Inheritance and Trusts

Question:

In the US, an individual can create a trust to hold property. When a trust is created, the Settlor (the person creating the trust) transfers legal title of the property (whether it is cash, stocks, real property, etc.) to the trustee of the trust, who then manages the property for the benefit of beneficiaries. There are many different types of trusts that can be created with different provisions and powers.

I would like to know in what instances will the property in the trust have to be distributed according to the Islamic laws of Inheritance, and in what instances will the property in the trust no longer be considered to belong to the Settlor (one creating the trust) and therefore it will not have be distributed to his inheritors under Islamic Law
1. A revocable trust – normally the settlor is the trustee and beneficiary. He has complete control over the property and can do whatever he pleases with it – sell it, gift it, he can terminated the trust and get all of the property back, etc. Essentially the settlor still owns the property, but it is now in the name of the trust. How should the property in this trust be distributed upon the settlor’s death?
2. An irrevocable trust limits the Settlor’s powers over the property depending on how it is drafted. The following are some of the types of powers the Settlor may have:
a. Right to substitute assets equal to fair market value – i.e. the Settlor can transfer real property worth 300,000 into the trust, 1 year later he transfers 300,000 worth of cash to the trust in exchange for the real property which is still worth 300,000 (this power is given for tax reasons)
b. Power to change beneficiaries of the trust via a Will or other instrument – i.e. the Trust says ABC are beneficiaries currently, but the Settlor can change the beneficiaries through his Will or during his lifetime
c. Settlor has the right to receive income from the trust during his lifetime
d. The settlor transfers a house to the trust and then the trust allows him to live in the house during his life or for a term of years without paying rent.

 

Answer:

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

Although the legal title in a trust is transferred over to the trustee, in terms of Shariah, he is not the true owner, as he is not granted unfettered rights over the property in the trust.[1] He is obligated to act for the good of and hold the trust on behalf of the beneficiaries.[2]

In terms of Shariah, the real ownership of the trust (whether revocable or irrevocable) still lies with the trustor (settlor). As such, any property or wealth remaining in the Trust upon the death of the trustor must be distributed according to the Islamic Laws of Succession and Inheritance as stated below:

According to the Islamic Law of Succession and Inheritance, distribution of an estate will only commence after funeral expenses, debts (including legal costs) and bequests (if any) made to non-heirs – which will not exceed one-third(1/3) of the Estate after debts and funeral expenses have been settled. Thereafter, all assets form part of the Nett Estate and will have to be distributed according to the Islamic Law of Succession and Inheritance.

And Allah Ta’āla Knows Best

(Mufti) Abdul Azeem bin Abdur Rahman

Checked and Concurred by my honorable Ustaadh (teacher),

Mufti Emran Vawda Hafidhahullah

 

Disclaimer:

 

The Shar’a ruling herein given is based specifically on the question posed and should be read in conjunction with the question.

 

Darul Iftaa Texas bears no responsibility to any party who may or may not act on this answer and is being hereby exempted from loss or damage howsoever caused.

 

This answer may not be used as evidence in any Court of Law without prior written consent of Darul Iftaa Texas.

[1]  ( الْمَادَّةُ 125 ) ( الْمِلْكُ مَا مَلَكَهُ الْإِنْسَانُ سَوَاءٌ كَانَ أَعْيَانًا أَوْ مَنَافِعَ ) أَيْ أَنَّهُ هُوَ الشَّيْءُ الَّذِي يَكُونُ مَمْلُوكًا لِلْإِنْسَانِ بِحَيْثُ يُمْكِنُهُ التَّصَرُّفُ بِهِ عَلَى وَجْهِ الِاخْتِصَاصِ (درر الحكام شرح مجلة الأحكام)

 

[2] https://www.fidelity.com/estate-planning-inheritance/estate-planning/trusts Last accessed on Jan. 29th, 2015