The supreme court decision, reached late Tuesday, confirmed a ruling by the Jerusalem district court last week that said May Peleg's last wish of cremation should be fulfilled.
Peleg, a 31-year-old who served as head of the executive committee of Jerusalem's Open House lesbian, gay, bisexual and transgender community centre, committed suicide earlier this month. She had long been estranged from her ultra-Orthodox family.
Before her death, Peleg drew up a will that specified she wanted to be cremated, but her mother asked the district court -- and then the supreme court -- to halt it because both suicide and cremation violate the Jewish faith.
In their ruling, the supreme justices drew on the legal principle that a deceased's directions for what to do with their body take precedence over their family's.
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In accordance with her wishes, Peleg's ashes are to be scattered over the sea and placed in the ground under a tree to be planted in her memory in Jerusalem.
The legal battle has highlighted the uneasy relationship between Israel's commitment to gay rights and its ultra-Orthodox Jews, who abide by a strict religious lifestyle.
Peleg was born a man and underwent surgery to become a woman after having been married and divorced. She had two children from the marriage.
Supporters of Peleg welcomed the ruling, saying it "respects her will and choices, and confirms the principle of individuals' autonomy."
"Alongside the instruction regarding what will be done with her body, which we will fulfil in the upcoming days, May left behind a long-term moral edict to struggle for a more just society," they said in a statement released through her lawyer.