Originally published in Moneyworks, May 2007.

In the offshore domain, trusts have their origin in the common law of England and have, for many years, been used by wealthy families in the Middle East to create long-term structures to address tax and succession planning. Trusts can be crafted so as to comply with the specific family requirements of Islamic law. Indeed, the concept of Waqf is the nearest equivalent to a trust in Islamic law and its components can with careful drafting be reflected in the terms of an English common law trust. Often trustees are chosen from one of the convenient offshore trust centres, such as one of the Channel Islands, but equally there are a number of Islamic states which recognise and enforce the principles underlying trusts. British Commonwealth countries such as Malaysia and Pakistan have had trust laws in place for years. However, the introduction of reforms to the law of Waqf and new legislation in jurisdictions such as Bahrain and Dubai, which do not have Anglo-Saxon roots to their laws, demonstrate that the trust concept which is recognised in the offshore domain is gaining in popularity.

With no single unified code of Islamic law we must look to the two primary sources of Islamic legal principle being the Qu’ran and the Sunna (the sayings of the Prophet Mohammed PBUH). Shari’ah laws are no different to laws around the world and have developed over the years through academic study of the legal system and principles, resulting in five principal schools of Islamic law, four for Sunni Muslims and one for Shi’a Muslims (amongst others).

The reach of the Islamic law stretches beyond the Middle East, into Pakistan, Malaysia, Central and South East Asia as well as parts of North Africa and encompass more than 1.3 billion people. Given the varied legal histories of these many jurisdictions it is inevitable that the core principles of the Shari’ah law vary from region to region, therefore making it necessary for jurisdictions such as those in the Channel Islands to offer tailor-made trusts, due to a wealth of expertise developed over years of experience to reflect the specific requirements of each client’s family and domicile.

In recent years jurisdictions with a non Anglo-Saxon legal heritage have introduced trusts legislation and trust cases are now heard in their courts on a regular basis. Trust cases in one jurisdiction are now frequently cited as persuasive authority before courts in other jurisdictions and whilst it remains the duty of a court to apply the "local" law, if that is the law which governs the trust under consideration, it will of course frequently be useful, if not essential, for that court to take into account relevant principles considered elsewhere and to decide whether they are of assistance.

Islamic Compliant Trusts

Given that there is no unified code of Islamic law and its role will differ from one jurisdiction to another there is no simple answer to the question "What is Shari’ah compliant?" There cannot be one single Shari’ah trust "product" covering all circumstances and jurisdictions and for the draftsman of Shari’ah compliant trusts, as indeed with the draftsman of any other trust, the challenge will be to produce a trust document that meets the settlor’s expectations whilst according with the laws of the jurisdiction which will govern it.

A Muslim settlor living in one jurisdiction may be more concerned than another settlor in another jurisdiction to ensure that his trustees’ investment powers are restricted to exclude investments which he considers repugnant to his religion, for example businesses with links to pornography and alcohol, or in interest-bearing securities. He may not be so concerned to specify at the outset the share of the trust fund that each beneficiary will receive, or the language in which the trust document will be written. On the other hand, a settlor resident in another jurisdiction may wish to establish a trust under a "local" trust law, in his own language, with a registered professional trust company and close involvement on a regular basis of an Islamic scholar or board of scholars to advise on applicable Islamic law principles.

An issue of key concern to many Muslim settlors is the separation of ownership of family wealth. Upon settling any assets into a trust the settlor is no longer classed as a legal owner of those assets. Indeed, this concept underlies the legal theory of the Waqf, where the settlor gives the ownership of the property to God, but is administered by the wali or mutawali. In the offshore domain, the legal title to the assets is placed in trust is clearly separated from that of the settlor and transferred to a third party who is sometimes unknown to the settlor and his family. The beneficiaries of the trust, as selected by the settlor, will become the beneficial, but not legal, owners of the trust assets. These actions remove the assets from the settlor’s personal estate which as a result can combine the benefits of asset protection and wealth preparation for future generations. These benefits can be of significant comfort to the settlor and his family, especially in the case of a family business.

In addition to these issues there is the question of inheritance on the settlor’s death. In certain jurisdictions a trust may be challenged in the local courts if it continues beyond the settlor’s death and does not comply with the local Shari’ah law regarding the distribution of the deceased’s assets. It is therefore important to have the family of the settlor on side. Alternatively, if the trust complies with Shari’ah law on gifts during lifetime and is made in circumstances where the transfer of assets in the trust cannot be challenged on grounds of "deathbed sickness", the trust can form an acceptable means of distribution, which is not restricted by rules on inheritance.

All this is not to say that a settlor would be giving up all control of the family’s wealth. Under the laws of Guernsey it is possible to have a family member, business partner or even a committee of the same to act as protector of a trust. The protector’s powers and duties depend upon the drafting of the trust, however, their consent may be required prior to certain actions of the trustees, such as making distributions or disposing of key assets. In addition to this the settlor may draft a letter of wishes. Such a letter is not binding upon the trustees, however, it is a strong guiding influence in the exercise of their discretions. Further the settlor may, in an appropriate case, reserve certain powers to himself.

Language and Interpretation

Most trusts are written in English and for historical reasons the vast bulk of trusts jurisprudence, statutes, reported case law and academic articles are to be found in the English language. One can immediately see challenges for practitioners who are asked to prepare a trust in a language other than English and indeed for a court which is asked to interpret trust legislation and documentation in another language. Individual words and phrases, such as "fraud", "wilful misconduct", "utmost good faith", amongst others, have been the subject of judicial consideration in many English-speaking trust jurisdictions and one can foresee difficulties for courts in "new" trust jurisdictions when called on to apply this judicial learning in circumstances where the corresponding words or phrases in the local language may have a different meaning or emphasis.

In any jurisdiction evidence will need to be adduced from experts in Islamic Shari’ah law regarding which school of law will apply. Trustees must deal with trust assets in accordance with the terms of their trust deed and applicable law and accordingly the draftsman must ensure that their draft assists the trustees by setting out their powers and duties in some detail. They should also assist the court which may one day be called upon to interpret the trust instrument by clarifying the principles of Islamic law which it is intended should apply.

Choice of Jurisdiction

Any settlor creating a trust should choose with care the jurisdiction which will govern the trust which will usually, but not necessarily, be the law of the place where the trustees are located. Most settlors will usually be well advised to select jurisdictions which have established trust regimes, clear and up-to-date legislation, courts and professional advisers that are familiar with the relevant laws and principles, and for added security the settlor may also wish to select a jurisdiction where professional trustees are regulated and subject to codes of practice requiring them to abide by principles of "best practice".

These arguments may mitigate against using the so-called "new" Islamic trusts jurisdictions which inevitably cannot start with "track records". Nevertheless, where such jurisdictions have based their laws on those of other jurisdictions with significant trust industries one can expect expertise and experience to be acquired rapidly and settlors based locally may prefer to establish trusts in languages with which they are familiar and where locally-based courts are on hand to deal with disputes.

Guernsey

Guernsey, being one of the Channel Islands, is situated off the French Normandy coast. It is a British Crown dependency which does not form part of the European Union, however, upon the UK joining the EEC, special terms were negotiated for the Channel Islands. Guernsey has over 60 years of trust and estate planning experience and has an independent legislative body . As a result the Island has unique and well-developed environment for trust structures, with many multi-jurisdictional clients and a sound financial services industry which is driven by its desire to meet the ever-evolving needs of our clients.

A popular trust structure in Guernsey, when dealing with family wealth held in companies, is that of the Private Trust Company. Directors of such a company may include the settlor and members of his family. The directors control the company, which as trustee, is the legal owner of the trust assets.

The introduction of Foundations to Guernsey

Guernsey is constantly striving to improve its reputation for innovative excellence. Several areas of the finance services sector are currently undergoing review and changes to enable the Island’s globally based clients to be offered the broadest possible range of products and services.

Key to these changes is the introduction of Purpose Trusts and the concept of Foundations. Countries such as Germany and Switzerland, which consider the traditional Anglo-Saxon trust structure alien, will be able to benefit from the introduction of Foundations which operate in the familiar manner of a contract.

This is an example of how Guernsey has established itself as an environment where flexibility goes hand in hand with growth and development. The international arena for estate planning is fast expanding and Guernsey’s experience and expertise, coupled with its wide product service range, makes the Island a worldwide and established leader in the provision of asset management structures going into the future.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.