The default position (except for the Family Trust, as mentioned here) is that the trust itself is liable to pay the taxes on the trust income. It is the trustee who is required to file the tax returns and who is responsible for ensuring that the taxes are actually paid.
The rates of tax applicable are the highest rates applicable to individuals, i.e. 48% plus the 2% surtax for total taxable incomes above NIS 811,560 (2014).
That being said, the tax rate is also limited on certain passive incomes in the same way as for an individual, e.g. 25% on most interest, dividends and capital gains, 10% on Israeli residential property or 15% on foreign rental incomes.
It should be noted that the exemptions and tax credits that apply to individuals do NOT apply to trusts. As such, there is no exemption for low-earning trusts who have interest income (compare here) or Israeli residential income (compare here).
There are though situations whereby the settlor or beneficiary can pay the taxes on the trust income. In such cases, the taxpayer can use their allowances and credits as if the income was earned themselves. They cannot though claim exemptions from tax on a personal level, if the exceptions are limited to certain income levels (e.g. residential property income):
Settlor as taxpayer:
1. The trust is revocable.
2. There is only one settlor, who is an Israeli resident and is still alive. The spouse of the settlor is also considers a settlor in such a case provided they are also Israeli resident.
2. Such an election must be made in the first tax return for the trust/settlor, and the decision cannot be revoked.
Beneficiary as taxpayer:
1. The trust is irrevocable (see here)
2. The income that is to be reported by the beneficiary must have been distributed within six months of the end of the tax year, or when the tax returns are filed; whichever is earlier.
3. Any undistributed income must be accounted for and taxes paid at the trust level.
4. The distribution is assumed to have come from the various income sources on a pro-rats basis, unless the trust deed says otherwise.