So why continuing trusts? Here is one major estate planning problem that comes up in our minds quite frequently: a 23-year-old man suddenly gets $700,000 as inheritance, unexpectedly. What do you think he is most likely to do with the money?
a) Put it away in an investment account so that he would use it for future, well-considered business ventures, charitable endeavors And other projects designed to build on the family’s legacy.
b) Haphazardly invest and spend based on the direction provided by his new larger circle of “friends.”
c) Spend nearly all of it on luxury items and vacation.
The “lottery curse”
You may well be familiar with how people who get “fast money” tend to lose it very quickly. The “lottery curse,” is where stories of people who win the lottery (or get a big NFL paycheck, etc.) might end up robbing banks to feed a heroin addiction.
So in American estate planning, many lawyers offer estate planning that keeps assets in trust, often indefinitely. You may be familiar with the concept of “trust fund babies.” Parents often don’t trust children with their inheritance, and figure trust companies and professional fiduciaries are better stewards of a person’s legacy.
Continuing trusts, that is to say, a trust that goes on in some form or another after the death of the person who created the trust, often well after (hundreds of years in some cases) come in many different flavors. The variety can be endless.
How these Trusts are used
One common motif used in American fiction is when someone writes in a will that the beneficiary must marry by age 35, or be cut off. Famously, Leona Helmsley wanted heirs to come to visit her mausoleum and sign her guestbook. Other trusts can be a matching program, where a trustee only matches to the extent that the child earns money.
So, for example, if a child decides to become a teacher, she will get less inheritance than her brother, who became an investment banker. Being a teacher is less valued by a high performing business owner. These trusts then become known for perverse choices particular to the values of the person making these rules.
Making this about Islam
For Muslims, we want to make sure and do everything consistent with Islam. Children are entitled to inheritance because the Allah ordains this. That is the fard of Islamic Inheritance. Muslims are unable to tie strings to wealth that is the right of the heir.
There are going to be exceptions to this of course. It would be irresponsible to fork over hundreds of thousands of dollars to a heroin addict.
Is there any way Muslims can make that “fast money” a little bit slower? Yes. You can use continuing trusts. Just not any way you might want to.
You could give away virtually unlimited amounts of strings attached to your wealth if you were to give it away during your lifetime.
Bilal, during his lifetime, creates a trust for the benefit of his children and progeny. It is a “Family Waqf” that owns 300 acres of ranch land. He wants the ranch land to be operated by a committee from within his family that would only make distributions from the ranch’s business operations to deserving people within the family for educational purposes or if they are at or near poverty. The Trustees would distribute a portion of the profits is to a charitable foundation that he creates.
Bilal can do this because none of this is subject to the Islamic Rules of Inheritance and is not a wasiyyah. It is a lifetime transfer. If he creates it in a document that goes into effect after he dies (like a will or a living trust), then it is not permissible.
Continuing Trusts and Asset Protection
It is also possible to create a trust after inheritance that distributes shares not to the heir directly, but to a trust for the benefit of the heir.
Bilal creates a living trust. After his death inheritance is going to be distributed consistent with the Islamic rules of succession, to his three children, Adam, Wahida and Sultana. Instead of the estate going to them directly, he creates three continuing trusts: the “Adam trust” a Wahida Trust” and a “Sultana Trust.” A Trustee of these trusts is directed to make distributions to the beneficiaries of the trust at the trustee’s discretion.
As a general rule, the trustee is not going to say no if one of the beneficiaries asks. However, if a Judgement creditor, an ex-spouse or another person who may legally stand in the shoes of one of Bilal’s children want the money, they likely cannot get it.
There is a strong incentive to leave the assets in continuing trusts since there is the benefit of asset protection. The trust can even purchase investments and grow. So there is often no reason to withdraw anything to invest.
The Trust may also continue to future generations, depending on the state the trust is set up in (it can be set up in any state, and the laws in each are different).
It’s a nice thing to do, but often not 100% necessary
It isn’t necessary to create continuing trusts. As a Muslim, you must make sure that your successor Trustee distributes inheritance correctly. However, giving your children a gift of asset protection and a potential buffer against “fast money” is probably a good move for many families.