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When the founder of an immensely successful family business in Kuwait passed leaving no will or foundation to manage his wealth, his estate and business were distributed to his wife, three sons and daughter according to the inheritance principles set forth by Sharia law.
His daughter had worked with him, while his sons had not been involved. Despite the expertise that made her an obvious candidate to take over the business operations, the application of the distribution law meant that she received just one small share of the business, while her brothers collectively received the vast majority. Jealous of their sister’s relationship with their father, her brothers quickly voted her out of the business.
“They ran it into the ground,” says Mahmoud Selim, a lawyer with Pinsent Masons in Dubai and Islamic law scholar. “That’s a typical example. There were no protections for her.”
Managing large fortunes and legacies is a difficult business at the best of times. For some families, a higher authority applies. Interpreting Sharia inheritance law, which derives from the Koran, stories about the life of the Prophet Mohammed and the writings of medieval Islamic jurists, is keeping wealth advisers and lawyers increasingly busy as traditional gender roles evolve and more women enter the workforce in the Middle East and India.
“If you’re living in 2018 and working from 9-5 every day, you’re not going to be happy that your brother is taking double what you’re taking,” says Selim. “The social climate has changed so dramatically that it now warrants a revisiting of those rules.”
Under Sharia law, when a man dies, assets in his name are divided according to formulas based upon the number, relation and gender of their heirs. One eighth goes to the surviving wife. The rest of the estate, including all homes and the family business, is divided among the children. Sons each receive double what daughters do. If there are no sons, the daughters take two-thirds of what remains after the wife’s distribution and what is left then goes to the closest male relative, regardless of how close a family member he is.
Sharia law was progressive in its time, evolving in the centuries since Mohammed left Mecca for Medina in 622. For the past 1,500 years under Islamic law, women have been entitled to property and did not lose it upon marriage. In the US, this was formalised by law in 1848 and in the UK, 1882.
The concept underpinning Sharia inheritance, Selim explains, is to distribute the money to the people who will be most burdened by the death. Under Islamic law, a male heir is responsible for the care of his mother and any unmarried sisters. He must maintain their accustomed standard of living and they can sue if he does not.
Advisers cannot begin with the premise that Sharia law is to be avoided, says Catherine Grum, head of family office services at business advisers KPMG in London. “The way I work with families is to understand how they interpret their Sharia rule and often work with a Sharia scholar to look at what the family are trying to achieve,” she says.
Interpretation is a key aspect of Sharia-compliant inheritance planning. “Preserving family wealth and not leaving your family destitute is a key aim of the Sharia so we can utilise that as an objective,” says Reshmi Manekporia, of BCLP Law.
“If you have such wealth that if you don’t do something it will dissipate, then you have an obligation to make lifetime plans.” Setting up a family trust, by this interpretation, can be the most Sharia-compliant means to achieve this, she says.
Sharia law stipulates that a person can make an unlimited number of gifts while they are of sound mind and sound body (in other words, no death-bed gifts). Since these “lifetime gifts” have limitations — if they are given to one heir they must be given equitably to all of the heirs — they cannot be used to keep assets from being divided.
However, it is Sharia-compliant to redistribute a family’s assets by setting up a trust or family office in their country, offshore or within a specific economic area.
The wealth holder makes a “gift” to the independent trustee, who then manages the trust in accordance with the family’s wishes. In such cases, a daughter could, for example, inherit the whole business and a son, for example with a gambling addiction, might only receive a limited allowance.
However, trusts have not traditionally been popular in countries where Sharia is codified as common law, in part because governments were in a habit of confiscating people’s money, says Selim. Trusts nearly disappeared by the 1960s with the rise of secular military governments. So, clients looking to safeguard their assets for future generations took their money offshore.
But offshore investors potentially run up against civil and common laws that conflict with Sharia inheritance rules. “In jurisdictions like Germany or Switzerland, there is forced inheritance, where the majority goes to your spouse and then an equal distribution among your children,” says Thomas Salmon, a tax and estate planning lawyer with Baker McKenzie in Switzerland.
“In the US or UK intestate [when there is no will] succession says everything goes to next of kin. In a married couple that’s your spouse. If you’re an Arab man it all goes to your wife, which isn’t Sharia.” So they have to structure their investments through trusts that are Sharia-compliant.
Many of the new considerations in the offshore trust world are driven by lessons learned during the Arab spring. “It is interesting to see what structures were put in place, which succeeded and which failed,” says Salmon.
When Egyptian president Hosni Mubarak was toppled in a public uprising amid accusations of corruption and abuse of power in 2011, Switzerland, sensitive to its reputation, quickly moved to freeze his Swiss-held assets and that of 22 of his associates. A chain reaction followed across the EU, UK and UK overseas territories. Mubarak and his associates were unable to access their assets, despite the terms of their independent trusts.
This showed people looking to protect their money in a UK-based trust system that these structures were vulnerable in the event of political upheaval, advisers say.
Now, the trend is towards the Pacific region, says Salmon, where countries such as Singapore, New Zealand and Hong Kong have a track record of only blocking assets in the rarest of circumstances: when the UN makes the request. Yet unhappy heirs can still challenge international trusts in Islamic courts, arguing that the trust was only put in place to circumvent intestate Islamic succession rights.
Selim says: “Judges are suspicious of arrangements done in the west and if they suspect it was done to circumvent divine law, they need very little persuasion to declare it null and void.”
Some governments are changing the system from within rather than losing money to overseas trusts. The Dubai International Financial Centre (DIFC) free zone is a common law enclave in the centre of the city that has trust law based on Channel Island Jersey’s model.
This year it increased protections for trusts created within the zone, with a legal system exclusively subject to DIFC regulations and courts. Bahrain has also extended trust law from businesses to individuals to accommodate growing wealth in the region.
Some countries have reformed Sharia law to create more gender parity. In Tunisia, the country’s president moved in August to propose gender equality in inheritance, though he left the door open to families who would prefer to use Sharia allocations. The proposal still needs to pass the country’s parliament.
Family planning and law can be a trying industry for those who work in it, where people’s worst impulses can take over without the proper protections in place. When inheritance goes wrong, says Selim, “it has nothing to do with Islamic law and everything to do with people”.
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