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Chapter 7 Estate Planning


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Islamic Financial Planning

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Chapter 7 Estate Planning

  1. 1. ISLAMIC FINANCIAL PLANNING Mahyuddin Khalid Estate Planning
  2. 2. Chapter Outline Content Why Estate Planning? Type of Estates Strategies of Estate Planning Procedures in Developing Sound Estate Plan Ranking in Asset Redistribution Wills Wisoyah Power of Attorney Faraid 2
  3. 3. Introduction Concerned about how one should distribute his wealth after his/her death. A well plan asset redistribution is important to take care the family unity and benefit. Several methods can be applied to distribute one wealth after he/she passed away:  Faraid  Wassiyyah (will)  Hibah. 3
  4. 4. Why Estate Planning? Estate planning is  A definite plan for the administration and disposition of one’s property during one’s lifetime and at one’s death Estate planning is an essential part of retirement planning and has two components  Build your estate through savings, investments, & insurance  Transfer your estate as you wish at death 4
  5. 5. Why Estate Planning? Newer lifestyles means different challenges, which means plan early and get expert help If unmarried make sure beneficiaries have information about your estate that they will need If married include spouse and children in estate planning process 5
  6. 6. Why Estate Planning? Opportunity cost of Rationalizing • Many people give little or no thought to putting their personal and financial affairs in order for their families that survive them Demands of daily living can keep people from thinking about death • Plan while you are in good health Estate planning is especially important for nontraditional households 6
  7. 7. What Is Estate Planning? Estate planning/asset redistribution is a lifelong process of evaluating one’s financial position and plans which involves Accumulatio Preservatio Distributio of assets to ensure that they reach the beneficiaries according to desired proportion 7
  8. 8. Example of Estate Savings account and current account in a commercial bank Tabung Haji, KWSP, Insurance, Takaful, ASB, and other unit trusts House, Land Shares (listed and non-listed, cooperative shares) Other valuable asset under the name of the deceased; jewellery. 8
  9. 9. Type of Estate All Malaysian, Muslim or non-Muslim, when he/she passed away, his/her estate will be handled by one of the three agency. Harta Pusaka Ringkas • Current assets which is valued less than RM 600,000 • Amanah Raya Berhad Harta Pusaka Kecil • Current assets and fixed assets which is valued less than RM 600,000 • Pejabat Pesaka Kecil Harta Pusaka Besar • Current assets and fixed assets which is valued more than RM 600,000 • High Court 9
  10. 10. Objectives/Goals of Estate Planning To ensure that the maximum value of the wealth is distributed to his/her dependents according to his genuine wishes. This means that you desire a minimum leakage of your estate to the government and others in the forms of taxes and administrative charges. 10
  11. 11. Strategies of Estate Planning Protecting Assets Maximize amount to heirs Minimize administrative costs and inconvenience Appoint capable executers to manage estate Appoint trustworthy individuals as guardians 11
  12. 12. Strategies of Estate Planning • One should seek a secure and risk minimizing method to protect the intrinsic value of the assets. • He/she should allow the continued growth and increase in profitability and liquidity. • In doing so, it will avoid the problem of insufficient income provision for heirs . Protecting Assets 12
  13. 13. Strategies of Estate Planning • It is important to preserve the maximum amount of wealth for distribution to their beneficiaries by minimizing the estate settlement costs and any other taxes associated with his/her estate. • This may involve giving gifts (hibah) while he is alive. Maximize amount to heirs 13
  14. 14. Strategies of Estate Planning • e.g.: Writing a will (wassiyyah) which is critical component of the estate plan. • It shortens lengthy court procedure and hence the administrative and legal costs. • It also economical and faster as it enables for grant of probate rather than letter of administration. Minimize administrative costs and inconvenience 14
  15. 15. Strategies of Estate Planning • The executor is responsible for administering and distributing your assets after your death. • The appointed individual must be trustworthy, financially competent and honest. Appoint capable executers to manage estate 15
  16. 16. Strategies of Estate Planning • In cases where your beneficiaries are minors, you need at lease 2 legal guardians. • The roles of these guardians are to hold your assets, invest and use them for the benefit of these minors. • These individuals must be trustworthy and genuinely care for the minors. Appoint trustworthy individuals as guardians. 16
  17. 17. Procedures in Developing Sound Estate Plan Step 1 • Ascertain how mush assets you own Step 2 • Determine how you want your estate distributed Step 3 • Decide on the means of transferring assets 17
  18. 18. Procedures in Developing Sound Estate Plan Step 1 : Ascertain how mush assets you own  Itemise all your assets (liquid assets, financial assets, real properties and personal properties).  Determine the proportion of ownership in each asset. Step 2 : Determine how you want your estate distributed  List all of individual (beneficiaries) whom you like to transfer your assets to upon death.  Decide what proportion of your wealth you wish to allocate to each beneficiary  Example : to your wife, son, daughter 18
  19. 19. Procedures in Developing Sound Estate Plan Step 3 : Decide on the means of transferring assets  You can distribute your assets either during your lifetime or at your death.  While you are living, you can distribute assets to your beneficiaries in two ways.  Direct gifts  Such gifts have the advantages of avoiding estate duties as well as seeing your beneficiaries enjoy these gifts while you are alive  Set up a trust to distribute your assets to your beneficiaries.  After the death, the assets can be transferred to your beneficiaries in the form of will, trust, intestacy law (die without will) and beneficiaries designated in the contract (e.g EPF) 19
  20. 20. Ranking of Asset Redistribution Among his heirs after settlement of (1) to (4) above. To distribute the remaining estate A will is not for a person's heirs. The amount of estate provided for in a will for disposal shall not exceed one-third of the remaining estate after the settlement of (1) to (3) above. To execute his will The settlement of such debts shall include the performance of the hajj on his behalf if he had not already done so in his lifetime, and the payment of mahr if payment had not already been made. To settle all his debtsTo pay for his funeral expenses Relating to zakat, various kaffarah or penalties for oath, zihar, coition whilst fasting in the month of Ramadan, coition whilst in the state of ihram during hajj or umrah, homicide, etc. To discharge all his obligations 20
  21. 21. Definition Of Will • A Will is a document where a person states his intentions as to how his estate is to be administered and distributed after his death and who is to administer it Definition • Neither a contract nor an agreement • Only take effect upon the demise of the testator. Features • For Muslims he or she can only distribute 1/3 of his or her estate through a will and another 2/3 will be distributed through faraid • For non Muslim he or she can distribute all his or her estate through a will Injunction 21
  22. 22. Characteristics of Wills Also include The appointment of guardian for minor beneficiaries Revocation of earlier wills Donation of organs Direction for burials Include information on the appointment of an Executor who will execute the will, the beneficiary(s) to the will and allocation of assets to the named beneficiaries. 22
  23. 23. Requirment Of Valid Will In writing Sign At least 2 or more witnesses Sound mind Not be under the age of majority 23
  24. 24. Who can make a Will? • Whether "personal property" such as cash, stocks, jewelry or furniture • Or "real property" such as land and/or a house Anyone who owns property • Only 1/3 of the whole estate may be given away to non beneficiaries • The balance must be distributed in accordance with the Faraidh According to Faraidh: 24
  25. 25. Validity of wills Attained the age of 18 (Peninsular Malaysia & Sarawak) or 21 in Sabah • A minor who is below 18 cannot make a will. Sound mind Acting on his own free will and without coercion • A person who wants to make a will should make on his own free will and without any forcing from another party 25
  26. 26. Why do we need a Will Important tool of estate planning Helps in expedite the legal process involved in estate administration Enables a person to choose and appoint his or her own executor and trustee Provide an opportunity for the testator to give and make allocations for any special needs of their loved ones Enables a person to bestow gifts to non-family members or non heirs incl. charities and religious organizations 26
  27. 27. Process to write a Will Establish one’s wealth distribution objectives prior to nominating beneficiaries and the estate allocation Analyze and evaluate one’s state of assets by compiling all the related documentations such as insurance policies, certificate of unit trusts and others Nominate beneficiaries and allocate assets for them as per one’s wealth distribution objectives Appoint a trustworthy executor with the capability to execute the Will in a reliable manner Get assistance from a trustworthy will writer to assist in writing the will Ensure that the Will is kept in a safe place and inform the executor on his or her appointment as executor as well as the location where the will is to be kept 27
  28. 28. Revocation of Will Marriage Destruction Unsound Mind Convert to Islam Dies Early Revoke the wills Illegal wills 28
  29. 29. Duties of Executor To identify the assets and beneficiaries of the estate. To collect and realize the deceased’s assets To pay the deceased’s funeral and testamentary expenses as well as debts due and owing to other parties To distribute legacies To complete the administration and distribute the residuary estate 29
  30. 30. Duties of Trustee To manage the assets to which they said beneficiary is entitled to, for the benefit of the beneficiary. Be responsible in managing a trust created by the testator in his will. The executor and trustee can be the same person. 30
  31. 31. Duties of the Guardian Responsible in taking care of the necessities and affairs of the minor children of the deceased Testator. The assets belonging to the minor children and/or the maintenance for their needs would be channeled by the Executor and Trustee to the guardian. Any parent who has parental responsibility for his/her child may appoint one or more individuals to be the child’s guardian(s). 31
  32. 32. How to update a Will? •As a result of a birth, adoption, marriage, divorce or death; The family changes •e.g. Testator want to add his other property Substantial changes occur in the amount or kind of property owned •Whether tax is increase or decrease so a will need to be updated Tax laws change •From one state to another •e.g. The testator move from Malaysia to Singapore Residence changes •e.g. They don’t want to be a trustee or guardian anymore The designated executor, guardian or trustee can no longer serve 32
  33. 33. Legality of Wills in Islam According to al-Baqarah: 180, wills is an obligation in Islam. After mawarith verse legal of wills will be: Jumhur Fuqaha’: Wills is recommended Fuqaha’ Tabi’in: Wills is an obligation to Islam Daud Al-Zahiri: wills is compulsory to parents relatives who had not received an inheritance. For Jumhur Fuqaha’ the law of wills change according to circumstances. 33
  34. 34. Pillars of Wills Testator’s (al-Musi) Beneficiaries (al-Musaalah) Bequeathed property (al-Musa bih) Sighah of wills 34
  35. 35. Wisoyah • A trust document which appoints a wasi (trustee) almost akin to the executor appointed under the English will Definition • Appoint an executor and/or possible alternative executor(s) for the estate • Nominate guardian's for minor children or other dependents • Instruct on the distribution of personal effects • Make specific bequests (wasiyyah) • Give the executor the power to administer the estate • Guide the executor on funeral arrangements. Features of Wisoyah 35
  36. 36. Power Of Attorney (POA) • It is essential for any individual who is concerned about losing control of their affairs and who wishes to minimize the expense and inconvenience of the courts supervision. Definition • POA is important when an individual wishes to see a financial, retirement, or estate plan carried out due to reasons including illnesses, poor mobility, or vacations. • POA can even be used in the unfortunate event of incapacity. Importance of POA 36
  37. 37. Matrimonial Property Right Matrimonial Property or Harta Sepencarian is the right of the parties (husband or wife) in a legal and valid Islamic marriage, in respect of properties which were jointly acquired during subsistence of the marriage. Scholars had viewed that harta sepencarian is rooted in a Malay custom which had been continuously practiced by the Malay community. It was said that this custom had been accepted by Muslim scholars as they view that it does not contradict Shariah principles in general. 37
  38. 38. Faraidh • Faraidh is a science dealing with the law pertaining to the devotional acts based on the Shariah in respect of the wealth of a person after the certainty of his/ her death or on the assumption of his or her death (Personal Finance) Definition • Deals with the distribution of the estate of a deceased person among his heirs in accordance with Allah's (God) decree in the Holy Quran and according to the hadith Scope 38
  39. 39. Types of Estate Involved Land Building (house) Jewelry (gold, silver etc.) Insurance and cash (whether invested or not) Domestic animals such as goats, cows, camel, buffalo etc) 39
  40. 40. Causes of Inheritance Nikah (marriage) Wala’ (relationship) Nasab (kinship) 40
  41. 41. Condition of Faraidh No one is entitled to inherit which are: Slavery Murderer A Muslim is not entitled to inherit from non-Muslim, an a non-Muslim is not entitled to inherit from a Muslim Heir beneficiary living at the time of death Beneficiaries die first 41
  42. 42. EPF Money, SOCSO and alike for Dead Muslim Members The 49th Discourse of the Fatwa Committee of the National Council for Islamic Religious Affairs Malaysia held on 19th September 2000 has discussed EPF money, SOCSO and alike for dead Muslim members. The Committee has decided that: • EPF money and savings are considered as inheritance that must be divided according to faraidh • EPF nominee is the administrator of the property. • The nominee should divide the EPF money according to faraidh 42
  43. 43. The Principles And Liabilities In Inheritance Distribution The liabilities or responsibilities must be fulfilled in the order of the following priorities Making payment for the funeral rites and expenses Settling the debts of the deceased whether debts to Allah s.w.t. or debt to human being Distribution of the inheritance to the rightful beneficiaries Carrying out the will made by the deceased Resolving matrimonial property claim by the still-living spouse 43
  44. 44. Distribution of Small Estate The distribution of small estate is provided in the Small Estates Distribution Act 1955 The Act provides the administration and procedure of distribution. The maximum value of a small estate is fixed at RM600, 000. Previously it used to be only RM25, 000. It is observed that a majority of Muslim estates in this country fall under the category of 'small estate'. 44
  45. 45. Distribution of Non-small Estates Procedurally, at the first instance the applicant shall apply for the grant of a letter of administration and following that, he shall also apply for a vesting order. Before making the vesting order, the High Court will normally require the Muslim’s applicant to obtain a Sijil Faraid from the Shariah Court. The applicant shall apply to the Shariah court for the Sijil Faraid and make payment at certain amount. Then he would submit the Sijil Faraid to get a vesting order. The distribution order made by the High Court is made in accordance with the Sijil Faraid. 45
  46. 46. Faraidh - Muslim Estate Distribution Share Who is eligible Condition 1/2 Daughter Husband Only child No child hls 1/4 Husband Wife Existence of child No child hls 1/8 Wife Existence of child 1/3 Mother No child 2/3 Daughter only 2 or more 1/6 Mother Father Existence of child 46
  47. 47. Faraid Heirs Chart 47
  48. 48. Case study Hassan died leaving behind his wife, two daughters and two sons. But before he died, he drew up a will for his assets to be divided equally among the five. Under faraid, his wife gets 1/8 of his assets; the two sons are entitled to twice the portion of their sisters which means each boy receives 7/24 of the assets while the sisters take 7/48 each. So would Hassan’s last wishes be accepted or would the faraid system override it? 48
  49. 49. Case study The final decision……. So in the case of Hassan, if they all agree and say: “Yes, let’s follow father’s wishes and divide it equally”, then it will be done… One crucial point is that the agreement from the heirs must come after the person’s death. It is not enough to have them agree even in writing before the person’s death. The agreement made prior to the death becomes null and void. Amanah Raya’s experience, he says, usually even if one family member disagrees with the will and insists on collecting his portion, the others would still go along with the will. 49
  50. 50. Mahyuddin Khalid End of Chapter Estate Planning 50