Article An introduction to Shari a succession 1

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1 Trusts & Trustees Advance Access published August 1, 2008 Trusts & Trustees, Article An introduction to Shari a succession 1 Robert Brodrick, Mukhtar Karim and Rami Cheblak*, Trowers & Hamlins Abstract The overall aim of this article is to provide an introduction to Islamic inheritance law. In the first section, the authors look at the sources of Islamic law generally (Shari a). This assists in developing an understanding of the Shari a succession rules discussed in part two, the main section of this article. In particular, the concept of dividing the deceased s estate in accordance with Shari a is highlighted, together with ways of avoiding a fragmented estate, a common end result which can be detrimental to family businesses. The penultimate section of this article discusses some of the practical issues that need to be dealt with when somebody dies, including how to obtain a Certificate of Inheritance which is the document issued by the Shari a court detailing how the deceased s estate is to be distributed. Finally, a case study applies the previous theoretical discussion to the context of a real-life situation. Introduction to Islamic Law Islam is the second largest religion in the world. Its teachings are based on the Quran and the Hadith (sayings and deeds of Prophet Muhammad) and its legal system, known as Shari a, is derived from these. Whilst corporate matters in the Gulf Cooperation Council (GCC) countries and other Arab Islamic states are generally governed by local civil laws, the civil courts exist side by side with the Shari a courts which cover family matters, succession, property and criminal law. There are two main branches of Islam, the Shia and the Sunni each of which have sub-schools. The majority of Shia are followers of the Ja afari school often referred to as twelver Shias or followers of the 12 Imams. They are principally found in Iran, Iraq, Lebanon, India, Pakistan, Kuwait and Bahrain. 1. Important: The authors would like to point out that they are not Islamic scholars and although they have taken all reasonable precautions to ensure that the information contained in this article is accurate, its content is not intended to be legally comprehensive. You should therefore not take any action on matters covered in this article without taking appropriate advice from an Islamic scholar or other professional qualified to advise on such matters. *Robert Brodrick, Mukhtar Karimand and Rami Cheblak, Trowers & Hamlins, Sceptre Court, 40 Tower Hill, London, EC3N 4DX, UK. Tel: þ ; rbrodrick@trowers.com Robert Brodrick is a partner in the Private Client department specialising in domestic and international tax and estate planning for wealthy individuals, their advisers and trustees. In addition to his domestic practice, which includes the creation of tax efficient wills and advising the owners of landed estates and heritage chattels, Robert has a large international practice. He has been involved in the creation and reorganization of structures for a number of high profile Middle-Eastern clients including Shari a compliant structures. Robert has recently been advising UK resident non-domiciliaires (including a number of substantial US families) on the changes to the taxation of non-domiciliaries and the reorganization of their offshore structures in the light of the 2008 Budget changes. Robert is a member of the Society of Trust and Estate Practitioners for whom he has lectured in a number of locations worldwide. He is recommended in the Legal 500 and Chambers & Partners according to which he enjoys a strong international profile and a reputation for excellent technical ability which he marries successfully with top-class client delivery. Robert features in the Spears Wealth Management 2007 Legal Power Index as one of the 50 brightest and best private client lawyers for High Net Worth Individuals and in the Citywealth Top 100 as a "Rising Private Client Legal Star. Mukhtar Karim is a solicitor in Trowers & Hamlins Commercial Property department which he joined in 2007 from Charles Russell LLP. Mukhtar qualified in Rami Cheblak is a solicitor in Trowers & Hamlins Oman office although currently on secondment to the Cairo office as a legal advisor. With thanks to Zayed Al Jamil, Abdullah Al Barwani and Craig Hatcher for their contributions. Trowers & Hamlins is a City and International law Firm with over 100 partners and 500 staff worldwide. The Firm s head office is located in the City of London with other offices in Abu Dhabi, Bahrain, Cairo, Dubai and Oman. The firm has a leading reputation in trusts, tax and estate planning. Trowers & Hamlins Private Client practice was highly commended as International Private Client Law Firm of the Year 2008 in the Citywealth Magic Circle Awards. ß The Author (2008). Published by Oxford University Press. All rights reserved. doi: /tandt/ttn064

2 2 Article Trusts & Trustees, 2008 In terms of Sunni schools of thought, there are four main schools: Hanafi principally found in Turkey, the Balkans, Central Asia, the Indian sub-continent, Afghanistan, China and Egypt. Maliki mainly from North and West Africa and several Gulf states. Shafi i from Indonesia, Malaysia, Egypt, Somalia, Yemen and southern parts of India. Hanbali in the remaining parts of the Arabia Peninsula. Islamic law is complicated by the fact that each school has different sources of jurisprudence, which means that although key elements of Islamic law are the same, the end result is non-uniform. In addition to the main sources of jurisprudence, the Sunni schools consider analogy and reasoning where there is no direct ruling from the Holy Quran or an authenticated Hadith but the four schools differ in determining which Hadith is considered authentic. As a result the weight given to a body of Hadith in deriving rules through analogy or reasoning may vary. The Shia on the other hand quote intellect as opposed to analogy and reasoning as a source of jurisprudence. The Shia also consider Hadith from the 12 Imams who succeeded the Prophet Muhammad as valid sources of the law as they consider these as merely elaborating the Hadith of Prophet Muhammad and not contradicting his Hadith. In addition to rules on the prescribed form of worship, Shari a prescribes certain attitudes to personal transactions. For example in matters of commerce, unlawful gain (riba) is not allowed. This includes payment of interest as well as unjust or unlawful gain. Other activities (which includes investment in such activities) such as gambling or trade in alcohol or pork products are also prohibited. Ownership of property and accumulation of wealth (maal) is allowed provided that it includes some benefit to the public. Taxation of wealth is structured to encourage wealth remaining in uses of benefit to the public. This is generally in the form of Zakaat and Khums a form of almsgiving or tithe. In the case of Zakaat, this is collected by the State in some countries and is payable at a rate of 2.5% on annual income or wealth above a certain threshold. On a more personal level, Khums, paid by the Shia to the highest member of the religious clergy, is payable at 20% of net savings. In addition, Islamic law sets out rigid inheritance rules that determine how a Muslim s estate is to be divided between his or her heirs on death. Structured Inheritance Under Islamic law testamentary freedom is limited to just one-third of the deceased s net estate (after all debts and funeral expenses have been deducted) the remaining two thirds is divided in accordance with Shari a. Where there are both male and female heirs, the share of a male is usually twice that of a female heir. The main reason for this disparity is to reflect the relative economic burdens on the individuals. For example, a man takes his share subject to the obligations to provide for the maintenance of the family, whereas a woman takes her share free from such conditions. In addition, a woman s assets remain hers after marriage, whereas a man s assets, including the assets he inherited, become shared assets upon marriage. While it is true that between siblings the male/ female ratio is unequal, the deceased s mother and father generally inherit in equal shares. Dividing the estate The division of the two-thirds share of the deceased s estate that is subject to Shari a Inheritance rules will differ depending on which Islamic sect (Shia or Sunni) and which school of thought is followed. The deceased s estate is distributed in accordance with a hierarchy of three classes of heirs, the first class often referred to as the Quran ic Heirs or Sharers being the primary heirs. The remaining two classes are the Residuary Heirs. There are six heirs who

3 Trusts & Trustees, 2008 Article 3 always inherit if they survive the deceased. These are husband, wife, son, daughter, father and mother. The first group are entitled to specific shares but they cannot all inherit at the same time and some (e.g. son) may exclude others (e.g. son s children). a. A husband is entitled to a half share of his wife s estate if she has no children. If she has children, he is entitled to a quarter share. b. A wife is entitled to a quarter share of her husband s estate if she has no children. If she has children, she is entitled to one-eighth. c. Sons usually inherit twice as much as their sisters when one of their parents dies. In the absence of children, the grandchildren or remoter issue would inherit although a daughter s children are unlikely to inherit even if the daughter has died. The second group includes grandparents and siblings. In the absence of siblings, nephews and nieces inherit. The third group includes paternal and maternal aunts and uncles and their descendants. Specific rules govern half brothers and sisters and step parents. Half-brothers and sisters only inherit if there are no full brothers or sisters alive at the date of death. Adopted children are not considered as the couple s own and therefore are not within the primary heirs but the deceased can leave them a bequest from the one third of his estate over which he has testamentary freedom. He can also give them lifetime gifts. One-third remaining share Although the one-third remaining share provides some degree of testamentary freedom, this distribution must also comply with Shari a. A bequest of this share to a spouse, for example, would be contrary to Shari a given that the spouse would already have received their authorised proportion as part of the structured inheritance distribution. It is generally accepted that a non-muslim, even if he is a Follower of the Book (ahl-ul-kitaab) cannot inherit from a Muslim although non- Muslims who are Christians or Jews (i.e. those who believe in revealed scriptures) can generally inherit from the part of the estate over which the deceased has testamentary freedom. This portion can be used to redress the allocation of the remainder of the estate. For instance, a Christian wife (with or without children) may inherit up to a third of her husband s estate, whereas a Muslim wife with children would only be entitled to a one eighth share of her husband s estate). If no testamentary requests are made, the remaining proportion of the estate will be distributed amongst the surviving relatives. Practicalities A significant disadvantage with the Shari a system of structured inheritance is that it can result in a fragmented estate. This is most apparent when the deceased s family business is divided amongst many relatives in accordance with the structured inheritance rules. The business then needs to be managed by consensus or, often, the day-to-day management decisions are dealt with by appointing a family member using powers of attorney. By the second or third generation the effect of this fragmentation can make it very difficult for the business to survive. There are ways to avoid these rigid inheritance rules. Transferring the business prior to death, for instance, is an option, but this is not commonly followed as it inevitably leads to loss of control, which many patriarchs are not prepared to give up during their lifetimes. In addition, any gift that is intentionally used to circumvent the prescribed inheritance rules is likely to be invalid as it is not in-keeping with the spirit of Shari a. This should be borne in mind when advising a Muslim client. Another solution is to transfer assets, such as company shares, into a Shari a-compliant trust. The Trustees would become the legal owners of the Trust assets, but family members can be appointed

4 4 Article Trusts & Trustees, 2008 directors of the underlying company as well as beneficiaries of the trust. The trust assets will fall outside the succession rules as they will not be owned by the deceased at his death, so continuity together with control is retained. Because the majority of the GCC countries where Shari a succession rules apply do not recognise trusts, any such trust would normally need to be established in an offshore jurisdiction. Transferring ownership of shares to such a jurisdiction may breach foreign ownership restrictions, although it can be possible to overcome these difficulties using a combination of partnership structures and loans. Alternatively, Bahrain and the Dubai International Finance Centre (DIFC) have now introduced their own trust laws. In terms of managing the family business, a situation may arise where all or most of the heirs are minors. Where a minor inherits an interest in a business, the Shari a court may order that their funds are liquidated and withdrawn from the business, or that the minor continues to participate in the business where it is in his interests do so. In the event that the Court appoints an executor to act in the interests of the child (i.e. where the father has died), the executor will have powers, albeit restricted, to deal with the minor s interests. Certificates of Inheritance (I lam Sahr i) In most of the GCC and other Arab Islamic States, Shari a succession rules have been expressly incorporated into the local civil code. This will normally only govern the estates of Muslims and for any non- Muslim who dies resident in one of these countries, the law of his country of origin/nationality will generally apply to the distribution of his Estate. When a Muslim dies, a Certificate of Inheritance is issued by the Shari a Court detailing the entitlements of the deceased s heirs in accordance with the structured inheritance rights discussed above. The procedure for obtaining a Certificate of Inheritance generally involves any male relative completing a prescribed form from the Shari a court or Wali (local governor) listing all the surviving relatives and assets of the deceased. The death certificate is also required. The purpose of the Certificate of Inheritance is to set out the correct distribution of the estate in accordance with Shari a. It does not replace the need to obtain a grant of representation where this is required, but it will act as evidence of who is entitled in the absence of a Will, for example if a grant of representation is required to deal with UK property. Prior to issuing the Certificate, the Court will investigate the application to ensure all possible heirs are considered, and that all assets of the deceased are included in their estate. This can be time-consuming, depending on the complexity of the case and the level of investigation required by the Court in order to consolidate the list of heirs and assets. The Courts frequently liaise with the central bank of the relevant country of the deceased to obtain details of accounts held by the deceased. Upon issuing the Certificate, the Court may distribute the assets immediately, although this rarely happens given that it often takes time to gather the assets of the deceased. Alternatively, the Court may grant a power of attorney to an executor elected by the beneficiaries who will proceed to distribute the assets upon receipt of the Certificate. An executor elected by the identified beneficiaries would then proceed to distribute the deceased s assets in accordance with the Certificate. Case study Faisal is a successful businessman with his own business in Oman. He is married to Zahira; they have two daughters, Salha and Amina. Amina sadly died leaving two adult sons Hassan and Ali. Faisal also has three nephews (the sons of his brother who, along with his parents, have predeceased him). In Oman, the entitlements of the heirs as required by Shari a are enshrined in the Personal Status Law RD32/97 (PSL). If Faisal were to die, after deducting costs of the burial, settling any debts and the costs of executing any will (Article 233), half his estate would go to his

5 Trusts & Trustees, 2008 Article 5 daughter Salha (Article 243(2)) with the rest being divided between his widow Zahira (Article 245) and nephews (Article 251(3) and Article 252). The nephews would receive the remainder of the estate. This is distributed equally in accordance with Shari a, each receiving a one eighth share. Because those entitled to a statutory proportion and those inheriting via male relatives (agnates) take priority, Amina s sons are unlikely to inherit, although Faisal could leave a one third share of his estate to them by Will to ensure that they are not overlooked (Articles 226, 227). If Faisal wants Salha to take on running and developing his business, this will be complicated by having to take into account her cousin s competing needs given that, although Salha receives half of Faisal s share in the business, the three cousins each get an eighth (Articles 243(2), 251(3) and 252). If Faisal left the one-third share that he is free to dispose of to Amina s children, Salha s share would be reduced to a third and the nephews and Zahira s share would be reduced to one twelfth each. Amina s sons would share the remaining one third (Articles 226 and 227). If, as well as owning property in Bahrain, Faisal had also got properties in the UK and France, there would be a conflict between Shari a rules on the one hand, and UK/French succession law on the other which, in the absence of a valid Will, would apply to real property situated in those countries (lex situs). There would also be tax considerations to think about. It may be possible for Faisal to overcome some of these obstacles by doing some lifetime planning, either by making lifetime gifts, by using a trust or simply by having a valid Will. Conclusion The aim of this article has been to provide an introduction to the complex area of Islamic inheritance law. In doing this, it was necessary to illustrate the various sources of Islamic Law that has created a legal system which is not only prevalent in all areas of everyday life, but is wide in its scope geographically and is subject to varying interpretations. In acknowledging these fundamental tenets of Islamic law, it is easier to develop an understanding of the complexities of Shari a succession. When advising clients on Islamic inheritance matters, it is important to bear the central features of Shari a succession in mind. As discussed in this article, the limitation of testamentary freedom to onethird of the deceased s estate and the hierarchy of the classes of heirs for the remaining two-thirds, together with the strict divisions that must be adhered to within this remaining share, need to be addressed. Furthermore, the practical problems that become evident when dividing the deceased s estate, particularly in respect of family businesses, need to be recognised and Shari a compliant solutions put forward to minimise these. As families and their businesses become ever more global, it is important to approach client matters from an international perspective. With this in mind, it is possible to complement the principles of the Shari a inheritance rules with other practical solutions (such as trusts) that can result in an efficient and organised distribution of a person s estate.