Episode 4 – Foundations for Muslims
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ discusses foundations from all angles as well as their multiple uses in practice.
In our fourth episode, Senior Associate Célia Titouni and Managing Partner Yann Mrazek discuss the use of foundations by and for Muslims.
Key Takeaways
The context
Over the next 10 years, assets worth an estimated one trillion dollars are about to go from one generation to another in the Gulf region. At the same time, only one family out of seven has some sort of legacy plan in place!
These assets– mostly composed of real estate and businesses – are at risk every day: business risk, political risk, family disputes. Succession is now a risk that families, Muslim or non-Muslim, can control and plan for using foundations.
What are the succession rules in the UAE?
The legal basis for inheritance in the UAE is found in the Personal Affairs Law, which is a codification of Sharia. Inheritance is subsidiarily regulated by the Civil Code. Both the Personal Affairs Law and the Civil Code provide that inheritance shall be governed by the law of the deceased at the time of death. The law of the deceased shall be understood as the law of his own country or community, applicable to his inheritance and will whenever he passes away.For non-Muslims, the UAE legislation provides the freedom to elect one’s own law to govern inheritance. UAE courts will however not apply foreign law to the inheritance of Non-Muslim in absence of an executed will.
How about Muslims?
Sharia principles will mandatorily govern the succession of a Muslim and the inheritance distribution process, regardless of his/her nationality.
The exact divisions prescribed by Sharia will vary depending on one’s gender and family situation.
There are different categories of heirs, including forced heirs. Heirs must be Muslims and they cannot have willfully caused the death of the deceased. Illegitimate and adopted children are excluded from being heirs.
The guidelines surrounding how the heirs’ portions are calculated are complex, and in each case, a probate procedure shall be opened with local courts and a Sharia scholar will be appointed to decide how the estate is to be distributed.
Some male heirs– e.g. one or more son, one or more grandson, and one or more germane or consanguine brother – are favored over the correspondent female heirs in a 2-1 proportion.A mechanism of exclusion is provided for, which debars an heir of all or part of the succession because of the presence of another more entitled heir.
Can Muslims plan their succession?
Of course and they should! Legacy planning is key to preserve and pass on the estate to the next generations in a smooth manner.
Why is it important to do so?
Whilst Sharia provides very well for a Muslim family in terms of fair allocation of assets, it does not specifically address certain risks that may lead to dilution and/or destruction of value, such as:
- Family disputes
- Irresponsible heirs
- Third parties attack
- Temporary freeze of assets
- Lengthy and costly Court probate procedure
How can I do it?
There are numerous legacy planning tools available (locally), chief among which are wills, foundations and trusts. The tools need to be chosen and implemented carefully in order to achieve the objectives.
Muslims can register a will with a UAE Notary. However, the testamentary freedom is limited to 1/3 of the estate and subject to the approval of all major heirs. The remaining 2/3 shall be distributed as prescribed by Sharia.
Wills fail to address key concerns e.g.:
- assets (real estate, shares) remain held in an individual capacity, thus subject to probate procedure in case of demise;
- assets are exposed to third parties’ attacks