An increasing number of Muslim high net worth individuals are exploring legal options and structures that help them achieve strategic objectives and optimal arrangements in asset management, planning and distribution. Aida Othman explores the options.
Many wealthy Muslims have begun to realise that it is important to have legal arrangements in place in relation to their extensive assets and that they are not limited to leaving an estate that will be distributed in accordance to Islamic inheritance rules only.
Trusts, foundations and companies can be utilised to achieve one or more of these objectives:
- Efficient management: enables holding of all assets and investments of a family and allows the individual, his or her family members and professional managers to manage the investments and assets. All assets of an individual may be consolidated for ease of administration and accounting under one roof.
- Strategic objectives: allows the individual to designate who to control certain investments and assets.
- Expertise: facilitates use of professional services from experienced managers, investment advisors, trustees and Shariah advisors.
- Succession planning: to plan the continuity and next generation of managers for a business.
- Charity: to carry out charitable objectives and benefit favoured causes.
- Preservation: for families to build family governance, long-term business continuity, and ensure future beneficiaries receive benefits according to a flexible distribution arrangement, e.g. via family trusts.
- Preparation for exigencies: to provide for advanced age, ill health and disability, emergency situations, and reduce one’s family’s reliance on costly and time consuming probate/letters of administration applications.
- Distribution: Transfer of the benefit of investments and assets to beneficiaries confidentially in such proportions and at such times and to such persons as the individual wishes.
- Minimise tax payments.
One of the challenges in Islamic wealth management is in understanding the differing vehicles for holding and distributing wealth found in civil law as well as common law structures, the Shariah issues raised in utilising them in Islamic wealth management and the extent to which those vehicles could be structured to become Shariah compliant. A case in point is the trust, the favoured device in the common law world, which is not recognised in the civil law world. The concept of trusteeship (Amanah) of an appointed individual (Amin) to manage and carry out certain duties in relation to certain assets is well-known in Islamic law and shares similarities with the common law trust. However some characteristics of the modern trust structures, such as requiring the vesting of the title of trust assets in the trustee and the roles of protectors, need consideration from the Shariah perspective.
A trust is a relationship whereby property is held by one party for the benefit of another. It is created by a settlor, who transfers some or all of his or her property to a trustee, who holds that property for the specified beneficiaries. Once created, a trust separates the property’s legal ownership and control from its equitable ownership and benefits. This may be done for tax reasons or for the trustee to control the property and its benefits in the absence, incapacity or demise of the settlor. A trust is usually governed by the terms of a deed of trust which outline how the trust assets will be managed for and in the interest of the beneficiaries.
The trustee is given legal title to the trust property and has a fiduciary obligation to carry out the terms of the trust and act for the good of the beneficiaries. Trustees may be compensated and have expenses reimbursed, but otherwise must turn over all profits from the trust properties. Trustees who violate this fiduciary duty are self-dealing. Courts can reverse self-dealing actions, order profits returned, and impose other sanctions. A trustee may be an individual, a company or a public body. There may be a single trustee or multiple co-trustees.
Trusts can be structured to be fully Shariah compliant with the advice and approval from a qualified Shariah advisor. At the outset, the Shariah advisor will work with other advisors to give guidance on:
- The nature of the assets eligible to become the trust assets;
- The management of the trust assets;
- The Islamic investment guidelines;
- The overall terms of the deed of trust;
- Qualified beneficiaries;
- Channeling of any impermissible amounts arising from investments; and
- Periodic Shariah review and Shariah audit for the trust, which can give comfort to beneficiaries and settlors that the income from the trust and its management are Shariah compliant.
Shariah compliant trusts could be established within the legal framework of the Labuan International Business and Financial Center (LIBFC). Labuan has distinct laws that cater to the unique features of Islamic financial services and structures to provide Shariah certainty and sound Shariah governance to Islamic entities and various stakeholders. In addition, in order to encourage use of its services, the Labuan Financial Services Authority (Labuan FSA) maintains a competitive cost structure for the setting up and running of the entities under its jurisdiction. This makes it attractive for wealth management as it does not significantly intrude upon the asset value of the estate.
In brief, the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA):
- Is an omnibus, specific legislation for Labuan Islamic financial businesses and Islamic entities;
- Requires compliance with Shariah principles. Section 6: “Any person carrying on any activity under this Act shall ensure that such activity shall be in compliance with Shariah principles.”
- Has specific provisions for Shariah governance for the Labuan Islamic entities including the Labuan Islamic Trust;
- Establishes the Shariah Supervisory Council of the Labuan FSA which is the ultimate authority and reference on Shariah matters in Labuan.
A Shariah adviser, according to LIFSSA, is a qualified person appointed by any licensed entity or entity pursuant to the Act to advise on matters relating to Shariah principles. His or her fit and proper criteria include possessing the necessary qualifications and expertise in Islamic commercial law or Islamic jurisprudence. A Shariah adviser includes a corporation having in its employment at least one individual meeting the fit and proper criteria stipulated.
The Labuan Islamic Trust which is a Shariah compliant Labuan trust established under Section 105 of LIFSSA. In addition to LIFSSA, the Labuan Trust Act 1996 (LTA) and any applicable guidelines issued by the Labuan FSA from time to time, will apply to Labuan Islamic trusts. Here are some of the legal provisions on the Labuan Islamic Trust:
- Enables a settlor to exercise his rights in creating a trust in accordance with Shariah principles;
- Can be for a fixed duration;
- The trust itself or a power exercisable under it can be revocable in whole or in part;
- Terms can be varied;
- Confidentiality is stipulated with few exemptions;
- A Labuan trust, validly created in accordance with or as provided by the LTA, whether in Labuan or abroad, shall be recognised and be enforceable in accordance with its terms, by the courts in Malaysia situated at Labuan;
- Where a Labuan trust is validly created in accordance with or as provided by the LTA, the Court shall not vary it or set it aside or recognise the validity of any claim against the trust property pursuant to the law of another jurisdiction or the order of a court of another jurisdiction.
The LTA has codified salient features and aspects of the common law on trust. For example:
- Section 30(1) states that: “A trustee shall in the execution of his duties and the exercise of his powers and discretion act with due diligence as would a prudent person to the best of his ability and skill, and observe the utmost good faith.”
- Section 33(1): “Subject to the terms of the trust and to the LTA, a trustee shall have all the powers of a beneficial owner in relation to the trust property. (2) A trustee shall exercise his powers in the interest of the beneficiaries and in accordance with the terms of the trust and the provisions of the LTA.”
- Section 33A: “In exercising any power of investment, a trustee shall observe the standard investment criteria – suitability and need for diversification.”
- Section 33B: “A trustee shall, before exercising any power of investment, obtain and consider proper advice relating to the way in which the power should be exercised, having regard to the standard investment criteria.”
A significant development occurred when the Shariah Supervisory Council of Labuan FSA issued the following resolution on the 30th October 2013 in relation to the Labuan Islamic Trust:
- The vesting of property into a Labuan Islamic Trust (LIT) by a settlor to the LIT may be facilitated by way of Hibah or Hadiah.
- Upon vesting of the property by the settlor to the LIT, the legal ownership of the property must be transferred to the trust and be disclosed in the trust deed.
- Where the LIT satisfies the following conditions, Faraidh in regards to the distribution of the settlor’s property, upon the demise of the settlor, is inapplicable and irrelevant on the vested property in the LIT.
- The vesting has been made immediate and irrevocable.
- The vesting has been made without any reserve power of the settlor.
- The vesting of ownership of the property through the trust instrument is absolute.
- The vesting has been made immediate and irrevocable.
- In relation to paragraph (c), where the settlor is one of the trustees and a manager of the trust property under the LIT, Faraidh remains inapplicable and irrelevant.
- Where the settlor is one of the beneficiaries in the LIT, Faraidh would be applicable and relevant on the portion of the property that the settlor is entitled to.
This resolution was intended to provide Shariah certainty as to the ownership and status of assets which have been designated as trust assets by its original owner. It affirmed that those assets no longer belong to the latter and the Islamic inheritance rules do not apply to them. However, the resolution laid out the Shariah conditions for the transfer and vesting of the assets to a trust for this principle to take effect. The transfer of assets is to be done via a validly executed Hadiah or Hibah in favour of the trust. It is important to note that the legal documentation to be used in executing either of these Shariah contracts needs to comply with both Shariah principles and the applicable law.
Trusts and other structures afford a great deal of flexibility while staying true to the principles and spirit of Islamic law. When structuring an Islamic trust, advisors need to take into account the individuals assets, the circumstances of his family and heirs, other instruments which he may need including Hibah (gifts inter vivos), Wasiyyah (will), debts and jointly acquired property rights, as well as the law or laws applicable to him and his assets. Islamic teachings guide how wealth should be acquired, managed and spent. Above all, wealth is a trust itself, a responsibility and form of trial by Allah to His servants; and each person will be accountable for how he acquired and disposed of his assets in this world. The Islamic law of succession (Faraidh) is not the only and ultimate way or outcome for a Muslim’s assets. It is important for an individual to be familiar with and utilise the methods available in Islamic wealth planning. Knowledge and appropriate arrangements will enable him to carry out his obligations as a Muslim, prepare for life’s eventualities, take care of his family’s needs in the event of his passing, achieve strategic objectives, minimise costs and prevent family conflict.
This article first appeared in Islamic Finance News (22 January 2014, Volume 11, Issue 3, Page 19 - 20). For more information, please visit www.islamicfinancenews.com