In the name of Allāh, Most Gracious, Most Merciful

Testamentary Trusts & Testamentary Awqāf

بِسۡمِ اللهِ الرَّحۡمٰنِ الرَّحِيۡمِ

Discretionary testamentary trusts are used by some practitioners when writing an Islāmic Will for their clients. Some Will templates available on the internet use this same approach. There is no parallel in Sharīʿa to the common law trust found in English law and other common law jurisdictions. The nearest equivalent to the common law trust in Sharīʿa is the waqf (plural awqāf).

Waqf literally means detention. A waqf (endowment) is like a gift whereby the corpus (ʿain) of the gift is detained and the usufruct (manfaʾa) is set free as an act of charity. The corpus cannot thus be sold, gifted, inherited, rented, etc. The use of the usufruct is declared by the donor.

Legally, according to imām Abū Ḥanīfa (), it means the detention of a specific thing which is in the ownership of the wāqif (donor) and the devoting of its profits or usufruct ‘in charity to the poor or other good objects’. According to imāms Muḥammad () and Abū Yūsuf (), waqf signifies the extinction of the wāqif’s ownership in the property together with the dedication and detention of the property with its implied ownership by Allāh (), in such a manner that its profits may revert or be applied ‘for the benefit of mankind’.

The purpose of establishing a waqf is to seek Allāh’s () pleasure.

ʿUmar () said to the Prophet (): “O Messenger of Allāh! I have a land in Khaybar which I prize highly, so what do you order me to do with it?” The Prophet () said, “If you like, you can give the land as an endowment and give its fruits in charity.” Thereupon, ʿUmar gave it in charity (as an endowment on the condition) that the land and trees will neither be sold nor given as a present, nor bequeathed. He endowed it for the poor, for his kith and kin, for the emancipation of slaves, for the cause of Allāh (), for travellers and for guests.” (Ṣaḥīḥ al-Bukhārī and Ṣaḥīḥ Muslim)

The waqf may be inter vivos (i.e. one created during the founder’s lifetime) or testamentary (i.e. created by way of a Will). A waqf established by a Will (testamentary waqf) is subject to the one-third rule, i.e. only up to a maximum of one-third of the net estate of the deceased may be placed into a waqf. If a waqf is indeed to be likened to a common law trust then one would expect the same restriction should apply to testamentary trusts, which would mean the whole of the net estate of the deceased cannot be placed into a testamentary trust but only up to a maximum of one-third of the net estate. However, under normal circumstances, including Islāmic Wills drafted by practitioners, the whole of the net assets of the deceased are placed in a testamentary trust. If the wafq in Sharīʿa is not seen to be the nearest equivalent to the common law trust in English law then what is?

A number of questions arise regarding the use of trusts in Wills. Since the use of such testamentary trusts in drafting Islāmic Wills violate the one-third rule are such testamentary trusts valid from a Sharīʿa perspective? Should the use of such testamentary trusts be limited to circumstances where no other Sharīʿa compliant methodology is available or in circumstances where the setting up of a testamentary trust confers an undoubted significant financial benefit in terms of taxes levied on the deceased's estate such as inheritance tax? Is the end result more important than the means used to achieve it, i.e. is it permissible to use non-Sharīʿa compliant methodologies to try to ensure that the final distribution of inheritance is according to Sharīʿa? Or is it more important to use Sharīʿa compliant methodologies to try to achieve the desired end result? As there is no guaranteed method which will ensure that estate is distributed as per Sharīʿa should the testator not adhere to Sharīʿa compliant methodologies?
 

UPDATE

With effect from April 2017, the UK government introduced the family home allowance or main residence nil-rate band (RNRB), which will eventually be worth an additional £175,000 per person by 2020/21. RNRB allows married couples and civil partners to pass on assets worth up to £1m including the main residence to their direct descendants, without paying any UK IHT.

RNRB allows each individual to claim an additional allowance of £100,000 to offset the sale of a family home on death, on top of their existing £325,000 inheritance tax exemption. This new tax allowance will rise to £175,000 by 2020, allowing a couple to pass on £1m estates tax-free.

Using a discretionary trust in a Will could mean the heirs of the deceased will face a hefty bill for inheritance tax which could have easily been avoided. It is, therefore, important that you review your Will if you are using a discretionary trust to ensure that you minimise your IHT liability.