20/03/2015 SHARIA COMPLIANT TRUSTS: SOME RECENT CASE STUDIES - PDF document

20/03/2015 SHARI’A COMPLIANT TRUSTS: SOME RECENT CASE STUDIES Thursday 19 March 2015 Piers Master (Charles Russell Speechlys) Lorraine Wheeler (First Names Group) - Chair STEP Jersey is sponsored by: Shari’a compliant trusts Presentation to STEP Jersey 19 March 2015 Piers Master, Partner charlesrussellspeechlys.com Introduction • “Shari’a compliant trusts” – what do you mean? • Shari’a succession law • Shari’a compliant investments • Is it possible to draft a Shari’a compliant trust? • Sensitivities 20 March 2015 3 1

20/03/2015 Shari’a succession law – a very brief summary • Fixed devolution of estates in given shares on death • Exact distribution depends on relevant school of Islam • Lifetime gifts – key for the trust practitioner • “Death illness” / clawback? • The one third rule 20 March 2015 4 Example of typical succession rules • Wife, mother, 2 sons, 3 daughters • 1000 shares • Wife receives 1/8 th – ie 125 shares • Mother receives 1/6 th – ie 166.6 shares • Remaining 708.33 shares divided so that each son takes twice the share of each daughter • So each son receives 2/7 th s of the 708.33 ie 202.38 • Each daughter receives 1/7 th of the 708.33 ie 101.19 20 March 2015 5 Succession – some further points • Must take local advice – law and practice varies • UAE: Civil Code takes priority over Shari’a jurisprudence • Saudi Arabia: purely applies Shari’a jurisprudence • Do the local courts have jurisdiction to entertain a claim from disappointed heirs? • Typically yes in the case of nationals of that state, and in respect of real property there • But practice varies 20 March 2015 6 2

20/03/2015 What might a Shari’a compliant trust look like? • Trust which automatically distributes in fixed Shari’a shares on death • Yes • Can be prepared – how useful in succession terms • Value for locally held assets • Investment provisions (discussed later) • Revocable trust • No • May protect the trust assets themselves from a claim on death • Anti-firewall legislation can help • But risk of “abatement” of local assets on death • The one-third rule • Irrevocable discretionary trust • If correctly drafted, possibly yes • But residual uncertainty may remain 20 March 2015 7 Why is it important? Abatement • Local courts claim that assets still owned by deceased (settlor) • Resulting in claim • Either assets in trust themselves (unlikely – firewall etc) • Or that because “trust” assets still owned by the deceased, they should be taken into account in calculating the entitlement of the Shari’a heirs to local assets • So – always ask about value and location of your client’s assets, including those staying OUTSIDE the trust structure 20 March 2015 8 Lifetime gifts – the key to understanding trusts • Three key conditions • offer • acceptance • receipt • Death illness period • If a gift is properly made and completed before the death illness period, it will not form part of the donor’s estate required to be distributed in accordance with the Shari’a inheritance rules. • If the gift was made during the death illness period of the donor, it is considered part of the donor’s will and not as a lifetime gift. • Factors vitiating gifts • Gift being reversible (revocable or “temporary”) • Donee being unable to accept gift (eg bar on foreign ownership) 20 March 2015 9 3

20/03/2015 Applying lifetime gift rules to trusts • Vital to take local (Middle East advice) • But two key principles • The gift into trust must be valid • The terms of the trust should not confer too much control on the donor/settlor 20 March 2015 10 Validity of gift into trust • The “ Heba ” rules • Donor must have capacity • What is meant by “capacity”? • Make sure the gift is properly documented • Property should vest in trustees (avoid nomineeship) – an actual transfer • Gifts made in “death illness” period can be clawed back especially if they exceed one third of the estate 20 March 2015 11 Too much control by the donor? • Terms of trust important • Donor cannot have automatic right to benefit • So discretionary trust good • Donor should not have power to revoke trust • Be very careful about Protector / Appointor powers • Consider Protector Committee / Trust Committee • The control vs influence debate 20 March 2015 12 4

20/03/2015 Example (1) • Saudi resident / national settlor holds shares in Jersey company holding UK real property • He transfers these shares to the trustees of a Jersey trust • Is there a risk of a challenge in the Saudi courts if: • The trust is revocable? • Settlor holds Jersey co shares as nominee for the Trustees? • The Settlor has power to appoint and remove trustees? • The Settlor sits on a Protector Committee consisting of three members, the Settlor plus two unrelated professionals, and that Committee has power to appoint and remove Trustees? • The trust deed is silent as to what happens at the end of the trust period? 20 March 2015 13 Example (2) • Saudi resident / national settlor holds shares in Jersey company holding UK real property • He transfers these shares to a private trust company (PTC) which acts as trustee of several family trusts • The shares in the PTC are held by the trustees of a Jersey purpose trust • Is there a risk of a challenge in the Saudi courts if: • The Settlor is a director of the PTC? • The Settlor is the Enforcer of the Purpose Trust? 20 March 2015 14 Shari’a compliant investments? • For full compliance, the permitted investment strategy of a trust must be Sharia’ compliant in terms of which types of investments are allowed. • Examples of investments which must be avoided: • gambling • alcohol manufacturing • trading and any investment that involves usury (e.g. conventional banking/financing) 20 March 2015 15 5

20/03/2015 Budget update • The Chancellor delivered his Budget yesterday, 18 March • Key points of interest to trust / private client practitioners 20 March 2015 16 Any questions? • Piers Master • +44 (0)20 7203 5352 • piers.master@crsblaw.com 20 March 2015 17 charlesrussellspeechlys.com Charles Russell Speechlys LLP is a limited liability partnership registered in England and Wales, registered number OC311850, and is authorised and regulated by the Solicitors Regulation Authority. Charles Russell Speechlys LLP is also licensed by the Qatar Financial Centre Authority in respect of its branch office in Doha. Any reference to a partner in relation to Charles Russell Speechlys LLP is to a member of Charles Russell Speechlys LLP or an employee with equivalent standing and qualifications. A list of members and o f non-members who are described as partners, is available for inspection at the registered office, 5 Fleet Place, London. EC4M 7RD. 6

20/03/2015 THANK YOU FOR YOUR ATTENDANCE STEP Jersey is sponsored by: 7