Creating an islamic compliant trust a guide for south carolina muslim residents


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Creating an islamic compliant trust a guide for south carolina muslim residents

  1. 1. www.scmuslim.comCreating an Islamic CompliantTrust: A Guide for SouthCarolina Muslim ResidentsIn the Name of Allah, Most Gracious, Most Merciful.CREATING A TRUST:A trust is a fiduciary relationship with respect toproperty where by a trustee holds legal title for the benefit ofanother. The Islamic waqf system in many ways resembles a trustin that it is based on the idea of someone gifting to a thirdparty specific property to be held for the benefit of others. Atrust is ideal if one does not want to have a conservatorshipproceeding wherein one’s family will have to go to court if theydisagree.A South Carolina Last Will and Testament can enable one tocreate a trust and designate a trustee to handle their estate(property left after death) on behalf of their children or other
  2. 2. beneficiaries. A trust, particularly a discretionary trust,enables one to collect, arrange, and manage their assets duringtheir lifetime. The assets then pass to one’s beneficiaries upontheir death. A trust achieves many of the same ends as a LastWill and Testament; however, a trust serves as a tax-savingdevice which enables one to avoid excessive estate expenses. Ifone’s Last Will and Testament is used to transfer property aftertheir death, there will be a probate. However, trusts are notrequired to go through probate, which can save one a smallpercentage of the total value of their estate.Title 62 - South Carolina Probate Code SECTION 62-6-101.Definitions. (14) mandates: "Trust account" means an account inthe name of one or more parties as trustee for one or morebeneficiaries where the relationship is established by the formof the account and the deposit agreement with the financialinstitution and there is no subject of the trust other than thesums on deposit in the account; it is not essential that paymentto the beneficiary be mentioned in the deposit agreement. Atrust account does not include a regular trust account under atestamentary trust or a trust agreement which has significanceapart from the account, or a fiduciary account arising from afiduciary relationship such as attorney-client.
  3. 3. It is therefore important to highlight that a trustaccount does not include a regular trust account under atestamentary trust (will trust) or a trust agreement. Atestamentary trust is a trust that is not created until after atestators death, and is therefore irrevocable; because, sincethe testator has died, it will be physically impossible for themto have the ability to amend or revoke the testamentary trust. Atestamentary trust can be established under ones Last Will andTestament, Revocable Living Trust, or Irrevocable Life InsuranceTrust.There are four parties involved in a testamentary trust: The one (grantor or trustor, but is generally referred toas the settlor) who stipulates that the trust be formed,generally as a part of their will The trustee (or Executor), who is generally named in thewill, is responsible for carrying out the terms of thetestators Last Will and Testament. If not named in thewill, they will be appointed by the probate court whichhandles the will The beneficiary(s) who will receive the benefits of thetrust in question The actual trust itself
  4. 4. STRUCTURING A TRUST:It is imperative that a Muslim living in South Carolinaconsider the practical Islamic guidelines with regard to how thetrust is actually structured. In theory, there are various waysone can structure a trust to achieve the underlying objectivewhile also remaining shariah compliant.Wali (guardian) of the trustThe Settlor can appoint one they consider an ideal wali,whose authority should be held in a fiduciary capacity whileacting as the protector of the trust. This individual shouldessentially ensure that all activities of the trust are incompliance with Islamic law. Furthermore, in order to ensurethat the Trustees observe the requirements of both Islamic andstate law while administering the trust, the settlor shouldprepare a letter of wishes. However, it is important to notethat as a matter of practicality, where the trust isadministered from an abroad jurisdiction this option may beinconvenient in practice.
  5. 5. Type of Trust - DiscretionaryA Discretionary Trust (Family Trust) is established by aDeed between the settlor who sets up the trust and a Trustee. Ina discretionary trust, the Trustee has the power use theirjudgment when deciding whether any sum is to be paid tobeneficiaries, and if so, how much. The heads of a family aregenerally appointed as a trustee companys directors; and inthis way they are able to control the exercise of the trusteesdiscretionary powers.Revocable/Irrevocable Trust structureAn important consideration is the issue of whether thetrust should in essense be revocable or irrevocable. Whenelecting a revocable trust, careful thought must be given to theinterests of the beneficiaries under the trusts; because, theparties involved could actually deviate from the rules ofestablished heirs outlined in the Quran, resulting in anunsupported couse of action. In summary, there are a variety ofways in which the framework of the trust can be adapted flexiblyto ensure that ones wishes are carried-out; however, carefullplanning will be required.Regarding Revocable Living Trust, some Trust advocatespreach against wills, declaring that Trusts are a better
  6. 6. instrument. Nevertheless, even if one has a Revocable LivingTrust, they are required to create a will. However, in manyinstances, a will is all that is required. Regardless of the sizeof one’s estate, a will should form the foundation of theirestate plan. In instances where one has a Revocable LivingTrust, it is ok if their will is very simple. Nevertheless, awill is still an important part of one’s estate plan, and itshould not be considered as being unimportant simply because aRevocable Living Trust has been created. In all fairness,something is wrong if one has a Revocable Living Trust and doesnot possess a will. When one has a Revocable Living Trust, theycreate what is referred to as a "Pour-Over Will." A Pour-OverWill acts as a safety net for one’s Trust. One’s Last Will andTestament will actually "tie" together the Revocable LivingTrust, tax plan, and other facets of their estate plan.In instances where one has minor children or anincompetent family member, the will in question should at leastname a guardian/conservator. The purpose of a Revocable LivingTrust is to allow property to be transferred through the Trustrather than through the will, thus avoiding probate. It is alsoimportant to note that some attorneys will flat out say thatRevocable Living Trusts do not work and should not be used inthe vast majority of the cases. The reason being, drafting a
  7. 7. will in the manner employed by most lawyers does not make a lotof money for them up front, but once a will is written, thetestator and their heirs are psychologically "locked" into thelawyer in question. As a result, a lawyer can benefitfinancially because the party in question will probably do otherlegal work with them. Unfortunately, there are even instances inwhich a lawyer will take advantage of one’s family during theprobate process. Lawyers will also draft a great deal of willsat inexpensive prices in order to get the probate business;because, their financial success is guaranteed by the probateprocess.Fundamentally a trust is formed by a token donation; suchas 10,000 USD, and thereafter transferring properties etc., intothe name of said trust. The donor then specifies specificbeneficiaries who will become the eventual owners of the trustonce it is dissolved. In this context, the donor neither intendson immediately donating their property, nor do they really wishto make the specified beneficiaries their immediate owners. Fromthe standpoint of Islamic law, there is no problem with regardto what clauses may be written into the trust deed, providedthat it does not constitute a violation of any aspect of Islamiclaw; i.e., involvement in interest, gambling, intoxicants,pornography, etc. However, as it pertains to Islamic law, the
  8. 8. trust in question is non-existent, and will be regarded as partof the donor’s estate upon their death; despite the fact thatthe trust deed is a valid legal document according to SouthCarolina law.The trust in question is non-existent because the intendedrecipients will not take actual possession until after the donorhas died. The same would apply even if the donor issued theitems in question as he was dying (maradul-maut); because inthis instance, the transaction would be regarded as a will. Inorder for the transaction to be valid under Islamic law, thedonor would have to issue a particular item and witness theintended recipient take actual possession prior to their demise.Thus, if a house was to be part of an Islamic trust, the ownerwould have to donate the house to the intended recipient, moveout, hand over the keys, and sign over the title to the newowner. The new owner could then allow the former owner to remainin the house until the time of their demise. However, eventhough the former owner will remain in the house, it isimportant to note that every detail pertaining to the house willbe at the new owner’s discretion.If the donor dies with the situation remaining unchanged,the donated property will transfer upon their heirs according tothe laws of inheritance. The evidence for this view is a hadith
  9. 9. collected by Bukhari, narrated by Abida, who reports: "If hedies and the gift has been set aside while the one who was givenit was alive, then it is for his heirs. If it was not set aside,it is for the heirs of the one who gave it. Al-Hasan said, Nomatter which one dies before, it is for the heirs of the one towhom it was given if it has been given to the messenger." Withthis being said, all the donor’s eventual heirs, as well asthose specified as beneficiaries to the trust in question mustbe informed of the true reality of the trust. Therefore, it isbest if the true position of the trust be documented and all theheirs and beneficiaries be required to sign the document inquestion, stating that they have been informed about the factthat the trust is non-existent in terms of Islamic law, and thatthe donor is the sole owner. Consequently, if one intends toform a trust that is valid according to Islamic law, it isimperative that they seek guidance from a scholar/expert who isexperienced in this field before any trust deed is finalized.Nonetheless, whatever the situation may be, the reality of thetrust must be clearly known and recorded in order to enable theexecutors to wind-up the estate correctly.Below is a listing of important questions one might haveregarding South Carolinas new Trust code; taken from Answers to95 Questions You Should Have About the New South Carolina Trust
  10. 10. Code, By Evans, Carter, Kunes & Bennett. According to theauthors, "The new South Carolina Trust Code (SCTC) was passed bythe South Carolina General Assembly and signed into law in 2005.It takes effect on January 1, 2006, and applies retroactively toall trusts. Modeled on the Uniform Trust Code (UTC), which waspromulgated by the National Conference of Commissioners onUniform State Laws, the SCTC was the result of the efforts ofthe SCTC Study Committee of the Probate, Estate Planning andTrust Section of the South Carolina Bar. For the most part, theSCTC is a default statute. The absence of case law and theabsence of statutes left practitioners dealing with uncertaintyin many areas of the common law. The SCTC introduces newconcepts and makes significant changes to our laws on trusts.The SCTC is codified in Article 7 of Title 62 of the SouthCarolina Code. There are eleven sections to the Act, and itincludes the official UTC comments as well as South Carolinacomments. Attorneys, judges, corporate and individual trustees,and trust beneficiaries and their duties and rights will soon beguided and governed by the SCTC. Herewith are answers to 95questions we should all have about the new law."The questions I have included are the following based ontheir relevancy to the objective of this book:
  11. 11. INSURANCE AND PENSION:If one’s insurance or pension policy is written in a trustof nominated beneficiaries, upon one’s death, these items willpass outside of one’s Islamic will directly to one’s designatedbeneficiaries. All insurance/pension policies will pass outsideof one’s Islamic will; because, these items are not regarded asone’s wealth due to the fact that they will not be in one’spossession at the time of their death. However, in the case of apension, since this item is accrued from years of service, inprinciple, the retirement pension scheme constitutes Mudaraba(The first party, the rabb al-mal, contributes the capital tothe mudaraba and does not get involved in its management, whilethe second party, the mudarib, brings no funds but only hisexpertise and entrepreneurial skills to manage the mudaraba.),
  12. 12. so the proceeds from said transaction will become the right ofall the legal heirs. Furthermore, even if one dies beforeobtaining their pension, the value of said item must be includedin their estate.According to a June 30, 2003 article in Arab News Islam,"Pension plans are generally acceptable. They work onpractically the same basis as life insurance, with somedifferences. Pension plans are operated by most, if not all,Muslim countries. They are also applicable to Al-Azhar and otherIslamic universities. Normally pension plans provide support toa retired employee, his wife, and children below a certain age.The idea is that after that age, which is normally 21, childrenshould be able to support themselves. Pension is a benefit givento those who are at a stage of life when they cannot supportthemselves. This is why it is paid to a retired employee and hiswife, or spouse. It is not part of a person’s savings, unlessthe plan specifies that. As such, it is not treated as part ofone’s estate, which is divided according to the law ofinheritance."It should also be noted that any insurance policy that is"required" for a South Carolina resident or employee is lawfulaccording to Islamic law. On the contrary, Life insurancepolicies are unlawful if not required by State law or a
  13. 13. workplace agreement. However, for those Muslims who engage insuch policies, upon their death, the funds from said policiespass directly to the beneficiary named within the document. Onecannot inherit funds from their own Life insurance policy; as aresult, one’s spouse is generally the primary beneficiary of thepolicy.One can also utilize a Letter of Wishes to change the waythat an asset is held so that it pays directly into theirestate; such as, changing one’s pension fund from directlypaying their beneficiaries to paying into their estate.Basically, one can include a Letter of Wishes for each assetthat passes outside of their will. This Letter will be addressedto the beneficiary of that asset. It must be signed and dated bythe Testator and can be either written or type. It does notrequire witness signatures. Unlike the will, the Letter ofWishes does not become a publicly available document upon deathand therefore should be kept with ones Last Will and Testament.The Letter of Wishes can also request that a particularbeneficiary include their share of the asset as part of thetestator’s estate. This ensures that the asset to be distributedwill be done so according to Islamic law. This fact is evidentfrom SECTION 62-2-512 of South Carolina Code of Laws pertainingto: Separate writing identifying bequest of tangible property,
  14. 14. which maintains: "A will may refer to a written statement orlist to dispose of items of tangible personal property nototherwise specifically disposed of by the will, other thanmoney, evidences of indebtedness, documents of title (as definedin Section 36-1-201(15); i.e., Document of title" includes billof lading, dock warrant, dock receipt, warehouse receipt ororder for the delivery of goods, and also any other documentwhich in the regular course of business or financing is treatedas adequately evidencing that the person in possession of it isentitled to receive, hold and dispose of the document and thegoods it covers. To be a document of title, a document mustpurport to be issued by or addressed to a bailee and purport tocover goods in the bailees possession which are eitheridentified or are fungible portions of an identified mass.),securities (as defined in Section 36-8-102(1)(A)), and propertyused in trade or business. To be admissible under this sectionas evidence of the intended disposition, the writing must eitherbe in the handwriting of the testator or be signed by him andmust describe the items and the devisees with reasonablecertainty. The writing may be referred to as one to be inexistence at the time of the testators death; it may beprepared before or after the execution of the will; it may bealtered by the testator after its preparation; and it may be awriting which has no significance apart from its effect upon the
  15. 15. dispositions made by the will." However, it is important to notethat a Letter of Wishes is not legally binding on one’sbeneficiaries; i.e., after one’s demise, there is no way toguarantee that their heirs will comply with the agreement.Nevertheless, as a backup plan, a testator can have theirexecutor reiterate to the beneficiaries in question theimportance of fearing Allah and honoring the testator’s finalwishes. With this being said, as detailed on document: Last Will and Testament - ImportantNotes - Point #6 - Case of more than one wife, every Muslim malewriting a will should reflect upon the following point of thedocument which reads: "Although I believe that the legal ban inAmerica and other Western countries on marrying more than onewife is wrong and instead, I call for regulating pluralmarriage, in a way that is consistent with Shari’ah, I do notcondone any violation of the law of the land. But since thereare a few Muslim men who have more than one wife withoutregistering the second marriage or both marriages, I feel a needto protect the rights of unregistered wives in the estate. Insuch a case I suggest personalizing the Last Will and mentioningthe names of the wives, registered or not, along with astatement that requires the distribution of any share of a wifein the Schedule of Mawarith equally between the survivingwives."