The origins of the modern trust are the subject of debate amongst academics; theories include the Islamic Waqf which was either a family or charitable endowment of property, created by a donor for use by designated beneficiaries and administered by trustees who in turn were under the supervision of a local judge. Under this theory, it is argued that the Waqf was imported by Franciscan Friars returning from the crusades in the thirteenth century, adopting the Waqf to the needs of their mendicant order.

Although the Waqf is similar to the trust, there are many benefits to the more developed trust including established law and regulation of professional trustees. Furthermore, the trust offers itself to a range of compliance with Islamic law (Sharia') depending on the wishes on a settlor.

The Sharia' Trust

As a generalisation, there are three Sharia' adherence options available to a settlor:

(1) strict adherence;

(2) lesser adherence; and

(3) departure.

It is important to recognise that a settlor's approach might differ depending on which school of Islam he belongs.

The strict approach

For a trust to be Sharia'-compliant (i.e. approved by an Islamic Scholar), it must comply with Sharia' principles, in particular restrictions on investment and rules of inheritance.

Investments

The trustees must ensure that the trust fund is not invested in Haram (prohibited) investments. This is done by screening investments, known as the "industry screen", which looks at activities of investments to determine compliance with Sharia'. For example, it is Haram to invest in: (i) conventional banking charging interest; (ii) alcohol; or (iii) gambling.

Industry screening can be difficult because it must be applied to all aspects of business activities which might not be obvious. For example, a leisure group including a major hotel chain subsidiary (which is Halal permissible)) might generate significant revenues from alcohol sales or casinos, all of which are Haram. Therefore, the usual wide investment powers of trustees would need to be restricted. This can be done, for example, by an investment committee with expertise in Sharia'-compliant investments. Ultimately, trustees, without appropriate knowledge should seek appropriate advice and not undertake investments without such advice; to do so might breach Sharia' which in turn is likely to be a breach of trust.

Inheritance

The trust must also not infringe Sharia' forced heirship rules. Under Sharia', primary heirs include the spouse(husband or a maximum of four wives), the children (sons and daughters), the parents (father and mother) and, if the son is already deceased, the grandchildren (but only of a son, not of a daughter). In the absence of all of the primary heirs, secondary heirs include grandparents (both paternal and maternal), brothers and/or sisters (only in the absence of father and son), uncles and/or aunts (only in the absence of grandparents) and nephews and/or nieces (only in the absence of brothers and sisters).

Therefore, the beneficial provisions of the trust need to be drafted in such a way as to accommodate Sharia' so that upon death, the trust fund would be distributed to heirs in the correct proportions. Hence, a good option might be a discretionary trust but with an obligation upon trustees to seek advice from a Scholar as to the proportions each heir/beneficiary should receive and to distribute in accordance with that advice. However, the trust would, in all likelihood, end on the settlor's death and its usefulness in terms of asset protection and wealth preservation would be lost.

The less strict approach

Investments

Scholars comment that it is difficult to remove all tainted investments because few companies operating in global markets will be fully Sharia'-compliant. Therefore, a lesser approach might apply the "industry screen" but also a "financial screen" taking into consideration an element of non-Sharia'-compliance in investments.

The financial screen reviews the impact of non-Sharia'- compliant financial behaviour of, for example, a company and its potential impact on corporate performance and share price. For this screening, a company needs to be compliant with the financial ratios prescribed by Scholars; such ratios will vary, but there are generally accepted prescribed ratios so that investments will be considered Halal. Therefore, for example, it would be permissible to own a hotel selling alcohol and providing a casino if the revenue generated from those activities does not exceed five percent of the hotel's total revenue.

From the trustee's perspective, the same methods (as mentioned in the strict adherence) would be applicable to the lesser approach when making investments, but provide the lesser approach provides the trustee with more options when making investments.

Inheritance

The settlor may establish a discretionary trust to preserve assets for the benefit of future generations, whilst nevertheless having regard to the Sharia' inheritance proportions (at least in relation to those assets located in an Islamic jurisdiction). Therefore, upon the settlor's death, the trustee may divide the trust fund into sub-funds in amounts determined by reference to the heirs' entitlement, but retained by the trustees with discretion as to when and how much is paid to the beneficiaries; thereafter allowing the trust to continue to benefit heirs past the settlor's death.

Departing from Sharia'

A settlor may wish to ring-fence assets outside of Sharia' and not be subject to the restrictions of Sharia'. Therefore, a settlor establishing a trust in breach of Sharia' will be reliant upon so called "firewall" provisions of trusts legislation to protect that property settled into trust.

Typical firewall provisions will stipulate that any question concerning the validity or interpretation of the trust, the validity or effect of any transfer or other disposition of property to a trust, will be determined in accordance with the law governing the trust without reference to the law of any other jurisdiction, so that no rule of foreign law (including Sharia') shall affect such questions. These firewall provisions have been tested and found robust in Jersey on many occasions and also in Guernsey.

However, rather than simply rely upon firewall provisions, in certain circumstances, it may be possible to depart from Sharia and have the trust approved of by Scholars to avoid the trust being attacked at a later date as being non-compliant. Whether or not a Scholar might approve the trust is entirely circumstantial, but if a Scholar is prepared to approve of the trust, such approval will provide another level of protection for the trust beyond the firewall provisions.

The future of Sharia' compliant trusts

The trust is a concept increasingly used for asset protection and wealth preservation whilst at the same time respecting Sharia'. Often Islamic clients choose to establish trusts outside Islamic countries for a number of reasons, including taking advantage of established trust laws, trust administration experience and the opportunity to settle assets in a mixture of a Sharia' and non-Sharia' compliant manner. Often the less strict discretionary trust is the preferred option to morally abide or be seen to abide by the Sharia' whilst also using the trust to its full potential.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.