Islamic Succession Planning

Islam certainly encourages Muslims to seek wealth, which is a very important point as there are certain quarters who believe that Muslims should focus on Ibadah (spiritual and worshipping) alone for Akhirat or the hereafter. This would be an extremely rigid interpretation of God’s word when in fact God instructed Muslims after completing their prayer to work hard to obtain prosperity and wealth:

And when the Prayer is finished, then may ye disperse through the land, and seek of the Bounty of Allah: and celebrate the Praises of Allah often (and without stint): that ye may prosper. (The Holy Quran 62:10)

Wealthy people have more capacity in terms of monetary resources and time to help others, as illustrated by philanthropists establishing foundations for charitable causes. God certainly encourages the sharing of wealth and for Muslims to help others with full sincerity:

Help ye one another in righteousness and piety, but help ye not one another in sin and rancour: fear Allah: for Allah is strict in punishment. (The Holy Quran 5:2)

An example is Tan Sri Syed Mokhtar Shah bin Syed Nor Al-Bukhary, the wealthiest Muslim in Malaysia with a net worth of over US$2 billion (according to Forbes). He has through his foundation contributed over US$300 million (RM1 billion) to charity.

Islamic Trust Development

The sharing of wealth in Islam during the days of Prophet Muhammad and his followers 1,400 years ago, led to the establishment of an institution called Baitulmal, which is still practiced in the present day. Literally Bayt is a house and Mal is property. It is a public treasury where alms or Zakat are collected as a form of tax from the people. Zakat in their respective proportions were collected and then distributed to the needy. Later on, when Arab and Indian traders started to travel around the world, especially in the Asia region, the role of trustee became more prominent. The traders entrusted their assets to trusted family members or to the head of the clan until they returned, and even laid out the distribution, should the trader never return.

There are, however, some issues that one needs to address and be knowledgeable of when setting up a trust to ensure compliance to Shari'a law as found in the Quran and the teachings/practices of the Prophet. Shari'a describes Halal as acceptable and the opposite is Haram, that which is forbidden such as the consumption of alcohol. One should also understand Fara'id or Islamic forced heirship rules that provide for a deceased person's estate to be apportioned among certain close relatives in definite fixed shares. This system of forced heirship applies generally to at least two-thirds of a person's estate. The opportunities to avoid the mandatory rules of forced heirship in Islamic law include lifetime gifts, bequests/wills or Waqf (an Islamic trust equivalent to be discussed below).

Third, there is also the need to emphasise the importance of witnesses in the execution. This is underlined by the Quranic verse 5:106, in making a bequest, that there should be two witnesses, preferably fellow Muslims (non-Muslims can also act as witnesses should there be no Muslims present). The preferred order of witnesses is as follows:

1. Two male witnesses;
2. If not available then one male witness and two female witnesses;
3. If not available then four female witnesses.

Islamic Trust Products

Waqf

Waqf is the popular term used to illustrate Islamic trusts. The setting up of a Waqf is normally intended by a charitable person. By definition, a Waqf can be a dedication of an asset in perpetuity for charitable and religious objectives. Second, a Waqf can be defined as the use of an asset for a specified cause. There are two categories of Waqf -- Waqf Am (general) normally used for public causes and Waqf Azzuri (limited to family members). Four main areas need to be considered when structuring a Waqf:

1. Waqif (the asset owner)
2. Mauquf (asset to be Waqf)
3. Mauquf allaih (beneficiaries)
4. Sighah (the contract)

Islamic Will

A will is defined in Islam as an admission (iqra) of honour made by a person during his lifetime. The purpose of preparing a will can be of a charitable nature or any other purpose permissible by Islam. The writing of an Islamic will requires two witnesses (Quran 2:180-182). The will comprises of two main categories that is divided into portions of one-third and two-thirds:

1. The one-third portion is defined as up to one-third of the amount of the estate, meaning the portion must be met, but not necessarily to the maximum of 33.3 per cent. It can be an amount lesser than one-third. The allocation is at the liberty of the testator, but must not be for those family members entitled under the forced heirship ruling (the two-third portion). Those entitled to the one-third portion include:

• Adopted children/ foster parents/siblings;
• Non-Muslim immediate family members (parents and siblings);
• Relatives not entitled under forced heirship rules, such as in-laws and grandchildren; and
• Institutions and organisations, both charitable and non-charitable.

Islam permits more than the one-third portion be made to the above beneficiaries if those entitled under the two-third portion agree so.

2. The two-third portion, or the balance after allocating the one-third portion, is allocated to relatives and family members. This distribution can be allocated according to the following:

• Directly following Fara'id distribution or forced heir-ship rules, close family members of blood-relation and spouses, who are also known as the main beneficiaries;
• The testator can also suggest or propose that instead of following Fara'id rules, the assets are to be distributed according to his wishes. However, such suggestions / propositions are subject to agreement by the main beneficiaries after the testator's demise; or
• The main beneficiaries may amicably agree to divide the assets according to their common agreement instead of following Fara'id distribution rules.

One of the important features of Shari'a law is its flexibility, because the overriding objective of Shari'a law is the preservation of human interest, its welfare and well-being. In the above situation, Islam is not rigid by enforcing Fara'id, and encourages common agreement among heirs and only when consensus fails, Fara'id rules come in as the provided Shari'a solution. However, certain objectives intended by the will's testator may not be fulfilled if distribution is ultimately determined among family members, and under such a situation, it becomes crucial to plan during the testator’s life time such as through establishing an Islamic trust.

Hibah

The Islamic trust product Hibah, by literal definition, means a gift. It refers to the transfer of ownership or conveyance of an asset from the donor to the beneficiaries. The donor is also known as settlor of the trust and the trust is created for the benefit of the beneficiaries. The creation is made voluntarily by the donor and without value consideration. The trust must be created during the lifetimes of both the donor and the beneficiaries. Furthermore, the creation of the trust in Islam is highly encouraged (giving good deeds or sunat).

Hibah can be applied three ways:

1. By Sadaqah - which means giving something to the needy. It does not require to be given inter vivos (taking effect during the lifetimes of the parties involved); meaning that there should not be any requirement that the beneficiaries must be in existence to receive from the donor. As for its charitable nature, it is a voluntary act without any condition or any consideration. The donor can create a Sadaqah trust for his private charitable objective, with an appointed trustee, instructing the trustee to donate on his behalf to the named beneficiaries.

2. By gift - which is an absolute transfer without any consideration, but inter vivos transfer is required, whereby the beneficiaries must accept from the donor as specified. It is an act of a voluntary nature, and again, without condition and without value consideration. The donor creates the trust by appointing the trustee, and nominating the named beneficiaries.

3. By conveyance inter vivos - which is the most sophisticated of the three applications. It is a voluntary act without consideration. The execution is basically broken into two segments:

• Action is required from both the donor and the beneficiaries where delivery is made by the donor to the beneficiaries, and then the beneficiaries must take possession of the asset. This action is documented in a Sighah (contract).
• Both donor and beneficiaries must agree to appoint the trustee to act as the legal owner of the asset by signing a trust deed. Any conditions can be included in the deed, which is now a contract among the three parties. The asset received by the beneficiaries is now transferred to the trustee who is holding it in trust on behalf of the beneficiaries.

Distribution

In understanding the effect of distribution in the trust, one needs to have a preliminary knowledge of Fara'id or force heirship rulings on asset distribution as defined prominently in the Quran verses 4:11-12.

The rationale of why the male gets more than the female is that, in traditional Muslim culture, males are heavily entrusted with and responsible for the females in the family. However, in the current world, gender can be quite a debatable topic. Nevertheless, the Islamic forced heirship formula should be considered as the provided solution by God when there is disagreement among heirs. Islam encourages mutual understanding or consensus among heirs, which should be the first solution in the distribution process, and only when such consensus is not successful, should Fara'id be reverted to.

The Fara'id distribution formula is unique and predetermined in the Quran. Those beneficiaries that are entitled include those heirs from blood relations like brothers, sisters, father and children, and by marriage i.e. spouse. Thus, adopted children, in-laws and grandchildren are not directly entitled to this portion. An illustration of Fara'id is as follows.

A husband dies leaving a wife, a son, a daughter and parents. After deduction of legacies and debt, the distribution is as follows:

1. Wife: one eighth
2. Father: one sixth
3. Mother: one sixth
4. The balance is divided among the children based on ratio of son to daughter 2:1, son: two-thirds and daughter: one-third.

Where there are only daughters, they are entitled to only two-thirds of the balance, with the remainder going to the father of the deceased or siblings of the deceased (in order of priority). Where there is only one daughter, she is entitled to a maximum of one-half of the balance, with the rest going to the father of the deceased or siblings of the deceased (in order of priority).

For an Islamic trust, the distribution of the trust is not subject to Fara'id if it is made irrevocable during its creation. This is due to the fact that the transfer of ownership is made during the settlor’s lifetime (including to the trustee as the legal owner). Such examples are Waqf and Hibah, which are irrevocable instruments of trust. On the other hand, a revocable trust, according to Shari'a principles, is subject to Fara'id rules.

Another important issue to be considered is where a beneficiary predeceases the donor. For trusts like the Waqf, Sadaqah and Gift, the asset becomes part of the estate of the beneficiary, ie, a father sets up a Gift trust for the house he is living in to be left to his only child, should his daughter then predecease him, the house he is living in becomes part of the estate of his daughter and needs to be distributed according to Fara'id rules. As a result, he is only entitled to one-sixth of the house. This situation is overcome by the Hibah conveyance inter vivos through two conditions in the trust deed, Umra (ie, a condition that only when the donor reaches a certain age, would the asset be transferred by the trustee to the beneficiary) and Ruqba (ie, should the child predecease the father, it is agreed by both parties that the asset held by trustee shall be Hibah to avoid the situation where the assets become part of the estate of the beneficiary).

Conclusion

Islamic succession planning is based on the principle that all wealth belongs to God and that anyone who possesses wealth is simply its caretaker:

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 the 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. (The Holy Quran 24:64)

Social responsibility is deeply rooted in this principle. Wealth management, therefore, has three phases -- the proper acquisition, preservation and distribution of wealth. As wealth is considered to belong to the Creator, it requires forward planning. This article discussed some planning tools that allow Muslims to plan their good financial deeds during their lifetimes as preparation for the afterlife.

*As adapted from a chapter in the book “Current Issues in Islamic Banking and Finance: Resilience and Stability in the Present System.”