Islamic Financial Planning

1. ISLAMIC
FINANCIAL PLANNING
Mahyuddin Khalid
Estate Planning

2. Chapter Outline
Content
Why Estate Planning?
Type of Estates
Strategies of Estate Planning
Procedures in Developing Sound Estate Plan
Ranking in Asset Redistribution
Wills
Wisoyah
Power of Attorney
Faraid
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3. Introduction
Concerned about how one should distribute his wealth
after his/her death.
A well plan asset redistribution is important to take care
the family unity and benefit.
Several methods can be applied to distribute one wealth
after he/she passed away:
 Faraid
 Wassiyyah (will)
 Hibah.
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4. Why Estate Planning?
Estate planning is
 A definite plan for the administration and disposition of one’s
property during one’s lifetime and at one’s death
Estate planning is an essential part of retirement planning
and has two components
 Build your estate through savings, investments, & insurance
 Transfer your estate as you wish at death
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5. Why Estate Planning?
Newer lifestyles means different challenges, which means plan early and get expert help
If unmarried
make sure beneficiaries have information about your estate that they will need
If married
include spouse and children in estate planning process
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6. Why Estate Planning?
Opportunity cost of Rationalizing
• Many people give little or no thought to putting their personal and financial affairs in
order for their families that survive them
Demands of daily living can keep people from thinking about death
• Plan while you are in good health
Estate planning is especially important for nontraditional households
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7. What Is Estate Planning?
Estate planning/asset redistribution is a lifelong process of
evaluating one’s financial position and plans which involves
Accumulatio
Preservatio
Distributio
of assets to ensure that they reach the
beneficiaries according to desired proportion
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8. Example of Estate
Savings account and current account in a commercial bank
Tabung Haji, KWSP, Insurance, Takaful, ASB, and other unit
trusts
House, Land
Shares (listed and non-listed, cooperative shares)
Other valuable asset under the name of the deceased;
jewellery.
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9. Type of Estate
All Malaysian, Muslim or non-Muslim, when he/she passed away, his/her
estate will be handled by one of the three agency.
Harta Pusaka Ringkas
• Current assets which is valued less than RM 600,000
• Amanah Raya Berhad
Harta Pusaka Kecil
• Current assets and fixed assets which is valued less than RM 600,000
• Pejabat Pesaka Kecil
Harta Pusaka Besar
• Current assets and fixed assets which is valued more than RM 600,000
• High Court
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10. Objectives/Goals of Estate Planning
To ensure that the maximum value of the wealth is
distributed to his/her dependents according to his genuine
wishes.
This means that you desire a minimum leakage of your
estate to the government and others in the forms of taxes
and administrative charges.
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11. Strategies of Estate Planning
Protecting Assets
Maximize
amount to heirs
Minimize
administrative
costs and
inconvenience
Appoint capable
executers to
manage estate
Appoint
trustworthy
individuals as
guardians
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12. Strategies of Estate Planning
• One should seek a secure and risk minimizing method to
protect the intrinsic value of the assets.
• He/she should allow the continued growth and increase in
profitability and liquidity.
• In doing so, it will avoid the problem of insufficient income
provision for heirs .
Protecting Assets
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13. Strategies of Estate Planning
• It is important to preserve the maximum amount of
wealth for distribution to their beneficiaries by
minimizing the estate settlement costs and any
other taxes associated with his/her estate.
• This may involve giving gifts (hibah) while he is alive.
Maximize amount to heirs
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14. Strategies of Estate Planning
• e.g.: Writing a will (wassiyyah) which is critical component of the
estate plan.
• It shortens lengthy court procedure and hence the
administrative and legal costs.
• It also economical and faster as it enables for grant of probate
rather than letter of administration.
Minimize administrative costs and inconvenience
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15. Strategies of Estate Planning
• The executor is responsible for administering and
distributing your assets after your death.
• The appointed individual must be trustworthy, financially
competent and honest.
Appoint capable executers to manage estate
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16. Strategies of Estate Planning
• In cases where your beneficiaries are minors, you need at
lease 2 legal guardians.
• The roles of these guardians are to hold your assets, invest
and use them for the benefit of these minors.
• These individuals must be trustworthy and genuinely care
for the minors.
Appoint trustworthy individuals as guardians.
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17. Procedures in Developing Sound Estate Plan
Step 1
• Ascertain how
mush assets you
own
Step 2
• Determine how
you want your
estate distributed
Step 3
• Decide on the
means of
transferring assets
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18. Procedures in Developing Sound Estate Plan
Step 1 : Ascertain how mush assets you own
 Itemise all your assets (liquid assets, financial assets, real
properties and personal properties).
 Determine the proportion of ownership in each asset.
Step 2 : Determine how you want your estate distributed
 List all of individual (beneficiaries) whom you like to transfer your
assets to upon death.
 Decide what proportion of your wealth you wish to allocate to
each beneficiary
 Example : to your wife, son, daughter
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19. Procedures in Developing Sound Estate Plan
Step 3 : Decide on the means of transferring assets
 You can distribute your assets either during your lifetime or at
your death.
 While you are living, you can distribute assets to your
beneficiaries in two ways.
 Direct gifts
 Such gifts have the advantages of avoiding estate duties as well as seeing your
beneficiaries enjoy these gifts while you are alive
 Set up a trust to distribute your assets to your beneficiaries.
 After the death, the assets can be transferred to your beneficiaries in the form
of will, trust, intestacy law (die without will) and beneficiaries designated in the
contract (e.g EPF)
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20. Ranking of Asset Redistribution
Among his heirs after
settlement of (1) to (4)
above.
To distribute the remaining
estate
A will is not for a
person's heirs. The
amount of estate
provided for in a will for
disposal shall not exceed
one-third of the
remaining estate after
the settlement of (1) to
(3) above.
To execute his will
The settlement of such
debts shall include the
performance of the hajj
on his behalf if he had
not already done so in
his lifetime, and the
payment of mahr if
payment had not already
been made.
To settle all his debtsTo pay for his funeral
expenses
Relating to zakat, various
kaffarah or penalties for
oath, zihar, coition whilst
fasting in the month of
Ramadan, coition whilst
in the state of ihram
during hajj or umrah,
homicide, etc.
To discharge all his
obligations
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21. Definition Of Will
• A Will is a document where a person states his intentions as to how his
estate is to be administered and distributed after his death and who is to
administer it
Definition
• Neither a contract nor an agreement
• Only take effect upon the demise of the testator.
Features
• For Muslims he or she can only distribute 1/3 of his or her estate through a
will and another 2/3 will be distributed through faraid
• For non Muslim he or she can distribute all his or her estate through a will
Injunction
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22. Characteristics of Wills
Also include
The appointment of guardian
for minor beneficiaries
Revocation of earlier wills Donation of organs Direction for burials
Include information on the appointment of an Executor who will execute the
will, the beneficiary(s) to the will and allocation of assets to the named
beneficiaries.
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23. Requirment Of Valid Will
In writing
Sign
At least 2 or more witnesses
Sound mind
Not be under the age of majority
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24. Who can make a Will?
• Whether "personal property" such as cash, stocks, jewelry or furniture
• Or "real property" such as land and/or a house
Anyone who owns property
• Only 1/3 of the whole estate may be given away to non beneficiaries
• The balance must be distributed in accordance with the Faraidh
According to Faraidh:
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25. Validity of wills
Attained the age of 18
(Peninsular Malaysia &
Sarawak) or 21 in Sabah
• A minor who is below 18
cannot make a will.
Sound mind
Acting on his own free will
and without coercion
• A person who wants to
make a will should make on
his own free will and without
any forcing from another
party
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26. Why do we need a Will
Important tool of estate planning
Helps in expedite the legal process involved in estate administration
Enables a person to choose and appoint his or her own executor and trustee
Provide an opportunity for the testator to give and make allocations for any special needs of their loved ones
Enables a person to bestow gifts to non-family members or non heirs incl. charities and religious organizations
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27. Process to write a Will
Establish one’s wealth distribution objectives prior to nominating beneficiaries and the estate allocation
Analyze and evaluate one’s state of assets by compiling all the related documentations such as insurance policies, certificate of unit trusts and
others
Nominate beneficiaries and allocate assets for them as per one’s wealth distribution objectives
Appoint a trustworthy executor with the capability to execute the Will in a reliable manner
Get assistance from a trustworthy will writer to assist in writing the will
Ensure that the Will is kept in a safe place and inform the executor on his or her appointment as executor as well as the location where the will
is to be kept
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28. Revocation of Will
Marriage
Destruction
Unsound
Mind
Convert to
Islam
Dies Early
Revoke the
wills
Illegal wills
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29. Duties of Executor
To identify the assets and beneficiaries of the estate.
To collect and realize the deceased’s assets
To pay the deceased’s funeral and testamentary expenses as well as debts due and owing to other parties
To distribute legacies
To complete the administration and distribute the residuary estate
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30. Duties of Trustee
To manage the assets to which they said beneficiary is entitled to, for the benefit
of the beneficiary.
Be responsible in managing a trust created by the testator in his will.
The executor and trustee can be the same person.
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31. Duties of the Guardian
Responsible in taking care of the necessities and affairs of the minor children of
the deceased Testator.
The assets belonging to the minor children and/or the maintenance for their
needs would be channeled by the Executor and Trustee to the guardian.
Any parent who has parental responsibility for his/her child may appoint one or
more individuals to be the child’s guardian(s).
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32. How to update a Will?
•As a result of a birth, adoption, marriage, divorce or death;
The family changes
•e.g. Testator want to add his other property
Substantial changes occur in the amount or kind of property owned
•Whether tax is increase or decrease so a will need to be updated
Tax laws change
•From one state to another
•e.g. The testator move from Malaysia to Singapore
Residence changes
•e.g. They don’t want to be a trustee or guardian anymore
The designated executor, guardian or trustee can no longer serve
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33. Legality of Wills in Islam
According to al-Baqarah: 180, wills is an obligation in Islam. After
mawarith verse legal of wills will be:
Jumhur Fuqaha’: Wills is recommended
Fuqaha’ Tabi’in: Wills is an obligation to Islam
Daud Al-Zahiri: wills is compulsory to parents relatives who had not received an inheritance.
For Jumhur Fuqaha’ the law of wills change according to circumstances.
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34. Pillars of Wills
Testator’s (al-Musi)
Beneficiaries (al-Musaalah)
Bequeathed property (al-Musa bih)
Sighah of wills
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35. Wisoyah
• A trust document which appoints a wasi (trustee) almost akin to the executor appointed under
the English will
Definition
• Appoint an executor and/or possible alternative executor(s) for the estate
• Nominate guardian's for minor children or other dependents
• Instruct on the distribution of personal effects
• Make specific bequests (wasiyyah)
• Give the executor the power to administer the estate
• Guide the executor on funeral arrangements.
Features of Wisoyah
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36. Power Of Attorney (POA)
• It is essential for any individual who is concerned about losing control of their affairs
and who wishes to minimize the expense and inconvenience of the courts
supervision.
Definition
• POA is important when an individual wishes to see a financial, retirement, or estate
plan carried out due to reasons including illnesses, poor mobility, or vacations.
• POA can even be used in the unfortunate event of incapacity.
Importance of POA
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37. Matrimonial Property Right
Matrimonial Property or Harta Sepencarian is the right of
the parties (husband or wife) in a legal and valid Islamic
marriage, in respect of properties which were jointly
acquired during subsistence of the marriage.
Scholars had viewed that harta sepencarian is rooted in a
Malay custom which had been continuously practiced by
the Malay community.
It was said that this custom had been accepted by Muslim
scholars as they view that it does not contradict Shariah
principles in general.
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38. Faraidh
• Faraidh is a science dealing with the law pertaining to the devotional acts based
on the Shariah in respect of the wealth of a person after the certainty of his/ her
death or on the assumption of his or her death (Personal Finance)
Definition
• Deals with the distribution of the estate of a deceased person among his heirs
in accordance with Allah's (God) decree in the Holy Quran and according to the
hadith
Scope
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39. Types of Estate Involved
Land
Building (house)
Jewelry (gold, silver
etc.)
Insurance and cash
(whether invested
or not)
Domestic animals
such as goats, cows,
camel, buffalo etc)
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40. Causes of Inheritance
Nikah
(marriage)
Wala’
(relationship)
Nasab
(kinship)
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41. Condition of Faraidh
No one is entitled to inherit which are:
Slavery Murderer
A Muslim is not entitled to inherit from non-Muslim, an a
non-Muslim is not entitled to inherit from a Muslim
Heir beneficiary living at the time of death
Beneficiaries die first
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42. EPF Money, SOCSO and alike for Dead
Muslim Members
The 49th Discourse of the Fatwa Committee of the National Council for Islamic
Religious Affairs Malaysia held on 19th September 2000 has discussed EPF
money, SOCSO and alike for dead Muslim members. The Committee has
decided that:
• EPF money and savings are considered as inheritance that must be divided
according to faraidh
• EPF nominee is the administrator of the property.
• The nominee should divide the EPF money according to faraidh
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43. The Principles And Liabilities In Inheritance
Distribution
The liabilities or responsibilities must be fulfilled in the
order of the following priorities
Making payment
for the funeral
rites and expenses
Settling the debts
of the deceased
whether debts to
Allah s.w.t. or debt
to human being
Distribution of the
inheritance to the
rightful
beneficiaries
Carrying out the
will made by the
deceased
Resolving
matrimonial
property claim by
the still-living
spouse
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44. Distribution of Small Estate
The distribution of
small estate is provided
in the Small Estates
Distribution Act 1955
The Act provides the
administration and
procedure of
distribution.
The maximum value of
a small estate is fixed at
RM600, 000.
Previously it used to be
only RM25, 000.
It is observed that a
majority of Muslim
estates in this country
fall under the category
of 'small estate'.
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45. Distribution of Non-small Estates
Procedurally, at the first
instance the applicant shall
apply for the grant of a
letter of administration and
following that, he shall also
apply for a vesting order.
Before making the vesting
order, the High Court will
normally require the
Muslim’s applicant to obtain
a Sijil Faraid from the
Shariah Court.
The applicant shall apply to
the Shariah court for the Sijil
Faraid and make payment at
certain amount.
Then he would submit the
Sijil Faraid to get a vesting
order.
The distribution order made
by the High Court is made in
accordance with the Sijil
Faraid.
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46. Faraidh - Muslim Estate Distribution
Share Who is eligible Condition
1/2 Daughter
Husband
Only child
No child hls
1/4 Husband
Wife
Existence of child
No child hls
1/8 Wife Existence of child
1/3 Mother No child
2/3 Daughter only 2 or more
1/6 Mother
Father
Existence of child
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47. Faraid Heirs Chart
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48. Case study
Hassan died leaving behind his wife, two daughters and two sons. But before he died, he drew
up a will for his assets to be divided equally among the five.
Under faraid, his wife gets 1/8 of his assets; the two sons are entitled to twice the portion of
their sisters which means each boy receives 7/24 of the assets while the sisters take 7/48 each.
So would Hassan’s last wishes be accepted or would the faraid system override it?
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49. Case study
The final decision…….
So in the case of Hassan, if they
all agree and say: “Yes, let’s
follow father’s wishes and
divide it equally”, then it will be
done…
One crucial point is that the
agreement from the heirs must
come after the person’s death.
It is not enough to have them
agree even in writing before
the person’s death.
The agreement made prior to
the death becomes null and
void.
Amanah Raya’s experience, he
says, usually even if one family
member disagrees with the will
and insists on collecting his
portion, the others would still
go along with the will.
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50. Mahyuddin Khalid
End of Chapter
Estate Planning
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