Estate planning: The benefits of Islamic estate planning (Pt 1)


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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 30 - June 5, 2016.

Estate planning is a vital but often forgotten element in a Muslim’s financial plan. According to Abdul Aziz Peru Mohamed, president and CEO of as-Salihin Trustee Bhd, estate planning is how we protect the assets we have spent a lifetime accumulating.

“Estate planning is the final part of financial planning. Of course, most of our energy is directed to accumulating assets, whether liquid or fixed. After that, we seek to protect our assets, so we take on takaful and insurance to protect our homes, our families and ourselves. But we always forget the last part. [Based on our research] 85% of the local Muslim population have not done any estate planning,” he says.

This lack of awareness was reflected in a recent news report, which cited Ministry of Natural Resources and Environment findings that there had been an estimated RM60 billion worth of unclaimed assets since the country’s independence in 1957. This is a substantial increase from RM42 billion worth of frozen assets in 2011.

Although the unclaimed assets mentioned in the report were those of both Muslims and non-Muslims, it is believed that most of the assets belonged to Muslims, says Abdul Aziz Peru. 

“Most of these assets are fixed assets such as land and property. When it comes to land, if it is in the name of the deceased, it will remain so after he is gone. The name will not be transferred unless there is a compulsory acquisition by the government. Families can only claim the land after obtaining the Letters of Administration,” he says, adding that liquid assets that are unclaimed for seven years go into the government’s coffers.

Abdul Aziz Peru believes that the amount of unclaimed assets illustrates the lack of awareness of the importance of estate planning as well as apathy or ignorance in following or carrying out the procedures of asset distribution among Muslims in the country. “RM60 billion is unclaimed because nobody is administrating the assets — because they don’t know how to go about it. By having a will or trust, the issue of unclaimed assets will not arise as the testator or settlor will appoint an executor or trustee to manage the deceased’s assets.

“It is not just about paying somebody to distribute your assets. They also need to understand that asset distribution is a complex matter. For example, if you have shares in a company, who will inherit them? [Who will do] the valuation of the shares and settlement?

“If a will is drawn up, the appointed executor will sort out the distribution process according to the Islamic law of inheritance. Without a will, the process will take longer.”

Abdul Aziz Peru was head of retail banking at Malayan Banking Bhd, where he worked for 34 years, before joining as-Salihin in 2005. “I was never involved in wills and trusts. So when I was about to retire, I received a suggestion that I should look into this and I have not looked back since. I am passionate about ensuring that a [deceased’s] family is well taken care of,” he says. as-Salihin has handled more than 100 estates and helps write an average of 300 new wills a month. 

 

Choosing how to distribute your estate 

Estate planning tools such as a will allow a testator to determine how to distribute one-third of his estate to non-Faraid (Islamic law of inheritance) heirs. If there is no will, the estate is distributed in accordance with Faraid, meaning the duty of executing the will falls on either the spouse, eldest son or eldest male relative. 

Faraid determines how the assets of a Muslim will be distributed after his death, Abdul Aziz Peru explains. “Faraid tells you what your entitlement is, based on surah an-Nisa [in the Qu’ran] and the Hadith, where the portions are clearly stipulated.”

Under Faraid, the distribution of assets depends on who survives the deceased. Hence, Faraid is dynamic. “For example, if the deceased leaves behind a wife, father, mother, son and daughter, the wife inherits one-eighth, father one-sixth, mother one-sixth and the rest is shared by the son and daughter in the ratio of 2:1 respectively,” he says.

“If the deceased leaves behind a wife, son and daughter, the wife inherits one-eighth while the balance is shared by the son and daughter in the ratio of 2:1 respectively.”

Faraid distribution is fixed. However, the heirs may vary the portion of distribution if they all agree on it. “For example, subject to agreement by the Faraid heirs, the son and daughter can share the assets equally even though under the law, the distribution is in the ratio of 2:1,” says Abdul Aziz Peru.

“Under the law, you must be a Muslim to inherit from a Muslim. That is why there is a provision that allows you to give away one-third of your assets to non-Faraid heirs [who can be non-Muslims or charitable organisations]. 

“If a Muslim chooses to allocate more than one-third of his assets to a non-Faraid heir — for example, a non-Muslim relative or for a charitable cause — he can do so in the will. However, this requires the agreement of the Faraid beneficiaries after the death of the testator.

“It is possible to allocate more than one-third to a non-Faraid beneficiary, provided that all of the beneficiaries agree. As long as the Faraid heirs agree, there is no issue.”

Drawing up a will makes for an easier and quicker execution process once the testator passes away. Although having a will is not mandatory, it has significant benefits as companies such as as-Salihin provide executorship and estate administration services that take care of the legal process when distributing the deceased’s estate, says Abdul Aziz Peru.

“From a theological perspective, the choice is given to a Muslim whether to write a will or to solely rely on Faraid. Even if the beneficiaries do not agree to carry out the will and choose to go with distribution in accordance with Faraid instead, the company remains the appointed executor of the estate of those who have written their wills with us. This cannot be challenged by any beneficiary of the estate,” he adds.

If the Faraid heirs do not agree on the portion of distribution for the fixed assets, the trustee or appointed executor of the assets will hold a discussion with them on how to liquidate the assets, says Abdul Aziz Peru. 

“We will appoint a valuer to look at the valuation — is it the correct value or equitable to the market value? Does the family agree to that value? Then we will look for a buyer if they request us to. We will draw up the sale and purchase agreement as the assets are entrusted to us; they are in our name,” he adds. 

“Then, we will discuss with a bank to ease the loan approval for the buyer … there is a lot of work involved.”

Abdul Aziz Peru says that usually, when the beneficiaries cannot come to a consensus regarding the appointment of the executor or how the assets should be distributed, they are more likely to procrastinate or abandon the distribution of the deceased’s assets.

“Yes, appointing us as trustee and executor will incur an added cost. But this is equitable to the work done, and with this you will have ease of mind — it is priceless. The job of an executor is multi-disciplinary. It involves accounting, legal work and so on. If the eldest beneficiary becomes the executor, he may not know how to be an effective one,” he says.

“Also, when you have a will with as-Salihin, every beneficiary receives a statement of account regarding the assets of the deceased. It will state how much assets have been called upon, how much of the liquid assets have spent, what are the debts that have been paid — to ensure that all the beneficiaries are aware of the financials of the deceased’s estate,” he adds. 

“Every expenditure will be shown and how much we charge will be indicated. All disbursement fees will be there — legal, valuation, commissioner of oaths’ fee — everything will be accounted for. It is very transparent. However, non-beneficiaries, such as adopted children, will not be given a statement of account.”

Estate planning: The benefits of Islamic estate planning (Pt 2)