Blog

A Muslim Guide to the 529 Plan

August 2, 2016 By Ahmed Shaikh

Many parents feel just a little guilty that they may not be saving enough for their children’s education, the 529 plan is one way to do it.

In the United States, post-secondary education is expensive, and most Americans with college educations now start their professional lives in debt. This adds needless stress to their lives, as well as pressure to pursue career paths that may not reflect their (or your) values. Perhaps you are banking on how your child will be a star athlete, get a full ride for being an amazing scholar, or you just plan on sending your child to Germany for free tuition.

The goal is to save and invest money and have plenty of cash by the time your child grows up and is ready to ask for it. If they end up not needing the money, you can use it for other things.

Congress came to the decision to encourage savings for education by offering tax incentives. What I want to discuss in this post is the 529 plan. I will leave other methods of saving for another day.

There are two kinds of 529 plans; one 529 plan is essentially prepaid tuition. This is where you lock in tuition at a particular academic institution. This will have very limited appeal for most parents. The second is a savings plan, where every state has its own sponsored plan. For example, California has the ScholarShare savings plan administered by TIAA-CREF.

This is savings for a specific purpose, a narrow one at that. Not every child goes to college, and indeed, not everyone needs to. Plenty of successful people have never attended a postsecondary institution, or have found their success through alternative educational resources. Some children use a whole lot more of their parent’s savings by being in school longer than other children or attend much more expensive institutions. Some will use less for other reasons, for example, they may have more scholarships and grants available to them.

So when you begin crafting a college savings plan, you want to be able to have the flexibility needed to move assets from the benefit of one child to another. Another option is if the money is no longer needed for your children’s education, you can use it for their wedding, a gift towards your child’s first home, for a vacation, or for whatever you wish.

Furthermore, ideally, if you went through some financial problems, or you went through a lawsuit or even bankruptcy, your children should still be able to go to college without going into debt.

Advantages of 529 Plans

Here are some advantages to the 529 Savings Plans.

Anyone can donate to it (so grandparents).
You can change beneficiaries as many times as you want.
It can be outside your taxable estate for estate and gift tax purposes.
It can be protected from bankruptcy, depending on who the beneficiaries are.
Withdrawals can be free of federal or state taxes if used for qualified educational purposes (this is fairly broad but not unlimited).
You can get the money back, just pay taxes and penalties on the earnings (not on the principle).
There are no income limitations. You can be wealthy and still participate in this program.
You can save as much money as you want in these plans, as long as it can be reasonably used for educational purposes. Some plans do have limits however, but they are quite large.
You can “roll over” a 529 plan into another one you like better without any penalty or taxes.
It has minimal impact on your child’s financial aid application. FAFSA in particular, which only takes into account 5.64% of parent’s assets and counts 529 plans as a parental asset.

There are some caveats to these benefits (this is a mere blog post, I am writing more about it elsewhere) however if you have children you expect to be paying college bills for, and are blessed enough that you can save some money, this likely sounds like a great deal.

Dealbreaker?

The 529 Savings plan does have one gigantic drawback that will make it a deal breaker for many Muslims. You cannot control the investments in the plan. That is to say for those who insist on “Sharia-compliant” investment products will not find them useful.

This plan is also one of many devices that is treated as your money for some purposes, and not treated as your money for other purposes. So 720 days after funds are deposited into your account and the beneficiary is a child or grandchild (step children and step grandchildren count as well), the asset is treated as essentially not being yours if you go through a bankruptcy. It is also not your own for estate and gift tax purposes if it is structured properly.

However, the money is your own (assuming you are the account owner) for other purposes. You can decide who gets the money; you can even give it back to yourself. Also, after death, the successor account holder needs to be named. The 529 account does not just disappear or get distributed to the beneficiaries. If you do not name a successor account holder, the 529 plan becomes a probate asset. This means a judicial process will determine how it will be distributed.

So if you have this kind of account, for purposes of the Islamic Rules of Inheritance, it is your money. You should pay zakat on it every year unless you have actually distributed it to a beneficiary. If you die before your children are educated it needs to be distributed based on the Islamic Rules of Inheritance, and not based on the educational needs of the children. So in that sense, it is treated exactly like any of your other accounts. The Trustee can provide educational benefits to those who need it without regard to inheritance rights so long as other beneficiaries are compensated with other assets.

My suggestion is that you name the Trustee of a Revocable Living Trust as the successor account holder. Then instruct the Trustee on how to handle the asset, assuming the 529 plan administrator allows this. This is based on contract and not state or federal law.

Check out my document on mistakes Muslims make in their Living Trust.

Counseling Sharia at the Wealthcounsel Quarterly

July 11, 2016 By Ahmed Shaikh

Please check out my article on “Counseling Sharia” published this month at the Wealthcounsel Quarterly in print. This is an organization I joined a decade ago and it has been tremendously helpful to me in learning the legal-technical as well as practice development aspects of what I do, both with regard to Islamic Inheritance as well as Estate Planning in general.

My practice has been about helping people live and organize their affairs based on their values. This allows for the sacred to be included in Estate Planning. Many Attorneys are unfamiliar with the notion of an Islamic Estate Planning Attorney or Islamic Inheritance. Familiarizing the Estate Planning bar is an important service since so many Muslims do not have the opportunity to go to a Muslim Attorney, or even if it is a Muslim community, the attorney may not be familiar with Islamic rules.

In general, we want to point to the following:

They should have a level of respect and understanding for Islam, and for their client that practices Islam. Unfortunately, many non-Muslim lawyers, like teachers and politicians and others in society, have internalized Islamophobia. Education about Islamic Inheritance will help.
Islamic Inheritance is not optional for Muslims. Of course, non-Muslim lawyers are not bound by the Sharia to help a Muslim client who wants to “fudge” on the rules. Muslim lawyers cannot help anyone do something prohibited in the Sharia.
Estate Planning Attorneys are used to doing things a certain way. They need to understand that they need to change their own conception of what they are doing and change their planning substantially. Some lawyers are just not equipped for doing that. This may include some Muslim lawyers, who may be uncomfortable with the rules and advising clients on them. Eventually, this will change in the United States.

Check out the article and let me know what you think.

The “Final Sickness” in Islam

March 30, 2016 By Ahmed Shaikh

The concept of a “Final Sickness” is part of the Islamic Rules of Inheritance and unlike what you might find anywhere in American law.

Let me take you back a little bit to describe what I am talking about, to a time in Europe when the Church was increasing its power and wealth in Europe. A man with an estate and children is dying. Clergy visits him. They tell him that if he were to grant all is property to the church, he will be granted absolution. The man agrees to this. When you are about to die, absolution is a very good deal. If that means impoverishing your family, so be it.

You see, at the deathbed, there is a long history of people doing wacky things. They seem to be more easily manipulated and subject to elder abuse. Things outsiders suggest to them start to “make sense” when they would not have beforehand.

The Islamic Rules of Inheritance recognizes this tendency among human beings. So in a “final sickness”, the rules that govern the alienation of property change. Normally, you can part with your money in the manner you see fit. There are a number of Companions of Muhammad (SAW) who gave away all of their assets during their lifetime. This is normally not a problem. Giving all your wealth to a religious institution, a hospital or to whomever you want is typically fine.

Yes, if you are healthy, you are unlikely to give away all your money, especially if the wealth is substantial. In general, people are more afraid of running out of money before death then they are death itself. But some people give these large gifts and it is not a concern is Islam, most of the time. Deathbed gifts are regulated. Of course, a Muslim can never really change an Estate Plan based on the Islamic Rules of Inheritance. A new rule that comes up is they cannot give things greater than what they may give in a wasiyyah, which is 1/3 of the Estate.

The rights of the family as specified in the Quran (4:11-14) take precedence over anything else, including a desire to give to charity. Remember: Inheritance in Islam is not about you or what you want. It is not even about you family. It is about a peaceful and cohesive society with a consistent set of rights. Allah ordained these rights. Muslims don’t second-guess them.

What is a final sickness though? An illness that would reasonably lead to death within one year is a typical answer. So having an illness doctors say is ultimately fatal with a longer life expectancy than one year does not result in the final sickness restrictions in Islam. This has important implications. For example, Alzheimer’s in its early stages is not typically a “final sickness.” People with this particular illness may live several more years and have the ability to competently do their estate planning and gifts for several of those years.

Muslims who are in a “final sickness” can and should do their estate planning and make sure their assets are distributed consistent with Islam. It is just as mandatory for them to do this as it is for anyone else. Indeed it is more imperative for family members to push them to do this. This is when they are subject to some great pressures and they can more easily be subjected to manipulation by the unscrupulous. Even if this were not the case, Islamic Inheritance would be vital in order to maintain peace and harmony in your family, and because it is fard. Just like it is for everybody else.

Unexpected ways Islamic Inheritance avoids conflict

March 25, 2016 By Ahmed Shaikh

I continue to be amazed with the utility and brilliance of the Islamic Rules of inheritance. Yes, it is an old system. Yet, it has long been recognized as the best-developed system of inheritance in the world. I am an Attorney that represents clients in Estate Litigation matters. That is to say inheritance disputes. I also do estate planning based on the Islamic Rules of Inheritance. So I sometimes think of disputes with a view towards looking at if Islamic Inheritance, if it was relevant in the case would have helped avoid the conflict. It would usually avoid a conflict completely. It may not help when there is some sort of abuse or oppression involved that has nothing to do with the actual shares of distribution.

Islamic Inheritance can fix unforeseen problems. Many people do “I love you” estate plans. That is to say the surviving spouse gets everything. In general, these types of plans are not allowed in Islam. The husband gets between either ½ or ¼ while the wife gets either ¼ or 1/8. There are reasons why these numbers might be different, but we don’t really need to get into that right now.

Here is a problem I did not think of before. A man dies from a car accident. He wants to give everything to his wife. Years later, his wife dies. After she dies, the man’s wrongful death lawsuit results in a $300,000 payment. The estate goes to the man’s siblings. This makes sense, because the wife is dead.

Here is the conflict: The wife had children of her own. They are completely unrelated to the deceased man. They want the money instead. They argue that if the wife were alive, the wrongful death settlement would have gone to her. And if she died without spending any of it, it would have gone to them. Since the inheritance did not come into fruition until after both the husband and wife died, the siblings figured they should get the inheritance.

Amazingly now, the law in Michigan (where this case is happening) is not clear on what is supposed to happen here. Should completely unrelated people get absolutely everything? Should it be the people who are related?

Why should this be so hard? There are no rights and no real underlying principles of what is justice and what is not. When you don’t have these things, administering justice can be a real pain.

Everyone needs to make this decision for him or herself, regardless of faith tradition. Is there an underlying system of ethics that governs what you are supposed to do? If so, the answer is pretty easy.

Check out our report on 6 mistakes Muslims make in their living trust.

Why is Bin Laden’s last will and testament so ridiculous?

March 2, 2016 By Ahmed Shaikh

The Director of National Intelligence released Bin Laden’s last will and testament from the raid on his hideout in Pakistan. You may want to see it for yourself here. For a variety of reasons, this last will and testament makes no sense. The headline, that there was millions in there for “Jihad”- is clear enough. How he had millions of dollars or had the ability to posthumously move them around, nobody has explained.

Unless the government released his last will and testament (or other copies were out there), those with access to his funds would have no way of knowing how they were to be distributed. Since the funds were supposed to be distributed for criminal activity, it seems inadvisable that the government releases this document. However I am a California Estate Planning Attorney and not in the “intelligence community” in Northern Virginia, so maybe I am missing something there.

In Islam, bin Laden’s professed faith tradition, the last will and testament completely ignores the fact that the Quran exists as the word of Allah and that shares of inheritance are ordained. This is actually a fundamental fact: Muslims don’t get to decide what children to benefit and what children to ignore after they die. Of course, he would not have been the first professed Muslim to make this mistake. He had family, spouses and children, according this Wikipedia article about the subject.

It is widely accepted in Islam that the wasiyyah, the portion of the estate that is mostly discretionary, cannot be more than 1/3 of an estate. The rest is distributed based on the fara’id, the mandatory shares of inheritance, which comes from the Quran in Surah Nisa (the fourth chapter). Inheritance is ordained in the Quran, and not doing it in a manner that conforms to the Islamic Rules of Inheritance has the specific punishment of hellfire. That specific verse is 4:14, keep in mind as you read it 4:11-14 are all about inheritance.

In general though, countries with laws based on the Islamic Rules of Inheritance would only care about what your wishes were when it came to 1/3 of your estate. In the United States, you can generally have a completely unjust estate plan and courts will often respect it.

There are no known cases of any country where bin Laden purportedly had wealth where the courts distributed it to family members. His personal wealth, whatever governments knew about, was seized years ago, for example there was this report of $2000.00 that he had in a Peshawar bank account.

The last will and testament seems to say is that it is a wish that his brothers and sisters respect that the funds be spent for his causes. So the plan may just be that brothers and sisters respect his wishes by voluntarily writing checks themselves from funds they may have on his behalf. But again, we have a problem. His brothers and sisters and maternal aunt are not his heirs in Islam. They should not have access to his funds to the exclusion of the rightful heirs. Given that he has several children and wives, these other relatives get nothing at all. They should not have the right to spend other people’s money just because a dead person told them to.

Of course, before assets can be distributed to anyone at all, debts must be settled. Seeing as he unjustly killed many people, the families may have claims.

This is not really a valid will, at least not in the Islamic tradition. There is no executor (someone named to carry out these instructions) and no witnesses and the shares violate the Sharia. It would be appropriate for an Islamic Court anywhere in the world or throughout time to throw it out. At this point though, the document is nothing more than a prop in the endless and tragic war on terror.

If you are a Muslim and want to learn more about doing Islamic Inheritance right and not make horrible mistakes (like bin Laden), check out my free guide on 6 mistakes Muslims make in their Living Trust.