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family balance sheet and income statement. Only once the mission statement has been created and the men- tioned family balance sheet and financial capacity meas- ured, can profound decisions be made about governance and the potential solutions for succession and the right legal tools be considered and correctly applied. As a re- sult, an in depth understanding of the family’s needs, re- quirements and aims compounded a good knowledge of both international and Sharia law is crucial.
Typical examples of potential difficulties problems in- clude: if a family business was passed onto five heirs with half aiming to sell, whilst others want to hold, or if a Muslim living in the GCC wished to spend his summers at his property in France, which may become subject to local inheritance tax, capital gains tax and wealth tax de- pending on how the property was acquired and financed. These cases illustrate some of the difficulties that may arise potentially creating costly emotional and financial pitfalls for the family if estate planning is not handled pro- fessionally with structured Sharia-compliant solutions.
Providing in perpetuity So, what are the solutions? In the history of Islam, Waqf became very popular in both its applications – the chari- table Waqf that provides for philanthropy, and the fam- ily Waqf that is used to protect and preserve the family business supporting members through its revenues. One of the Waqf’s main principles is perpetuity, meaning that only the income can be given to the beneficiaries but the body of the assets must be preserved. The sale of these core assets is restricted and, at best, permissible only if replaced by equivalent assets.
While initially only physical real estate was deemed to be a lasting investment for a Waqf, cash is now deemed to be allowed. This means that modern portfolio theory can now be used to guide investment decisions, allowing a more flexible approach in applying socially responsible criteria including screening for Sharia-compliant stocks and securities.
Furthermore, 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. Such criteria should be outlined explicitly to the Trustee in line with the family mission statement.
For a Muslim client, we find that four key types of Islamic Trusts meet different needs and can be customised to accommodate diverse 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 entitle- ments of children until they are older.
30 Global Islamic Finance October 2010
Inheriting in Islam Islamic inheritance law is based on the principles of re- distribution, 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, other prerequisites must be taken into account and before any distribution, the es- tate’s debts and funeral expenses must be paid. A key factor to discuss nowadays is the allocation for women in inheritance.
Previously, women were not allowed to form part of a will as men had to support families and parents under Islamic law. However, nowadays, many Muslims live in countries where women are legally obliged to support their rela- tives financially - a potential solution to this issue could be a gift made during the settler’s lifetime which would compensate for this obligation. Irrevocable gifts (Hibah) can be made during the settler’s lifetime and fall outside the Islamic inheritance laws as long as the gifts are equal and the intent is pure.
Managing philanthropic endeavours Aside from serving family financial issues, a banking advi- sor must also consider options for charitable purposes for a client. It is an indispensable part of Islamic estate plan- ning in order to create and preserve wealth and share it with dependents and the less fortunate, as commanded by Prophet Muhammad.
Indeed, 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’, es- timated the magnitude of philanthropic giving in Muslim communities at between USD 250 billion and USD 1 tril- lion 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 distrib- uted 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 serv- ices to support for culture and scientific research. Giving under these various approaches needs analysis, a clear concept and planning to achieve a significant impact and to last for generations.
In this way, after taking a pragmatic approach and explor- ing all the options under Shariah law, conducting an in depth analysis of a family’s requirements and applying the appropriate financial instruments for estate planning, a Muslim can therefore achieve tax-efficient global solu- tions, legally entrusting his assets to a politically stable environment, while keeping his worldly affairs in good or- der as instructed by Allah.
This is Bank Sarasin’s aim for all its Muslim clients as they seek to provide a fully comprehensive Islamic wealth management service of which estate planning advice is a crucial part. gif
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