Jersey: Wealth Planning For Sharia' Law

Last Updated: 10 September 2018
Article by David Dorgan

Most Popular Article in Jersey, September 2018

The origins of the modern trust are the subject of debate amongst academics; theories include the Islamic Waqf which was either a family or charitable endowment of property, created by a donor for use by designated beneficiaries and administered by trustees who in turn were under the supervision of a local judge. Under this theory, it is argued that the Waqf was imported by Franciscan Friars returning from the crusades in the thirteenth century, adopting the Waqf to the needs of their mendicant order.

Although the Waqf is similar to the trust, there are many benefits to the more developed trust including established law and regulation of professional trustees. Furthermore, the trust offers itself to a range of compliance with Islamic law (Sharia') depending on the wishes on a settlor.

The Sharia' Trust

As a generalisation, there are three Sharia' adherence options available to a settlor:

(1) strict adherence;

(2) lesser adherence; and

(3) departure.

It is important to recognise that a settlor's approach might differ depending on which school of Islam he belongs.

The strict approach

For a trust to be Sharia'-compliant (i.e. approved by an Islamic Scholar), it must comply with Sharia' principles, in particular restrictions on investment and rules of inheritance.

Investments

The trustees must ensure that the trust fund is not invested in Haram (prohibited) investments. This is done by screening investments, known as the "industry screen", which looks at activities of investments to determine compliance with Sharia'. For example, it is Haram to invest in: (i) conventional banking charging interest; (ii) alcohol; or (iii) gambling.

Industry screening can be difficult because it must be applied to all aspects of business activities which might not be obvious. For example, a leisure group including a major hotel chain subsidiary (which is Halal permissible)) might generate significant revenues from alcohol sales or casinos, all of which are Haram. Therefore, the usual wide investment powers of trustees would need to be restricted. This can be done, for example, by an investment committee with expertise in Sharia'-compliant investments. Ultimately, trustees, without appropriate knowledge should seek appropriate advice and not undertake investments without such advice; to do so might breach Sharia' which in turn is likely to be a breach of trust.

Inheritance

The trust must also not infringe Sharia' forced heirship rules. Under Sharia', primary heirs include the spouse(husband or a maximum of four wives), the children (sons and daughters), the parents (father and mother) and, if the son is already deceased, the grandchildren (but only of a son, not of a daughter). In the absence of all of the primary heirs, secondary heirs include grandparents (both paternal and maternal), brothers and/or sisters (only in the absence of father and son), uncles and/or aunts (only in the absence of grandparents) and nephews and/or nieces (only in the absence of brothers and sisters).

Therefore, the beneficial provisions of the trust need to be drafted in such a way as to accommodate Sharia' so that upon death, the trust fund would be distributed to heirs in the correct proportions. Hence, a good option might be a discretionary trust but with an obligation upon trustees to seek advice from a Scholar as to the proportions each heir/beneficiary should receive and to distribute in accordance with that advice. However, the trust would, in all likelihood, end on the settlor's death and its usefulness in terms of asset protection and wealth preservation would be lost.

The less strict approach

Investments

Scholars comment that it is difficult to remove all tainted investments because few companies operating in global markets will be fully Sharia'-compliant. Therefore, a lesser approach might apply the "industry screen" but also a "financial screen" taking into consideration an element of non-Sharia'-compliance in investments.

The financial screen reviews the impact of non-Sharia'- compliant financial behaviour of, for example, a company and its potential impact on corporate performance and share price. For this screening, a company needs to be compliant with the financial ratios prescribed by Scholars; such ratios will vary, but there are generally accepted prescribed ratios so that investments will be considered Halal. Therefore, for example, it would be permissible to own a hotel selling alcohol and providing a casino if the revenue generated from those activities does not exceed five percent of the hotel's total revenue.

From the trustee's perspective, the same methods (as mentioned in the strict adherence) would be applicable to the lesser approach when making investments, but provide the lesser approach provides the trustee with more options when making investments.

Inheritance

The settlor may establish a discretionary trust to preserve assets for the benefit of future generations, whilst nevertheless having regard to the Sharia' inheritance proportions (at least in relation to those assets located in an Islamic jurisdiction). Therefore, upon the settlor's death, the trustee may divide the trust fund into sub-funds in amounts determined by reference to the heirs' entitlement, but retained by the trustees with discretion as to when and how much is paid to the beneficiaries; thereafter allowing the trust to continue to benefit heirs past the settlor's death.

Departing from Sharia'

A settlor may wish to ring-fence assets outside of Sharia' and not be subject to the restrictions of Sharia'. Therefore, a settlor establishing a trust in breach of Sharia' will be reliant upon so called "firewall" provisions of trusts legislation to protect that property settled into trust.

Typical firewall provisions will stipulate that any question concerning the validity or interpretation of the trust, the validity or effect of any transfer or other disposition of property to a trust, will be determined in accordance with the law governing the trust without reference to the law of any other jurisdiction, so that no rule of foreign law (including Sharia') shall affect such questions. These firewall provisions have been tested and found robust in Jersey on many occasions and also in Guernsey.

However, rather than simply rely upon firewall provisions, in certain circumstances, it may be possible to depart from Sharia and have the trust approved of by Scholars to avoid the trust being attacked at a later date as being non-compliant. Whether or not a Scholar might approve the trust is entirely circumstantial, but if a Scholar is prepared to approve of the trust, such approval will provide another level of protection for the trust beyond the firewall provisions.

The future of Sharia' compliant trusts

The trust is a concept increasingly used for asset protection and wealth preservation whilst at the same time respecting Sharia'. Often Islamic clients choose to establish trusts outside Islamic countries for a number of reasons, including taking advantage of established trust laws, trust administration experience and the opportunity to settle assets in a mixture of a Sharia' and non-Sharia' compliant manner. Often the less strict discretionary trust is the preferred option to morally abide or be seen to abide by the Sharia' whilst also using the trust to its full potential.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions