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Free Loans for Muslim Family Members Have Secret Interest, Not Riba

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Riba is Haram, but is Interest? 

One of the more confusing aspects to Muslims is “riba” which is often (maybe imprecisely) translated as “interest.”  It is a grave issue. In the Quran, Surah Baqarah, it says the following:

Quran 2:278

Quran 2:279

O believers! Fear Allah, and give up outstanding interest if you are ˹true˺ believers.

If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal—neither inflicting nor suffering harm.

Here you will notice “riba” is translated as “Interest.” The translator is Dr. Mustafa Khattab. Other translators, such as Mufti Taqi Usmani, do not translate “riba” at all, but leave the transliterated Arabic word in the translation. Abdullah Yusuf Ali uses the term “usury.” From my understanding of how finance works in the real world, the word “interest” is imprecise. A fulsome discussion of riba is outside the scope of this article, since I want to keep to the Muslim gift and estate tax planning context.

Muslims want to make sure we avoid riba. We should also want to do our Islamic Estate Planning. However, “interest” is often an unavoidable feature in estate planning, and in particular Gift and Estate Tax Planning. That does not need to mean riba.

A Story of Interest When There is No Riba

Haroon, 65, has an import-export business worth $2,000,000 based on an appraised value. He wants his son Elyas to have the business and supplement his retirement while being fair to his children by not just giving away something to one son that he will not give away to his other children. Haroon gets a fair price for his business and in his Islamic Estate Plan, he would distribute his estate based on the Islamic inheritance rules after he passes away. The business will not be in his estate anymore since he sold it.

Haroon sells the business to his son Elyas for $2,000,000, payable over 20 years with zero interest. Simple right?

Imputed Interest 

The IRS, because of Section 7872 of the Internal Revenue Code is going to apply “imputed interest,”- which is to say the law understands the economic consequences of a free loan. We get to what the loan looks like by calculating something called an “original issue discount.” In addition, this is going to be a “gift,” which may have its own tax consequences. In federal tax, the estate and gift tax system is somewhat distinct from the income tax system, though there is crossover.

So, in this example, with Haroon and Elyas, the “interest free loan” will not be regarded this way. It would be a “partial gift” and “partial sale.” That means he is not really selling his business for $2,000,000. He is selling it for $796,648.61. This is the original issue discount (at the time of writing since this will vary).

You get this by applying the “Applicable Federal Rate” (AFR), which changes every month. The rest of it, $1,203,351.39, is a gift. In the open market, if we had an “arms-length transaction” with an unrelated party- Haroon would never actually sell his business for two million unless it was cash up front. He would be assuming the risk of default and losing out on having the ability to deploy the cash for other purposes. Also, the value of $2,000,000 for the business assumes cash right now, not a 20-year loan.

Original Issue Discounts or Even “Interest” is Permissible Here

Now in Islam, it is considered permissible for Haroon to sell the $2 million business for $3.2 million or even $4 million. This would be a cost-plus contract, effectively getting an interest rate that would be reported as interest income on Haroon’s tax forms. That is not riba, but rather a “murabaha” contract since it is not money for money, but a thing being sold on a payment plan. It has long been understood that trade is permissible, but riba is not. Selling something for more money over time than the cash price is often a fair deal.

Gifts and “Fairness” within the family

Intra-family loans are common in families. In my example, it was the sale of a family business. The older generation may also use loans to sell properties to their children. They may not give it away because if they have three or five children, they may not have three or five homes of the same value to give away. There is frequently a misunderstanding between children and parents about what is a “gift” and what is a “loan.” Both have tax implications, but more importantly, they have family harmony consequences as well.

De Minimis Exception: No Interest, No Riba

We do not worry about loans of a small value. Under the Internal Revenue Code, this is a loan of $10,000 or less. This can be safely given interest free. However, the parties should still write these loans down. So, a father loaning his son, who was recently laid off, $10,000 interest-free to help pay some expenses is usually not going to cause problems.

Loans Used in Estate Planning

Notes with interest are a common way to conduct estate planning, especially for those with higher net worths or complex assets. All of what an Islamic Estate Planning Attorney does when doing Estate and Gift Tax Planning can effectively be described as using the exemptions that exist in the tax code, combined with the time value of money. As a result, gifts and sales with interest are common. In Islamic Estate Planning it is vital that when these arrangements are created, they are done in a way that will match your values and not result in injustice or oppression.

For a no-obligation 15-minute discussion on zoom about doing your Islamic Estate Planning, you can click here.

 

Muslim Burial Challenges

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maMusim Burial

Abu Hurairah (May Allah be pleased with him) reported: I heard the Prophet ﷺ saying, “Hurry up with the dead body (for its burial), for if it is pious, you are speeding it to goodness and if it is otherwise, you are laying an evil off your necks.”

Cremation Nation and Muslim Burial  

Urn is not used in Muslim burial Say you are in a crowd of people: Look to your left. Then look to your right. Chances are high that one or both of those people is going to be cremated. If you are Muslim and you are in a crowd of Muslims, then that statement is not true (I hope).

Cremation has started to dominate how the human remains are dealt with in the past few years. It may be surprising to learn how dominant cremation has become in American society. In 1976, about 7.3% of Americans were cremated (about one hundred years after cremations became a thing in the United States). Now it exceeds 60% and is expected to plateau at 80% of all funerals. Cremation, to the uninitiated, is a process of placing human remains into a chamber that burns the body until it is ash. There is a related procedure called a “water cremation” which does not involve fire but water and various chemicals that also results in a kind of powdery residue. Ashes can be placed in an urn at home, or scattered in various places, like the ocean, or a favorite activity in Southern California and Central Florida, in the Haunted Mansion at Disneyland or the Magic Kingdom (which have HEPA cleanup teams to deal with this).

What do you care? Well, burial is rapidly becoming extinct. Religious groups that once viewed cremation as disrespect of the dead, which was historically a crime, have now adopted means other than burial. This trend most vividly affects converts to Islam whose families either do not respect or are not especially curious about Muslim tradition. Practicing Muslims with a “secular” family who do not care about Islamic traditions may have a similar problem. There are other ways to dispose of human remains other than Islamic burial.

Donation to Science

Do you want to donate your body for the purpose of having scientists, medical students and potentially others dissect it? Do you want to have your body chemically treated to be placed in museum displays? How about displayed in private collections? The Islamic Medical Association of North America has taken the position this is fine, so long as it is fine with you.

Without question, generations of medical students have been educated by dissecting human cadavers. Millions of people have seen the “Body Worlds” exhibits that have been touring the globe for decades. Though, some of those bodies have allegedly been stolen and trafficked without the decedent’s permission. Even when there was permission, it may not have been for the purpose of putting the body on display.

Now, one thing you have probably figured out is that human remains has value and can be trafficked, mishandled, and abused. I am not sure it makes it better that a doctor, a scientist, a medical student or Harvard is doing this. Famous deceased geniuses have had their brains stolen to be studied, only to have nobody find anything in the brain tissue that tells us what made them special.

Because there is an opinion that donation of the body is okay to do, this is one of those non-burial thing Muslims are more likely to do.

Medical schools often have memorials or a process to honor the “silent teachers” and, if requested, would eventually return the remains to the family, so they could conduct a burial or cremation or whatever else they want to do.

From speaking with various clients who have experience with the way medical schools treat human remains, I have found most Muslims I have spoken to, “in the know” would be uncomfortable having their own body go through that process. Though without question, there will be Muslim physicians who would be completely fine with this. Outside the medical field, I don’t see Muslims being interested.

Casket Burial

There was a time when funeral homes insisted on caskets, built relationships with manufacturers of caskets, and made caskets a necessary part of a “package.” The funeral and burial industry got itself a bit of a reputation for being an exploitative racket. Four decades ago the Federal Trade Commission aimed to address a variety of poor practices of the industry. In recent years, this has included lying to families and other sleazy sales practices, making threats about remains, or all manner of abusive conduct against families going through enormous stress.

The funeral rule does not prevent a cemetery from requiring a casket. The funeral rule itself governs funeral providers, not cemeteries.

“Green Burial” is not Exactly Muslim Burial

Muslims traditionally do not use caskets. The practice of Muslims is like a trending practice known as “green burial.” This is where the body is not treated with chemicals and there is no casket or coffin, or if there is one (for non-Muslims) it is biodegradable. This is maybe a bit different from the practice of “human composting” with is the use of a container that is filled with various microorganisms to turn the human body into soil more rapidly. The soil in that case is used outside a cemetery setting, like to plant things in a back yard.

Islamic Burial is quick, uncomplicated, efficient, and dignified. The problem though is that societal trends (except maybe green burial, which is far less common than cremation) work against it.

How to get people to care about your burial being done right?

One thing I tell Muslims who come from established Muslim families is that you should not worry about it, and you are remarkably fortunate because of your background. This is especially true if you are in a metropolitan area with an established Muslim community where there is a system for burial. One of the more remarkable things about burial is that this is something Muslims do well, far better than other faith traditions in my opinion (why cremation has become so popular in the first place).

Muslim burial providers are silent heroes in the community and are frankly underappreciated for the good they do. Doing the Ghusl, the Janaza and everything else that goes along with it and doing it quickly and with dignity is a vital service for families.

There is a special problem however for Muslims with no or little Muslim family. It is even worse when that family has not accepted that person’s Islam and will not respect the traditions of the faith community the individual belongs to. No matter the age, it is important to make sure there are proper arrangements.

Where instructions go

Muslim funeral providers do not need to be told how to do a Janaza or where the body is supposed to face in the grave. They already know the answers to these kinds of questions. The main instruction is that your body needs to be buried based on Islamic tradition by a funeral provider that has experience and employees or volunteers that will act quickly.

Advance Healthcare Directive or Separate Writing  

 

In California (where I am based) Health and Safety Code Section 7100 and 7100.1 give the power over who can control your remains. The highest priority goes to the person who is your agent under the Power of Attorney for Healthcare. If you want a Muslim burial, do not make the agent someone who has not accepted your Islam, even if that person is your parent, sibling, or spouse. That will likely result in a non-Muslim burial. There is a copy of an advance healthcare directive for California here.

If there is no advance healthcare directive, then under the law it is the spouse, parents then siblings and so forth. Muslim friends would have no legal authority in this area and would not be able to do anything other than try to persuade family members, which is to say if they even heard about the death before the funeral.

An alternative is a separate written instruction on burial under Health and Safety Code Section 7000.1. This will take precedence over family priority in deciding the issue. If you put these instructions in an Islamic Will, they are to be conducted immediately even if the will ended up not being valid for whatever reason.

A writing that is separate from a will is often best. But what is more important, is that it be accessible to the people who need it, when they need it.

I have three recommendations and sample instructions.

  1. Get to know who does Islamic burials in your area. By that I mean maybe meet them in person, at a Janaza and burial you are attending. If you have not attended a janaza and burial, be sure to do that. It should not matter that you do not know who the person is.
  2. Consider the cost of the service. Burial services, especially cemetery plots can be a profitable business, and Muslims have entered this space for a profit motive. If they offer value to families for the money this is not a problem. However, this can pose a potential problem for Muslims who are indigent, unless the organization has a policy on taking all comers regardless of ability to pay, which is typical for nonprofit services operating in the Muslim community.
  3. Some Muslim mortuary organizations offer cards with instructions, including that you want a Muslim burial and their contact information, with a place for you to sign and print your name. Consider using this or making your own. Instructions can be as follows:

Instructions Regarding my Remains 

 

I ___________ am a Muslim and wish to be buried in accordance with Islamic traditions. In the event of my death, I direct my executor to contact ________________ (name of Muslim organization) at ________________ (phone number) immediately to make funeral and burial arrangements. If I die far from my residence, I direct my executor arrange that I be buried in accordance with Islamic tradition closest to where I passed, and this be managed by a qualified Islamic burial service.

 

Note: If you do not have an estate plan with a named executor, then you can name the person who should be responsible for your burial, a Muslim in the community who is most likely to step up and take responsibility should you pass away. You may consider naming multiple people.

 

I ___________ am a Muslim and wish to be buried in accordance with Islamic traditions. In the event of my death, I direct ____________ (name of person), and if not available ______________ (name of second person) facilitate my burial to contact ________________ (name of Muslim organization) at ________________ (phone number) immediately to make arrangements. If I die far from my residence, I direct my executor arrange that I be buried in accordance with Islamic tradition closest to where I passed, and this be managed by a qualified Islamic burial service. I direct payment for such services be reimbursed through my ________________ (bank name) account located at _______________ (address of bank).

(Insert Contact information for both individuals who are to be contacted)

Both instructions are designed to be brief so you can place it in a wallet card. Keep in mind I am providing this for educational purposes and not offering legal advice to readers of the article by writing this suggested language.

How to Pay for it 

As my second suggested instructions says, you may need to deal with the issue of payment. The law requires instructions be unambiguous and that there should be a way to pay for it. As a practical matter, if you are Muslim, the burial provider will not charge if you did not have means to pay.

The person you appoint may not know if you have resources or not. If you do have resources, it is vital that you have an appropriate Islamic Estate Plan. Consider the Islamic Rules of Inheritance, and burial. If you have resources to contribute to a burial and not more, then you need to have instructions that direct the person helping you where to find the resources to pay for it. Your providing knowledge of where to get reimbursed will be helpful to the person helping you get your burial done correctly.

In an Islamic burial, often there is a premium on speed. Getting the death certificate quickly and arranging the prayer and burial as expeditiously as possible. Muslim organizations will often worry about payment later. However, as Muslim it is vital that you do not pass away in debt.  Don’tassets to family who can access bank accounts but not to those who paid for your funeral. This would be an injustice you would want to avoid.

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For a 15-minute initial zoom call with Islamic Estate Planning Attorney Ahmed Shaikh, if you are looking at getting your estate planning done, you can click here.

Can You Inherit A Masjid? (Why It May be Reasonable to Think So)

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According to the case reporter, Imam Pasha Shaluddin was a pillar of his community and Masjid in Newark.  Imam Pasha founded a nonprofit religious corporation in 1988, the Islamic Center of Passaic.  He started the organization with no constitution or bylaws.  Imam Pasha had complete control.  Consolidated control, by the way, is typical of how some people have formed Masajid in the United States.  Someone starts it, runs it, and controls the whole thing. Completely normal. 

Imam Pasha’s community purchased a building in Patterson, New Jersey.  It was partially rented commercial space, the revenue from which would fund most of the Masjid on the same property.

Imam Pasha’s wife served as the Finance Director of the Islamic Center.  When Imam Pasha passed away in 2013, his wife, according to the appellate panel, “was under the mistaken impression she inherited Islamic Center and its property from her husband.” The wife “also appears to have believed she was vested with sole control of Islamic Center.” 

Why would she believe this? She may not have been unreasonable in thinking she controlled the organization.  The Masjid started as a personal fiefdom.  It was under the control of a husband and wife, where the husband controlled everything but the money, which was under the control of the wife.  For most people, absolute control is not anything different from ownership. 

Just like a country can be passed on from father to child, as is the case in many countries around the world, so can a farm, a house, or, it would seem, a Mosque.

In that case, another Imam and board created new bylaws, which were followed to remove the widow from her position. A trial court and appellate court agreed that the wife did not get the Masjid. 

The Fiefdom Masjid Model

Masajid with consolidated control is not uncommon in the Muslim community in the United States.  It works for a while.  Suppose someone has the support of other Muslims in the community or the resources themselves. In that case, they can start a Masjid, raise money, draw a salary, and not worry about “accountability” or people asking “questions” about how he runs the organization, his decision-making process.   

This model is also relatively standard in the United States for other faith traditions. 

Muslim organizations do not have political protection and are subject to tax laws that are perhaps not as enforced in some communities but could have some harsh results if they were.  The fiefdom model can be a horrible idea. 

The Private Inurement and Private Benefit Doctrines

A religious organization must operate exclusively for religious and charitable purposes.  Any private benefit can jeopardize the organization’s tax status.  Control by a person or family would be a massive red flag.  Occasionally, masjid property may be owned directly by the person controlling the Masjid, but donations would flow to a nonprofit organization. 

This issue concerns private inurement and private benefit, which are related but somewhat distinct concepts.  Private inurement is an absolute bar that prohibits people from taking undue advantage of a nonprofit in a way that is not identical to ordinary business practices.  So, for example, if giving the Masjid property to the person who runs the Masjid is just a deal for the guy who runs the Masjid, it would be pretty suspect. There are taxes on what are known as “excess benefit transactions” in IRC 4958. 

The Private Benefit Doctrine differs slightly, but courts have blended it with private inurement.  The concept can go beyond monetary gain, and suspect benefits can go to more people than insiders but benefit a limited number of people. 

Both private benefit and inurement can also harm the organization and the person who runs it.   

Muslims Have Been Fortunate

There is a strong tendency by mostly smaller Muslim organizations to be run as private for-profit businesses. That we are dealing with a “business” has implications for expected Islamic inheritance.  Family members may naturally expect to inherit from a nonprofit organization, which is technically supposed to be for charitable purposes and has no owners.  So, family members may end up disappointed because while they may naturally expect it because of the specific nonprofit culture, that is not how nonprofits work.  Beyond this, though, there is the potential for more significant losses if the IRS becomes interested in what is happening.  So far, they have not been.

As we transition to a new federal administration, it may be time to look at whether Muslim organizations and the people running them are vulnerable to enforcement of tax laws.  

For a consultation with Ahmed Shaikh regarding your Islamic Estate Planning, you can schedule a 15-minute meeting on zoom by clicking here.

Muslim Trustees Stealing Inheritance and How to Stop it (maybe)

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Stealing Inheritance among Muslims

Orphans and stealing inheritance in the Quran and Islamic estate planning

Indeed, those who unjustly consume orphans’ wealth ˹in fact˺ consume nothing but fire into their bellies. And they will be burned in a blazing Hell! – Quran 4:10

 

Stealing Inheritance Has a Long Tradition

This is a verse of the Quran, 4:10, that immediately precedes the verses on Islamic Inheritance. It is a recognition that people do steal from orphans. The thing is, it’s possible to get your Islamic Estate Plan right but have someone you trusted steal it after you die.  It happens all the time.   Often, these are not just random people, they are not merely unscrupulous orphanage administrators. Sometimes, they are uncles, the surviving parent, stepparents and others who have guardianship of an orphan.  Precisely the people who are in a position of trust.

One of the weaknesses with any estate planning is that we are dealing with human beings. People can be fickle, their personalities can change, their circumstances can change, or, the trust that someone placed in them was misplaced for years and the folks who trusted either had no idea or wanted to have no idea.

This is the thing about trust;  it is essential to a functioning society. We trust mothers, we trust fathers, children grandparents and others in our family. Going beyond that, people trust their school systems, their banks, their employers, their government, customers and on and on. We need to do that, that is how society works. Even so, we all know that governments often violate the trust of the governed, children let their parents down all the time, as do teachers and just about everybody else at some point or another.

How does this fit in with the trust?

The thing about doing a revocable trust, is that the distribution of the trust of the various beneficiaries happens after you pass away. You are going to pass away at some indeterminate point in the future. Sitting here right now, reading this, you have no idea what the circumstances of the world will be like when you leave it. You do not know who is rich, who is poor, who has a gambling problem, a drug problem, what religion anybody is, who they are married to, or if the people around you right now are living or dead.

You do have some advantages here though. While you are alive, and healthy, you do know what the circumstances of the people around you are like, for the most part. Sometimes your family members are keeping secrets from you.

Understanding your responsibilities in selecting a trustee or other fiduciary

Often, people with adult children will often select the eldest child as their first choice of a successor trustee, even if there may be misgivings among other family members over this choice. This is often because they do not want to offend the eldest child, given that there is a   ranking system among children within families that has to do with birth order.  Other times, people’s will select family members based on how successful they are, how successful their marriage appears to be, physical proximity to the parents or other considerations.

In some families, it’s not the children, but the daughter-in-law or the son-in-law that would be the most trusted and reliable.

None of these things are necessarily bad or wrong in themselves- that is how things go in families.  There can be problems though.

Who has influence over the parents

Sibling rivalries often figure prominently in Estate Planning.  Muslims are quite fortunate in that there is a uniform system of inheritance.  Parents don’t get to pick the share of inheritance or determine who is more deserving among children.   There is however, a difference between “Estate Planning”- which is how assets are organized, and include a complex array of gifting, tax planning, business planning and asset protection systems, and “inheritance”-which is what successors get from a deceased person when that deceased person cannot take things with him or her (which is every deceased person, to be clear).

In certain types of estate planning, parents may have very different relationships with different children. Those include the following:

  1. Business relationships

There may be controversies among family members about how much a child who is in the family business actually contributed to that business. A child who works in the business may actually consider themselves to have earned “sweat equity” and may take over the business in ways that might increase tensions among others in the family. Siblings were not involved in the business may not feel that there was any sweat equity at all and that the child in the business was little more than an entitled ne’er-do-well collecting an allowance though adulthood while pretending to be a business tycoon at their father’s company.

When it comes to family business planning, keeping the peace within the family over the long term is often a vexing goal for parents. More than that, because there are often going to be allegations of “undue influence” between the child that is in the business and children that are not in the business, it’s going to be important how much you “privilege” one child over another.

Children were not involved in the business are often going to feel like there inheritance was stolen from them. They may all live in different realities about what happened throughout the rest of their lives.

 

  1. The failure to launch

 

This is a scenario where one child continues to stay with the parents, never really has steady employment and perhaps never gets married. As the years go on, this child starts taking over virtually all financial responsibilities for the parents. Other siblings might see the situation differently.

  1. Was it a loan?

One of the more common scenarios is intrafamily loans. Parents may loan certain children far more since some children are more successful than others. Loans can be for failed startups, real estate or, just to provide some needed cash at the right time.  These things may not be loans at all, but could be gifts from parents. That is also known to happen.

The problem is children may not actually know what it was. If one child was the beneficiary of largess from a parent that another child was not, often the parent will not be blamed. The sibling who was the beneficiary of this largess will often be accused of stealing, or some sort of elder abuse. Not paying back a loan by re-characterizing it as a gift when it was not a gift would be stealing.

The problem is, the vast majority of the time, loans are not documented within families. The people who gave the loan or gift, are typically not available to tell anybody what it was. Different siblings might have different stories about what the parents told them.

Of course, writing all of this down is vital, and something advised in the Quran.

Managing conflicts of interest

In a variety of situations, including the ones I mentioned above, there are conflicts of interest when it comes to children acting as trustees for their parents. Among the responsibilities of the trustee, for example, is managing a business or collecting debts. These are some of the biggest controversies in managing estates.  Siblings may be caught in the middle of them.   Managing conflicts of interest poorly is often indistinguishable from stealing inheritance for some people.

Personal failings

Sometimes beneficiaries can play fast and loose with ethics. They may “borrow” funds, live in a house indefinitely when they should be selling it or paying themselves unduly generously in salaries or other perks.

Then there are other things that I mentioned above, such as the gambling issue.  Oftentimes, desperation will lead people to feel stealing inheritance from family members is okay.

Use of professional fiduciaries

A professional fiduciary is one of the more valuable and underutilized tools in estate planning. For the most part, many families would rather not pay a third party to manage their finances in the event of death or incapacity. They would rather lean on their children or other family members if possible. And in fact, family members would rather do this as well. That is what family does, they step up when there are problems, right?

Professional fiduciaries can sometimes solve significant problems.  Much of this has to do with uncertainty.  Time will change facts when it comes to your family and the circumstances of it’s members.

I am not going to pretend that time does not affect professional fiduciaries or that these people are never going to be stealing anyone’s inheritance, the same as family members stealing inheritance.  What I can say though, is that unlike family members, professional fiduciaries tend to be professionally licensed, bonded and insured.  Many have billions in assets (though some are mom and pop operations that are still bonded and insured).  Think of this as a bank.  Bank employees steal from the banks they work at all the time.  You know this.  And yet, we all keep putting our money in the bank.  We know the money is insured.

Another advantage is family unity.  Someone upset with a Trustee over something is upset at an outsider, not a brother or sister.  The family members can oversee the Trustee’s operations and make sure the Trustee is doing a comprehensive and professional job.  It’s awkward and uncomfortable to look over the shoulder of a family member Trustee.  Most people won’t do it.  Before anyone notices the money is gone, it would be too late.

A Blessing, But We Still Have People

The Islamic Rules of Inheritance is a blessing from Allah.  It makes life easier for families because of uniformity when it comes to shares of inheritance that are not based on your vanity and how you think things should be.

However, this does not stop Muslims from stealing inheritance from their family.  Not much in the world happens without trust and you should trust people that have earned it.  One thing you should not do though, especially in your Islamic Estate Planning, is trust that everything will always be the same.  It won’t.

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To schedule a 15-minute no-obligation zoom call with Islamic Estate Planning Attorney Ahmed Shaikh, click here.

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.