limit. In other words, nearly half of your legacy could be lost to taxes if you’re not prepared.
Currently, the estate tax exemption stands at around $14 million per spouse (or $28 million per couple). If your estate falls below this threshold, you might not see immediate concerns. However, there’s a major change on the horizon: In 2026, the exemption is set to drop to around $7 million per spouse unless Congress intervenes. This shift could affect a much larger pool of families who previously believed estate taxes were not a concern.
Let’s look at an example of a single person. Imagine you own a home worth $3 million, have $2 million in retirement accounts, and hold $4 million in investments. With today’s exemption limits, your estate wouldn’t owe any federal estate tax. But if the exemption drops to $7 million, the portion of your estate over that limit—$2 million—would be subject to taxation. Depending on your assets’ future growth, you could face an even higher liability.
It’s important to plan ahead because these limits don’t just impact high-net-worth individuals. As assets appreciate and exemptions shrink, more families may fall into the tax net than they realize. Taking proactive steps now will ensure your legacy remains intact.
Israel’s Capital Gains Tax: A Hidden Trap
Here’s some good news: Israel doesn’t have an inheritance tax. That means when you inherit property, stocks, or other assets, the transfer itself is not taxed. However, before you breathe a sigh of relief, there’s a catch—capital gains tax. While Israel won’t tax you on the inheritance directly, they will impose capital gains tax when you sell those inherited assets.
This is where things get complicated. Unlike the U.S., Israel does not allow a “step-up in basis” for inherited assets. In the U.S., when you inherit an asset, its value is reset to its market price on the date of the original owner’s death. For example, if your grandfather bought Apple stock decades ago for $10,000 and it’s now worth $1 million, the U.S. would use $1 million as your new cost basis. You would only owe capital gains tax on any further appreciation after you inherit it.
Israel operates differently. They use the original purchase price to calculate capital gains tax. So, using the same example, Israel would see a $990,000 gain if you sold the Apple stock, even though you inherited it at the market value of $1 million. This can lead to a capital gains tax of up to 30%, depending on the asset type and your tax situation.
Let’s break this down a step further. Imagine you inherit $1 million worth of Apple stock. If the total estate is large enough to exceed the U.S. estate tax exemption, the U.S. government could take up to 40% in estate taxes before you even receive the shares. That means $400,000 goes to U.S. estate tax, leaving you with $600,000 worth of stock.
Now, when you sell the stock in Israel, the Israeli tax authorities look at the original purchase price—what the person who left you the shares paid for them. Let’s say they originally bought the stock for just $10,000. Israel considers the difference between that purchase price and the sale price as a capital gain. So, even though you simply inherited the stock, Israeli tax law sees you as making a profit of nearly $1 million ( $990K) and taxes it at around 30%. That’s another ~$300,000 in Israeli capital gains tax.
At the end of the process, out of the original $1 million inheritance, $400,000 went to U.S. estate tax, $300,000 went to Israeli capital gains tax, and you are left with just $300,000. This is why careful planning is essential to avoid losing so much of your inheritance to taxes.
This example uses rounded numbers and approximate figures for illustration purposes only. Every situation is unique and should be reviewed by a qualified professional.
This is what’s known as a double-tax scenario—U.S. estate taxes on one side and Israeli capital gains taxes on the other. Without proper planning, this can create a significant financial burden, potentially wiping out a large portion of your inherited wealth.
How to Fight Back: Smart Strategies to Protect Your Wealth
Managing cross-border wealth can feel like being caught between two heavyweights—the U.S. and Israeli tax authorities. Without proper planning, you’re vulnerable to hefty tax hits on both fronts. However, with the right strategies, you can protect your assets and secure your family’s future. Here’s how you can stay ahead of the game:
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Leverage Donor-Advised Funds to Reduce Taxes
A donor-advised fund functions like a charitable investment account with significant tax benefits. By donating appreciated assets—such as stocks—you immediately receive a tax deduction and reduce your taxable estate. You can then advise the donor-advised fund how to distribute the funds to charities you wish to support.
This strategy isn’t just beneficial for U.S. estate taxes. Israel often recognizes these charitable contributions, potentially giving you additional tax relief. It’s a win-win: you support causes you care about while minimizing your family’s long-term tax exposure.
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Protect and Transfer Wealth with a Family Limited Partnership (FLP)
If you want to pass down assets without relinquishing control, an FLP is a potentially valuable option. Here’s how it works: You transfer your assets into the partnership and gift shares of the FLP to your children. Because these shares are not easily marketable, the estate value of the assets is often reduced through a valuation discount.
Despite gifting the shares, you can retain management control over the assets. This structure prevents your heirs from accessing or misusing the wealth until you choose to give them control. It’s a strategic way to reduce the taxable size of your estate while maintaining authority over your investments.
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Use Trusts to Protect and Control Your Assets
Trusts are powerful tools for both tax reduction and asset protection. An irrevocable trust can remove assets from your taxable estate entirely, reducing exposure to both U.S. estate tax and Israeli capital gains tax.
Trusts offer a level of control that can be invaluable. You can dictate how and when your heirs receive their inheritance, ensuring that the assets are used responsibly and protected from outside risks, such as creditors or legal disputes. Some trusts can also provide cross-border tax benefits by managing the jurisdiction where assets are taxed. This dual protection is particularly useful for families navigating complex tax systems in both the U.S. and Israel.
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Structure Your Investments for Stability and Growth
Without a clear investment plan, you risk losing control of your finances during market fluctuations or life transitions. Think about dividing your portfolio into three key components:
- Short-term conservative investments (1-5 years): This portion is designed to cover your near-term living expenses and upcoming financial needs. Since you’ll need this money soon, it should be kept in low-risk investments like cash, money market funds, or short-term bonds. The goal is to ensure stability and easy access to funds, so you don’t have to sell investments at a loss if the market takes a downturn.
- Medium-term balanced investments (5-10 years): This portion is for goals that are still years away but not far enough to take on full market risk, such as saving for a child’s education or wedding, or an upcoming major purchase. Since you have time to recover from short-term market swings but not decades to wait, a mix of stocks and bonds helps balance growth with risk management. This approach allows you to participate in market gains while reducing volatility.
- Long-term aggressive investments (10+ years): Money in this category is meant for building wealth over the long run, such as funding retirement or leaving a legacy for your family. Since you won’t need this money for a decade or more, you can afford to take on more risk through higher-growth investments like stocks and equity-based funds. While markets will have ups and downs, history shows that long-term investments have the best chance of outpacing inflation and growing your wealth over time.
By structuring your portfolio this way, you ensure stability in the short term, balanced growth in the medium term, and strong wealth-building potential in the long term—helping you navigate life’s financial challenges with confidence.
In any case, investments aren’t “set it and forget it.” Regular reviews and rebalancing are crucial to stay aligned with changing markets, tax laws, and financial goals. Properly structured investments not only provide growth but also reduce the risk of surprise tax liabilities.
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Coordinate Tax Planning Between the U.S. and Israel
Cross-border families face a unique challenge: the tax codes of the U.S. and Israel don’t always align. To avoid pitfalls, it’s essential to work with advisors who understand both systems. Coordinating strategies across both jurisdictions can help you time asset sales, structure transfers, and take advantage of applicable treaties, deductions, and exemptions.
Many families fall into the trap of relying on advice from U.S. or Israeli specialists who lack cross-border expertise, only to receive surprise tax bills later. Don’t let this be you. Having a unified plan with cross-border experts can prevent costly errors and protect your wealth.
By leveraging tools like donor-advised funds, family limited partnerships, and trusts, you can minimize your tax exposure and secure a stronger financial future for your loved ones. Start today and take control of your financial legacy.
Disclaimer: Investing and financial planning are complex, and the right strategy depends on your personal situation, goals, and risk tolerance. This information is for educational purposes only and should not be considered specific investment advice. Before making financial decisions, consult with a qualified financial professional who understands your unique needs.
Questions to Ask Yourself (or Your Advisor)
These aren’t just “good to know” questions—these are the ones that could save your financial future:
- Am I at risk of double taxation on my U.S. investments or inheritance?
- Have you coordinated tax planning between both countries, or are you unknowingly set up to pay two governments on the same assets?
- How can I reduce my taxable estate before I pass on my assets
- Have you explored strategies like charitable giving, trusts, or family partnerships to lower the value of your taxable estate?
- Are my investments structured to give me both short-term income and long-term growth?
- Does your portfolio include a smart balance between conservative investments for near-term needs and aggressive ones for future growth?
- Have I educated my heirs on managing inherited wealth?
- Are your children or beneficiaries prepared to handle the responsibility of large assets, or could they be blindsided by taxes and poor decisions?
- Am I working with advisors who understand the ins and outs of both U.S. and Israeli tax laws?
- Do you have a team that specializes in cross-border financial planning to help you stay compliant and optimize your strategy in both jurisdictions?
If all this investment and tax talk has your head spinning, don’t worry—we’re here to help. Schedule a free Cross-Border Financial Evaluation and we’ll walk you through your options. During this call, we’ll take the time to understand your unique situation and see if we’re the right fit to help you stay on track.
Remember, failing to plan is planning to fail. Act now and sleep better at night knowing your finances are secure.