Estate Planning for the Muslim Client Part 1: Lifetime Giving

Most Muslims know that one element of their religious practice is to bequeath their wealth upon their death in the manner prescribed. When one dies, his or her wealth is to be distributed according to fixed fractions that are explicitly laid out in the fourth chapter of the Quran. Giving in this way may present difficulties which we will discuss below. While our religious life is of the highest importance and is favored over our material life, that does not mean that those difficulties are any less real. Nor does it mean that we should not take the permissible methods afforded to us by our religion to make those difficulties easier. 

Material Complications of Bequeathing in Accordance with the Quran

The entire scheme of on-death bequests described in the Quran is beyond the scope of this article. Instead, we will focus on those facets of the mandatory fractions—laid out in the fourth chapter of the Quran—that may give rise to material difficulty. Namely, those are:

• That only 1/4th of a man’s wealth may go to his wife if there are children, and only 1/8th may go to her if there are children. A husband may feel this amount is insufficient to support his wife over her lifetime.

• That daughters receive inheritance at 1/2 of the rate of sons. As with the first rule, this may be less than the parent feels is best to support the daughter in the parents absence.

• In combination with the above two rules, that in the absence of sons, a portion of one’s wealth goes to his or her father, and if he is no longer alive, to his or her brother(s). While this rule is unavoidable absent a waiver of the recipient at the time of death, it may prove vexing in the instance that the father or brother is receiving more, essentially at the wife or daughter’s expense.

• The less common, but altogether plausible, inverse of the first rule: where a wife feels her husband’s prescribed share is less than adequate for his support.

Hiba: The Lifetime Gift

All of the fractional shares prescribed in the Quran pertain to the disposition of one’s wealth upon death. However, during life, Muslims can give freely without regard to those fractions. Thus, a Muslim planning his or her estate that is concerned about the Quranic share that his or her spouse or child will receive can simply give during his or her lifetime. There is no limit on what they may give or to whom they may give it. Where the limitations arise are in how they give it.

How a Hiba Must be Made

Islamic law stipulates that in order to qualify as a Hiba, five main elements must be met:

1. Voluntary act of the parties. A Hiba is a transfer of property by act of the parties and not by operation of law. It means that any transfer of property forced by a court of law or any transfer of ownership by the Muslim law of inheritance—or any other law for that matter—will not be considered as Hiba.

2. While both parties are living. For a transfer to qualify as a Hiba, a living Muslim voluntarily transfers the ownership of any property to another living person. In US law, this is called an inter vivos transfer.

3. Absolute interest. The transferor must transfer ownership of the property in absolute interest and the transferee must get the complete title in respect of the property given to him.

4. Immediate effect. The property must be passed immediately, not at some future date, to the transferee and must be in existence at the time when the gift is made.

5. Without consideration. If anything of any value is taken by the transferor in return or exchange, such a transfer of property is not a hiba. In other words, this gift must come with “no strings attached.”

Example 1: Ahmed has a net worth of $500,000. He is married and has two young children, both boys. Ahmed works full time and has been doing so for the last ten years, while his wife has stayed at home to focus on raising the children. If he dies, he knows that his sons will inherit 7/16, of his wealth, or about $218,000 each. His wife, on the other hand, will receive 1/8, or about $62,000. He would rather his wife have more wealth to support herself and also continue raising their children until they are old enough to receive their share. Ahmed makes a hiba of $250,000 to his wife.

Example 2: This time, Ahmed has a net worth of $1,000,000.00 and has one son and one daughter. Ahmed is older than he was in the first example, and his children are in their thirties. Ahmed’s son is an engineer and has a stable career with a good income. His daughter, on the other hand, has unfortunately gone through a divorce and has no career after spending her time raising children of her own from her marriage. Ahmed “does the math” by applying Islamic inheritance laws and sees that his son will receive 7/12 of his wealth, or roughly $580,000 while his daughter will receive half of that, about $290,000. (His wife receives the same fraction she did in example 1). Out of love for his daughter and concern for her financial well-being after his death with only her “shariah amount,” Ahmed makes a hiba of $100,000 to his daughter.

Drawbacks of Lifetime Giving

Using Hibas can be a powerful tool to solve for the material complications that Islamic inheritance law can present, but it is not without drawbacks. The first and most obvious one is that, as we have seen, a Hiba requires total relinquishment of control without condition. The giver now has less wealth and no legal means of recalling the gifted wealth. This could prove troubling in a case where a Hiba goes to one’s spouse who then pursues a divorce or to a child who takes the wealth and squanders it.

The second drawback to using Hibas lies in its tax implications, which are listed below:

• Loss of step-up in basis

Under the tax code, when someone receives property upon another’s death, whether by will, trust, or other means, the recipient gets favorable tax treatment. The property is essentially revalued to its cost at the time of death. This can be a powerful tool with property that has appreciated significantly, notably real estate. A house purchased for 100,000 dollars that is worth 500,000 dollars at the death of the owner will be given to the beneficiary and considered to have a value of 500,000 dollars. On sale, the beneficiary realizes zero gain and pays no tax. If they had received it during life, however, they would take it at its present tax valuation, and, if they sold it, they would realize 400,000 dollars in gain for which they would have to pay at least 60,000 dollars in taxes. As far as Hibas are concerned, gifting cash assets like we saw in our examples does not trigger these implications, but it is something to look out for when gifting other assets.

• Gift tax

The gift tax is not a serious consideration when making a Hiba except for high-net-worth individuals. Aside from the requirement that you file a tax return for gifts over $16,000 to anyone other than your spouse (as of 2022), you can give up to $12 million as an individual before there are any tax implications.

A Hiba is an effective way to secure for our loved one’s financial stability while at the same time staying completely compliant with the requirements of our religion. However, as we have seen, it requires a careful consideration of the financial and tax implications before it is undertaken because it is a final and irreversible act.