Estate Planning for the Muslim Client Part 2: The Implications of Ownership

In the first article in this series, we discussed how a lifetime gift, or “hiba” can be used when our religion’s rules on which of our heirs receive and how much they receive creates material difficulties. This article will tackle the inverse problem: when the material world and its secular laws contradict our religious life and its prescriptions.  Certain states in the US have predetermined rules of ownership over property. Those rules become relevant when we consider that the Quranic heirs of each spouse may differ and the fractions that each spouse gives will always differ. Beyond the state-imposed rules on ownership, we will look generally at how ownership impacts our Quranic heirs and the amount of wealth they are entitled to.

Whose Wealth? Whose Islamic Heirs?

If Islamic inheritance law is focused on distributing one’s wealth to specific individuals upon one’s death, then the question must be asked: whose wealth is it? In classical Islamic law, property is treated as separate; it belongs to whoever earned it. Typically, this is the husband although this is by no means always the case. For most of our lives, this means very little because during the marriage, assets are shared freely between husband and wife regardless of who earned it. Where it becomes relevant is in divorce or death. Let’s take a look at an example of how ownership matters in determining which heir receives what.

Example: Ahmed and Busra have been married for 20 years. Ahmed works full time and Busra stays at home with the kids. Ahmed is the “breadwinner.” They have assets of 1 million dollars, all earned from Ahmed’s work. They have two children, both daughters. Ahmed’s only living relative is his brother, Chakib. Busra has no living relatives besides the two daughters she and Ahmed have together. Ahmed and Busra decide to go with the classical Islamic position on how wealth is owned and treat all the wealth as if it were Ahmed’s.

In such an instance, Ahmed’s wealth passes to his wife, Busra, and his two daughters but also to his brother, Chakib. When Ahmed dies, his two daughters will receive 1/3 of his wealth, or about $330,000 each. Busra will receive 1/8 of the wealth, or about $125,000. Ahmed’s brother, Chakib, will receive roughly 5/24, or around $100,000.

Looking at the above example, it might seem alarming that Ahmed’s brother will receive a share similar to that of Ahmed’s wife of over two decades. Some might find this presents no concerns with regards to Busra. Maybe Busra has an established support system that she can fall back on, or maybe her and Chakib’s relationship is so good—and his financial situation is so secure—that he plans on waiving his right to his share upon Ahmed’s death. Even if that is the case, Busra may still feel that she contributed to the household and that it is fair that she be entitled to some wealth so that her heirs—both of her daughters—receive more upon her death. If that were the case, Ahmed may decide to use the previously discussed Hiba to gift a percentage of property to her during his life, effectively treating the property as if it is owned part by one spouse and part by the other, with each part distributed to each person’s respective heirs on their death.

Community Property versus Separate Property and the Islamic Implications

In several US states—Arizona, California, and Texas among them—the law presumes that all property acquired during the marriage is owned 50/50 by both spouses, regardless of who earned it. This is a legal principal called “community property.” On the other hand, in so-called “separate property” states, the property one earns is that persons alone. We will focus on the implications of this upon one’s death.

Some couples may find that a community property division is suitable. This may be because, as in our first example, the couple feels that more going to their common Islamic heirs (usually children) is actually a desirable outcome. They may also not mind a community property division for the reasons that we discussed in the previous article: that they actually want to give to their spouse during life to leave them with more wealth than they would get upon death from their shariah share (more on this below). 

These are just a couple reasons why some may feel comfortable with 50 percent of the wealth—even if it is all earned by one person—being held by either spouse during life and distributed to each of their heirs on death. Certainly, in the above example that seems like it would not present any pressing concerns. After all, the spouses in the above example had common heirs in their children, and only one uncommon heir in the husband's brother, so a 50/50 division really would not make much of a difference except to leave the wife with more and allocate more to their children and less to the husband’s brother. However, consider this example as one where such a division might be more problematic.

Example: Amira and Bilal have been married for three years. Amira works as an executive at Apple and Bilal does not work despite having a degree in electrical engineering. Amira is the “breadwinner.” Amira has amassed assets of 1 million dollars in cash and company stock since the two were married. They have one daughter. Amira has no living relatives, but Bilal has a brother and his mother is still alive. Amira, despite her best efforts, has never been able to be on good terms with Bilal’s brother or his mother, both of whom resent her for not fulfilling what they feel is a “traditional” role as housewife. Upon Bilal’s death, “his wealth”—which is one half of the wealth accumulated in the marriage despite being earned all by Amira—goes to his mother ($166,000) and brother ($208,000), Amira herself ($125000), and their daughter ($500,000).

Problems with community property presented in this hypothetical include:

• A relatively short marriage (3 years)

• A spouse who can probably earn on their own and therefore may not need to be left a large sum (Bilal has a degree in electrical engineering).

• Estranged in-laws receiving a windfall from wealth earned entirely by their daughter in-law

• The general “unfairness” of the heirs of one spouse who may not have contributed much despite being able to receiving a large some of wealth from a spouse who performed the majority of the work

Often times, it is the husband who works and whose wealth, despite being earned by his work alone, is treated as being owned 50/50. However, that is not always the case and this hypothetical illustrates that a wife’s earned wealth—which would be considered hers alone under Islamic law—is just as susceptible to 50/50 treatment under community property law. Regardless of whether the husband or the wife earned the wealth, it is always the case that if any of the issues in our above example are present in marriage, couples that live in a state with community property laws may want to consider deeming the property as being owned at a different percentage.

Property Ownership Under Shariah and US Law: Resolving Conflicts Between the Two Systems

We can now see how community property laws can create problems for Muslim couples in certain circumstances. We also can envision a circumstance where—as we saw in our previous article—shariah, which treats property owned solely by its earner, can cause material complications for a spouse. This is especially the case where one spouse has never earned, does not have an ability to earn a lot if the other spouse dies, and will only be left with a small amount of wealth from their fraction prescribed in the Quran. That is why the first step a couple must make when creating an estate plan is to have a conversation about how they want to consider the property to be owned.

Deeming Wealth Accumulated by the Earning Spouse as Being Owned by the Non-Earning Spouse for Islamic Inheritance Purposes

If the couple would like any amount of the wealth owned by one person to be held by the non-earner spouse, in order to be in compliance with the shariah the earning spouse would use a lifetime gift as discussed in the previous article. Since assets in the community property state are already owned half by both spouses under the state’s law, all the elements of the lifetime gift, or Hiba, are met save for the first: A voluntary act. Therefore, to deem 50 percent of the property as owned by the non-earning spouse in a community property state, all the earning spouse must do is make an intention and include it in their trust or will. If the couple wanted to deem the property as owned more than 50 percent by the non-earning spouse in a community property state—or any percentage at all in a separate property state—in order to comply with shariah the couple would need to make an immediate transfer of the total amount of that property to the spouse’s name. If it were cash, simply adding the spouse’s name to the bank account would suffice, but if it were other assets, actual change of ownership would need to take place.

Example: Adam and Bilqis live in a community property state. They have been married 20 years and have assets of 2 million dollars. They have two sons together and no living relatives. While Adam worked and earned over the last two decades, Bilqis maintained the household and raised the children. They both feel that Bilqis’ sacrifice merits her being entitled to leave some of the accumulated wealth to her Islamic heirs as well as enjoy a greater share than her 1/8th prescribed in the Quran in the event Adam dies first. Adam makes intention that he will gift 50 percent of the wealth to Bilqis. He then entrusts Bilqis to divide the assets in half upon his death, taking 1 million and distributing it to his Islamic heirs when he dies and keeping the other million for herself, to be distributed, of course, to her Islamic heirs upon her death. They have their attorney create a trust that leaves all the wealth to the surviving spouse upon the first death, makes that surviving spouse the trustee, and includes instructions to distribute one half of the wealth according to the Quran. The trust names successor trustees to step in on the second death and distribute the remaining amount according the Quran as well.

In this example, the money ultimately goes to the same heirs, the two sons. But it has advantages in that it requires no mechanisms to work around community property rules and leaves Bilqis a larger share to live on when Adam dies, all while complying with shariah.

Deeming Wealth Owned by the Non-Earning Spouse due to Community Property Rules as Being Owned by the Earning Spouse for Islamic Inheritance Purposes

Now let us assume that you live in a community property state and want the wealth owned by one spouse to be deemed as being entirely owned him or her for Islamic inheritance purposes. Obviously, you need to “get around” the community property rules which say that 50 percent of that wealth is owned by both spouses. There are three ways of re-appropriating ownership of that wealth for Islamic inheritance purposes, each with varying degrees of formality.

The first is to entrust the surviving spouse with the duty of treating the property as being owned entirely by he or she who earned it. This works best with couples that have been married for many years already in which there is a high degree of trust.

Example: Ashraf and Badra are similar to Adam and Bilqis above: they live in a community property state, are married 20 years, have assets of 2 million dollars, and only Ashraf worked and earned. Together, they have two sons. Ashraf’s parents have both died but Badra’s father is alive and is a wealthy man. Badra has little to no wealth of her own Islamically, but her father established a trust that distributes to her monthly income and will leave her with a payment when she turns 50 in ten years. Seeing no need to leave Badra with more than her Quranic share of 1/8th and no desire to have money that Ashraf earned go to Badra’s father (one of Badra’s Islamic heirs), the couple would like to treat the money as being entirely owned by Ashraf for Islamic inheritance purposes. Like with Adam and Bilqis above, they achieve this by entrusting Badra, should she survive Ashraf, with the duty of enacting the agreed-upon goal. They have their attorney draft a trust that leaves the whole 2 million dollars to the survivor, and names a successor trustee to step in on the second death and distribute any property remaining to the Islamic heirs of Ashraf. If Badra dies first, Ashraf simply keeps the 2 million dollars for his life. If Ashraf dies first, Badra is entrusted to distribute all the property immediately to Ashraf’s Islamic heirs.

While this is administratively easier, it may be ill-advised. One obvious reason is that, were Badra to remarry and then die before her new husband, that new husband would receive 50 percent of the wealth, which is not in accordance with Islamic inheritance. Beyond this, such a distribution leaves Badra completely vulnerable to creditors for all of the 2 million. If she were to become liable for some accident she caused, or the subject of a lawsuit, the aggrieved party could “go after” that whole 2 million dollars.

The second method would be to deem the property as belonging to Ashraf in the terms of a trust and then add language in that trust that creates a separate trust upon Ashrafs death into which all of his wealth is dumped following the payment of funeral expenses, any debts and the 1/8 distribution to Badra. Following that, he could make Badra the trustee over that wealth, whose legal duty would be to distribute the wealth by the terms of the trust, terms that would spell out the Islamic distribution. One advantage of this would be certainty, since Badra would be contractually obligated to follow the terms of the trust, that the distribution was done correctly. Another would be assuredness that the money would not be lost in a second marriage. But even if those two scenarios seem remote—as they likely would in a marriage of 20 years—the very real possibility of creditors going after the wealth would be avoided since the money would not be in Badra’s name, but in the name of the trust.

The third and most formal approach would be to execute a post-nuptial agreement, referred to as a transmutation of property. In doing so, Badra would legally divest herself of any right over property that she previously had a legal right to (by virtue of community property laws). Then, that property which now belonged solely to Ashraf could be left to his Islamic heirs in a will or a trust.

Conclusion

Hopefully, this article has served as a primer on the conflicts between Islamic ownership and ownership in Community Property states and the ensuing complications that can arise when that property is to be distributed Islamically. Ideally, this has given the reader some understanding of the tools at their disposal to solve for these problems. Talk to an estate planning attorney versed in both systems for further insights and solutions.