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Islamic Inheritance

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The Family Home

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Family homeWe talk about this all the time in Islamic Estate Planning: What to do with the family home?

About more than Inheritance

Estate Planning is about far more than the shares of inheritance when someone passes away. My goal is to create a simple process, though the thought that goes into it is quite complicated. One of the reasons it has to be complex and becomes more so as we age is because there are numerous competing interests inside families that you need to balance. A lot of these are competing interests that may reside in your mind simultaneously.

In the broader sense, the idea of Islamic inheritance itself is simple. You cannot take your worldly possessions with you. Shares get distributed from what you leave behind. That is almost the easy part, though of course, most people mess that up.

The harder parts include elemental things like what is your property in the first place since that is less than obvious. The other part has to do with dealing with sometimes conflicting and competing interests around your wealth and family.

There are several such areas. However, let’s focus on the house since that is what I promised to discuss.

Abdulrahman and Fatima and their family home

Abdulrahman is married to Fatima. They have three children together, Aisha, Hafsa, and Alam. His parents are deceased. So under the Islamic Rules of Inheritance, since Alam is a boy, he gets 7/16. The daughters, Aisha and Hafsa, get 7/32 each. His wife, Fatima, gets ⅛. Rahim’s biggest asset is his house, which he purchased before he married Fatima and is his alone. Abdulrahman and Fatima have about $50,000 in savings between them, and the house itself is worth $600,000.00.

Abdulrahman wants his wife to have the house, then have it go to his children based on the Islamic Rules of inheritance after he dies. Can he do this?

Well, the short answer is that his wife cannot just take the whole house herself as inheritance and have it still be an “Islamic” plan. She is entitled to ⅛ of the estate, and the value of the home is worth more. The idea that it will eventually pass to the children is flat out not good enough. Fatima may live for decades after Abdulrahman passes away. She may outlive one or more of her children. Fatima may get remarried; adding to additional complications, she can also get sued or go bankrupt. The main reason she cannot have the entire house is that the children are entitled to shares in the Sharia.

Owning the family home together

So this brings us to another possible solution. Fatima can own a house together with Alam, Hafsa, and Aisha after Abdul Rahman dies. So, in this scenario, the house is split apart by deed, with all four people owning the family home as “tenants in common.” If the shares are correct in Islam, the form of ownership is not a problem. The problem though is that it is not really a secure home that Fatima can reliably live in through her old age.
Owning a home with children is, as you might imagine, dangerous. Children age. Their lives get increasingly complicated. We are not just concerned about Fatima getting married or bankrupt or sued; we have similar concerns for all three children as well since any of these things happening can result in Fatima potentially losing her ability to continue to live in the house. So we don’t divide up the house.

One additional solution and I emphasize this is only a solution for some people and may be inappropriate for others, is to split apart the ownership and “equity” in the house. We do this through a combination of trusts and other arrangements. This formulation contemplates inheritance not just as cash, but as beneficial ownership in the property. The goal is to protect the inheritance of the heirs, while at the same time, it allows for the surviving spouse to continue to live in the home.

Like a Business

This type of arrangement is similar to creating a business partnership or other business entity, which is another way we can distribute inheritance.  However, we do this for the family home.

Such an arrangement can be flexible, allowing for families to fulfill their If one of the children wants inheritance in the form of cash and that cash is available, the Trustee of the Trust can write a check. There is also the possibility the surviving spouse sells the house before he or she passes away, resulting in a cash distribution. The most likely situations where this happens is if the surviving spouse gets remarried (and thus moves to another home) or leaves the geographic area.

Different features in Estate Planning come with both opportunities and risks. How we develop them is about balancing different interests and goals. Unless everything is getting sold off and distributed after death, you have some level of complication. Family businesses, real estate, and other assets can cause problems.  The family home is a common concern.

Control is always an issue. Control leads to the possibility of oppression. We worry about abuse in some families more than others, though we never know what the future goes. That is knowledge of the unseen.

This process, estate planning, is more about people and relationships than it is about lawyers and documents. Those things are, and you really cannot do the half-way decent plan without them. We always try to focus on relationships, the planning follows.  This is for the family home and everything else.

Before you leave, get our free resource guide on Islamic Inheritance by clicking here.

Muslim Prenuptial and postnuptial agreements

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Muslim Guide to Prenuptial Agreements

Why are we discussing prenuptial and postnuptial agreements? I often tell people my best Estate Planning advice, more important than getting a good lawyer or doing a living trust or really anything at all, is this: Marry wisely. It is perhaps the most critical decision you will make. It amazes me how often people don’t think through the implications, or they don’t have the right people in their universe there to tell something is a bad idea. Too often, it is a bad idea. It’s just not enough to say marriage has a high divorce rate. For those previously married, the divorce rate can be as high as 80%.

But people marry hoping for the best. You don’t look at someone you want to spend the rest of your life in a manner that is suspicious. Marriage is a relationship of trust after all. At the same same, if you are a grown up and have lived and breathed for a few years, you don’t want to be nieve either.

Prenuptial and Postnuptial agreements are Similar to Estate Planning

Prenuptial and postnuptial agreements are similar in some respects to Estate Planning. In the event of estate planning, you are trying to change lousy default circumstances, like the way you own your home or the state intestacy statute, into something that better fits your values. If you are Muslim, you want it to be done consistently with Islamic Inheritance. When it comes to prenuptial or postnuptial agreements, you are trying to get a set of laws, parts of the state Family code, not apply to you by creating your own rules.

There are limitations to this sort of agreement. Certain things may not be binding. That may include things like some support or child custody issues. But that does leave open lots of problem-solving opportunities.
Being married without being “married.”

It would be a mistake for me not to mention the possibility that you can marry in Islam without being married under state law. Couples do this all the time. Of course, you want to make sure that you have exactly the rights that you want from the marriage if things don’t work out.

Adult Children

Hafsa is 67 years old. She has been widowed for ten years. Hafsa also has three adult children as well as some property. She married Abdullah, a 70-year-old man who has been a widower for one year. He also has adult children. Adult children typically see marriages such as this as a threat. They would like to show that it is not a threat to them and that money has nothing to do with this relationship.

They both sign a “cohabitation agreement”establishes the relative rights and responsibilities of each person. It also makes clear that there would be no common property ownership, no community property, no joint bank accounts and so forth. They also do their separate Estate Plans that list each other as beneficiaries, but based only on the rules of Islam, meaning that if Abdullah dies first, Hafsa gets no more than ⅛ of his estate, and if Hafsa dies first, Abdullah gets no more than 25% of her estate. They make sure they keep their children in the loop as successor trustees in the event of either death or incapacity. You do this through an incapacity plan.

The benefits they have from doing this include:

There are no complications that come with marriage under the family code.
They protect the relationship with adult children.
Protection for themselves in the event of attempts at elder abuse or alienation from their families.
Inheritance is consistent with Islamic rules.

Starting out in life

Adil, 22, wants to marry Zarina, 21. Neither of them has any assets on their own and plan to rent an apartment together near the university where they both study. They both plan on being in well-paying professions when they graduate, however. Zarina’s parents Abid and Aisha, do have some substantial assets. Abid and Aisha would like to make sure that anything Zarina gets would be for the benefit of Zarina.

The parents do not want Zarina’s assets, including any gifts they give her, as well as any inheritances, co-mingled with Adil’s assets. Abid and Aisha are worried in the event of divorce, Adil may end up with with a significant amount of the family’s wealth. Zarina’s parents are also not wholly content with Adil just yet. They think the marriage is risky for Zarina and would like to do something to protect her.

Community property does not, by default, include gifts and inheritance. So if Zarina’s parents want to give something to her, it does not mean that half of it automatically goes to Adil. As a practical matter though, it often works out that way.

Abid and Aisha have a couple of different options. These are not mutually exclusive (they can do both):

To protect Zarina, it would make sense to encourage a prenuptial agreement. She and her family have more of an ability to negotiate the terms of any divorce before the marriage than they would after it has taken place. So they can address issues like support, mahar, and determine what property would be “community property” and what property would be separate.
They can do their estate plans, which may include a plan for both inheritance and gifting. An Estate Plan can be done to protect their daughter in the event of divorce, or in case there are efforts to exploit Zarina’s future wealth.

The Second Act

Firdaus and Alam are both divorced. Both want to marry each other. Both are wounded from their prior relationships. Neither wants to go through another painful divorce that costs them immense sums of money. They both have a child each from their prior marriages, but are still young and want to have more children if possible. They both have some assets from the time of their previous marriages.

Firdaus and Alam need to negotiate the terms of their marriage. There is no established way of doing this. However, they would likely want to keep their property separate, perhaps owning one community property account to share expenses.

To do a prenuptial agreement, and this would be the case in all situations, it is necessary to do it in a way to make sure it is enforceable. Prenuptial agreements are considered by the law to be presumptively coercive. Courts may be inclined to think whoever it getting the short end of the stick in a prenuptial agreement was essentially forced to sign away their rights. It is a paternalistic system. A prenuptial agreement is no ordinary contract.

Firdaus and Alam will need to get their separate attorneys who are independent of each other. They will need to negotiate an agreement as an arm’s length transaction. There will also need to be a waiting period to demonstrate they both had the time to read the contract. Preferably, there would be a record of redlined drafts.

Talking about it

Prenuptial agreements are difficult to discuss. The problem is that it goes against our ideals. There is generally a lot of hope and a whole lot of fear that the dream can quickly fade if you only bring up the possibility that the marriage may not work out.

I understand that. However, if you are getting married, know that your marriage will end. It is not a matter of if. You either leave your marriage horizontally or vertically. Don’t think of this sort of planning as only planning for divorce. It’s often about the same thing Estate Planning is for: taking care of those you love.

401(k), IRA and Inheritance in Islam

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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.

 

Thinking of Orphans in Islam

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It is impossible at this point for me to do a full presentation on Islamic Inheritance without talking about orphans in Islam. Orphans are fundamental to our understanding of inheritance rules in Islam. Inheritance is about justice. However, it is not about the justice or injustice done by other people. Rather, it is about the injustice we do ourselves. It is our parting shot to the world, where we can easily make what we leave behind, our families, far worse off than what it was like when we were alive. This is often because we as human beings can become victims of our vanity. We know better. We decide what is best. Islam is different. We need to leave our vanity in the back seat and follow a command of Allah. That is what Muslims do.

Start with the Quran

The best-known verses of the Quran concerning inheritance are at 4:11-14. It states the shares of inheritance, the reward for following Allah’s command and the punishment for not doing so.

But even if you read all those verses, you may be missing something. The verse that comes immediately before (4:10) is worth a look at as well when it comes to understanding a major problem being solved. It is a warning against eating the wealth of orphans.

Orphans in Popular Culture

In popular culture, the living are blamed for how orphans are treated. Think of Cinderella and the wicked stepmother weaponizing her wealth; Little Orphan Annie and Mrs. Hannigan who ran the Orphanage; the Baudelaire Orphans and Count Olaf scheming to steal their fortune. We are trained to think in those terms because of popular fiction that for the most part, rings true to most people. The true villains in the story of orphans are often not so much the living, though you can expect unscrupulous characters to try to exploit the weak, rather it is the parents who failed to look after the interests of their children. Then they died. This goes beyond shares of inheritance in many respects, and beyond providing for children when they are minors. Injustice can mean many more things.

You and Empires

Years ago, a British Prime Minister was asked to comment on solving the long-running saga of Kashmir. He stated this would likely not be helpful since past British governments are responsible for creating these problems in the first place. If you create a legacy of injustice, that legacy often has a way of an enduring year after year, decade after decade. This is true of empires, large, and small. The British imperial masters of old left their legacy of injustice. You may feel there may not be much you can personally do about that. However, you can do something about the legacy you leave behind.

If you don’t already have our FREE Islamic inheritance Resource Guide, get it now.

Giving Inheritance in Advance

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Can you give away “inheritance” in advance?  This comes up from time to time, even though the premise of it may seem strange.  Inheritance is what happens after you cannot take it with you.  You don’t know what you will have when you die since you don’t know when that will be.  Let me suggest a hypothetical:

Abdul Rahman wants to start a business.  He asks his father Sulaiyman for a gift of $300,000 to do it.  This is approximately the value of the inheritance Abdul Rahman were to get if he died.   He suggests just giving him the advance now and exclude him from the estate plan.

The right of Islamic inheritance comes into play once: when an individual passes away. Unfortunately, some people often make the mistake of distinguishing between gifts and inheritance. This results in conflicts within families. In many cases, parents will provide more financial assistance to one child over another child. When the time for distribution of inheritance comes, this financial assistance might actually become a sore spot and cause conflicts among siblings.

Parents try to address this by restating the financial assistance as an “advance on inheritance.” My advice is to never do that. There is no way of knowing if any inheritance at all is going to be distributed to anybody. Furthermore, it is not at all certain that the person receiving advance inheritance will survive the person who is giving that assistance. Simply put, the son may die before the father.  As a practical matter, there is no such thing as an advance on inheritance

If parents actually want to ease the anticipated family problems that might occur if financial assistance is provided to one child who is in need  then the way to handle it is by characterizing the assistance as a “debt.”  Debt has its own challenges, as I discuss here.