Welcome back to our series on Islamic wealth protection and preservation. In previous edition, we had established that Wealth is a part of sustenance granted by Allah to all mankind, and Islam permits its accumulation. You can find it here.
In this edition, we continue our discussions on protecting and preserving wealth as Islamic faithfuls using Islamic Estate Planning tools as well as Asset Diversification / Risk management.
HIBAH/ GIFT GIVING
Hibah is a gift-giving done voluntarily to one or several subject matters to the recipient(s) by owners of wealth during their lifetime without any consideration or return.
The basis of implementing hibah giving is based on Allah’s saying in Surah An-Nisa”, verse 4 which means: “And give the women (on marriage) their dower as a free gift; but if they, of their own good pleasure, remit any part of it to you, Take it and enjoy it with right good cheer. (4:4)”
At the same time, hibah giving is also encouraged to be given to the closest family members as a symbol of affection as Allah said in Surah Al-Baqarah, verse 177 which means: “ to spend of your substance, out of love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those who ask…. (2:177)”
Additionally, Prophet Muhammad also said as narrated by Abu Hurayrah (Al-Bukhari, n.d.) :
“Give gifts and you will love one another.”
There are three vital elements to ensure the validity of hibah giving, they are contracting parties, contract (aqd), and subject matters. The two contracting parties are donors (owners of wealth) and recipient(s).
Donors must have the intention to give his/her wealth, be capable of transferring the wealth, and be able to do the transaction (clear mind and wise in managing the wealth (rusyd). Donors must be the absolute owners of the wealth.
Hibah giving must be done willingly without any coercion or undue influence. However, if there are any elements of coercion and undue influence, the contract of hibah giving is void.
Furthermore, recipients can be anyone either Muslims or non-Muslims, have the ability and capability to own and manage the wealth and be present when the hibah giving contract is carried out.
In terms of contract, there must be an offer (ijab) and an acceptance (qabul), have connectivity and similarity between offer and acceptance, donor and recipient(s) must understand the contents of the contract, no hanging condition (ta”liq), no changing of the first party before the second party, clear declaration of hibah giving (must be heard by other close party who are near to the contracting parties) and two parties remain qualified while making the contract and clear utterance by mentioning subject matters.
Hibah giving contract also must not subjected to any conditions. Subject matters must be transferred physically, lawful, exist during the contract is made, valuable, and legally owned.
WASIYYAH – Islamic Bequest
Wasiyyah is a contract that is made during lifetime of testators to distribute their estate to beneficiaries which is effective only after their death.
However, there are two main limitations in which wasiyyah is only for non legal heirs and the total amount of wasiyyah is not more than 1/3 of the total estate. Besides that, legal heirs should not be named as recipients unless other heirs give their consent.
IIniitiially, it is compulsory for Muslims to leave wasiyyah based on Surah Al-Baqarah, verse 180 which means: “It is prescribed, when death
approaches any of you, if he leave any goods that he make a bequest to parents and next of kin, according to reasonable usage; this is due from the Allah fearing (2:180)” However, this law has been amended by Surah An Nisa”, verse 11 and 12 which revealed faraid distribution and Prophet Muhammad”s Hadith narrated by Imam Ahmad, Abu Dawud and Ibn Majah which means: “Allah, Mighty is His Name, has given every person who has rights his due, and there is no bequest to an heir.”
Based on the consensus among Muslim scholars, wasiyyah has four main pillars namelyTestator; Beneficiary(ies); Subject matter(s); and Contract (offer and acceptance).
The conditions for testator are that the testator must be mukallaf (adult and sane/sensible), independent, the owner of subject matters and the bequest must be done voluntarily.
While for beneficiaries, they must be known, (except for charity wasiyyah), alive after the death of testator, capable to own and manage the estate, and bequest is only for non-legal heirs.
For subject matter(s), it could be movable, immovable property or usufruct which is valuable in Islam, could be transferred after the death of testator and exist in the ownership of testator if the subject matters are specified or exist after the death of testator for unspecified subject matters.
Offer and acceptance could be manifested (sarih) or symbolized (kinayah). Wasiyyah could be verbally such as, “I bequeath to you my property to …..” and written by the testator or through any expert firms which provide written wasiyyah services. However testator is preferred to prepare wasiyyah through firms who have relevant expertise to ensure that wasiyyah can be enforced after the death of testator.
WAQF
Waqf (Arabic for endowment) is a model of Islamic philanthropy that is instituted to endure in perpetuity i.e., It is a structure that is set up to stand the test of time. It involves donating a fixed asset that can produce a financial return or provide a benefit as long the asset(s) is in existence to certain beneficiaries. It is loosely referred to by Estate and Inheritance Practitioners as Islamic Trust. This is because the key elements to set up a trust are evident in a Waqf. These are:
- The unambiguous intention to establish a Waqf;
- The settlor, called the Waqif, who is the legal owner of the asset(s) and is donating or bequeathing the assets;
- The assets being donated/bequeathed;
- The beneficiaries for whose benefit the assets would be utilized and the proceeds thereof distributed.
In Islam, a Muslim only has the free will to determine how one-third (1/3) of his estate will be allocated, the remaining two-thirds (2/3) have been automatically distributed by Allah (SWT) by way of Faraid (the Law of Inheritance).
While the one-third (1/3) portion can be distributed by way of drafting and executing a Wasiyah (Will) which would expressly capture his desires for the distribution of his/her estate, he/she is also permitted to structure the 1/3 (in whole or in part) as a Waqf.
By this, a Muslim can either donate a monetary value (Cash) of his wealth to Charity for purposes that are in line with the Islamic faith or dedicate a fixed asset such as Land, buildings, or Vehicles for Charitable uses.
Waqf is of two types:
Waqf Khairí (waqf for a charitable purpose) and Waqf Dhurrí or Ahlí (waqf for the family).
- Charitable trusts are a type of waqf khairí.
- Family trust, children’s education trust, minors’ trust, dynasty trusts are a form of waqf dhurrí.
Waqf can serve as a tool for a business succession plan.
Asset Diversification and Risk Management
Islamic faithfuls can protect and preserve their wealth through diversification of their asset and investment portfolios as well as management of attendant risks.
Shariah prohibits investments and transactions that are uncertain and full of risks, accordingly, an Islamic faithful is not allowed to pass off his risk to another person. It is considered injustice to do so.
Diversification of investments and holding a well diversified portfolio of assets is a way to manage and mitigate risks to wealth.
Sukuk investments, Sharia-compliant equities, and real estate investments provide opportunities for diversification, helping to spread risk and protect assets and wealth from the inherent volatility of singular assets.
Asset Diversification and Risk Management
Islamic faithfuls can protect and preserve their wealth through diversification of their asset and investment portfolios as well as management of attendant risks.
Shariah prohibits investments and transactions that are uncertain and full of risks, accordingly, an Islamic faithful is not allowed to pass off his risk to another person. It is considered injustice to do so.
Diversification of investments and holding a well diversified portfolio of assets is a way to manage and mitigate risks to wealth.
Sukuk investments, Sharia-compliant equities, and real estate investments provide opportunities for diversification, helping to spread risk and protect assets and wealth from the inherent volatility of singular assets.
Takaful
Takaful in Arabic means “joint guarantee”. It is an Islamic cooperative insurance scheme based on the ideas of shared responsibility and mutual aid. Participants put money into a shared fund pool to hedge against certain risks. Whenever a claim is made, the money goes toward paying the impacted participants. In line with Shariah principles, takaful encourages cooperation, risk-sharing, and fair treatment amongst its members.
Takaful is the alternative to conventional insurance which encourages riba (interest) and al-gharar (uncertainty). There are different types of takaful but the most common are family takaful and general takaful.
Family takaful offers members and their dependents protection against death, disability, or survival in addition to long-term savings. It is an insurance scheme that covers a person’s loved ones including friends, employees, colleagues, etc. It is sometimes referred to as life insurance because it shields the insured’s beneficiaries or heirs from future unforeseen financial risk.
Generally, takaful is for protection of properties against fire, loss, accidents and it is usually short term.
We would continue examining Islamic wealth planning for Islamic faithfuls in subsequent editions of this Newsletter.
Remember you can secure your legacy according to Islamic principles with our expert estate planning services.
Get in touch with one of our professionals today by sending a mail to contact@fiduciaryservicesltd.com.
