It is possible that to some, a “living trust” seems alien to Islam or at least Islamic history (since none of the early Muslims went and got one). The early Muslims followed Islamic laws of inheritance in a system that respected it. If you want to read more about the Islamic Rules of Inheritance, I have a comprehensive guide
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Essential Planning for Many
The concept of a “trust” is derived from awqaf, though what we will be discussing is not necessarily a waqf. For our purposes, a living trust is the core of an Estate Plan created by Muslims to give life to their values in the event of death or incapacity. An Islamic Living Trust is at the center of how Muslims must plan inheritance in the United States.
If you do live in the United States, you would know that state law governs estate planning (for the most part) and individual states can be entirely different from each other, both in terms of the law as well as culturally. All states have lawyers that would recommend living trust-based estate plans. In some states trusts are quite rare, while in a place like California, living trust-based estate plans are nearly universal.
My general recommendation is that Muslims, no matter what state they live in, adopt a Trust-based estate plan, which is to say an Islamic Living Trust. That is a plan where the significant provisions of the plan are in the living trust. The reasons for this recommendation has nothing to do with the relative ease or difficulty of moving cases through probate, which is the court-supervised system of administering decedent estates, but rather something more fundamental: the ability to make sure your values are respected when you are no longer around.
It’s about peace of mind
Muslims have obligations to their family and need to find a way to fulfill these obligations. In many countries (not the US) the government fulfills these obligations. Islamic succession is a communal responsibility. It may well be that some societies are better at fulfilling these responsibilities than others, but even so, people who live in these societies usually don’t worry about it much.
If you live in a place that does not have Sharia as the guiding principle of Islamic succession, then you are responsible for everything yourself. So you need to plan to make sure that you have people that you trust who will be able to carry out your instructions and that the people you appoint will have the legal authority to do what you want them to do. You base all of your decisions on trust.
A Trust is a relationship. It is not a document per se. The paper you produce is a byproduct of a relationship you have with someone.
Salma is married to John. Salma has named John as the successor Trustee in her living trust. She also specified instructions on what is supposed to happen to her estate after she dies. The instructions include making sure that her property goes in specific portions, after paying debts and expenses, to her children and parents as well as some of it (¼) to John himself. If John is not available to do this for whatever reason, she entrusts her brother Sam. If Sam is not available, she assigns her sister Sarah to do the same.
The Law of the Contract
Living Trusts are creatures of contract law. As a general matter, the contract is the law. If you enter into an agreement and there is no public policy reason not to enforce the contract, the terms of the contract have the force and effect of the law itself.
Contract law is essential for Muslims who do not have Sharia as part of the law in the United States. Estate planning is inherently a place where people pass on their legacy consistent with their values, and it is essential for Muslims to do their estate planning consistent with their values. A living trust allows for this in a way other devices just can’t.
No Ordinary Contract
A Living Trust is not just an ordinary contract though, like say a marriage or business contract. It is often a contract with yourself. So the parties in the agreement are:
The Grantor (also known as the Trustor, Trustmaker and a few other titles): This is the person who creates the Trust and sets all the rules in it.
The Trustee is the person who manages the trust based on instructions provided by the Grantor.
The beneficiary is the whole reason this Trust exists in the first place. This person benefits from the Trust.
In a revocable living trust, the same person fills all three roles. A Trust is created by, run by and enjoyed by the same person.
What makes a Living Trust tick is that it is a rulebook. When the person who created it dies, they have established rules about what would happen. If there is a question about incapacity, there are rules about what would happen to both determine if there is incapacity and if there is, who comes in as the successor Trustee.
In the event of death, the trust will have successor beneficiaries. In an Islamic Living Trust, it would be people who are entitled to inheritance under the Islamic rules of succession as well as any wasiyyah beneficiaries. For more on what a wasiyyah is, you should check out this guide.
Comparing a living trust to a will
When we talk about a living trust or a will, we are in essence talking about pieces of paper with things written on them. One thing is not inherently more “complex” or “simple” than another. Nor is one “cheaper” or more “expensive” than another as a general matter. Things written on paper represent something. A living trust can be completed on a paper napkin and be a few lines long, just like the last will. It may not provide a lot of value to the person making these documents though. Both Living Trusts and Last Wills can be mind-bogglingly complex, with multiple trusts built inside.
The only real difference between a living trust and a will is that a will-based plan will be court-supervised and a trust-based plan, as a general matter, will not be. Remember, the living trust is a creature of contract.
Court supervision is a dealbreaker for Muslims in the United States. Because a court cannot enforce Sharia, I don’t think there is any such thing as a “Sharia-compliant” last will in the United States. The provisions of the probate court will fill in critical gaps.
Nadia creates an Islamic Living Trust. In it, she states that if she dies, her husband Bilal gets ¼. Her parents Kamran and Dalia get ⅙ each, and her son Khalid gets 5/18, and daughter Firdaus gets 5/36.
Unfortunately, Khalid dies in a car accident. One month later, Nadia dies. Unfortunately, the shares she designated, while correct when she wrote her living trust were accurate, they no longer are. The shares would have to be different. A judge would have to interpret Sharia if her estate plan was will-based. No Judge in the United States would (or should) do that. If it is Trust-based, the trust might include provisions to make sure the shares are correct even if the unexpected happens. A will-based plan likely will not be able to do this, regardless of if there is a massive amount of detail in the document since it still requires interpretation. The probate process is what handcuffs flexibility that might otherwise be available.
How it fits in an Estate Plan, and how it does not
An Estate Plan is a process of organizing our affairs in the event certain things happen. Most of the time, we plan for things like death or incapacity. However, people may prepare for other things as well. Families may consider unexpected lawsuits, charitable tax planning, business planning, and other goals. What I mean with a living trust is limited to property and what happens to it in the event of death and incapacity.
Guardianship for minor children is one of the significant things parents often need to address. A living trust does not cover this. If you want to learn more about guardianship, please read the guide we created.
While a living trust will typically be the “core” on an estate plan as it relates to property, an estate plan usually includes many different documents. This includes healthcare, incapacity and funding documents.
Only as good as the funding
A living trust needs to be “funded” with assets. That means your property, which includes real estate and personal property, needs to be named in the living trust. If you have a home, the deed shows the living trust owns it. If you have a bank account, the bank typically needs to know the bank account is meant to be in it. The same is true for financial assets, business entities, and other interests.
Some interests cannot be registered in the name of a trust because the asset is already Trusteed, retirement assets, for example, the 401(k), which I have written about previously. Such assets are beneficiary designated.
When you do an estate plan, all of your assets are affected in some way or another. Estate Planning is in large part about organizing. The Islamic part of it is to make you are respecting the rights people in your family have over whatever it is you cannot take with you.
Planning for Incapacity
There is more to a living trust than deciding what happens after death. One of the significant planning objectives of estate planning is to avoid something called a “conservatorship.” A conservatorship is a Probate Court process to administer the estate of a person who is still alive, yet cannot manage his or her finances or their own body. Conservatorships are an imperfect yet necessary system. These court hearings and filings are public and often expensive. The person being “conserved” often knows what is happening, disagrees with the decision of family members and loved ones who seek a conservatorship and is angry with the people inside the family responsible for the decision.
Part of any good estate plan is a way to avoid the pain and humiliation of a conservatorship. We do this through an incapacity plan that both decides if there is incapacity and then assigns someone the role of “trustee” when there is no capacity.
Azhar had a lousy month. The 60-year-old immigrant is a successful businessman with a dry cleaning business, three grown children and a wife. However, when someone approached him with a business opportunity: loan a drycleaning customer $100,000 to purchase a rice farm in the Philippines at 1% interest, he could not pass up on the chance. He sold some stock from his retirement plan to make this happen. His wife and children found out about this and were not especially happy. Two weeks later, Azhar gets a cold call from a “veterans” organization. Azhar immediately donates $10,000 to a “charity” Azhar had not previously heard of (and neither has anyone in the family. The family learns from a web search that the organization is a scam. Azhar is still running his business, can have intelligent conversations, goes to the gym; nothing else seems to have changed.
Even so, the family is alarmed. They need to do something to prevent Azhar from getting scammed. Azhar, for his part, thinks nothing is wrong with him, and that is family should not interfere in his business.
Family members have a few options:
- Ignoring the problem is a rational option for some families. People make mistakes. The actions they may take to protect the family’s wealth may not be worth the pain it would cause Azhar and the rest of the family.
- They can get a conservatorship, a public court process that Azhar may find especially humiliating. He may blame whoever is responsible for initiating this process.
- If there is a living trust with a disability panel provision, the disability panel can privately decide the issue of removing Azhar as Trustee of the Trust. There would be no judicial finding that he has mental incapacity. He can still run his business but be subject to financial controls from a trustee he selected before the events that gave rise to this question happened.
I am not going to pretend there is an option here that would make Azhar feel good about himself. There will be an option though that will be private; the outside world will not know about things that are deeply embarrassing to him. It will allow him to maintain his dignity and wealth during a difficult time.
There can be several different planning goals in an Islamic Living Trust that are a little bit different than distributing inheritance to heirs or even addressing incapacity. You must consider the consequences based on your family’s circumstances, the times we live in and how you own and use assets. You can address some interests in a living trust, and other interests in other parts of your estate planning. I discuss more of these goals in my email list, which you should subscribe to if you have not done so already.
The Surviving Spouse
One of the more complex yet common issues in an Islamic Living Trust is the family home. The surviving spouse in Islam may not get a lot of inheritance. Yet, she or he may need a place to do that. How do we do that? I wrote about this problem here.
There is so much more
A living trust is the core of an Estate Plan. There is no one design for Muslims. One thing you do know though is that if you do nothing, the plan you have is almost certainly wrong. You also want peace of mind in knowing you are doing it right and exactly the way you want.