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Trusts and Waqf in Private Wealth Management

Global Arab Network - - John Short

Monday, 06 July 2009 13:01

Trusts_and_Waqf_in_Private_Wealth_Management

It is likely that most readers will be familiar with the concept of a Waqf, and in particular those used for charitable purposes such as the funding of a Mosque. Similarly, most readers will be familiar with the concept of a Trust and the use of Trusts in private wealth management. However, it may come as a surprise to some readers to learn that several academics have suggested that the concept of a Trust was brought back from the Middle East by the Crusaders and actually derives from the Waqf. This article will seek to compare the Trust and the Waqf, discussing their similarities and differences, and to suggest how a Trust can be used by Muslims for their private wealth management and succession planning.

The first question to be answered is why has there been such an increase in the use of Trusts by Muslims resident in the Gulf Cooperative Countries (GCC) and Middle East and North Africa (MENA) regions. In the author's experience this arises from four main factors;

* An ageing generation of wealth creators looking to preserve that wealth for the benefit of future generations,
* Preservation of a family business as a cohesive unit, whilst benefiting all the members of a family entitled to benefit on the death of head of the family under Shari'a Law,
* Reducing the burden of foreign taxes on assets held in high tax jurisdictions, and,
* Maintaining confidentiality.

As will be seen, each of these is certainly not mutually exclusive, indeed, most Trusts are established for a combination of one or more of these factors, and other reasons.

Whilst historically the first of these factors was the most common reason, in recent years many Settlors have sought to use a trust-based structure to maintain a family business as a single unit, rather than allow it to broken up on their death by distribution to their heirs. This objective has required the development of some very creative structures to ensure that members of the family continue to control the business and benefit from it, whilst actual ownership of the business has been transferred to the trustees.

Another factor has been the passing of Trust laws in Bahrain and in the DIFC such that trusts can be established in those jurisdictions. Both these laws derive from, and indeed are very similar to, the Trust Law that was first passed in Jersey in 1984 and these provide a comprehensive body of legislation under which to create private (express) and public (investment) trusts.

Trust and Waqf
The creation of a Trust and a Waqf have several similarities, in particular in the transfer of assets by the Settlor to the Trustees or the Wakif to the Mutawalli and these assets are administered for the benefit of others. Many Waqf are established for philanthropic purposes, which has parallels in the establishment of Charitable Trusts, whilst many family Waqf (commonly known as Waqf ahli, or Waqf dhurri) have been established to preserve a family business as a single unit for the benefit of the family as a whole.

However, there are many differences between the two concepts. Of these the major differences are:

* In a Trust, the assets are owned by Trustees and they may transact with the assets as they deem appropriate. In a Waqf, the assets are transferred to the ownership of God (Allah) and whilst the mutawalli administers these assets, they generally will not be able to sell the assets without express permission from a Shari'a court.
* It follows that a Waqf will normally continue to exist indefinitely, however, for a Trust the "rule against perpetuities" or Trust Law will require that the assets must vest within a certain time period.
* A Wakif does not have the power to revoke a Waqf, whereas Trust law permits the reservation of a power to revoke by the Settlor.
* There are restrictions on the nature of assets that can be transferred to a Waqf, e.g. usufruct, whereas such assets can be owned through a Trust.
* Most importantly, a Wakif is generally prevented from having an interest in the assets of the Waqf, whilst a Settlor may be appointed as a beneficiary of Trust.

These, and other factors have led to a decline in the usage of the Waqf. One factor arises from the fixed nature of Shariâ€™a law principles such that the Waqf has largely remained a static institution. In comparison, for many centuries in England, Jersey and elsewhere, the courts have continued to develop and refine trust law principles such that the Trust has proven remarkably flexible and responsive to changing conditions affecting the preservation and management of family wealth.

A common question asked by prospective Settlors and their advisers is, "Is a Trust Shari'a-compliant?" Whilst the individual circumstances of each Trust makes it impossible to give a definitive answer, by careful drafting of the Trust Instrument it would seem reasonable to argue that a Trust can be established to be Shari'a-compliant, should the Settlor require it. The three critical areas for this are in the establishment, investment policy and distributions of the trust.

Establishing the Trust
One of the common features of the Waqf and the Trust is that the donor gives his assets to the Waqf or Trust. Under Shari'a Law, subject to the conditions outlined below, such a distribution of assets is not subject to the rules of inheritance, or forced heirship as they are often referred to.

For such a gift to be valid under Shari'a, it is necessary that the following conditions be observed:

* there must be a clear defined proposal and acceptance with regards to the gift, and
* it is necessary for the gift to be taam (complete) such that the recipient takes possession of the item.

These requirements for a lifetime distribution and gift being acceptable under the Shari'a are very similar to the three "three certainties" that must be met for a Trust to exist, i.e.:

* certainty of intention,
* certainty of the Trust property, and
* certainty of the beneficiaries of the Trust.

Further, it is essential that the transfer of legal ownership actually occurs; otherwise the Trust is incompletely constituted and invalid.

It follows that, subject to meeting the conditions above, a Muslim can gift certain of his assets into a Trust and that this gift would be acceptable under Shari'a such that the gifted assets will not form part of his estate on death.

Investment policy
It follows that in such cases the Settlor will normally require that the investment policies to be followed by the trustees are in accordance with Shari'a Law, and this requirement would generally be included in the trust document.

Therefore, the trustees will then need to ensure that any assets held by the trust are Shari'a compliant. Where a trust has a large portfolio of investments in stocks and shares, it is unlikely that the trustees will be able to undertake this selection process themselves and they will normally either employ a specialist investment manager or invest in an Islamic Investment fund. In turn, the investment manager will be guided by the rulings of a Shari'a Supervisory Board with which they will have agreed certain investment criteria to form an overall investment universe. The criteria that the Manager will be required to work within can be split into two distinct categories: firstly the qualitative criteria that will consider the actual business activities of the target company such that any haram activities are excluded (i.e. unacceptable or harmful activities under Shari'a Law); and secondly certain quantitative measures that will consider certain financial ratios derived from the target company's accounts to ensure that the company is appropriately financed by equity and not debt.

Distributions
In order to allow flexibility, most family Trusts will be established as Discretionary Trusts, and provide that "distributions shall be made at such times and in such amounts as the Trustee determines in the Trustee's sole discretion" or "distributions shall be made in the Trustee's discretion for the support, maintenance, education and needs of the beneficiaries."

However, if the Settlor wishes the Trust to be fully Shari'a compliant such wide powers of distribution will be inappropriate as these are likely to breach the Shari'a laws relating to forced heirship. This topic is extremely complex, and will vary depending on the school of Islamic faith that the Settlor believes in, such that the Trust documentation should provide for the Trustee to appoint and seek guidance from a Shari'a adviser. In particular, the Trustee will need to research and document the Settlor's family tree in great detail to ensure that all Quranic and other heirs and relatives are identified.

Conclusion
The link and similarities of a Trust and a Waqf are readily apparent, but whilst this is important, of greater importance are the differences outlined above. The flexibility offered by a Trust is greater than a Waqf and this makes the Trust an ideal vehicle for use by Muslims in managing their financial affairs and providing for their successors.

Global Arab Network

For further information on Islamic finance matters contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it , Volaw's Director of Islamic Finance and Funds Group. The following article was published in Islamic Finance in Practice magazine

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