ZAKAT AND ESTATE PLANNING – PART 1
Zakat in Islam is generally regarded as a form of worship and self-purification. The third pillar of Islam, Zakat is the compulsory giving of a specific portion of one’s wealth to charity. In monetary terms, Zakat refers to the portion of a Muslim’s income (usually 2.5%) earned within a lunar year which goes to the less fortunate/less privileged in the community. This generally applies if your annual wealth exceeds a specified amount and is calculated on the amount in left over after other essential responsibilities have been covered.
The wider aim and concept of Zakat, is enabling the poor to become self-sufficient. This is based purely on the Prophetic directive; when the Prophet (SAW) sent Mu’adh to Yemen, he said to him: “You are going to a nation from the people of the Scripture …tell them that Allah has enjoined on them Zakat of their properties and it is to be taken from the rich among them and given to the poor among them…”. However, this is not meant to be a permanent solution and many Islamic scholars agree that in paying Zakat, priority should be given to one’s neighbours.
The Qur’an does not dictate a specific measurement tool for Zakat and as such, it is the responsibility of the individual to calculate and pay the portion of his income that should be given to the poor in line with the guidelines provided. It is important to highlight, however, that Zakat amounts have been specified, and as such, it is not up to the individual to decide how much he or she is willing to give.
Zakat is payable on five types of material wealth:
- Personal wealth and assets
- Liquid and exploited assets
- Agricultural produce
- Livestock and business commodities
- Treasure i.e. gold, silver etc.
Also, there are three major conditions for Zakat on these types of wealth:
Sole, exclusive ownership
Growth (actual or potential)
Passage of a zakat-year
In aggregating your assets for the purpose of Zakat, your assets may fall into any of the following categories:
Liquid Assets – are goods that can be easily sold, usually for a profit. They are ‘Zakatable’ only once in the Zakat-year and fit all the other conditions of Zakat or any other ‘Zakatable’ wealth.
Non-liquid Assets – Also called “exploited assets”, non-liquid assets are considered a form of business wealth. While liquid assets may be sold, non-liquid assets remain with the owner often as permanent capital. They are possessions obtained for the purpose of generating income and to benefit their owner.
Exploited assets include anything rented out for profit, such as residential buildings, equipment or means of transportation. They also include producer animals such as sheep for wool, cows for milk, or bees for honey. These (non-liquid assets) are Zakatable.
It is important to highlight that assets owned and used for personal use or for meeting basic living expenses are not ‘Zakatable’. This simply means that your home and personal car are excluded for the purpose of Zakat. However, if you own other properties that are being used for investment purposes and you have the intention of keeping it, the profit earned from such ventures are generally subject to Zakat.
Next week, we will go into the details of how Zakat fits into your wealth transfer plan and the Islamic guidelines that relate to Zakat and Estate Planning. Should you require advice on this
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