Families in the know in the Gulf are increasingly looking at established centers such as Jersey to provide a better balance to the forced heirship provisions of Shariah Law within the context of a trust arrangement. With almost 12 years experience in the region, ADRIANA ROCCHI guides us through some of the issues facing these families and highlights some of the options available for successful estate planning.
Solutions need not be ultra modern and families are still able to rely on the tried and tested options to cater for their wider succession planning requirements. For example, the trust concept has been in existence in Europe for hundreds of years and quite easily adapts to what families guided by the Islamic principles would require in their planning process.
What exactly is a trust?
The first Waqf was created by the Prophet and it was established to secure land and drinking water for the mosque in Madinah and this was a clear example of a charitable Waqf. On the other hand, the Prophet (declared that the most pious offering is to one’s family in providing for their wants and this would be more pious than giving alms to beggars. Muhammad Al Bukhari added that deriving from the Prophet’s words the most excellent of Sadaqah is that which a man bestows upon his family.
It was actually the Franciscan Friars, who were active in the Middle East in the 13th century, who introduced the concept of the Waqf Ahli (family Waqf) and Waqf Khairi (charitable Waqf) in England. The similarities between a Waqf and a trust are therefore striking, to say the least.
A trust is simply a legal obligation that comes into existence when an individual or other legal entity (known as a settlor) transfers the legal ownership of assets, which may be of almost any type, to another person (known as a trustee) to hold not for their own benefit but for the benefit of the beneficiaries, who can be individuals, corporate entities or charities. It is essential that the transfer is gratuitous otherwise the transaction takes on the characteristics of another legal entity. A trust may therefore be defined as an equitable obligation, which binds the trustee to hold and deal with the trust assets for the benefit of the beneficiaries in accordance with the terms of the trust deed.
If we now consider the five conditions for a Waqf to be valid, conditions upon which the majority of the Islamic jurists agree, we shall see how the common law trust meets the same requirements:
The creator must be an adult and of sound mind;
The property can be movable or immovable;
The creator must appoint a trustee (Mutawali) and can appoint a successor trustee;
The beneficiaries must be identifiable;
A Waqf can be done orally, verbally, in writing or by deed.
The same jurists agreed on the same restrictions and again, the first two are found also in the common law trusts:
Once declared, a Waqf is irrevocable and beneficiaries cannot change its status;
In order to ensure fulfilment of the charitable cases a Waqf must be created in perpetuity;
When a Waqf is created the property is transferred to Allah (s.w.t.) and no one can become the owner unlike the trustees of common law trusts.
Therefore it can be suggested that planning with common law trust is a valid instrument for Muslim families. Some of the benefits are highlighted in an example below.
The practical uses of a trust for Gulf-based families
We live in an age when families are much more mobile in their make up and aligned to that, their assets are increasingly being held in different parts of the world. This actually creates an opportunity to plan using a trust and a trustee who is not only in a tax neutral jurisdiction, but also one who is able to appreciate and legally blend within an Islamic context. A trust arrangement can assist to mitigate matters such as:
The conflicts of laws when assets are situated in various jurisdictions and to apply Shariah to assets in countries with civil and common law;
To keep the families private matters confidential, especially so, to avoid the very complex and public probate procedures in different countries;
To avoid the fragmentation of family wealth and avoid disputes within the family after the death of the settlor;
To achieve long-term asset protection;
To mitigate against political risk; and
To keep family matters private.
The family will often seek advice and request a Shariah compliant structure initially, but it is important to explore the patriarch’s precise attitude to Shariah compliance in order to deliver a structure that meets their needs. Our experience is that most Gulf-based families fall into two categories when planning a trust lead solution:
Strict compliance involving a rigid adherence to the settlor’s specific school, and with specific reference to a scholar.
A solution based on a discretionary trust accompanied by a letter of wishes, requesting the trustees to follow Shariah principles when investing and making distributions. This allows the trustee some flexibility to adapt to changing family circumstances during the structure’s life span.
Now let us consider what happens when someone passes away. Generally speaking all bank accounts are frozen, real estate cannot be sold or transferred, nor can shares be transferred, cars cannot be re-registered and so on and so forth. Joint accounts will be frozen too until the inheritance is determined and joint property in non-Islamic countries will also give rise to problems.
Let us assume that a Qatari with two wives, one son working and living in London, real estate and bankable assets in his own name in his home country and in London were to pass away. He was the sole shareholder of the family business in Doha.
From an Islamic point of view firstly the funeral expenses will be settled, then the debts of the deceased will be repaid, unpaid Zakat will be settled, mortgaged property will be redeemed. Then the will would be executed for the one-third freely disposable share, and lastly the distribution of the net assets will take place in favor of the Fariad heirs (as said identified on the Shariah certificate issued by the Shariah Court).
Now let us look at what would happen from a legal and tax point of view. First and foremost the application of Shariah inheritance rules will never prevent inheritance tax being levied on the estate of a deceased located in any jurisdiction, which is not a zero tax jurisdiction. Secondly immovable property is governed by the law where the asset is, while the law of the jurisdiction where the deceased was resident will apply to the devolution of the movable assets.
In non-Muslim countries the heirs should present for the probate procedures a Shariah certificate (i.e. a certificate of succession from Shariah Court in the country where the deceased was domiciled). The will would allocate one-third of the estate as arranged by the testator, the remaining two-thirds would pass to the Fariad (Quranic heirs) in the manner and proportions as on the succession certificate. The assets in Qatar will be distributed pursuant to the fractional share for each beneficiary shown on the Shariah certificate. The family business in Qatar, the shares of which were held by the deceased, will be split among the Fariad (heirs).
Now to go back to our example. The UK does not recognize polygamy therefore the first question we need to ask ourselves is how would the second wife be treated for inheritance purposes. As far as taxation goes, the second wife could not benefit from the nil rate band tax deduction that would apply only to the first wife. The UK property would trigger inheritance tax whether one is resident or not in the UK. On the value of the property, 40% inheritance tax would be levied by the tax authorities at the passing of the owner of real estate. In the UK, probate is an open procedure and strictly speaking it involves probating the will of a Muslim (if available and pertaining to one-third of one’s wealth) and dealing with what is considered intestacy for the remaining two-thirds of one’s wealth. At any rate it is a lengthy public procedure. In Qatar the Shariah certificate issued by the Shariah Court would deal with the estate safe for any assets covered in the will.
Our Qatari gentleman should have set up a trust arrangement to allow him to hold real estate and passive investments following Islamic law while deriving the tax mitigation often associated with trust planning. For instance, one can hold real estate in a company held in trust and arrange for Islamic compliant financing through a company. At the passing of the settlor, the Murabahah would not need to be repaid as the trust fund did not belong to the deceased, but it is already held for the family for generations to come.
Any part of the trust fund (cash or immovable property) would not be subject to probate as it was not an asset of the deceased and his passing would have been an immaterial event for the trustees.
The trust arrangement could have had a class of beneficiaries to read the Faraid heirs or for example “all my children (Awlad) and their children for three generations whenever born”, and he could have also dedicated part of the trust fund to charity. His son, who lives in England, is possibly a resident not domiciled and he could profit from tax mitigation if the trust were to be structured suitably for his needs. The trustees would also oversee that the bankable assets be invested and stay year after year Shariah compliant though the guidance of a Shariah scholar or expert.
As you can see from these brief observations, a trust arrangement can aid people of the Muslim faith to ferry in today’s world where families are mobile, assets are across continents and taxation is applicable to both individuals as well as to the investments made. Arrangements with trustees provide an opportunity, which Gulf based families should profit from more and more.
This article is for information purposes only and should not be treated as advice. Minerva holds no responsibility if the information provided is used otherwise. Advice should be sought prior to setting up any structure. This article represents a general understanding of the main Islamic principles and does not purport to address the differences between the various Islamic religious schools.
Adriana Rocchi is the manager of Islamic services at Minerva Middle East DMCC. She can be contacted at