Plan Islam » Sadqa Jaaria Planning

Messages from Leslie and the waqf

Ahmed Shaikh — Wed, 25 May 2011 07:17:40 +0000

Those of you who get these updates by email saw a curious email from “Leslie Mills.” That was an error, the email was not meant to have come from her.

In case you missed it because of that reason, the post that month was a well considered one on Waqf, and how giving to one can be a bad idea. Check it out if you have not yet.

Lots of ways giving to a Waqf can be a bad idea

Ahmed Shaikh — Mon, 02 May 2011 03:49:58 +0000

Muslims tend to be charitable by nature. Here in Southern California, the Muslim community and perhaps in other communities around the country, it is fundraising season again. Many organizations are holding banquets and doing fundraising in order to meet their annual budgets.

In some cases, organizations would like to be able to build for the future.

They would like to build new buildings, hire staff, and many cases, simply bulk up their bank accounts into what is often being referred to as a “waqf” with the promise that they can continue doing these things for generations to come.

As an Attorney specializing in Estate Planning, I am often asked to advise on long term giving for particular organizations within the Muslim community. Oftentimes, I find myself reluctantly recommending against planned giving for programs I like run by people I admire. I do not discourage giving in charity during lifetime in order to benefit worthy causes and love to plan gifts. However people work hard for their money, and we need to carefully evaluate who the estate is given to.

It is easier to give more in charity after you do not need it anymore, because you have died. The Islamic rules of inheritance actually restricts how much you give after your death, including to beneficial purposes such as charities.

You can get up to one third of your assets to a wasiyyah after your death. The Quran mentions this term, and also mentions that it comes out before inheritance is distributed. However, exactly how much you can give in a wasiyyah is not itself specified. What is specified, is how much is distributed in inheritance, which is ordained (Quran 4:11-14).

The one third restriction comes from a hadith where it is clear that one third may be too much (though plainly permissible). While Muslims are encouraged to give to charity (zakat is an obligation), after death, the money is no longer yours to give away.

Some Islamic organizations are beginning to promote various sorts of planned giving mechanisms. Though admittedly, these are typically in the infancy stages. One of the major problems with much of what occurs and planed charitable giving is that some of the techniques violate Islamic rules on riba, gharar, or the Islamic Rules of Inheritance. Violating one or more of these rules, ostensibly to benefit a charity (though mind you they frequently benefit the donor as well) would of course seem silly.

When giving your estate to charity, make sure you follow the following steps:

Don’t tie contracts to your death, unless you have taken care of the 1/3 rule already.

The charitable remainder trust is a popular technique. It is a wonderful tool. When it’s done right, individuals may save a substantial sum of money on taxes and may actually be financially richer for having done it. Also, they end up giving a lot of money to charity. There are assumptions involved that may or may not make the thing work.

Most of the time, these trusts are set up in order to give an individual and income interest or a “unitrust” interest during their lifetime, and the balance goes to a charity. It becomes a questionable transaction when you are tying the arrangement to death, since children are disinherited in the deal. However, if the gift is done over a period of years, I do believe you are and much safer territory. The problem however is that such a trust may become less attractive for some, particularly for those using this as a retirement tool.

Make sure you have the flexibility to change the charity later on in life

Planned charitable giving often provides us with a gray area we are not usually familiar with when it comes to giving and charity. You are giving a “split interest.” This means it’s partially your property and partially the property of the charity you have given it to. If you do it right, who exactly have given it to may well be up in the air throughout your entire life.

This is because institutions, just like people, are constantly in transition. People move, elect new boards of directors, go bankrupt or deal with monstrous litigation costs. You won’t know these things in advance. If you lock yourself into a situation where a charity once adored have now fallen out of favor, you won’t get much peace of mind that you will not be happy with the donation that you have given, which in many cases would be a large portion of your wealth.

Planned charitable giving programs frequently like to lock people in to their own charity for decades, This is of course in their best interests. However, it is not in the donor’s interests.

Beware of personality driven organizations looking to start a “waqf”

Even well-established institutions are more vulnerable than people might think. Some people are able to raise large amounts of money through sheer force of their personality or celebrity. However, if you evaluate what may become of their organization should that individual leave the stage, you may find the organization looking weak and unsuitable. When evaluating an organization, it’s best to simply ignore the famous people promoting it. If you are not sure why I want you to ignore the famous person at the help you should google “Crystal Cathedral financial troubles” and you will begin to understand.

Preachers in all faiths have a way of mesmerizing us while separating us from our money. This happens in Islam to. Thats all wonderful when good happens with the money. But estate planning is business. Lets stop being mesmerized for a few minutes and look at the facts. Particularly when we are being asked to contribute to a fund that will sustain an organization forever while partially disinheriting our own children:

Some Factors to consider when naming a charity to your plan:

How long has the organization been around? I would say the lower it goes from 20 years, the weaker case it has to be part of your estate plan. No matter how promising they appear, give them a chance to prosper. Donate to them to help them during this time if you like them, stop if you don’t.

Do you have a personal connection to the work, have you been involved? If not, why not? If you are giving away up to 1/3 of your estate to an organization, you may consider an institution to be somewhat on par with your children on an emotional level, at least thats what frequently happens. Make sure your not just adding an organization to your estate plan just because you heard nice speeches or powerpoint (hopefully you are not doing that).

Does the organization suffer from some version of “founder’s syndrome” – where one or more founders fancy themselves as indispensable? If so, there is a risk this will be a self-fulfilling prophesy. Its not a newsflash for me to point out that the founders of every organization will die.

Do they have a leadership succession plan/ a strong leadership bench? This goes back to the issue of personality driven organizations. If you go to the organization’s website and see one person’s picture and name over and over again, and the whole website looks like a love letter to that one person, its probably a weak candidate for your estate plan.

If the organization’s “heavy” leaves and starts a rival organization, what would happen to this institution? Of course you don’t truly know, but if there is a risk the organization may collapse, its a weak candidate.

Do they have a plan set up that protects their endowment from lawsuits? Occasionally, organizations say they have a separate “waqf” but there is little legal substance to the arrangement. Future generations can easily squander it, as we have seen many times in the past. Make sure and have this evaluated before putting the organization in your plan.

Is funding an organization forever really the best use of your wealth? It may be. After all its your money and you want it to be directed in accordance with your values. However do consider money is a renewable resource and if the parents of today can figure out how to charge tuition and pay teachers, put cash in a donation box at the Masjid, future generations may be able to do the same. An endowment may also change an organization and make it less accountable to the people it is serving, since the people running it have their money guaranteed by dead people.

These are various factors that you may consider looking at, they are not absolute rules. Of course, you do not know what an organization is going to be like 100 years, 50 years, 20 years or even one year from now. However, like I said, if you are going to partially disinherit your children in order to benefit a charity’s bank account, you should go through an analysis to see if there’s a good chance this will benefit humanity over the long-term in the way you intend.

This type of analysis is unnecessary when we are NOT talking about giving an organization an endowment, but rather doing other sorts of sadada jaaria (continuous charity), such as irrigation programs, getting clean drinking water to those who need it, certain types of building programs and so forth.

Such analysis is also unneeded if you establish a Family Foundation so that charitable dollars for a particular purpose, such as education, scholarships, salaries for worthy charities, building projects and so forth are awarded by successors. If you do not have the means to fund such a charity while you are alive, you may be able to mandate one be created after you die (stay within the 1/3 rule).

This will ensure that your overall charitable goals are met over the long term, but its not necessarily tied to an organization, the fortunes of which may be fleeting.

Lastly, its far better and less complex to give in charity now, while you are alive and healthy. See the benefit of it while you are alive. Go to those fundraisers and build those institutions. A disclaimer: Some of you reading this may have specific charities popping up in your head figuring I am attacking them. I am not. I am recommending prudence when planning an estate but encouraging charity to those organizations you like.

Waqf Issues for Islamic Organizations (Short Video)

Ahmed Shaikh — Mon, 22 Nov 2010 02:36:57 +0000

A brief video on establishing a Waqf for an Islamic Organization. Many organizations are thinking about it, some are actually doing it.

“Even a smile can be charity”: But how about burning down your own house?

Ahmed Shaikh — Wed, 28 Jul 2010 01:53:32 +0000

Many things that we regard as charitable come with no sacrifice. For example, a smile. Some provide no sacrifice but do provide a tax deduction. Others provide no sacrifice or tax deduction.

Fire departments like to burn down homes for training purposes. People donate their homes to provide real world training experience to firefighters. The case of the Hendrix's demonstrated a case of taxpayers who wanted to test the limits of what is charity by donating their home to the fire department, temporarily, when they found this a cheaper route, compared to paying for a demolition. They were told by their advisor seeking a deduction would be aggressive. They also failed to sufficiantly cover themselves with a written acknowledgement and appraisal. If they are going to get a tax benefit from doing something, they needed to document what they were doing a little better.
They got their demolition for free, they helped the fire department. However they did not get any tax benefits.

Islam and Private foundations: It’s a lot of work. Is it really worth it?

Ahmed Shaikh — Sat, 19 Jun 2010 00:48:44 +0000

Any family considering a “private foundation” should do so only after significant thought has been given to the charitable goals the foundation is supposed to undertake as well as a the level of commitment the family willing to bring to the table.

It’s a lot of Money

Many well-informed practitioners have recommended to their clients at least a $500,000 initial commitment to the foundation to get going. A recent article in Trusts & Estates magazine (subscription required) is the initial figure at $3 million with a “willing and able” contribution threshold of $5 million. There is a substantial upfront costs including the necessity to prepare documents federal and state filings and ongoing administrative expenses for recordkeeping, grant-making and continuing filings.

It’s not all about Taxes

A private foundation is really not the best vehicle for somebody who is solely, or even primarily interested in a tax deduction. There are other vehicles that provide tax deductions that may be better targets to explore.

It does make sense however to strategically time the contributions in order to maximize the allowable tax deduction. coordination with a tax advisor is necessary in order to make sure that this happens correctly.

Growing the Pot

With a private foundation, you essentially have a charity with some restrictions. These restrictions exist because of private foundation typically is not a charity that does its own charitable things, rather it is a grant making organization that provides grants to other charities. Furthermore, its controlled by a family leaves open the possibility for abuse. In fact, private foundations have been abused frequently and have been subject to some congressional, media and IRS scrutiny.

Even so, since we are talking about a charity, assets inside the charity will tend to grow tax-free or subject to a relatively small (1% or 2%) excise tax on net investment income.

The authors of the article cited above state that while this is usually true that growth is greater inside a foundation then in a taxable account, it is not always true. Much of this has to do with the types of assets that may be donated to the foundation.

In all instances, it is necessary to have an overall strategy, including an investment, tax and charitable strategy in order to make this particular type of arrangement work.

To DAF or not to DAF

Donor advised funds typically offer less of the financial and time commitment than a private foundation (though the numbers provided above were simply guidelines, not hard and fast rules) and are in many cases, a better fit than private foundations.

Of course, as a charitable giving plan would have to be part of an overall integrated strategy, every strategy will have to be thoroughly tested and evaluated.

The article cites the bankruptcy of “the National Heritage Foundation ”where bankruptcy court decided that all of the donor advised funds assets were available to satisfy creditors claims. This means that the philanthropist who gave money out for the purpose of charity ended up giving to creditors of the company they decided to operate their Donor Advised Fund.

Undoubtedly, for many philanthropists, this may well be a dealbreaker on donor advised funds.

Charity: Donations to foreign religious organizations not necessarily tax deductible

Ahmed Shaikh — Sat, 29 May 2010 00:51:54 +0000

A Tax Court case (PDF) tells the story of a woman who was a young girl in her home country saw atrocities committed against Catholics and saw a Catholic Church destroyed. After living in the United States she started making donations to her home country's Catholic Church. The donations were not made directly, but through a relative as she may have feared reprisals. Those donations are not tax deductible according to this opinion. However donations to US Based organizations that do work in her home country (she eventually gave to one) would be. Donations must be given to "a corporation, trust, or community chest, fund, or foundation." Wiring money to her relative was none of these things. Also, even if it did, the organization did not qualify. She also attempted to get a tax deduction for airfare to her country, which also did not work.

It is helpful to know, for purposes of foreign religious organizations, you may not get the tax deduction. Many people donate to causes outside the United States regardless of the tax deductibility of the donation. It may also be possible to get a deduction if you donate to a US Organization that works in a foreign country.

Islamic Rules of Inheritance and immortality

Ahmed Shaikh — Thu, 29 Apr 2010 18:23:26 +0000

The Financial Times notes a new book out by Ray D. Madoff called “Immortality and the Law” which is about the ever-increasing rates of dead people to control the rights of the living. Of course, people cannot take their property with them. However, it does seem nonsensical that individuals have a wide range of obligations to their family that simply evaporate on death, forcing family members to become wards of the state. Unfortunately, in the United States, this seems to happen over and over again.

From a positive review of the book, which I should hope to write about in the future in this space, there also appears to be a hostility to charitable foundations. It questions whether this is a net societal benefit. The underlying assumption here is that somehow the government can spend money in a manner that is more likely to benefit society. Given where government funds are usually spent, a small portion of which is really for societal benefit, I would question the underlying assumption.

In the Islamic rules of inheritance, family members have rights to inheritance that cannot be changed by the deceased person during his lifetime. An individual can give their money away during their life, however it cannot be intended to injure the rights of the people who are entitled to inheritance under the Islamic rules of inheritance. Up to one third may be utilized for a beneficial purpose, including charity. The Islamic rules of inheritance provides a middle way between simply allowing for a property owner to engage in his own personal vanities while at the same time,allowing the utilization of resources for charitable purposes as well.

Charity: But your rich! So why don’t you donate?

Ahmed Shaikh — Wed, 28 Apr 2010 00:14:39 +0000

A recent report from Barclay's Wealth (PDF) addresses the concerns of wealthy philanthropists, and why they may be less so. There is a study on why it is those that donate do so. The top reason, "I can afford to." Religious beliefs came in at number 10 (though it came in on top as an "internal motivator." The study concerns the UK and US. It would not make much sense to do a study this way except that Barclay's is a British Bank, and so the numbers may be a little skewed.

The results however were bad overall. Most wealthy people donated less then 1% of their net worth every year, indicative of hoarding, only 1/3 gave more. The economy is not the main reasons the wealthy hold back, though its a factor. Tax policies, how charities are run and the lacking of key motivators are also to blame. Trusts and Estate Magazine summarized the report here (subscription required).

Building an Endowment

Ahmed Shaikh — Sat, 17 Apr 2010 22:23:17 +0000

I recently spoke in Chicago on building endowments for Islamic Schools. Its not an easy subject and in fact, many schools would not be able to set up an endowment as they are too new or too small or do not have enough of a donor base. Before delving into the issue, you want to have the consulting and legal expertise available. Trusts and Estates Magazine has a brief primer on building a better endowment. You can access it here.

A few highlights:

Endowments are not especially common among US charities. While everyone has heard of the giant Harvard and Yale endowments, they are more the exception then the rule. Furthermore, and this is obvious to many, Endowments have taken massive hits recently.

Endowments may have many, sometimes thousands of seperate special use funds associated with them. The purposes of donors in such accounts are governed by state law. Most states have adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Here is a link to a PDF of the act.

The Act uses a "total return" approach to investing, rather then the traditional way, which was looking at income alone. In developing a trust based Waqf, I have looked at removing some of the "default" UPMIFA rules, particularly on investment returns so as to make them more conservative. However the Uniform Act has a good approach and does much to protect endowments. Of particular interest for many in the Muslim community is the difference between they way Trusts and Corporations are treated. For historic reasons, as well as the continued inclination to to develop Islamic Rules of Awqaf by contract, I continue to favor the use of Trusts when developing endowments.