(文章只備英文版本)
Succession planning is one of the most important decisions you will make in your lifetime. This is particularly true in the Muslim world where rules under Shariah1 govern how your estate will be distributed when you pass away. This will be the case unless you have made other legal arrangements that respect Shariah.
Brief overview of Shariah principles on succession
Compared with inheritance laws in the common law world, Shariah principles on succession adopt a relatively restrictive approach to testamentary freedom (which is more akin to succession laws in some civil law jurisdictions).
If a Muslim dies intestate, his estate (after payment of funeral expenses and debts, if any) will be distributed to the legal heirs according to the faraid principles of Shariah. While there is a long and complicated list of types of heirs, for practical purposes, the estate of the Muslim intestate will be distributed in a manner that results in a greater distribution to males over females – generally, sons get more than the daughters and more than their mother (the wife of the deceased), brothers get more than the wife and so on.
Although all adult Muslims have the general testamentary power to make a will (wasiyya) to provide for their heirs upon their death, this power is subject to two principal restrictions under Shariah:
- The first restriction is the so-called “One-Third Rule”. Essentially, this rule limits the amount of the testator’s bequest to not more than one-third of his net estate at the time of his death. The residue estate must then descend in fixed portions to his heirs in accordance with the faraid principles under Islamic law.
- The second restriction limits who can be a recipient of bequests, i.e. a testator may not make a bequest in favour of his Quranic heirs over and above their respective portions under the faraid principles2.
Crucially, one of the main impediments to inheritance under Shariah succession laws is a difference or change in religion as a majority of Islamic scholars agree that a non-Muslim cannot inherit from a Muslim and vice versa.
Issues arising from a lack of considered succession planning
Against this backdrop, a failure to properly engage in succession planning could lead to significant problems. This is best illustrated by the following scenarios:
Scenario 1: A testator with no surviving spouse has two sons and one daughter (all of whom are Muslim). Suppose the daughter is affected by a severe case of Down syndrome and needs to be cared for throughout the duration of her entire life. The testator therefore wishes to maximise the inheritance he can bequeath to his daughter in the event of his death. Strictly applying the faraid rules, the most she can inherit is one-fifth of his estate as each of his two sons’ shares has to be double that of his daughter’s.
Scenario 23: A non-Muslim person had converted to Islam without his family’s knowledge. He then dies intestate, leaving behind his non-Muslim wife and three young children who would need to be looked after. However, his non-Muslim family will be entirely excluded from inheriting his estate under Shariah, and such estate will be handed over to the state treasury (the Bayt al-mal).
Both scenarios demonstrate that a lack of succession planning can lead to significant (yet avoidable) financial burden and hardship for the family members of a deceased Muslim. Scenario 2 can be partially resolved if the Muslim convert had made a will to dispose of not more than one-third of his estate to his non-Muslim next-of-kin, which is permitted under Islamic law, but this does not deal with the two-thirds residue of his estate. With regards to Scenario 1 and the residue of the estate in Scenario 2 and, indeed, any distribution outside of the faraid distribution principles, the solution may have to be found in a common law trust which has, in fact, interesting parallels to the Islamic Shariah-compliant legal structure called a “waqf”.
Comparing a “waqf” with a common law trust
To understand how a waqf works in practice, it is important to examine the similarities and differences between a waqf and a common law trust:
| Characteristics |
Waqf |
Trust |
| Purpose |
In principle, a waqf must be made for a pious purpose (defined as anything that is good and pleases Allah) including but not limited to, religious and charitable purposes. However, “charity” is interpreted broadly in Islamic law to include provision for the family as taking financial help from others is not a good Islamic practice and trust proceeds can prevent descendants from becoming needy and requiring of financial help from strangers.
|
As long as its purpose is lawful, trusts can either have a charitable or a private purpose.
|
|
Settlor as beneficiary or trustee
|
A waqif (settlor) is generally not allowed to declare himself as a mauquf’alaih (beneficiary) but, like a trust, he can be a mutawalli (trustee) himself.
|
A settlor can declare himself to be a beneficiary or a trustee of a trust.
|
| Ownership |
In theory, ownership of a waqf vests in Allah, instead of the mutawalli. In practice, this means that the mutawalli is merely an administrator of the waqf assets and exercises less discretion than a trustee would.
|
Legal ownership vests in the trustee with the assets to be held for the benefit of the beneficiaries.
|
| Investment |
The investment powers of a mutawalli are relatively limited because his role is only to maintain and manage the property within the limits of Shariah.
|
Trustees have broader powers of investment but must still act in accordance with the provisions of the trust deed.
|
| Duration |
Perpetuity is a core tenet of waqfs which must have unlimited duration.
|
Some common law jurisdictions impose a rule against perpetuities which prohibits assets from being held in a trust perpetually. However, in England, trusts could originally be made in perpetuity until the rule against perpetuities came into force. In Hong Kong, the Perpetuities and Accumulations Ordinance (Cap. 257) has now abolished the rule against perpetuities and permits trusts to continue for an unlimited period.
|
|
Conditionality/ Revocability
|
Any transfer of property to a waqf must be unconditional and irrevocable because a waqif cannot attach any condition which may hinder the immediate creation of a waqf.
|
Settlors have the flexibility to create a discretionary trust or reserve their right to revoke the trust.
|
|
Subject matter
|
The subject matter of a waqf must be halal or Shariah-compliant, e.g., no investments in gambling, alcohol or pork.
|
The subject matter of a trust need only be lawful.
|
|
External supervision
|
Qadis have the power to supervise the actions of mutawallis, appoint new mutawallis and set aside waqfs.
|
Courts have the power to supervise the actions of trustees, appoint new trustees and set aside trusts. Depending on the terms of the trust document as well as the governing law of the trust, settlor-appointed protector(s) or enforcer(s) can also supervise the trustees.
|
Considering the commonalities between a waqf and a Shariah-compliant trust, some academics have even argued that the origin of the English trust can be traced back to the Islamic waqf structure. However, a common law trust has several unique features that make it more flexible than a waqf.
One advantage is the existence of precedents. Under common law, the conditions for establishing and administering a trust, e.g., the need to satisfy the “three certainties” of intention, subject matter and object, are clearly set out in binding case law and statutes. By contrast, as a waqf is governed by Shariah, it is subject to conflicting scholarly interpretations of Islamic texts. For instance, there is considerable debate as to whether non-Muslims can be waqifs or not.
Another advantage is that common law trusts are (relatively) less prone to regulatory interference than waqfs. For example, in Malaysia, administration of waqfs has been centralised in the hands of the State Islamic Religious Councils (Majlis) who must be the sole mutawalli of all waqf properties. Given that these Majlis are often tightly regulated and even controlled by the government, there may be concerns regarding state interference in the administration of waqfs. This contrasts with common law trusts where settlors have leeway in appointing trustees and overseeing the management of the trust.
Furthermore, common law trusts provide a wider range of remedial tools to hold trustees to account and enable beneficiaries to recover trust property. For example, the Islamic law of waqf does not have provisions parallel to the equitable remedy of “tracing” trust property falling into the hands of another or liability for “dishonest assistance” or “knowing receipt” where third parties can be held liable for breach of trust if they knowingly meddle with trust property or its administration.
How would a Shariah-compliant trust work?
There are many ways to design a common law trust so that it is Shariah-compliant. Broadly, there are three such types of trusts:
- Strictly compliant trusts - These are trusts that rigidly adhere to Shariah principles. The trust deed will require very specific and targeted drafting, possibly with the approval of specialist Islamic scholars (ulama).
- Materially compliant trusts4 - These are operationally flexible trusts that can be designed to enable structural changes during its life. Shariah compliance can be ensured by issuing an appropriate letter of wishes that mandate halal investment strategies and/or require the advice of a suitably qualified ulama.
- Fully flexible trusts - These trusts would be useful for a settlor who wishes to make provision for distributions not covered under the faraid principles. So, while the majority of his assets could be subject to Shariah succession laws, a settlor could allocate a proportion of his assets to this type of trust to cover, for example, a Scenario 1 situation.
While a trust can also be included in a person’s Islamic will, the assets cannot be more than one-third of the testator’s total assets, because this is the only portion of the estate that can be freely dealt with under the Shariah. Therefore, setting up a separate trust before death is always preferable. Moreover, setting up a trust as early as possible enables the settlor to maximise the amount of time that passes between the trust being set up and the death of the settlor as distributions deemed to have been made during the settlor's lifetime can operate to break up the nexus between the trust and the settlor's death.
Practical benefits of a Shariah-compliant trust
Given their features, a common law trust can be appropriately structured to mitigate the problems posed by the two scenarios outlined above:
In Scenario 1, the testator can instead create a trust in favour of his daughter with Down syndrome. He can structure the trust either as a will-substitute, i.e., the trust assets will be transferred to his daughter when he passes away, or as a continuing trust, i.e., the trustee will continue to manage the trust assets for the benefit of his daughter even after his death in a manner that is Shariah compliant. As set out above, a continuing trust is always preferable as it should decrease the chances of a successful challenge against the trust after the death of the settlor.
In Scenario 2, the Muslim convert can also enjoy the same benefit if he places his assets in a trust in favour of his non-Muslim family, which is permitted under Islamic law. If he is reluctant to lose control over all or part of his assets during his own lifetime, he can transfer the assets to professional trustees and structure the trust so that he can continue to enjoy the benefit of the property during his lifetime but, upon his death, such property will not become part of his estate.
A collateral advantage of using trusts is the potential tax benefits it may bring, e.g., in limiting inheritance tax liabilities for trust properties. Although this might be less relevant in jurisdictions without inheritance taxes such as Malaysia or Indonesia, this factor could be of consideration to Muslims who are tax resident in jurisdictions which impose taxes that apply on death. This is obviously subject to the terms of the relevant local tax rules but, at the very least, the inter vivos disposition of assets in a trust has the structural potential to reduce inheritance tax liabilities as one of the tools in the armoury which can be used to legitimately mitigate such tax liabilities.
Conclusion
A timely succession planning strategy can go a long way in securing the legal position of your heirs and giving you the certainty that they will be looked after in the event of your demise. Bespoke advice will be required as to how strictly the settlor wants Shariah to apply, the location of the assets, the tax residency of the settlor, the tax residency of the beneficiaries, and other material factors unique to the individual. By adapting a properly drafted common law trust, a settlor can avoid the various issues associated with establishing and administering a waqf yet ensure Shariah-compliance.
This article was prepared as of February 2025.
This article is general in nature, intended to be purely informatory, and is not, nor is it intended to constitute, professional, legal or Shariah advice. The authors are legal professionals and how the Shariah is applied in practice is based on their personal observations over time. You should seek independent professional advice before taking any action as to matters discussed in this article and should not rely solely on the contents of this article in the absence of such professional advice.