There are several different schools of Islamic theology and jurisprudence – with the most significant two being Sunni and Shia – and within each of these are many different sub-schools.
In relation to inheritance, the Shari'a system encourages an outright distribution of wealth to the family in fixed proportions and there are slight variations between the rules of each school. In any particular case, clients should seek advice from their own Imam (an authority on Islam) or other suitable experts, as the creation of trusts within Shari'a is fraught with difficulties.
The Shari'a investment rules create the distinction between investments that are halal (Shari'a-compliant) and those that are haram (non-compliant). The most relevant haram investment is Riba or usury – the practice of charging interest on loans. This is a bar on any investment that produces a predetermined fixed return – the profit element is then Haram. Therefore, there must be no guaranteed return, but instead the chance to make a profit and the risk of loss whenever any money is committed to a project.
Unethical investment
At the same time investment in unethical or haram industries or products is illegal – these include pornography, alcohol, drugs, gambling, and tobacco rights, and they can also include hotel or entertainment investments.
The practical consequence is a ban not just on bank deposits and loans, but also (depending on the school of Islam) a ban on futures and options, bonds, derivatives, mutual and hedge funds – which could all be seen as a form of gambling – as well as property where haram activities are conducted.
So is the creation of a Shari'a-compliant trust possible? There is no concept of a trust in Shari'a but it is not wholly alien because there is a type of charitable gift in which the donor or his family can retain a form of usufruct, known as a Waqf.
Consistent with this is the general rule that a Muslim has complete freedom to make lifetime gifts, whether or not in the Shari'a proportions, although some scholars suggest that lifetime gifts that are free of the Shari'a devolution rules have to be limited to one-third of the estate.
The Shari'a has no concept of "clawback", but lifetime gifts made during a period known as the "death sickness" – this is in effect the Shari'a concept of legal capacity – are forbidden.
Therefore, it is certainly possible to create a Shari'a-compliant trust, but there are gradations of compliance, particularly in the context of the inheritance rules.
Letter of wishes
Several crucial issues should be borne in mind when drafting a Shari'a-compliant trust. It might be tempting to attempt to create fixed interests for different heirs, in line with the Shari'a provisions. But the entitlements will not become clear until the death of the settlor when the number of other relatives living at that time is ascertainable, and so it is just not possible to set out the Shari'a proportions in advance in the trust deed.
One solution that is sometimes followed is to incorporate wording in the trust deed to the effect that the trust assets should be held for the benefit of the persons who would be entitled to them under Shari'a law if the settlor owned them personally at the time of his death. This may be coupled with a direction to the trustees that they are entitled to rely on a certificate from the local Shari'a court of the settlor as to the way in which his estate properly devolves on his death.
An alternative that appears to be acceptable is a discretionary trust with a wide class of beneficiaries, coupled with a careful letter of wishes from the settlor. The letter of wishes could ask that a certificate from the local Shari'a court be acted on by the trustees, or that the trustees consult with a named individual, or individuals, as to the correct proportions. Or, the letter of wishes could attempt to explain the method of division that the settlor desires, based on Shari'a principles.
Other ways of ensuring compliance with Shari'a might be to appoint an Alim (Islamic holy man) as a protector of the trust or even as a trustee.
As far as the Shari'a investment rules are concerned:
- the trust deed can restrict permitted investments to those acceptable under Shari'a
- investment guidelines can be incorporated in a letter of wishes from the settlor reflecting the Shari'a investment rules
- the trust deed can provide that the power to make or vary investments is vested in an investment director, or directorate, with knowledge of Shari'a investment rules.
This is a unique and complex area. With the ever-increasing demand for trusts to which Shari'a is relevant, advisers and trustees need to be informed of the issues involved and it is extremely important that the appropriate advice is taken in individual cases according to the particular facts and circumstances.
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.