Trust Purchase of an Apartment — When Is It Used and What Are the Laws?

What Is a Trust Purchase of an Apartment?

A trust purchase of an apartment is a legal structure in which the buyer does not purchase the property directly in their own name, but rather through another person (the trustee) who appears as the property owner in the land registry and in the transaction. The trustee acts on the instructions of the actual buyer and holds the property for the benefit of the true buyer, according to a trust agreement signed between them. This is a legitimate legal method used for various purposes and often for legal or financial reasons.

The trustee may be a close family member, spouse, business partner, or even a legal entity established for this purpose. However, a trust transaction requires considerable legal attention to protect the rights of the actual buyer and to avoid legal and financial risks.

When Is a Trust Purchase of an Apartment Used?

There are several circumstances in which buyers choose to use a trust purchase of an apartment. Below are the most common reasons:

• Protection from liabilities: A person carrying significant legal or financial liabilities may purchase through a trust to protect the property from creditors' claims or enforcement. When the property is registered in the trustee's name, it is not part of the actual buyer's assets from the creditors' perspective.
• Legal separation in divorce or family disputes: During family disputes or divorce proceedings, a spouse or family member may prefer that the property be in the name of a third party to avoid disputes over asset division.
• Real estate investment and collection: Real estate investors sometimes use trusts to separate different properties and manage a complex investment portfolio.
• Concealment of beneficial ownership: In some cases, a buyer may wish to conceal actual ownership for business or personal reasons, such as maintaining privacy or preventing unwanted offers.
• Tax or financial planning purposes: In certain contexts, a trust structure may have certain tax implications, although this requires expert legal and financial advice.
• Special discounts or benefits: In some cases, a buyer may be entitled to special discounts or legal benefits (such as benefits for a new citizen or a person in special social circumstances) that require the property to be in a specific person's name.

What Is a Trust Agreement?

A trust agreement is a legal contract that defines the relationship between the actual buyer (the beneficiary) and the trustee (the party appearing as the property owner in the land registry). The agreement must be precise, legal, and properly structured to protect both parties.

A trust agreement should include the following points:

• Names and identification numbers of the trustee and beneficiary
• Complete description of the property (address, land registry number, size, etc.)
• Date of commencement of the trust and its terms
• Instructions regarding the purpose of the trust
• Division of rights and obligations between the trustee and beneficiary
• Instructions regarding sale or transfer of the property
• Instructions regarding payment of trust fees or expenses (if applicable)
• Conditions for termination of the trust
• Notarized signatures and seals

It is very important that a trust agreement be drafted by an experienced real estate attorney to ensure that it complies with the law and protects the rights of the actual buyer in all circumstances.

Purchaser's Rights in Trusteeship and Trustee Obligations

When an apartment is purchased in trusteeship, the actual purchaser (beneficiary) retains significant legal rights, even though the trustee appears as the formal property owner. Understanding these rights is critical to protecting your investment.

Rights of the Actual Purchaser (Beneficiary)

• Economic Ownership: The actual purchaser is the true owner of the property from an economic perspective, even if the property deed is registered in the trustee's name. The purchaser is entitled to all benefits from the property, including rental income if the property is leased.
• Right to Direct: The actual purchaser may instruct the trustee how to use the property, maintain it, service it, or even sell it.
• Right to Sue: If the trustee breaches the trust agreement, the actual purchaser may file a lawsuit in court to protect his rights.
• Right to Terminate Trusteeship: Under certain conditions, the actual purchaser can demand that the trustee transfer the property to his name or to another buyer.

Trustee Obligations

• Property Preservation: The trustee must maintain the property in good condition and not neglect it.
• Compliance with Instructions: The trustee must act in accordance with the instructions of the actual purchaser, as defined in the trust agreement.
• Financial Transparency: The trustee must report to the actual purchaser on every transaction or expense related to the property.
• No Self-Dealing: The trustee may not use the property for his own benefit, sell it, or encumber it without explicit consent from the actual purchaser.
• Legal Liability: The trustee is liable for damages or breaches of the trust agreement, and may be required to pay compensation to the actual purchaser.

Risks in Purchasing in Trusteeship

Although trusteeship can be a useful legal tool, there are significant risks that purchasers should be aware of:

Risk of Betrayal or Non-Compliance

If the trustee decides to act against the wishes of the actual purchaser, the purchaser may find himself in a difficult position. For example, the trustee might sell the property, encumber it, or even claim ownership. Although you have a trust agreement, legal proceedings to recover the property may be lengthy and difficult.

Financial Risk

If the trustee is subject to legal or financial liabilities, creditors or courts may attempt to seize the property. Although a trust agreement should protect the property, there are cases where such agreements are challenged in legal proceedings.

Tax Risk

There may be tax consequences to purchasing in trusteeship, such as capital gains tax or purchase tax. It is important to consult with a tax advisor or experienced attorney before conducting a trust transaction.

Legal Risk

If the trust agreement is not properly established or does not meet legal requirements, it may have questionable validity in court. This is why it is very important to use an experienced attorney in preparing the trust agreement.

Risk of Family Separation

During divorce or family disputes, the property owner on the deed (trustee) may be entitled to claim rights to the property, even if he has limited rights under the trust agreement. This may lead to complex legal proceedings.

Comparison: Direct Purchase vs. Fiduciary Purchase

Below is a table comparing direct apartment purchase with fiduciary purchase to help you understand the significant differences:

As can be seen from the table, fiduciary purchase offers significant advantages in certain cases, but also requires greater legal attention and carries higher risks. The choice between the two options depends on the specific circumstances of each buyer.

The Process of Purchasing an Apartment in Trust — Step by Step

To better understand the practical process of purchasing an apartment in trust, here is the typical way such a process occurs:

Step 1: Selection of the Trustee and General Agreement

The actual buyer selects the trustee (usually a close family member or another party whom he trusts) and discusses the basic terms of the trust. It is important that the trustee be aware of his obligations and risks.

Step 2: Preparation of the Trust Agreement

An attorney experienced in real estate law prepares a precise trust agreement. The agreement should include all the details of the transaction, the rights and obligations of both parties, and conditions for termination of the trust. Both parties must sign the agreement in the presence of a witness or before an attorney.

Step 3: Property Inspection and Title Deed Review

A thorough inspection of the property is conducted, including a review of the title deed, inspection of legal claims on the property, and verification of tax and municipal fee payments. This is important to ensure that the property is free of liens and rights of third parties.

Step 4: Obtaining Bank Approval and Arranging Financing

If the actual buyer requires a mortgage, bank approval must be obtained. Typically, the bank will require special approval to mortgage the property when the property is registered in the trustee's name.

Step 5: Signing the Purchase Agreement and Executing the Transaction

The purchase agreement is signed between the seller and the trustee (not the actual buyer). The trustee appears as the buyer in the agreement. The purchase fee, capital gains tax, purchase tax, and any other costs related to the transaction must be paid.

Step 6: Registration in the Land Registry

The property is registered in the land registry in the trustee's name. This registration is carried out through the Land Registry office. At this stage, the internal trust agreement does not appear in the land registry — this is a private agreement between the trustee and the actual buyer.

Step 7: Completion and Receipt of the Property

After registration in the land registry, the property is transferred to the actual buyer (or held by the trustee on his behalf). The trustee may sign additional documents to transfer administrative rights to the actual buyer (such as the right to collect maintenance fees, receive reports from the municipality, etc.).

How Mendelboums, Gor, Witzman-Gor and Partners can help you

Mendelboums, Gor, Witzman-Gor and Partners law firm specializes in real estate law since 2008. We specialize in complex real estate transactions, including purchases in trusteeship, urban renewal, land subdivision, and any matter related to the purchase and sale of properties.

When choosing a lawyer to prepare a trusteeship agreement or for legal consultation on this matter, it is important to select a firm with deep experience in real estate law and practical experience in similar transactions. Mendelboums law firm offers:

• More than 18 years of experience in real estate law in Israel
• Preparation of accurate legal agreements that protect the rights of the actual purchaser
• Comprehensive legal consultation regarding rights, obligations, risks and opportunities in the transaction
• Full management of the transaction from beginning to registration in the land registry
• Legal protection in case of dispute or breach of the trusteeship agreement
• First consultation meeting at no cost to understand your needs and give you a clear picture of the way forward

We understand that purchasing property in trusteeship is an important and significant step, and we are here to ensure that it is done correctly and safely. Whether you are a first-time home buyer or an experienced real estate investor, we are here to assist you.

Our office is located in Ramat Gan, and we also have a branch in Petah Tikva. We work with clients from throughout the south, center and north of the country, and provide personalized and dedicated service.