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The Power of Attorney in Islamic Estate Planning

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The Power of Attorney is a big part of the “Big Four” set of Estate Planning documents

The “Power of Attorney” is a vital part of the “stack” of estate planning documents commonly provided by attorneys when completing an overall estate plan. While estate planning documents can include a wide range of things, the most common are as follows:

Estate Planning big four documents, including Power of Attorney

There are many other estate planning documents. However, these are the “big four.” The Revocable Living Trust is the backbone of any estate plan. It deals with the question of what happens in the event of both death and incapacity.   For Muslims, it is vital that this contains provisions for the Islamic Rules of Inheritance and the Wasiyyah.

The Last Will and Testament, deals only with what happens after death.  This is a backup document, but it is coordinated with the Islamic Inheritance plan, specified in the living trust.  The healthcare directive deals with what happens if a person cannot make healthcare decisions for themselves.

The Power of Attorney (often called a POA) deals with what happens in the event of incapacity, but not always. In fact, we often don’t even associate it necessarily with incapacity.  Traditionally, A “Power of Attorney” has no effect once the “principal” (the person who signs the power of attorney) is financially incapacitated.  That is not the kind of Power of Attorney estate planning attorneys use when preparing an estate plan, since estate planning is often concerned with “what if” scenarios.

 

What Power of Attorney does

Traditional Power of Attorney

Salma is a successful children’s book author. She gets revenue from a variety of sources, movies, music, touring, endorsements and the like. Her husband Adam is her  business manager.  Salma trusts Adam to manage all her financial affairs. She signed the Power of Attorney allowing Adam to invest her money and pursue various business deals as Adam sees fit so that Salma can focus on her creativity child-rearing, and lifestyle without worrying about her day-to-day financial affairs. Salma grants Adam a Power of Attorney, where Adam manages her financial affairs, periodically consulting with Salma.

However, for nearly everything, Adam has the power to sign Salma’s name as her agent under the power of attorney. In this case, Salma is the “principal” and Adam is the “agent.”  The “agent” is sometimes also referred to as a “attorney-in-fact.”

In a traditional Power of Attorney, if Salma were to become financially incapacitated, Adam can no longer make financial decisions for Salma.

Types of Powers of Attorney

Durable Power of Attorney

Salma has the exact same relationship with Adam. However, if Salma is financially incapacitated, Adam can continue signing for Salma. We call this a “Durable Power Of Attorney.”  If Salma were to become comatose for an extended period, develop dementia or have some other calamity or life circumstance that prevents Salma from maintaining his executive decision-making ability, Adam can simply go on and make decisions for him.

Springing Durable Power of Attorney

Salma and Adam do their estate planning.  Salma sets up her plan so that Adam does not immediately have the power to sign Salma’s name even though she made him her agent in this document. This is because she signed something called an “Springing Durable Power Of Attorney.”

A Springing Durable Power of Attorney is one of the more common devices used by estate planning attorneys. It only comes into effect if a “spring” is sprung. That spring can exist in the revocable living trust, or in the Power of Attorney itself. The spring occurs only if:

  1. Salma is incapacitated.
  2. Salma decides she wants to give Adam all of her authority regardless of his incapacity.

Definition of Incapacity

Most people prefer they maintain their own liberty and freedom and not simply headed over to another individual.  People like freedom and personal liberty.  There may be business or practical reasons to hand somebody Power of Attorney right now.  Many people would be completely fine handing over that authority the other spouse immediately. Indeed, some estate planning attorneys prefer doing this.

But in the event that we have a “Springing Durable Power of Attorney” there needs to be a way to define incapacity. In general, people create incapacity provisions in a revocable living trust and a Power of Attorney document to avoid a conservatorship. A conservatorship is a judge supervised process to deal with allegations of loss of capacity and managing the affairs of those who have been adjudged to have lost that capacity. It is often a difficult system for families.

One of the major reasons to do an estate plan with an attorney is to maintain dignity and privacy for families during their more difficult periods.

Disputes over Capacity

Say Salma, from our earlier example, is making some pretty bad financial decisions. She is hanging out with a new group of friends, somewhat younger than her, that appear to be exploiting her financially. Adam, her husband, becomes alarmed and wants to do something about it. His children, who are adults now, are similarly alarmed.

Salma, in this situation, seems completely normal.  She is intelligent, funny and more than capable of dispensing wisdom. She does not believe she is being financially exploited and enjoys the company of these new friends.

They have a few options in this situation

  1. They can convince Salma that she has lost financial capacity and agree to sign a document that gives Adam power over his affairs so that this financial exploitation can stop.
  2. If the estate planning documents contain a provision to determine incapacity, which could include the use of medical doctors or a panel of family members or others that can decide the issue of incapacity privately, they may go about doing that.
  3. They can get a court to decide on Salma’s incapacity against his will.

Peace of Mind

Estate planning documents are the byproduct of a process and not merely a thing you sign.  For Islamic Estate Planning, there is no leeway in how much one heir gets versus another heir.  That is ordained in Islam.  However, you have a massive amount of leeway when it comes to other aspects of your planning.  That includes incapacity planning.

What one person is comfortable with may not be the same as what another person, including a spouse, may be comfortable with.  It is vital to have a conversation about these things before signing anything.

Don’t take the Power of Attorney lightly.

 

To discuss Islamic Estate Planning with Attorney Ahmed Shaikh, you can schedule a 15-minute Zoom call by clicking here.

 

 

 

 

 

The “Golden Child” Problem in Islamic Estate Planning

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The Golden Child and Islamic Estate Planning

Start with a Goal

A “golden child” is a problem that can upend the plans of parents with the best of intentions. So let’s work this out.

Anytime we talk about things that have to do with estate planning it is important to start with goals. One of the great things about doing estate planning based on the Islamic rules of inheritance is that I am dealing with Muslims who tend to have the same goals.

When it comes to gifting though, that is not inheritance. Parents have significantly more leeway to distribute gifts to adult children. It is relatively frequent that parents will decide that they are going to give more to one child versus another. The reasons may be varied but they come down to the following:

Tuition

In the case of college tuition, it may be that one child goes to an expensive private university while another goes to a relatively inexpensive public institution, maybe does not go to college at all. This will result in one child getting a benefit from their parents that may be in the hundreds of thousands of dollars (this is common for professional education, like medical school) while another child may get none of this.  While it some cases this may contribute to resentment, it’s usually not as big a of a problem in families.

Economic Disparity

There is a substantial economic disparity between children. One child is remarkably successful while the other is not successful at all. The child who is not financially successful will often be showered with gifts, including real estate and what might amount to an allowance that never seems to stop. Other children might work for a living. They might find the arrangement with the less financially successful child a source of resentment.

The Family Business

A child might be more privileged on account of their closer association with the parents because that child runs the family business. This may not be gifts given, per se, but it may sure seem that way. An adult child that works at their father or mother’s company may get benefits and titles unavailable to other employees. It may also not be clear to other children outside of the company if the child is contributing to the success of the company or if the child is effectively just getting an allowance.

In social science this person is called “the golden child,” and often this individual might have an oversized perception of their own contributions to both the family and the company. Sometimes, we have seen situations where the child wants to extract all the value of the business for themselves to the exclusion of the other children. As a result, the “gift” to the golden child can be quite spectacular.

Being at home or close to home

Like the situation with parents involving a child in the business, is when parents start to become more dependent on specific children. Sometimes, the person that the parent has become dependent on is not the child at all, but a daughter-in-law or son-in-law. In very extreme cases, the child may serve to restrict access by other children, often making it uncomfortable for other family members who do not live with their parents to even visit with their parents. The distance between parents and children can grow over the years and result in increasing financial benefits to the child who stays at home or close to home. Sometimes, this can border on or become financial elder abuse.

Addressing the “golden child” family dynamic

One of the greatest forms of wealth that you can potentially give to your families is not monetary. It is social capital. The best form of social capital is that you have children who are close to each other, they have their own children who also get to know each other and can bond with each other and be a benefit to one another. Anything that you as a parent might do when it comes to financial benefits received by one child that is not also given to another child potentially be harmful to your family’s social capital.

We all know that it is prohibited in its to cut family ties. We should also do whatever it is that we can to make sure we are not doing anything that encourages cutting a family ties, like causing needless sibling conflict by effectively anointing someone as the golden child.

So how can we avoid the “golden child” problem?

Have a mission statement.

 

This might sound a little bit corny; you should seriously consider how you plan to utilize your wealth as you grow older. You do want it for yourself with, so that you can travel, enjoy life, and sustain yourself for the rest of your years. You also want to give to charity, and most importantly, you do want to help your children if they need that help.

This mission statement would become a lot more vital as guiding principles for things such as business succession, charitable giving, and your plan for growing older, which has some fairly unpleasant but relatively frequent problems as such as potentially needing more help with things, with the understanding that you may lean on some children more than others.

Transparency

Family meetings can be incredibly helpful. Your adult children should know what your plans are with respect to your wealth, how you hope to help each of them whenever it is that they need that help.

Siblings are often very understanding about why it is that one of their siblings needs extra assistance. There is often the difference though between helping someone get back on their feet and a grown man living on an allowance provided by their parents when he is perfectly capable of getting a job. If you have a child with special needs, children will of course be very understanding and may contribute to help their sibling themselves.

Do not think of your wealth is being your wealth, do not think of it as being your family’s wealth either. It is neither of those things. Wealth is entrusted to you by Allah.

To Allah belongs what is in the heavens and what is in the earth, and Allah is enough to trust in.

Your wealth can be used to support peace and harmony over the long term within your family or it can be used to promote harm. Often, especially with wealthier families, parents often use wealth, unwittingly, to promote long-term harm among children.

Was it a gift or a loan?

Make your intra-family financial arrangements clear. Will anyone know if it was a gift or loan, after you died?

Example:

Sulaiman 35, $750,000 from his father, Yasin, 75, towards the purchase of a home. This constitutes about half of Yasin’s wealth. Yasin, tells his daughter Asma about this, and says “Sulaiman will pay me back when he gets a promotion.”  Sulaiman and Yasin never have a written agreement. Yasin dies 2 years later. Asma asks him about the loan, and Sulaiman tells her it was not a loan but a gift because he did so much to help his parents while Asma allegedly did nothing. This results in long-term resentment between Sulaiman and Asma.

The solution in such cases is obvious, write it down. The fact that you make a loan within the family is not less of a reason to document the transaction, it is more of a reason.

Business Succession Planning

it is vital to look at business succession planning in a way that is fair to all children, including those not in the business. It is normal for parents to be disappointed when they have children who do not want to be involved This process should leave that aside.

If you are fortunate enough to build a successful business, the goal of handing it off to children can at times seem a bit myopic. Children who are involved with the business might make unreasonable demands that parents are willing to fulfill, just to have the children continue to be involved. They often feel like they have leverage over their parents, which seems strange but it’s true. It may not matter that the children are not especially good at management or capable of growing the business.

Sometimes, there is nothing wrong with having a business succession plan that does not involve giving the top job to your child, at least not right away. You want to make sure that you are running your family business in a way that is most beneficial to your family. Sometimes, this means not giving “golden child” status to a particular child. This is true even if the child has put many years into the business.

In this case, you need to go back to your mission statement. Is your mission statement say anything about privileging a golden child to the exclusion of other children? Probably not.

Putting it all together in an Islamic Estate Plan.

An Islamic Estate Plan can often have to do with more than just the Islamic Rules of Inheritance. It may be a plan for healthcare decisions, communication, transparency, business succession and incapacity. The most vital component of this plan though is to maintain peace.

To discuss your Islamic Estate Planning, you can schedule a no-obligation meeting with Ahmed Shaikh on Zoom by clicking here.

What is an Islamic Trust?

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Islamic Trust

When someone uses the term “Islamic Trust,” it could mean one of several things.  However it usually just means a trust where hopefully nothing haram (prohibited in Islam) is going on.  A “trust” is a relationship; it is not a piece of paper, though often a byproduct of that relationship is pieces of paper.  

Example: 

Abdullah travels to Africa for three months. He then asks his best friend, Haroon, to take care of his pet anaconda, Isabella. They write nothing down, but  Abdullah and Haroon have nevertheless created a trust.  

 

This basic concept leads us to use trusts with an Islamic Estate Planning Attorney. Trusts are never oral, but the idea of having your affairs managed in the event of death, incapacity, or for other purposes is the same. An “Islamic Trust” can be used for a few different purposes. 

Implementing the Islamic Rules of Inheritance

 

Islamic Inheritance is fard for Muslims. I have a comprehensive article you can read about here. However, a trust as part of an individual’s Islamic Estate Planning includes a “living trust,” a will, a power of attorney (for incapacity planning), and other documents. 

Waqf

A Waqf is a trust, but the context of the term and its use is far different from planning for Inheritance.  Contrary to popular belief, a “waqf” is not the same as charity. A masjid or a school can be a waqf, but many Masjid and school founders did not organize it that way.  A waqf has a perpetual existence.  However, it may be for the benefit of a family, the Muslim community, the community at large, or animals (like a nature preserve).  Of course, like anything else, the thing that makes it “Islamic” is that it is not prohibited in Islam and is hopefully beneficial.  

Charitable Trusts

A charitable trust is not necessarily a waqf.  There are a variety of such trusts, including charitable remainder trusts, charitable lead trusts, and other trusts with philanthropic components.  An Attorney who is an expert in Islamic Estate Planning would need to structure such trusts so they don’t violate various Islamic rules.  Learn more about it here. 

Other purposes

Trusts are contracts. As such, they can be used for a wide range of purposes.  For example, including business succession, public benefits planning, asset protection, tax planning, and more.  

If you need an Islamic Estate Planning attorney to help you form an Islamic Trust, whatever form that may take, you can schedule a 15-minute no-obligation Zoom call here.  

No-Contest Clause and Islamic Estate Planning

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No Contest Clause In Islamic Estate Planning

 

When I speak about Islamic Inheritance, or when people ask me a question, they often ask a variation of “Can Islamic inheritance work in our courts?”.  Another version of this question wonders what happens if someone challenges the Islamic Rules of Inheritance: say, for example, a daughter who gets less inheritance than a son can go to court and challenge this. 

The answer is complex and fact-specific.  This should never prevent someone from planning based on Islamic rules. Only understand that a lawyer can never offer certainty or guarantees about anything, and there is usually nuance even in questions that should seem simple. 

Let’s draw out a hypothetical:

Abdullah has two children, Haris and Ishaq, both boys.  Haris, to Abdullah’s great disappointment, has left Islam.  As a result, he is no longer entitled to inheritance in Islam.  Abdullah has an Islamic Living Trust, but he decides to disinherit Haris, which means he writes that Haris will get nothing in his living Trust.  

Haris can sue after Abdullah dies.  If he wins or not is another question.  If Haris can prove that Abdullah lacked the legal capacity to write his living trust or will, or if there was fraud, duress, menace, or undue influence, Haris may win if he has evidence.  Even if he fails, the mere act of litigating an estate in court is a loss. 

Abdullah can prevent this by doing a couple of things.  The first (in some jurisdictions like California) is that he can go to court, giving Haris notice, to preclude challenges after he passes away.  The second is that he can write a no-contest clause.  However, the “no-contest clause” is useless in this specific case. 

What a No-Contest Clause Does

To simplify, the no-contest clause says that if a beneficiary contests aspects of the estate plan, the beneficiary will not get anything.  Now, if a beneficiary is getting nothing, there is no cost to contesting the plan.  Abdullah’s successor, Ishaq, may want to settle with Haris by paying him something, or he can take the case through trial and potentially years of appeals. 

Another possibility is that Abdullah does not disinherit Haris completely. Instead, he gives Haris a “wasiyyah” (Haris is still not entitled to inheritance in Islam).  He still does not get what Ishaq gets, but if Haris feels like litigating, he has something to lose: the wasiyyah amount. 

What About Contesting Shares with a No-Contest Clause?

Okay, now let’s assume Abdullah has a son, Ishaq, and a daughter, Firdaus.  Firdaus is Muslim, but she does not like getting half of what Islaq is calling and wants to sue?   What happens? Firdaus needs grounds to challenge the estate plan.  However, the successor Trustee of the Trust will need to expend a portion of the estate on attorney fees to defend it.  Abduallah has testamentary freedom.  If he wants to plan based on his religious beliefs, he is free to do so, which is his right.  However, if Firdaus can claim about Abdullah’s capacity and get a Judge to agree with her, she may win. 

So, this gets us to the no-contest clause.  If there is a no-contest clause in Abdullah’s estate plan that says Firdaus would take nothing if she sued, that would be harsh.  Firdaus is Muslim, and she is entitled to inheritance in the Quran.  So, can she be penalized if she comes up with a spurious challenge to Abdullah’s estate plan? 

What if Firdaus Just Wants Her Rights?

I believe a no-contest clause should not apply if all Firdaus wants is her rightful share of the inheritance, and if she has a challenge related to that and brings it through arbitration, there should be no penalty.  So, if she is contesting the valuation of an asset being distributed and claiming the allotment is less than what she should get, she should be able to do this.  Another possibility is that even if Firdaus goes through with a spurious lawsuit against her father’s estate, she still not be denied inheritance outright.  Instead, any cost of litigation should be charged to any share she would receive.  

So, if Firdaus is entitled to $500,000, but the Trust had expenses of $250,000 successfully defending against a lawsuit by her that went on for two years, the distribution to Firdaus would be $250,000.  

What About Challenging things other than distribution? 

Beneficiaries challenge estate plans for many reasons.  They may be okay with the plan’s substance, but they don’t like how the successor trustee handles things.  Should we penalize beneficiaries for challenging this?    

My preference is to find alternatives to litigation.  This includes mediation, arbitration, and a trust protector.  However, the denial of inheritance to someone entitled to it in Islam is a serious matter. I would avoid drafting in a way that would do that whenever possible. 

Click here to schedule a 15-minute no-obligation consultation with Estate Planning Specialist Ahmed Shaikh.