Growth in the Islamic Financial sector has being phenomenal.

The Star online on 22 March 2012 reported for 2011 ending the Islamic banking sector increase in growth by over 23.8% or RM 434.6billion representing 22.4% of the banking sector. In the takaful sector, 15.8% or RM 17billion for 2011 ending. It also reported that Malaysia dominated the global sukuk market by 73.2%. With all the drive and initiatives by the Government, the Islamic Financial sector is bound to grow rapidly to accommodate the increasing demand for Islamic wealth management.

With this growing demand, so will the need for proper estate planning. Under Syariah inheritance laws, the estate of Muslim shall be distributed according to faraid distribution. Very briefly, faraid distribution involved the following rights:


                                                     Diagram 1: Rights of faraid distributions


Under blood relationship, if the deceased have heirs to the estate such as surviving parents, children and even siblings can inherit a portion of the estate. Of course if the deceased is married to a muslim, the estate also goes to the surviving spouse. If all attempts to locate heir fails, than the unclaimed estate shall be given to Baitul-Mal. The unfortunate assumption made by a lot of muslims were, there is no necessity to do estate planning since their wealth is already covered under faraid distribution. That presumption is obviously incorrect because under the Probate & Administration Act 1959 (revised 1972) all deceased estates are required by court to file in for probate. In that case, even for a muslim who have predeceased, all assets shall be frozen pending probate approval even if they have a wasiat, if not a lengthy process of applying for a letter of administration shall also take place. Without proper planning, assets of deceased shall remain frozen until an executor or administrator is appointed. Not only that, while estates are intestate, two sureties are also required. As you would realised by now, the same probate and administration applies to muslims too.

With the growing numbers of muslim high net worth in the country, wealth planning becomes more complex with mixtures of assets in local and global equities, real estates, joint shareholders in a number of companies, etc. With such wealth complexities, there is a demand for proper Islamic Estate Planning to preserve and protect the wealth for generations to come.

Some popular Islamic Estate Planning tools:-


                                  Diagram 2: Basic Islamic Estate Planning tools

Introduction to Islamic Estate Planning:-

  1. Wasiat;
    Wasiat or Islamic will writing is very similar to conventional will writing. The main objectives of having a wasiat is to reduce the probate time and making distribution more effective where by heirs of estate will have to respect the instructions laid out in the wasiat. Appointment of executors (wasi), trustees and guardians in a wasiat are part of the planning to protect the interest of minors and incapable members of family. In wasiat, muslim can only gift away 1/3 of assets to heir and non-heirs of the family under the Muslim will (Selangor) Enactment 1999, Section 26(2). Non-heirs here also refers to children of family whose heir have already pass away, not immediate heirs, charity and non-Muslim relatives, very common for those who have converted to Islam. The rest shall have to follow faraid laws, unless testator( person who wrote the wasiat) can get approval from all the faraid heirs to agree on his wasiat distribution. The main tasks of the appointed executors are to settle funeral expenses, debts , claims on Harta Sepencarian and distribution by faraid laws.

    2. Hibah;
    Another popular Islamic estate planning tool, hibah can be done during the lifetime of the donor with certain conditions address in the hibah or by giving away perpetually . Under two concepts called umra or ruqba, the asset is only be transferred when donor deceased, while in ruqba either ways applies, the transfer to donee can be revised upon death and reverts back to donor who is still alive. Used mainly in businesses where non heirs are joint owners in the business or assets and even in the case of adopted children and muslim converts. Hibah is not subjected to Probate and Administration Act, therefore shall not fall under estate or be frozen upon deceased of owner. Also commonly used in business insurance planning to reduce the complexity of faraid distributions. In this context, the business enterprise may have heirs and non-heirs as shareholders, by using hibah business succession planning can be done with minimum disruptions to transfer to rightful owners and compensation to heirs of deceased by way of insurance claims. As muslims, no insurance nominees can be named but with hibah, policyholder can chose who to be the beneficiaries.

  1. Wakaf;
    It is an irrevocable dedication/gift made expressively in charity for purpose of acquiring merit in the eyes of Allah. There are two types of wakaf (sighah), direct wakaf and conditional wakaf. Under conditional wakaf, certain requirements have to be met before the gift can be delivered.

  1. Islamic trust;
    Unlike wasiat, Islamic trust takes effect immediately upon execution of trust deed. It will not be subjected to faraid or frozen upon death. Also known as living trust, it is creditor’s proof and beneficiaries rights are protected and secured. Because the trust takes effect immediately, the creator of the trust shall have no ownership anymore but vested on the trustee through the trust deed created in his lifetime. Here the most appropriate trustee would be private trust company and not an individual/person for perpetuity reasons. The duration of the trust will depend on the asset in trust and also the number of years the trust was set up for. By forming a trust, owner shall have full confidentiality has to who the beneficiaries are and the general public have no access to the details of the assets. There is also another trust which only takes effect upon death, testamentary trust. In this trust it is form as part of the wasiat and can only give away 1/3 of the estate. If more than 1/3 of estate is to be given to certain heir, than consensus from other heirs must be approved before the trust can be effective. (Section 26(2) Muslim will (Selangor Enactment) 1999. Testamentary trust are subjected to probate and administration laws and not creditors proof.

Another popular trust among wealthy muslims is charitable trust. Here certain assets of the muslim client shall be formed into a trust for the purpose of charity. The different types of charities are usually for orphanages, education for the poor and single mothers. The trust shall be managed by a trust company and it’s functions shall be spelled out in the trust deeds.

  1. Harta Sepencarian;
    This planning refers to a muslim married couple whereby during their lifetime both parties have contributed either directly or indirectly towards the acquisition of such property. The form of contribution can be defines has either directly in terms of monetary and indirectly by providing family support such as love, care, welfare for home,etc The only ways which assets don’t fall under harta sepencarian are by receiving an inheritance or receiving a hibah while still alive. The main advantages of harta sepencarian are to allow both spouses to agree upon the distribution during the lifetime, rights of both spouses protected, avoid legal suits and hasten the distribution process.

With the increasing  number of wealthy muslim individuals, the estate becomes more complex and will require better estate planning to minimise time for distribution, peace of mind and protection of wealth from squandering heirs. There is also an increasing need of awareness among muslim converts on how to distribute the wealth among muslim and non-muslim relatives. Failing to plan, will leave non-heirs of muslim converts with no access to the assets. Worst if they do not have any faraid heirs, it will then goes to Baitul-mal. Why deprived your loved ones from inheriting part of your wealth? And how would you answer to the Almighty on the day of judgement for failing to provide enough?

Please seek advice from your trusted financial planner to give you a complete solution to your estate planning today.

This article is written by Mr. Lawrence Seow, Head of Financial Planning, VKA Wealth Planners Sdn. Bhd and was published in Money Compass Magazine (English) on February 2013. 

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