A Jersey trust may not only form an important part of a Muslim client's lifetime tax planning strategy, but may also offer an opportunity to create a flexible long term structure which is capable of dealing with the possible unwanted succession issues which are inherent under Islamic Law.
Contrary to popular belief, the concept of a trust should not be alien to the Muslim client as there are several similarities with the Islamic waqf. A waqf is an irrevocable gift of land or property made for religious, educational or charitable purposes. Such a gift is made to God (Allah) but is distributed in accordance with the wishes of the donor by a waqf administrator, whose office and duties bear many similarities to those of a trustee.
In order to understand the needs of the Muslim client, it helps to have a general understanding of Islam.
The Arabic word Islam means 'safe and sound' and 'submission' to the will of God. Shari'a law is derived from two main sources, namely the Qur'an and the Hadith. The Qur'an (sometimes spelt 'Koran') is the sacred text of Islam, whilst the Hadith is the words and actions of the Prophet Muhammad, peace be upon him (sallallahu alayi wa sallam), interpreting the Qu'ran and which Muslims are recommended to follow.
The Five Pillars of Islam are the most important practices for a Muslim which must be satisfied if he is to live a sincere and responsible life according to Islam. The Five Pillars are the declaration of faith, praying, giving money to charity, fasting and a once in a lifetime pilgrimage to Mecca.
Islam itself is made up of two groups: the largest is the Sunni which consists of four sub- schools, whilst Shi'a is the smaller. Although, there are clear recognised differences between each group, the majority of followers will not allow them to be used to cast the other out of Islam.
Succession under Shari'a law
The forced heirship rules will be different for each group, sub-school and possibly each Islamic country, but generally:
- At least two-thirds of the estate must be distributed to surviving family in fixed shares in accordance with Islamic law.
- The fixed share for the wife is one sixth. If the deceased has more than one wife then the one sixth share will be divided equally between them.
- The share of the male heir is usually twice that of the female heir (this is because the male takes subject to a duty to maintain his family whereas the female takes her share free of any conditions).
- There is testamentary freedom to dispose of the remaining one-third share with the exception of applying it for the benefit of those who have already received an entitlement under a fixed share.
The forced heirship rules only apply on death and there are no restrictions under Shari'a law with regard to the making of lifetime gifts. Therefore, subject to any tax considerations, the Muslim client is free to form a trust during his lifetime with any assets he may wish and which will be regarded as a valid disposition under Islamic law if the two following conditions are satisfied:
- there is a clear defined proposal and acceptance with regard to the gift; and
- the recipient takes possession of the asset.
The establishment of a lifetime trust will meet those conditions.
However, 'death bed' gifts will not be treated as a lifetime gift and the succession rules will apply. The definition of a death bed gift is rather wide and will include a gift which is made during the period of awareness of a fatal illness but which will generally not extend to negate a gift made more than a year before death. Care must therefore be taken and in particular circumstances it may be advisable to ascertain the client's state of health when taking instructions.
The benefits for the Muslim client of setting up a Jersey trust
- Protection of assets – as the assets will be 'ring fenced' in a trust they may be protected from creditors, divorce or seizure by a politically unstable regime. The new Article 9(4) of Trust (Jersey) Law 1984 as amended, substantially protects and strengthens the position of Jersey law trusts from attack from other jurisdictions by declaring that foreign law does not apply.
- The family business – holding the family business in the trust may allow for the whole family to benefit and could help to prevent fragmentation upon death which results from forced heirship.
- Tax mitigation – with the right planning a trust can assist with the reduction or deferment of tax liabilities for the three taxes – income tax, capital gains tax and inheritance tax. Professional tax advice should of course be sought in the country of residence.
- Succession and Estate planning – assets held in trust will be outside both the reach of the forced heirship rules and probate formalities. Again, Jersey law trusts are protected from attack from other jurisdictions by the Trusts (Jersey) Law 1984 as amended.
- Confidentiality – there is no requirement to register trusts in Jersey with any regulatory body and therefore confidentiality is assured.
- Flexibility – a trust is a very flexible vehicle which can be quickly adapted to deal with any changes in family and/or financial circumstances and may be utilised to provide for any person and/ or charity.
- Shari'a compliant – whilst the trust may be extremely flexible, it is possible to restrict the workings of the trust to ensure that at all times it complies with Shari'a law.
The benefits for the Muslim client of setting up a trust are very much the same as for any other client who is considering preservation of wealth, tax mitigation and avoidance of any forced heirship provisions. The significant difference is, however, the ability to tailor the trust to ensure that where and when required it is Shari'a compliant.
Ensuring that the trust is Shari'a compliant
There are a number of safeguards which can be employed to satisfy the Muslim client that the trust he is setting up will be Shari'a compliant and they are as follows:
The Letter of Wishes
Whilst it is well recognised that such a letter is not legally binding and acts only as a guide to the trustee, it could contain a recommendation that the trustee should consider seeking advice from a Shari'a scholar during the administration of the trust and on the death of the client (the settlor) to ensure that any distributions are made in accordance with Shari'a law.
Once the trust has been set up the letter could also deal with the client's obligation to pay Zakat. Zakat is calculated by reference to an individual's wealth and is payable annually to charity. Such an action is one of the five pillars and is regarded as a type of worship, self purification and divesting oneself of one's love for money. The letter could request that such payments are continued during the settlor's lifetime.
Investment policy of the trust
Although it is now possible for trust instruments to be prepared with very wide powers of investment, such powers can be restricted to ensure that any investment is appropriate under Shari'a law. The trustee could consider instructing a specialist investment manager who could recommend investment in any of the Shari'a compliant stocks which are now available, or in an Islamic investment fund or the relatively new Shari'a compliant exchangeable trust certificates (sukuk) – an exchangeable Islamic bond.
Appoint a Protector
Since the Protector's consent would be required prior to the exercise of various specified powers/actions this could provide additional reassurance for the client that the trust will be administered in accordance with Shari'a law. It is possible that a Shari'a scholar could be considered as a suitable Protector.
Provisions of the Trust Instrument
The trust instrument could contain a specific provision which bars the trustee from acting in a way which conflicts with Shari'a law. By way of assistance such provision could be extended to include a recommendation that the advice of a Shari'a scholar of a particular sub-school should be sought if there are any reservations.
Considering that there may be differences of approach for each group, sub-school or Islamic country it would be prudent to have the trust instrument approved by a Shari'a scholar prior to execution. The additional cost will of course have to be taken into account when advising the client.
Private Trust Company
In these circumstances, the sole purpose of a private trust company would be to act as a trustee of the trust. The directors of the company would usually include the settlor, professional trustees and advisers. However, it may also be beneficial to consider appointing members of the settlor's family in order to keep those who are likely to potentially benefit from the trust in the future involved in the administration of the trust which, would keep them informed of any decisions affecting the trust and up to date with regard to their respective rights under the terms of the trust.
By being involved in the daily running of the private trust company the settlor, and possibly his family, could 'control' how the assets of the trust are dealt with and this could act as a additional safeguard to ensure that the trust is Shari'a compliant, if required.
It is popular for the shares of the private trust company to be held by a non-charitable purpose trust (they will not form part of the settlor's estate), the object of which is usually to benefit the settlor's family. However, in certain circumstances a Foundation may be a more robust structure to hold those shares and therefore may prove more appropriate than a trust.
Islam is the second largest religion in the world and is the fastest growing. Like any client who is considering how best to protect and preserve his wealth, the Muslim client must, with professional advice, take into account not only the various tax liabilities of their country of residence but also the likely impact of any forced heirship provisions.
Under Islamic law there already exist a number of ways of circumventing the succession rules, namely lifetime gifts, waqf and zakat. Whilst a Jersey trust may not appear to be an obvious fourth option, due to its flexibility it can be tailored to form an important part of the Muslim client's strategy for safeguarding any chosen asset(s) for future generations to enjoy in a way which would be Shari'a compliant now and in the future.
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.