The foundation of any estate plan for American Muslims with property significant enough should be done through a revocable living trust, or what might be called an Islamic Living Trust. This is not to say that there is some sort of an either/or proposition or that this document, and of itself is the solution to anything, but most everybody should be thinking about doing a living trust for their families.
In a last will and testament, a person is essentially telling a judge what that person’s instructions are for his or her affairs after death. A judge may follow these instructions are not, depending on what the law is and what the other facts may be. Or he may not.
A revocable living trust is a special kind of contract. It is privately administered and does not subject itself to the court’s jurisdiction unless there is some sort of a dispute or there is another reason do this.
There are many ways to create a revocable living trust, this particular list will cite some of the more common problems that occur when Muslims do it.
1) Assuming Living Trusts are “Standard Templates” or are all the same
A revocable living trust is a contract. Just like any other contract, the terms inside a trust can vary widely. Just like a contract, they can be done orally, on a paper napkin or contain thousands of pages of consequential legal terms. What a living trust says and how it was created are all meaningful.
The most important thing about a living trust is not if you have one or do not have one, rather it is what your overall estate plan does for your family and how it protects your loved ones in the event of your death or incapacity.
What may surprise you is that many people have exceedingly horrible living trusts that do nothing to protect anyone and in fact, only engender hostility, conflict and legal fees. The cost of any estate planning should be assessed not just at the beginning stage, when the person is creating a living trust, but how much it may cost at the end when the trust is being administered, not just in terms of dollars and cents (though that is not unimportant) but in terms of heartache, fractured relationships and time expended.
The design of the living trust should be one that reflects your own values and not merely assigns names to a “standard” template, the value of which you may not know.
Example:
Ishaq creates a revocable living trust for himself. He is a small business owner. His trustee does not take into account the fact that he is a small business owner and does not consider the tax treatment of his small business.
Upon his death, his estate goes through needless expense in order to remedy this situation.
2) Getting presumptions wrong
There are going to be a number of things associated with revocable living trust as they are commonly done in the United States that would have to be done differently for American Muslims. This includes things that have nothing to do with who gets how much inheritance, at least with respect to people that you know are your beneficiaries right now. However, as a practical matter, the end result of getting these things wrong could result in injustice is being done to your beneficiaries under the Islamic rules of inheritance.
Among these issues is the presumption of death. It is very common, indeed it is in state statutes, that a beneficiary dies shortly after a decedent, that beneficiary is to be presumed that before the decedent died. Now in Islam, you’re not allowed to presume people are dead when they are actually alive, even if that is for a short time. The consequences of doing this, particularly because of the way the Islamic rules of inheritance are set up, could be harsh.
Example
Ali has a son whose name is Muhammad. Ali does a revocable living trust with traditional presumptions of death clause in it. He dies on a Sunday. Muhammad coincidently guys on the next day, Monday. As a result, Mohammed is presumed to be dead on Saturday. The result of this presumption is that Muhammad cannot inherit anything from Ali. Furthermore, because Mohammed cannot inherit anything, those assets cannot pass to Mohammed’s wife and children.
In Islam, this would not be permissible.
3) Defining words incorrectly
Under the Islamic rules of inheritance, certain words may be defined in ways that are going to be different from definitions that are common in other living trusts or, are common in a statute. Who becomes a beneficiary has changed over time in all states. Natural born children are not necessarily the only kind of children that a person may have. The difference between defining what a child is under the Islamic rules of inheritance and under traditional law is immense and can have major consequences for beneficiaries.
Example
Abdul Latif has done a revocable living trust that he believes conforms with the Islamic rules of inheritance. He does not, however, include a definition of “child” that is consistent with the Islamic rules of inheritance. He has one son, Adam, who adopted a son, Tahir. Abdul Latif also has parents, Khalid and Aisha. Adam dies just a few days before Abdul Latif. If a calculation were to be made based on the Islamic rules of inheritance, Tahir would take more inheritance than he deserves.
In this particular situation, even though the estate plan may call for the distribution based Islamic rules of inheritance, state law or “template” definitions will prevail over what the distribution actually needs to be.
4) Not planning for remarriage
It is often the case that the surviving spouse is given a disproportionate amount of control over assets belonging to others, for example, children. What this does not contemplate though is that the surviving spouse may actually get remarried, causing additional dynamics with respect to control of the assets. It is best to plan for this through a mechanism that would protect all of the beneficiaries.
Example
Omar is married to Sultana. They do a living trust together. Sultana dies. Omar very quickly marries Cathy. Cathy proceeds to manage all finances and utilizes trust assets in a manner that is helpful to the needs of her own make-up supply store in the form of loans. Her store eventually goes out of business and the assets of the beneficiaries are then lost.
This type of scenario could be avoided with a requirement in the living trust that the surviving spouse get a prenuptial agreement with a new spouse if he or she wishes to continue to manage the assets of the trust.
5) Not addressing incapacity through a Shura
A revocable living trust is not just for inheritance purposes. Indeed, the “living” portion of it indicates one of the major purposes behind it is to take care of a person’s needs while living, not just after death. Unfortunately, many people get this wrong and when the living trust is needed, it does not serve its purpose.
The scenario being planned for her is when a person loses their executive decision-making ability and cannot manage money anymore. Under those circumstances, family members can either allow for a parent or other relative to spend money improperly. This includes being cheated by unscrupulous strangers or even relatives or, go to probate court and obtain a conservatorship. A conservatorship may be regarded as being hostile and can cause problems with the entire family. It is also a public process and can cause humiliation and animosity.
In order to avoid having this occur, we recommend a “Disability Shura.” The role of this group is to determine, privately, if a given individual should lose their ability to manage things. The person who creates this trust creates the process. This would be predictable and fair because there are multiple people involved. It is less likely that a person will feel like they are being railroaded through the process if the process is fair. Even more important, it is less likely to cause general animosity throughout the family.
Example:
Yasin is 72 years old. His children start to notice mail coming to the house that includes headlines such as “past due” frequently. They also find that their father is unreachable by phone because it turns out, the phone bill is not paid. After further inquiry, they find out Yasin is spending large amounts of money on telemarketers and completely random inexplicable things. Yasin is convinced that he is fine and that his children should not meddle. One of the children decides to obtain a conservatorship. The other children do not wish to get involved as this would make their relationship with their father completely toxic.
Yasin could have instead completed a revocable living trust with a Disability Shura. He could have appointed all of his children or other relatives that had his best interests at heart. They could have simply taken a vote and agreed that whoever Yasin appointed as a successor trustee can take over management. Yasin and his family do not need to go to court and have a humiliating judgment means against him after a humiliating set of hearings.
6) Not Organizing Property Properly
There is a first principle with respect to the Islamic rules of inheritance people often forget. Islamic inheritance is about rights to inheritance. That much is obvious. However, you cannot vindicate rights to inheritance unless you know what you own first. It is easy to make ownership unclear, so inheritance distribution will end up being wrong.
Address this is by making sure that deeds, business, account ownership, beneficiary designations, and a property agreement are done purposefully.
Example:
Idrees and Jameela are married to each other. They have one child together, Ali. Idrees has three other children from a prior marriage. He also had substantial assets. Despite doing an estate plan, they did not properly segregate their assets. After Idrees died, Jameela received far more inheritance than she otherwise would have. As a result, after Jameela died, her successor husband and daughter received more than what they may have otherwise. The three children from Idrees’ prior marriage ended up receiving nearly nothing.
This could have been resolved by properly titling property and completing a marital property agreement.
Conclusion
As you might imagine, there are many other potential pitfalls in estate planning. It is important to consider spending some time with your attorney in developing a plan that addresses various contingencies. For more on Islamic Living Trusts, see our guide. We have a lot of additional articles on our education page.
If you would like to discuss this further, please feel free to contact us at (866) 403-5294. You can also schedule a miniconsultation online.