Question: 

Zaid foresees that his estate will pay large sums in Estate Duty Tax upon his demise.(up to 20% of his estate)

He is advised to open a life policy, and upon his demise the life policy will pay funds into his estate. His intention hereby is twofold.

1- he would like his executors to withdraw all premiums he has paid into his life policy, and this will form part of his estate. 

2- a large portion of his life policy payout is to be used to cover Estate Duty taxes. 

Any surplus funds from the pay out are to be given by his heirs in charity without reward.

Is the above permissible? 

Will a person be sinful for taking out a life policy with the intention of paying taxes there from?

Zaid also can not guarantee that his heirs will give any surplus away in charity. 

Answer: 

The funds in the life policy, over and above the premiums contributed by the policy holder is considered as interest. Now, the deceased estate comprises or is made up of the heirs (of the deceased), hence these heirs will be benefitting from such funds (interest funds,) if such interest funds are used to pay estate duties which is impermissible. Actually, if the estate duties were paid directly from the estate funds, then such a payment will be executed from the funds of the various inheritors (since they are owners of the deceased person’s assets). Based on the above explanation, we conclude that it is the heirs that are benefitting from the Haraam insurance funds (if such funds are used to pay estate duties), hence it is fundamentally impermissible.

It will therefore not be permissible for Zaid to subscribe to such a policy.

Yes, there are extenuating circumstances wherein certain Muftis have given some leeway; but those circumstances could differ from person to person and a Mufti will have to be consulted as per those special circumstances. We however recommend that as far as possible, one should abstain from taking out such policies and rather adopt other methods, such as what we have suggested hereunder:

Zaid should consult with an experienced accountant who would be in a position to guide him as to how the estate duties could be avoided. There are ways of avoiding huge estate duties such as forming a vested or discretionary trust and properties may be gradually sold over to the trust. Properties (that form part of a trust) are generally exempted from estate duties. As stated earlier, consult with an accountant for finer details. At the same time, one should understand the Shari’ee position of a trust deed as well, as a trust deed needs to be structured according to the principles of Shariah.

AND ALLAH TA’ALA ALONE IN HIS INFINITE KNOWLEDGE KNOWS BEST

ANSWERED BY: Mufti Mohammed Desai 

CHECKED AND APPROVED BY: Mufti Muhammed Saeed Motara Saheb D.B 

Date: 24 Dhul Qa’dah 1441 

English Date: 16 July 2020