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Many millions of people have accounts under the  Employee Retirement Income Security Act (ERISA), particularly the 401(k) or similar programs, such as the Individual Retirement Account (IRA).   For American Muslims, there are concerns about how to handle these assets when it comes to planning their estates.

From the perspective of Islamic Inheritance Law, there are only two different kinds of retirement plans. The first is a financial account.  You or your beneficiaries can pull money from these accounts. Now there may be some taxation involved, maybe even some penalties. However, this is your money. After you pass away, it belongs to your heirs.

The second type of retirement asset is not a financial asset in the traditional sense. It is a promise. Say, for example, Mohammed works as an engineer for 35 years. Upon turning the age of 65, he has promised half of his salary for the rest of his life and the rest of his wife’s life as well.   This arrangement is known as a pension plan that includes a joint and survivor annuity.

For the most part, I am going to be dealing with the first asset. While there may be some nuance to this, we generally do not consider the second type of asset to be something that you can inherit, so we do not apply the Islamic rules of inheritance to it.   

401(K) Nest Egg

We think of retirement assets as a nest egg, not just for the person who earned the income, but for the couple. So, for example, Hamza is an engineer, his wife of 40 years, Hafsa is a housewife.  He also has a son, Ishaq, and a daughter, Kulsum. Hamza has a 401 (k). If he were to pass away, he would like for his wife to be able to “rollover” this 401(k) into her plan so that she can use this for her retirement.  Under rules governing these plans, the surviving spouse typically has a favored position relative to other beneficiaries. While other beneficiaries may inherit these plans, the government will usually look to taxing them more quickly.    A 401(k) is favored in this way primarily because of the purpose of it, which is retirement.

However, for purposes of the Islamic rules of inheritance, it is viewed as an asset that can be inherited.   So in the example above, Ishaq and Kulsum also have inheritance rights. This would mean what is counted as Hamza’s estate, 1/8th would go to his wife Hafsa, 7/24 would go to Kulsum and 7/12 would go to Ishaq.  

So How does Hafsa Retire?

The question of what does the surviving widow get is often an issue when we plan based on the Islamic rules of inheritance. In American culture, it is typical that the surviving spouse will get everything while in Islam, we recognize the inheritance rights of others. Also, in Islam, inheritance rights of the surviving spouse is often quite small relative to everybody else, Including parents and children.

However,  there are some caveats here. The first is that the surviving spouse may have contractual rights upon the death of her husband, the mahar mu’akhar. This is the amount of mahar that is paid out in the event of the marriage’s end, which may be either death or divorce. This can be virtually any amount. The other thing to consider is what property is already owned by the surviving spouse. Now I just told you, in this particular example, the 401(k) belongs to Hamza,  he was the engineer who worked for 35 years. His wife did not. That means Hafsa only gets ⅛ of the 401(k) right? Not necessarily.

For example, if Hafsa lives in California and she and her husband agreed,  either by default or in a written agreement, that they own everything as community property, then 50% of everything that he earned while they were married is already Hafa’s. It is not Hafsa’s after her husband dies,  but it belongs to her regardless. The fact that the account is only in Hamza’s name does not change this fact. Of course, if Hafsa and Hamza divorced, she would get 50% of everything, including the 401(k).

Look for flexibility

A plan should allow a successor some level of flexibility concerning what to do with individual assets.    When you are doing your estate planning, you’re planning for a time where you will not know the circumstances of your survivors.   Hamza can create beneficiary designations for his retirement plan that would allow for the spousal rollover but also include a property agreement with his wife so that she can compensate the other beneficiaries.   Most Muslim spouses have two major goals. Spouses want to take care of each other, while not being unjust to others they love. In particular, their children or parents when it comes to the Islamic Rules of Inheritance.  

Charity

Often, people like to include a wasiyyah with a charitable purpose. They can give up to one-third of their estate for this. Retirement assets are often the preferred basket from which charity is given since charities don’t typically pay income taxes.  Normally, inheritance does not have an income tax associated with it. The government taxes previously untaxed income though. So an estate plan that includes both charitable giving and retirement plans should take this into consideration to avoid paying more than necessary.

There is a lot more to Islamic Inheritance and Estate Planning.  For my free resource guide, click here.

Debt is a scary word.  It is a natural part of life.  In our tradition, debt is not necessarily looked upon as a business.   Rather, as a benefit or an act of charity.  Indeed, the interest-based system of debt is explicitly prohibited in Islam.  Muslims regularly engage in this system of debt for things as varied as education, healthcare, businesses and of course mortgages.     The subject of this post is not about those types of debts.   Whatever “halalness” or “haramness”  of these, it is useful to say that these types of debts often have the benefit of being clear as to their terms and their effect when it comes to the estate.

Debt and Inheritance in the Quran

After death, debts must be paid off before any of the beneficiaries are given anything (Quran 4:11) pursuant to the Islamic Inheritance.   This is made easier by the fact that student loan contracts and mortgage agreements have specific terms that deal with what happens after death. It is something that people know how to deal with, or at the very least, can figure out.

The debt that I am most concerned with is the variety that causes problems within families  Or amongst friends.   Frequently, this type of debt is not documented anywhere and if it is, the documentation can be inconsistent or difficult to confirm after one of the parties has died.   Occasionally, basic facts about the transaction can be disputed, including whether the debt was even a debt at all or if it was a gift. If part of our all of it was forgiven or if it was repaid.

Write Down Debt

Follow the recommendation in the Quran.  Make sure you have your agreements in writing.   Not all debt contracts will always fit the exact description in the Quran and this is not regarded as a requirement, but do it anyway.  Some family and friends agree to  “pay me whenever.” Or, “if you have the money, pay me.”   A lackadaisical or not especially concerned creditor loaning to family members or friends out of a sense of goodwill may be horrified to learn that their loan caused so much grief after death.  Don’t be that person.

Even with the best intent, debt can be a dangerous thing.  Make sure you always write down the terms.  Be sure it is witnessed and all responsibilities are clear. This is not about whether you care or not.  It is about if you leave a legacy of conflict or harmony. How you conduct your business affairs can lead to either result.

When we plan based on Islamic Inheritance, how do we account for legal fictions?

A while ago there was an interesting story about a man who wants to be declared alive but has had no luck.  He disappeared for years only to resurface and wants to reenter his life somewhere.  There appears to be no mechanism for him to gain a new birth certificate after he has already been declared dead.  A former wife, or the legal widow, opposed undoing the death because she was a financial beneficiary from that death, and could not pay the money back.

The law is full of fictions.  This means we say things are a certain way because some goal of society is being met by doing so.  Having fictional anything in the law as fulfilling a valuable goal or not is subject to the whims of policymakers.

“Corporations are People my Friend”

What former Presidential candidate said was kinda true, corporations and LLCs have the same rights as people in many respects. They can sue and they can be sued, though they don’t vote.   Similarly, adoption serves a legal fiction, where the parental rights of one parent or a set of parents is severed in favor of one or more parents who have no blood relationship with a child.  The “child” may not even be a “child” but could be an adult. California allows for more than 2 legal parents for a single child. As of now, this is impossible as a matter of fact but is certainly possible as a matter of law.  If Apple Inc. can be a person; a child can certainly have three legal mothers.  These are legal fictions we have become used to. 

Similarly, a person who is alive can also be legally dead, as I described.   An actually dead person can, of course, be legally alive, at least for a time.  Estate Planning documents usually do not address the dead coming back to life. These legal fictions are rare.  The closest that I have ever seen are for “personal revival trusts” meant for people who are cryogenically frozen after death who expect to wake up, eventually.  I don’t do personal revival trusts.  Those are just scams. 

In Islamic Estate Planning, Living Trust provisions often include simultaneous death or death when it cannot be determined if one person died first or another.  It may also address other legal fictions such as adoption and corporations. Keep in mind, for Islamic Inheritance, Islam will govern all of these things. You cannot presume a person is dead when they are alive, and adopted children do not have the same rights as children.   You can read more about this in our guide to Islamic Inheritance.