Shari’a law and practice

It is easy for the uninitiated to underestimate the difficulty of applying classic Islamic jurisprudence to English common-law principles. The outsider may expect to find Shari’a law easily accommodated by western estate-planning practices, simply by observing a shortlist of ‘do’s and don’ts’.

Complications inevitably arise when it comes to accommodating Shari’a law to the existing legal system of a particular country. However, the following is a solution for Muslims seeking assistance with their faith-based estate planning, but guided by the teachings from the Quran.

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 being practised 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 the assets and families to trusted family members or the head of the clans until they returned, and even laid out the distribution, should the trader never return.

There are however, some issues that need to be addressed in the setting up of a trust and its compliance to the Shari’a laws as the guiding principles, i.e. from the Quran and the teachings/practices of the Prophet. Shari’a describes Halal as acceptable and the opposite is Haram, the forbidden ones. When discussing Islamic trusts, knowledge of Fara’id or forced heirship distribution must be attained and approval from a Shari’a supervisory council must be obtained, in order to provide credibility to support the Islamic product.

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, however non-Muslims can also act as witnesses should there be no Muslim present.

The preferred order of witnesses is as follows:

1. two male witnesses, if not available then
2. one male witness and two female witnesses, if not available then
3. four female witnesses.

Islamic trust products

Waqf

The first type of Islamic trust is a Waqf. It is also currently the most popular term to be used in illustrating 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; secondly, a Waqf can also be defined as the use of an asset for a specified cause. There are two categories of a Waqf i.e. Waqf Am (general) normally 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 (beneficiary)
4. Sighah (the contract)

Islamic will

It is further important to understand how the will is prepared and executed according to Shari’a laws. A will is defined in Islam as an admission (iqra) of honour made by a person during their life time. The purposes of preparing a will can be of a charitable nature or any other purpose permissible by Islam. Even in the Quran, in verse 2 from 180 to 182, writing of an Islamic will, requires two witnesses (as described earlier). The will comprises of two main categories that is divided into portions of one-third and two-thirds.

• 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 in a lesser amount as long as the amount is allocated. The allocation is at the liberty of the testator, but must not be for those family members entitled under the forced heirship ruling (two-thirds). Example of those entitled to the one-third portion are:
  • adopted children/foster parents/siblings
  • non-Muslim immediate family members (parents and siblings)
  • relatives not entitled under forced heirship ruling, for example, in laws and grandchildren
  • institutions and organisations, either charitable or non-charitable.

On the hand, Islam recognises that more than the one-third portion can be made to the above beneficiaries, however such agreement would be required from those relatives entitled under the two-third portion after the death of the testator. If not agreed to, then it would revert back to the one-third portion.

• The two-third portion, or the balance after allocating the one-third portion, is allocated to the relatives of family members. This distribution can be allocated according to the following:
  • directly following the 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 the Fara'id, the assets are to be distributed according to their wishes. However the suggestion/proposition is subject to the agreement of the main beneficiaries after the testator's demise;
  • conversely, the main beneficiaries may amicably agree to divide the assets according to their common agreement instead of following the Fara'id distribution.

One of the most important features of Shari’a law is that of 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, but certainly encourages common agreement among the heirs and only when the consensus fails, Fara’id comes in as the provided Shari’a solution. However, certain objectives intended by the will’s testator may not be realised due to the differences among the family members, and under such a situation it is crucial to plan during the life time, vis-a-vis establishing an Islamic trust to achieve the intentions.

Hibah

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

The Hibah can be categorised into three applications:

• Sadaqah; means giving something to the needy. It does not require inter vivos; meaning that there should not be any requirement that the beneficiary 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, then instruct the trustee to donate on his behalf to the named beneficiary.
• Gift; is an absolute transfer without any consideration, but inter vivos is required, whereby the beneficiary 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 beneficiary.
• Conveyance inter vivos; is the most sophisticated of the three. It is a voluntary act without consideration. The execution is basically broken into two segments:
  • Action is required from both the donor and the beneficiary, then delivery is made by the donor to the beneficiary. Then the beneficiary must take possession of the asset. This action is documented in a Sighah (contract).
  • Both the donor and the benficiary must then agree to appoint the trustee to act as the legal owner of the asset by signing another document, the trust deed. Any conditions can be included in the deed as it is now a contract among the three parties. The asset received by the beneficiary is now transferred to the trustee that is holding it in trust on behalf of the beneficiary.

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 during estate administration. Such a ruling is highly prominent in the Quran as per verse 4:11-12.

The rationale of why the male gets more than the female is that, in traditional Muslim culture, males are heavily entrusted and responsible for the females in the family. However, in the current world, gender is quite a topic. Nevertheless, the Islamic forced heirship formula should be considered as the provided solution by God when there is disagreement among the heirs. Islam encourages mutual understanding or consensus among the heirs, which should be the first solution in the distribution process, and only when such consensus is not successful, Fara’id will 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 entitled. 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: 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). When 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 the creation. This is due to the fact that transfer of ownership is made during the 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 ruling.

Another important issue to be considered in Islamic trust distribution is a situation where the beneficiary predeceases the donor. For trusts like the Waqf, Sadaqah and Gift, the asset becomes the estate of the beneficiary, i.e. 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 the estate of his daughter and needs to be distributed according to the Fara’id ruling. 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 (i.e. a condition that only when the donor reaches a certain age, would the asset be transferred by the trustee to the beneficiary) and Ruqba (i.e. should the child predecease the father, it is agreed by both parties that the asset held by trustee shall be hibah to another beneficiary, thus avoiding the assets to becoming the estate of the beneficiary).

The author wishes to acknowledge the assistance provided by Dr Aimi Zulhazmi Abdul Rashid of Bank Islam Trust – Malaysia.