Malaysia: Succession Planning Of Family Businesses From An Islamic Perspective

Last Updated: 27 June 2016
Article by Labuan IBFC Inc.

Introduction

This paper begins with a discussion on estate planning where evidence from the Quran and Hadith are discussed to show that it is a commendable act to leave one's children in better spiritual and material conditions. The paper next discusses the institution of Waqf, in particular family to Waqf, and its role in enabling a person to provide for the future prosperity of one's children. The subsequent nationalisation of Waqf management is critically examined next. The application of Faraidh rules to family businesses is discussed in the light of Quranic verses and Hadith. The paper argues that the distribution and the subsequent disintegration of family businesses will reduce its productivity and harm the heirs. It contends that preserving the business while distributing its revenue would, in substance, adhere to the Faraidh rules. The paper next examines the concepts of private trust and family foundations. It concludes that charity and in particular the provision of continuous charity (Sadaqah Jariyyah) to one's family and other purposes is a praiseworthy act.

Estate Planning from an Islamic Perspective

Allah (swt) has endowed humans with the natural desire to acquire own wealth and to have children. Humans also have the natural desire to preserve and protect wealth, and to transfer it to their children in order to provide for their future prosperity. There is evidence both in the Quran and Hadith that supports wealth succession planning and management. A starting point for a discussion on Islamic wealth management would be the Quranic verses in Surah al-Kahf (Surah no. 18).

According to these verses, Moses requested Khidhir to be his companion to learn about the 'the higher Truth' (18: 66). Khidhir reluctantly allowed Moses to follow him after the latter agreed not to question Khidhir's actions until and unless Khidhir himself voluntarily explain to him (18:70). In the third incident, which is related to our discussion, Khidhir set up a straight wall in a village where inhabitants refused them food and hospitality. Moses told Khidhir: "Had you wished, surely you could have obtained some payment for it?" (18:77). The question was a breach of a promise as to not to question Moses' action and therefore Khidhir had to part from Moses. He then explained to Moses, that a father buried a treasure (Kanz) beneath a wall in the village. The Quran states:

"And as for that wall, it belonged to two orphan boys, [living] in the town, and beneath it was [buried] a treasure belonging to them [by right]. Now their father had been a righteous man, and so thy Sustainer willed it that when they come of age they should bring forth their treasure by thy Sustainer's grace. And I did not do [any of] this of my own accord: this is the real meaning of all [those events] that thou were unable to bear with patience" (18: 82).

In these verses, the Quran provides a small window to enable us to see how humans could take measures, to manage as far as possible the harmful effects of death on family and wealth. The Quran states that a 'righteous' (Salih) person buried treasure for the benefit of his young children. His intention was that after his death the children would dig up the place and retrieve the treasure when they reach the age of majority. He might have kept some wealth for the day-to-day expenses of the family and children. The buried treasure was specifically intended for the future well-being of the children in the case where the father die early. He must have informed his children of its location. He took this measure in order to minimise the harmful effects of his death on the future well-being of his children. He most probably could not trust the people and could not leave the treasure with them. Yusuf Ali, in his commentary on verse 18:82, has the following to say:

"The wall was in a ruinous state. If it had fallen, the treasure buried beneath it would have been exposed and would certainly had been looted, among so churlish and selfish a people. The treasure had been collected and buried by a righteous man. It was not in any sense of the word, ill-gotten gains: it was buried expressly in the interests of the orphans by their father before his death. It was intended that the orphans should grow up and safely take possession of their heritage" (Abdullah Yusuf Ali, commentary No. 2425)

There are lessons that we may draw from these Quranic verses. These verses indicate that although a person cannot foresee future events, he/she should take measures and have plans to manage their unfavourable effects on life and family welfare. That parents may have a succession plan through which the wealth earned could be transferred to children in the safest possible way.

These verses also indicate that it is a virtuous act (Amal Salih) for a parent, following the example of this 'righteous' person, to take all necessary measures to earn wealth in permissible ways and to plan for the future wellbeing of his/her children. Since death cannot be predicted and may happen at any time, it is advisable to have a proper succession plan that will minimise harm and provide for the future of one's children and to ensure, as far as possible, that they are in a better spiritual, moral and material condition. Similarly, assisting parents who plan for the well-being of their children during their lifetime or after their death is also a meritorious act. The Quran also tells us that on occasion, Allah's will interferes to protect the wealth that a righteous father intended to reach his children (18:82).

The Hadith also acknowledges the human desire to provide for one's children during his lifetime and after his death and recommends that it is better for parents to leave their children in a better state rather than leaving them poor and make them to beg from others. In a Hadith mentioned by Bukhari, the Prophet (pbuh) is reported to have said:

pilgrimage, on account of (my) illness which had very severe and I have much property and there is none to inherit from me but a daughter, shall I then bequeath two-thirds of my property as a charity?" He said, "No. "I said, "Half?" He said, "No." Then he said: "Bequeath one-third, and one-third is much, for if you leave your heirs rich (free from want), it is better than that you leave them in want, begging from (other) people; and you do not spend anything seeking thereby the pleasure of Allah but you are rewarded for it, even for that which you put 1628, 3/1250)

The Prophet (pbuh) is also reported to have said:

him) that a person told O Prophet of Allah should I tie my camel and put my trust in Allah (swt) or should I release it and put my trust in Allah (swt). The Prophet told him tie your camel and put your trust in Allah (swt)." (Sunan Al-Tirmidhi, Hadith no: 2517, 4/668)

The Hadith implies that the true meaning of trust in Allah (swt) is that a person should first take all the necessary measures to minimise risk and then to put his trust in Allah (swt).

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