بِسۡمِ اللهِ الرَّحۡمٰنِ الرَّحِيۡمِ

USE OF THE COMMON LAW TRUST IN ISLAMIC WILLS

 

Muslim solicitors, Will writers and tax accountants have been advocating the use of testamentary trusts (also called Will trusts) in Islamic Wills over the past 15-20 years. Some believe that this is the best or the only way to ensure Islamic inheritance takes place, some give precedence to mitigating inheritance tax (IHT) above all else in the belief that paying IHT somehow violates the rights of the legal heirs while some may be promoting Trusts with an eye on the revenue generated in setting up such Trusts and their subsequent administration costs for years, which can run into thousands of pounds. Be wary of those solicitors who when drafting your Will put themselves forward as witnesses and executors/ trustees of your Will/ Trust. This article looks at some of pros and cons of setting up a Trust through a Will, referred to as a testamentary trust or Will trust.

 

What is a common law Trust

The origin of the trust in the common law system goes back to medieval England. In a trust, the owner of a legal interest (the settlor), transfers the legal title to another person (the trustee), to be used for the benefit of other person or persons (the beneficiaries). By the creation of a trust, the legal title (in law), the equitable title (in equity) and the beneficial title are separated into three elements, which are the trustee (title holder), trust property and the beneficiary or object of the trust. A trust is not a separate legal entity as a company.

There are numerous types and classification of trusts. A trust which is set up in a Will is called a testamentary trust or Will trust. In such a set up the Will is the Trust Deed and the executors of the Will become trustees of the Trust.

For a valid trust three certainties are necessary; certainty of intention, certainty of subject matter and certainty of objects as explained below.

Settlor (grantor) is the person who puts assets into the trust. The intention of the settlor to set up a trust is essential. The intentions of the settlor are usually expressed in a legal document called a ‘trust deed’ or in his Will.

Trust Property is the money, land, shares, etc. placed into the trust. The subject matter of the trust must be clear, certainty of subject matter.

Trustees carry out the wishes of the settlor. The trustees are the ‘legal owners’ of the property held in the trust. The trustees can be individuals or an organisation. The trust can continue even if the trustees change.

The beneficiary is anyone who benefits from the property held in the trust. There may be more than one beneficiary. Each beneficiary may benefit from the trust in a different way. The beneficiaries are the ‘beneficial owners’ or ‘equitable owners’ of the trust property. The beneficiaries must be clearly stated, certainty of objects, otherwise, the trust may fail. Beneficiaries can be appointed as trustees in a discretionary trust.

A trust does not require mandatory court supervision during the administration of an estate.

 

Testamentary trust to mitigate IHT

Trust planning can allow estate management to be more tax efficient. The overall inheritance tax consequences is dependent on the amount of property placed in a trust and the type of trust set up.

 

Use of trusts in Islamic Wills

Although the concept of trust finds application in Islām in different forms, such as the waqf (charitable trust), amanah (trusteeship) and sharikat al mulk (shared ownership/ partnership), common law trusts are generally not accepted in the Islāmic world.

The transmission of property of the deceased via a Will (testamentary) trust to trust beneficiaries is not inheritance according to Islāmic law nor according to English law, in the strict sense. The trust beneficiaries are not regarded as heirs. However, some scholars allow use of the common law trusts in Islamic Will as a temporary arrangement to fulfill a desired goal. But it is not without its drawbacks and potential problems. The devil is in the detail. The main purpose of a common law trust is asset protection, such that those who may have a legitimate claim against an individual's assets such as a divorced wife, a creditor if the individual claims bankruptcy, negligence claim etc. are unable to attain justice because the individual's assets are locked up in a legal entity called a trust which he does not legally own but in reality he does. A Muslim should not want to leave such a set-up behind as his legacy where the rights of others may be violated. This would be an argument against setting up a Will trust. For a Muslim avoiding paying IHT and protecting his or her assets against legitimate claims should not be a goal in itself. 

Waqf under Islāmic law is very similar to a trust under common law. Both involve the concept of separating the legal and beneficial title. The two devices are parallel in purpose, theory and structure. Waqf created by a Will, that is on the death of the propositus, is only valid up one-third of the estate (application of the one-third rule) whereas a trust created by Will can include the whole estate of the deceased.

 

 

There are different kinds of trust which can and are used in Islamic Wills and only some allow reduction of IHT. Any assets passing to a surviving spouse on the first death of a married couple are treated as exempt from inheritance tax this will include if the assets are placed in a Life Interest Trust with the surviving spouse being a life tenant or simply given as inheritance via Will. 

Discretionary Trust

By transferring all your estate upon death into a Trust you are effectively distributing all your estate into a Trust, at this point your inheritance ends. The Trustees are now responsible as to how the “Trust property” is distributed. The details of how the trustees deal with the Trust property is often deliberately not written within the Will/ Trust deed so the trustees exercise discretion, hence the term Discretionary Trust. A discretionary trust created upon death through a Will is referred to as "relevant property trust" for tax purposes. You may write a Letter of Wishes to the Trustees that you want them to distribute the Trust property as per Islamic inheritance law but this Letter of Wishes is not part of your Will and it is not legally enforceable. If you want to set up a testamentary trust through your Will and want to leave clear unambiguous details as to how the estate is to be distributed as per Shariah you could incorporate a Schedule of Inheritance into the Will/ Trust Deed. The advantages mentioned of setting up a Discretionary Trust it that it allows flexibility, possible tax-efficiency, any third-party including a recently divorced wife cannot make a claim on the assets due to a beneficiary (heir), if a beneficiary (heir) goes bankrupt his assets held in the trust are protected against any claims, the trustees can decide how to distribute assets to a spendthrift beneficiary (heir) and if a beneficiary (heir) is on government benefits the trust assets are not taken into account. 

While it is true that a Trust does provide asset protection but from a Shariah perspective in some cases, this is simply violating the legitimate rights of others. When a person dies his legal heirs become joint owners of his estate in proportion to their inheritance shares, the trustees do not have the right to determine who gets what and when.

 

Life Interest Trust (also known as Interest in Possession Trust)

This is one type of trust advocated by some solicitors/ Will writers to mitigate Inheritance tax IHT.

Let us use an example of a married man who jointly owns a house, his main asset, with his wife. They are tenants in common of the property with 50:50 ownership. The man writes a Will in which he stipulates creating a Life Interest Trust with his wife as the life tenant and upon her death, his children are to be beneficiaries (remaindermen), the share of each child to be as per Shariah. If the family house is jointly owned as joint tenants then a LIT is ineffective as the right of survivourship applies.

When the husband dies his widow (referred to as the life tenant) has the right of occupation and any income generated by the family house until she dies then the property is distributed to the children. The widow is not entitled to the capital in the Trust in a purely life interest trust. If all the assets of the deceased are transferred (gifted) to the surviving spouse there is no IHT liability thus creating a LIT is tax neutral. In a Life Interest Trust with the wife as the life tenant the wife is deemed to own the whole property for IHT purposes. These assets do not escape IHT entirely because IHT will be payable on them when the wife dies. If any IHT is payable at 40% then it is paid pro-rata between the Life Interest Trust and the surviving spouse’s estate. In effect, the Life Interest Trust becomes a Discretionary Trust upon the death of the life tenant and the Trust capital is distributed by the trustees to the beneficiaries (children), an exit charge of approx. 6% applies.

 

Many Muslim men like the idea of leaving the family house for their wife to live in and then divide the inheritance upon her death. Some write their Wills in this manner. Some Muslim women are also of the mentality that they automatically become owners of all their husband's property upon his death. I have personally been contacted by Muslim men to see if this can somehow be accommodated within Shariah as well as seen so-called Islamic Wills to this effect.

Let’s see what Mufti Tariq Masood has to say on this issue.

 

Flexible Life Interest Trust

A FLIT in the above example would allow the man’s widow (the life tenant) the right of occupation and any income generated by the family house until she dies plus access to the capital in the Trust. Can IHT be avoided if the widow (life tenant) gives away the assets in the FLIT? Not necessarily, any gifts given from the FLIT will be treat as potentially exempt transfers (PETs) and subject to the seven-year rule.

 

Discussion

Setting up a testamentary trust does flag up some issues from a Shariah perspective. A life interest trust has no concept in Shariah, the legal heirs are dependent on the trustees to give them their inheritance rights, who owns the assets can be confusing. A trust based Will to mitigate IHT would be identical for a Muslim and a Non-Muslim, the only reason such a trust based Will is labelled as an Islamic Will by some is because of the Letter of Wishes accompanying the Will, but the Letter of Wishes is not part of the Will. Can IHT be mitigated in some cases without setting up a Will trust? Yes. 
Everyone is entitled to a nil rate band (NRB) for IHT. Assets that pass from one spouse to another are exempt from IHT. This is the actual basis of saving on IHT not the setting up of a Will trust. So if on death, a husband leaves everything he own to his wife it is exempt from IHT and he has not used any part of his NRB. So a Muslim man could arrange to leave all his estate to his wife and make her promise or even take an oath that she will distribute the estate amongst his heirs according to Shariah. In such a scenario there is no IHT to pay. Of course, the wife has to be trusted in a similar manner to trusting trustees in a formal Trust. If the wife goes back on her word there is no legal recourse unless it can be proven that a constructive trust was established. The distribution of the husband's estate by his wife to his heirs (children) in both the above scenarios will effectively be gifts and treated as PETs for tax purposes. 

When the wife dies, the husband's unused NRB can be transferred to the wife's estate which could give her estate an  IHT exemption of up to a million pounds including residential NRB.
Of course, a man leaving all his estate in his Will to his wife to avoid  IHT is not Shariah-compliant but neither is transferring all his estate into a Trust upon death. In both methods the deceased husband transfers all his assets at death to his wife to avoid paying IHT, both are temporary arrangements based on trust to mitigate IHT and ultimately achieve distribution according to Shariah based on trust. If non-Shariah methods are to be tolerated for the purposes of avoiding IHT on the principle of the means justify the end then it is possible to use non-probate instruments (A Will substitue) to bypass the whole probate process altogether and hence IHT.
It is much better to manage one's estate while one is alive so as to minimise IHT and accept that any IHT which may arise as an inevitable tax which has to be paid and simply write a Will which is completely Shariah-compliant using only Shariah-compliant methods  as this would probably be better for one's akhira.

The main objective of an Islamic Will should be that the Will writer (testator) does whatever he can to ensure that his estate after his death is distributed according to Shariah as soon as possible, ideally the Will should appear to be Shariah compliant rather than relying on some other arrangements outwith the Will. Both the intention and methodology must be correct. The rights of his legal heirs nor the rights of any claimants on the assets of these legal heirs should not be compromised. Trying to mitigate IHT by whatever means should not be the primary objective. 

 

Dr. A. Hussain

Author of The Islamic Law of Succession (2005) and The Islamic Law f Wills and Inheritance (2015)