Estate planning takes particular forms and must adhere to certain rules under Shariah law. Sarasin, the Swiss private bank, takes a look at the processes and issues that arise in this particular area.

Unlike in the West, estate planning for Muslims is based on the principle that all wealth belongs to Allah and that anyone who possesses wealth is simply its caretaker. According to the Qu’ran, wealth creates specific religious responsibilities that can be interpreted as a Muslim version of socially responsible investing.

Specifically, Islamic estate planning takes into consideration the concept and meaning of wealth in Islam, the religious requirements of making a will and the rules of inheritance. In the Qu’ran, mankind is a trustee of the Creator and everything belongs to Him. The Qu’ran (Sura 24, Verse 64) says:

“Be quite sure that

To Allah doth belong

Whatever is in the heavens

And on earth. Well doth He

Know what ye are intent upon:

And one day they will be

Brought back to Him, and He

Will tell them the truth

Of what they did.

For Allah doth know

All things.”

Social responsibility and accountability are deeply embedded in this concept. Wealth management, therefore, has three phases: first, the proper acquisition of wealth; second, the preservation of wealth; and third, the correct expenditure and distribution of wealth. Estate planning predominantly manages its preservation and distribution. “A Muslim should prepare himself for the next world as if he is going to die tomorrow, but at the same time work hard to improve all his worldly comforts as if he is going to live forever.” (A quote from the Prophet narrated by Al-Dailami).

Earning wealth from acceptable sources is morally of utmost importance and being wealthy is seen as a positive and graceful attribute, especially when wealth expenditure and distribution is conducted modestly and demonstrates obligatory and voluntary charitable spending. As wealth is considered to belong to the Creator and mankind is nothing other than its guardian, private guardianship of wealth ends with the death of the guardian. Appropriate provisions to deal with death must be in place. A man asked the Prophet, “O Allah’s Apostle! What kind of charity is best?” He replied, “To give in charity when you are healthy and greedy, hoping to be wealthy and afraid of becoming poor.

Don’t delay giving to charity until you are on your death bed saying, ‘Give so much to so-and-so and so much to so-and so,’ because at that time the property is not yours but already belongs to so-and-so (i.e. your inheritors).” (A quote from the Prophet narrated by Abu Huraira in Sahih Bukhari, Volume 4, Book 51, Number 11).

Hence wealth requires forward planning that incorporates and affects life-long action. Good financial deeds should be conducted during one’s lifetime as preparation for the afterlife. Charity is not effective when a person fears imminent death. Each Muslim should know this and determine charitable allocations that most closely match his values.

The limits set by Allah

During his lifetime, a Muslim may plan to give away his wealth to a charity or to others, including family members, without violating the principles of Shariah, since he is still the guardian. However, as death approaches, the distribution of assets is ordained by Allah, its Ultimate Owner, in accordance with the Qu’ranic inheritance rules.

These rules are mandatory as the Qur’an says, “Those are limits set by Allah. Those who obey Allah and His Messenger will be admitted to Gardens with rivers flowing beneath, to abide therein, (forever), and that will be the supreme achievement.” (The Qu’ran, Sura 4, Verse 13).

Furthermore, the Prophet allows that one may assign, by virtue of a last will, up to one-third of the net estate to charitable causes. In this regard, Ibn Abbas, the Prophet’s companion and cousin says: “I recommend that people reduce the proportion of what they bequeath by will to one-fourth (of the legacy), for Allah’s Apostle said, “One-third, yet even one-third is very much.” (Sahih Bukhari, Volume 4, Book 51, Number 6).

The portion to be transferred by means of a will should therefore not exceed one third.

The remaining assets are already “assigned” to heirs within the family. This Qur’anic assignment cannot be changed by a last will. Even though the inheritance proportions are fixed, it remains necessary for each Muslim to write a will, leaving his worldly affairs in good order.

The Prophet said: “It is not permissible for any Muslim who has something to will to rest for two nights without having his last will and testament written and kept with him.” (Narrated by Abdullah ibn Umar: Sahih Bukhari, Volume 4, Book 51, Number 1).

What must will be

The elements of such a will and testament, (wasiyah, regarding the transferable third), include distribution to charities and to persons who are not ordained to inherit, such as the grandchildren of surviving children, (parents are first in line to receive, rather than grandchildren, unless the parent is deceased) and friends. Further, in countries that do not have Shariah-based inheritance laws, it becomes necessary to include distribution to heirs according to Shariah-assigned proportions because of their mandatory religious nature.

However, it is very common to add more issues of importance to a last will. These additions may include naming creditors and necessary debt settlements, guardianship of minors, healthcare instructions in case of incapacitation, instructions for funeral rites, and naming a trusted person to act as the estate administrator, (wasiy). Additionally, local legal requirements may need to be met in the country of residence.

To summarise, Islamic estate planning has two major instruments:

1. An irrevocable gift during a lifetime. This can be personal or in the form of Waqf, (endowment of a public or private cause). 2. A will, allowing for a maximum of one third of the estate to be passed on to any designated charitable entity or person. Estate planning may be complex if the estate is domiciled in various countries and thereby subject to different estate and tax laws, resulting in delays to transfers and possibly forced deviation from the will.

Knowledge is better than wealth

Since a family business is typically the source of wealth, estate planning must address succession issues. Family business presents a special challenge regarding how it should be managed, continued and passed on to the heirs. Wealth preservation in this regard faces numerous family dynamics that need to be considered. The central guideline for managing such dynamics is, in the words of Ali Ibn abi Talib, “Knowledge is better than wealth because knowledge will take care of you, but you have to take care of wealth”.

Many families are satisfied with the guidance given by their lawyers with respect to wealth preservation. However, in reality, most of those families are not successfully preserving their wealth when measured against the universal cultural proverb: “From shirtsleeves back to shirtsleeves in three generations”.

Legal solutions do not usually guard against this possibility, which is counter to Islam. Recent studies have shown that:

• A family can successfully preserve its greatest wealth, capable individuals who form the family, over a long period of time.

• A family’s wealth consists first and foremost of its human capital (individual family members) and intellectual capital (individual family members’ knowledge) and second of its financial capital.

• The purpose of the family is to enhance the individual members’ achievement of happiness, (Khair, the good in the here and in the hereafter), in the overall pursuit of the long-term preservation of the family as a whole.

• Successful long-term wealth preservation requires the creation and maintenance of a system of governance or joint decision making that assures broad consensus over a period of at least 100 years.

According to the ethics of Islam, a family must be governed in accordance with the writings of the Qu’ran. A family mission statement is therefore a key part of a governance system. It is an expression of the purpose, vision, values, and goals of a particular individual, couple, family, or enterprise. The creation of a Shariah compliant family mission statement is the starting point for determining the family’s approach to preserving its wealth.

Defining a family’s goals

For a family that is already organised, the need to express its purpose, values and goals will become apparent as soon as the first problem arises and family members have no shared way of understanding how to resolve it. When a family is in the process of wealth preservation, a mission statement will help achieve long-term success. If a family cannot define its goals, how will it know how and if they have been achieved?

What are the issues a family mission statement needs to address to define the family’s purpose, vision, values, and goals?

• A family needs to understand its purpose. While it can be argued that the purpose of a family is to enhance the pursuit of happiness in the worldly life and in the hereafter for its individual members, and thereby preserve its human, intellectual and financial capital, each family must determine and define its own philosophy. The first goal of a mission statement is defining the family’s philosophy behind its purpose.

• A family must have a common vision. It must look ahead to the future and form a consensus around a shared goal. A family should ask itself how it plans to achieve its current goals, while looking ahead 25, 50 and 100 years.

• A family shares certain values. These are the values that foster that family’s uniqueness.

• A family needs to acknowledge its “secrets”. Every family has open secrets.

Not addressing these “secrets” creates an atmosphere in which every member thinks the family is connected to each other, but in reality the family is falling apart because no one is willing to discuss buried issues. Such a situation will drain not only the family’s wealth but its human and intellectual capital.

• A family needs to recount its history. The preparation of a family mission statement allows an opportunity to tell family stories.  Family stories are the glue that binds individual family members together. Every family that is successfully preserving its wealth sets aside time at its family gatherings to share its unique history. Both young and old tell stories, discovering their common bonds and values. A family mission statement should express the family’s unique history.

•A family must choose a form of governance. The family mission statement should indicate the form of governance selected by the family and how it will assist in long-term wealth preservation.

• Each person needs to understand his or her role in the family. A family mission statement affords each individual family member the opportunity to consider his mission as a member of the family and as an individual. Once clarified, an ethical, goal-oriented day-to-day operation is possible. This is what classical authors of Islamic administrative ethics call “Tadbir”. If the mission and roles are not defined, administration cannot act responsibly.

Measuring a family’s balance sheet

The family balance sheet and family income statements are key tools for measuring the health of a family’s wealth preservation strategy. A traditional balance sheet attempts to measure the state of wellbeing of a business at a specific time. Such balance sheets contain statements of assets, liabilities and shareholder equity as a reflection of the business’s financial status. Similarly, a family balance sheet also lists assets, liabilities and shareholder equity but it expands on what each category measures.

Because successful long-term family wealth preservation is achieved by enhancing the wellbeing of individual family members over a long period of time, the family balance sheet must measure human and intellectual capital as well as financial capital. A family balance sheet is an addition to, not a substitute for, a family financial statement. Those managing the family’s wealth, like every other financial manager, must know its financial capacity to carry on its mission. Only based on this understanding can profound decisions be made about governance and the potential solutions for succession. Such tools might be an Initial Public Offering or a trust, depending on the family’s total balance sheet, in the sense of a balanced approach based on justice.

Transcending prudence

Reasons for creating trusts & Waqf and their technicalities:

Extending the view of a family business to overall family wealth accumulation that includes real estate and bankable assets again raises the issue of wealth preservation. Wealth preservation transcends prudent investment strategies such as diversification and modern portfolio theory to take into account:

• Business ownership, for example keeping the business family-owned as an alternative to an IPO.

• Political risk factors, including where assets or residences are located.

• Local legal systems and inheritance laws that could, for example, mean assets may be frozen.

• International tax issues.

• Potential disputes, both personal and legal.

Some examples

The family business is passed onto five heirs, such that each owns 20 per cent. Some heirs aim to sell, while others want to hold. Agreement cannot be reached. A Muslim resident in one of the GCC countries holds US securities in his portfolio and owns one apartment in the US occupied by his son, who studies in the US. US inheritance laws do not tax individuals specifically but primarily the estate, hence the US securities and properties would be subject to US inheritance tax per se.

A son who studies in the US may receive a substantial gift from his father. The son would then be subject to US gift tax which could possibly be lowered or avoided in consultation with international tax lawyers.

A Muslim living in the GCC wants to spend his summers at his property in Nice, France. The property may become subject to local inheritance tax, capital gains tax and wealth tax depending on how the property was acquired and financed.

Each case illustrates some of the many difficulties that may arise if estate planning is not handled professionally. Hence, advice from private bankers, tax planners and lawyers is needed to structure solutions that avoid costly emotional and financial pitfalls.

Trusts may be part of a solution. What is a Trust? It is similar to the concept of a Waqf. Waqf (plural Awqaf) consists of assets assigned to support a specific cause. If the cause is philanthropic, it is called Waqf Khayr and if for family members, Waqf Ahli. The documents constituting donation, (Waqfiyya), are registered with the court, (Qadi), or Department of Awqaf. One of the Waqf’s main principles is perpetuity, meaning only the income is for the beneficiaries but the corpus (principal or capital sum) of the assets must be preserved. This is reflected in the word Waqf, which has ‘to hold’ as its Arabic root. The sale of the core assets is restricted and, at best, permissible only if replaced by equivalent assets.

Providing in perpetuity in the history of Islam, Waqf became very popular in both its applications - the charitable Waqf that provides for philanthropy, and the family Waqf that is used to protect and preserve the family business as a consolidated unit and to suppor t family members through its revenues. The Waqf has its own legal entity as a juristic person; its appointed representative is the Mutawli, (the trusted agent).

An Anglo-Saxon trust, in contrast, is not a juristic person. The assets transferred are held in trust by the trustee. Further, a trust may allow certain options not known in Islamic law, such as the power to dispose of the corpus by the trustee. A trust may be established for a temporary period while the Waqf is intended to exist in perpetuity.

Cash becomes a lasting investment

While initially only physical real estate was deemed to be a lasting investment for a Waqf, cash was allowed later. In US trust history there was an interesting shift in the way assets have to be managed. Originally the Prudent Man Rule, (originating from 1830), directed trustees “to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering probable income, as well as probable safety of the capital to be invested”.

This required the trustee to judge each investment implicitly on its own merits. Only in 1992 did modern portfolio theory lead to a new approach known as ‘The Uniform Prudent Investor Act’, whereby trustees apply modern portfolio theory to guide investment decisions. Under the Prudent Investor Act, a trustee would not be held liable for individual investment losses, as long as the investment, at the time of acquisition, was consistent with the overall portfolio objectives.

Such an approach allows for greater flexibility in applying socially responsible criteria. Trustees may be told which non-financial criteria should be applied to investments, for example, regarding the typical screening for Shariah-compliant stocks and securities.

Such socially responsible criteria should be outlined explicitly or the trustee is obliged to focus only on financial criteria to fulfil his duties and avoid dispute.

Furthermore, since an important goal of an Islamic trust or a Waqf is perpetuity, active exclusion of risk factors, such as high indebtedness and harmful industry sectors, and inclusion of long-term opportunities, such as alternative energy and water, and best practices in environmental management, are natural investment criteria which fur ther foster the aim of perpetuity.

For a Muslim client, four main types of Islamic trusts meet different needs and are customised to accommodate varying personal objectives:

1. A trust for the purpose of benefiting Islamic charities or causes.

2. A trust which replicates the Waqf by preserving capital but allocating income to beneficiaries.

3. A discretionary trust during the settler’s lifetime, which will be distributed according to Islamic inheritance laws thereafter, but quickly and efficiently without probate.

4. An irrevocable discretionary trust following Islamic principles, while remaining flexible for interpretation by the various schools of Fiqh, for example, to defer entitlements of children until they are older.

Using Islamic-oriented trusts as instruments for estate planning, the settler, (‘testator’ in the US), can achieve tax-efficient global solutions, legally entrusting his assets to a politically stable environment, while keeping his worldly affairs in good order. The settler may assign beneficiaries who are close to his heart, because they took additional care and showed prudence in their lives. Irrevocable gifts (Hibah) should be made during the settler’s lifetime and fall outside the Islamic inheritance laws. This is fully compliant with the form and spirit of Shariah if the intent is pure, meaning that it does not counter the proportion of assets due to heirs under the Islamic inheritance system. Furthermore, gifts to children and grandchildren should not unjustly favour some over others, as the Prophet is reported to have rejected gifts that are not equal.

Islamic inheritance law is based on the principles of redistribution, lineage and inter family members’ financial responsibilities. As already discussed, a maximum of one-third can be given to non-heirs, the remainder must be left to the heirs. However, before any distribution, the estate’s debts and funeral expenses must be paid. Islam introduced shares for women in inheritance.

Previously, under ancient laws they were not allowed to take part in inheritance. The share of a female is half that of a male in most cases, because of the much greater economic responsibility assigned to Muslim men. While men must support families and parents under Islamic law, women are not obliged to provide such financial support. However, many Muslims live in countries where women are legally obliged to support their relatives financially.

A gift made during the settler’s lifetime could compensate for this obligation. Aside from serving family issues, the trust can be an excellent charitable instrument with Muslim philanthropy as the cornerstone. The status of a Muslim in regards to Allah depends only on his “God-consciousness”  (Taqwa), but there are two areas where he may envy others, as cited by the Prophet:

“There must be no envy except in two: a person to whom Allah has given wealth and who spends it in the right way and a person to whom Allah has given wisdom (i.e. religious knowledge) and who takes his decisions accordingly and teaches such wisdom to others.” (Narrated Ibn Masud: Sahih Bukhari, Volume 2, Book 24, Number 490).

Furthermore, a trust allows the deceased to receive rewards even after his death.

In a Hadith in Sahih Muslim, Abu Huraira reported Allah’s Messenger as saying:

“When a child of Adam dies, his deeds come to an end, except for three:

1. Recurring charity, or,

2. Knowledge (by which people) continue to benefit, or,

3. "A pious son, who prays for him.” As such, the high importance of giving is apparent and deserves further comment.

Islamic philanthropy, a duty practiced

Under Islam, giving is not only a theoretical religious duty but a standard practice. USAID, in its report ‘The Idea and Practice of Philanthropy in the Muslim World, 2005’, estimated the magnitude of philanthropic giving in Muslim communities at between $250 billion and $1 trillion annually.

By itself this is astonishing, but it should be noted that such giving has a long tradition. Historically three-quarters of all the land in the Ottoman Empire in the 1850s was Waqf. Awqaf is a recurring charity, since its revenues are distributed to charity year after year and, from a religious point of view, it is highly prized since it rewards the deceased even after death. Islamic Trusts can be used for such a purpose. Contemporary themes that charity addresses range from: poverty alleviation, education and social services to support for culture such as arts, literature and music and scientific research and improvement.

These themes are not independent, as poverty alleviation is impacted by education which fosters sustainable self-help. Among Muslims it is often preferable to give discreetly to a needy person. Equally important, such generosity should not make the donor feel proud.

Giving under these various approaches needs analysis, a clear concept and planning to achieve a significant impact and to last for generations. It is therefore an indispensable part of Islamic estate planning in order to create and preserve wealth and share it with dependents and the less fortunate, as commanded by Prophet Muhammad, (s.a.s*), who said:

“The best charity is that which is practiced by a wealthy person. And start giving first to your dependents.” (Narrated Abu Huraira: Sahih Bukhari, Volume 2, Book 24, Number 507).