So you have an Islamic Estate Plan: A living trust designed to respect your wishes. You have a will, designed to back it all up. An attorney drafted a power of attorney in the event of financial incapacity. Your lawyer transferred your real estate to the living trust so that the home transfers how you want after death and your family avoids probate. You also transfer your bank account so that your trust owns it. If you have a business, you transfer or assign your shares so that it all flows the way you want. All good things. But there may still be a problem.
How Retirement Plans Work
There are many retirement plans out there, the 401(k), the 403(b), the Individual Retirement Plan (IRA), the SEP-IRA, and so much more. Most of them follow the principle that customers cannot hold assets in a trust because the financial institution already has them in a special account. Unlike your home, business, and bank accounts, accounts like 401(k)s and IRAs are governed by a separate contract.
Ignoring Your Wishes
Estate Planning Attorneys at an organization I am part of recently started complaining about the difficulty in administering estates per the descent’s wishes. Let me give you an example:
Abdullah has a living trust and will that designates his estate to be distributed based on the Islamic Rules of Inheritance. He does not, however, do something called a “beneficiary designation” for his 401(k) worth $1.8 million. Abdullah’s family is a bit complex. He has five children from two prior marriages and is now newly married. Different branches of his family don’t like each other, and nobody seems to like his new wife.
Abdullah has a 401(k) with a brokerage that has a policy of giving the entire estate to his wife unless he specifically designates otherwise in the brokerage’s own form. What he says in his will or living trust is irrelevant. This was NOT his intention. According to the Quran, his wife is entitled to only ⅛ of the estate. It is possible she will consent to give up the retirement plan (which she can roll over into her own). Maybe she will, but given the bad relationships in the family, and also, because it’s a large amount of money, maybe she won’t.
A popular brokerage like Schwab, for example, has a “line of succession” policy independent of a client’s wishes. So if Abdullah does not do a beneficiary designation, a huge injustice can occur.
How to fix this
Abdullah wanted his successors to distribute his assets based on the Islamic Rules of Inheritance after his death. He could draft a beneficiary designation based on the Islamic Rules of Inheritance on his brokerage’s form. So Abdullah can name all beneficiaries and their percentages. This can be tedious and may eventually be wrong since you don’t know who your survivors will be when you die.
Given that inheritance is a moving target, he may need to adjust the shares if, for example, he gets divorced and remarried, has more children, or a parent, child, or spouse passes away. To simplify this, it may also make sense to name his trust as the beneficiary, which should be designed with retirement plans in mind and provisions that protect it from periodic changes in life.
Of course, Abdullah would have to revise his estate planning periodically, but it’s easier to do that through a living trust.
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