Structuring Trusts For Shari’a Compliant Clients

Increasingly Muslim high-net-worth-individuals (HNWIs) are considering structuring their assets to deal with estate planning in a Shari'a setting.

In addition non-Shari'a countries are becoming more involved because such family relocation results in a complex cross-border exercise which is difficult to get right. There is a growing need for efficient management of assets; expertise in the provision of professional services including experienced managers investment advisers trustees and Shari'a advisors.

As such trustees looking to the Middle East for potential business often need to have knowledge of Shari'a compliant trusts.

The preservation of family values continuity of management of family-owned businesses dealing with the family obligations towards the payment of Zakat [1] and charitable purposes in general are very important issues for Muslim HNWIs.

The use of a common-law trust is often considered for Muslim families. They can be fully Shari'a compliant under advice from a qualified Shari'a adviser or equally the trust can contain certain but not all Shari'a provisions. Advisers will consider the nature of assets eligible to become trust assets their management Islamic guidelines and investment guidelines generally.

A question that also needs to be asked is: how Shari'a compliant do clients wish to be? The two areas that need to be discussed at the outset are first whether any restrictions are required in investments and second the rules relevant to the Islamic rules on inheritance.

Trustees should be aware that generally there are no restrictions on making lifetime gifts; however on death there are strict and complex rules on the division of assets. Trusts that are Shari'a compliant must to the greatest extent possible follow such rules. It is extremely important that trustees fully document and understand these rules and their records are kept up to date as well as the records of any change of family circumstances that may impact the whole structure. More specifically each change in family circumstances can alter the succession for all beneficiaries and potential beneficiaries.

A letter of wishes is very valuable to trustees as it is with most trusts. Albeit non-binding it gives a snapshot of the family circumstances and the trust remains flexible enough to deal with circumstances that could not have been predicted during their lifetime.

Historically the patriarch or matriarch of the family rules during their lifetime and has total control of the activities and investments. It is key to the success of the structure that trustees ensure a smooth transition of management of investments and any family businesses. Often recommended is the use of a private trust company (PTC) to act as trustee for Shari'a-compliant trusts. This enables the settlor to continue to exercise some influence over the assets in the structure and more importantly to enable family members to be exposed to the management in a measured way. Involving family members as soon as possible especially in the board of the PTC is crucial to the success of the structure after the settlor's death. The other advantage of a PTC is that it can act as trustee of multiple trusts along family lines: different family units can be catered for in this way.

Middle Eastern families often consider appointing a protector or protectors and a combination of a family council and a protector for large families is preferred. A protector who understands Shari'a is very valuable for obvious reasons. They could be a family adviser but equally they could be an Islamic scholar who can assist trustees on matters such as investments and ensuring any distributions made are in accordance with Islamic principles.

The family council concept is also favourable because while it can be structured to not have too much power it can be very useful to ensure family members feel they are part of the family. This can help them begin to understand the business and aspire to become more involved in the future.

A trust structure is a very useful vehicle to ensure that family wealth remains available for future generations. Some structuring may not be fully Shari'a compliant and this is often a useful compromise for family members who wish to benefit from the trust concept but at the same time understand and respect that distributions would be allotted in accordance with Shari'a law.

Trustees need to be conscious at all times of the family circumstances and review their files and interact with the settlor often to ensure that their files properly document the family circumstances as they change. And they will.

[1] The compulsory giving of a portion of wealth to charity

Email: martyn.crespel@praxisifm.ch