The vast majority of Americans say religious values and customs are a significant part of their lives. Surveys show that more than 95% of Americans believe in God or some higher being. Even many who profess not to be actively practicing any particular organized religion may still feel an affinity toward, or find comfort and solace in, the faith of their family or youth.
Yet when it comes to estate and financial planning, religious topics are rarely discussed and almost never integrated into planning. The most finely executed rolling GRAT tax strategy may still leave a family fractured beyond repair if religious disputes mar a parent's final days and funeral. If a client's personal beliefs include strong feelings about avoiding certain types of investments or making certain types of expenditures, and these are ignored, how can the investment plan really succeed?
Religious issues have received considerable media attention. The tragic last days of young Terri Schiavo's life became a media circus, undoubtedly magnifying the terrible pain for everyone involved. But financial planners rarely concern themselves with the decisions in a client's living will and health proxy (other than encouraging clients to address these documents with their attorney). So are there religious considerations that planners can and should address with clients? Absolutely.
A COMPREHENSIVE PLAN
While some religious considerations may be on the fringe of a planner's responsibility, they nonetheless remain important to providing a surprisingly large number of clients with a comprehensive estate plan. Planners do not need to develop comprehensive religious knowledge or expertise, all they need to do is raise the issues and use their existing skill set a bit more creatively to address religious concerns. Religious queries should be viewed no differently than other personal questions planners routinely ask.
As advisors add client's religious and other personal wishes to the planning process, they often build a bond that will expand the relationship beyond being merely a planner to being a true family advisor. The rewards of providing that level of personal service will enhance their practice and client retention. Following is an overview of how clients' religious beliefs might affect some aspects of estate planning.
* General directions. If religious customs or laws are important to a client, then advisors can tailor estate planning and documents to reflect these religious wishes. For example, limited liability companies (LLCs) and family limited partnerships (FLPs) are ubiquitous among wealthy clients. The legal documents governing a client's business or investment FLP can require that business operations conform to general religious precepts.
For example, a family real estate LLC might include a prohibition against renting to tenants such as a bar, liquor store, an adult bookstore or other businesses that would offend the family's religious views. Addressing these concerns early can avoid conflict at a later stage.
A more specific approach would be to modify specific provisions to incorporate religious requirements. For example, an LLC operating agreement for a Muslim client could include a prohibition against paying or earning interest based on a prohibition of making a guaranteed profit on capital. There are other ways to structure many business transactions to avoid charging interest. For example, the operating agreement could mandate that in the event of any dispute about the application of Islamic investment standards, the manager shall consult the ISNA (Islamic Society of North America) for further clarification.
* Charitable giving. Every religion advocates the virtues of charity, but charitable giving can be tailored to reflect the unique nuances of your client's faith. While many religions mandate tithing of income or assets to charity, others provide more specific standards.
For example, charitable giving is an essential part of the Baha'i Faith as it demonstrates devotion to Baha'u'llah and represents the ideal of charity. Baha'is are expected to give a certain percentage of their income and assets to Baha'i charitable organizations through a mandatory donation. But proactive giving is often necessary to comply with the requirements.
Planners needn't understand the nuances of any particular client's religious mandates for philanthropy. Instead they must merely inquire how to coordinate techniques like charitable lead trusts, bequests and insurance to address religious charitable objectives.
* Lending transactions. Several religious traditions place prohibitions and restrictions on the charging of interest. While modern commerce has generally ignored these restrictions, they are important for a meaningful number of clients. Thus, in structuring an estate plan transaction for a Muslim or Jewish client, advisors should be ready to address how to recharacterize or avoid interest charges, if asked.
Under Shari'ah (Islamic legal doctrines derived from the Quran, teachings of the Prophet Mohammed and interpretations by Islamic scholars) Muslims may not pay or receive interest, called "riba," for the use of money. While the term "riba" may be translated as "usury," tradition interprets the restriction to apply to all interest payments.
This restriction will affect the documentation and structure of estate planning transactions. For example, instead of charging interest on a financing transaction, the transaction could be structured as a sale to a third person, who then resells the asset to the ultimate purchaser. The price the third person sells at would include a profit that would be in lieu of an interest charge. This structure is referred to as Murabaha.
Jewish law also restricts the charging of interest in certain transactions. For a loan transaction for a Jewish client, a side agreement called a "Heter Iska" can be used to recharacterize what would be deemed interest, called "ribis" under religious law and for religious purposes, recharacterize it as a return on a "partnership" with the borrower. This document is intended to convert, under Jewish law, the interest component to a noninterest or profit component.
A common wealth-shifting planning technique in today's low-interest rate environment is the intrafamily loan. Many large wealth transfers are based on the client selling valuable assets or business interests to a grantor trust for a loan. For tax purposes, the loan must bear interest at a minimum rate mandated under Internal Revenue Code Section 1274. With some ingenuity, these techniques can be adapted to a family whose religious beliefs prohibit interest charges. Without this, either a great planning opportunity would be missed or an important religious belief compromised in the name of tax planning.
* Selecting fiduciaries. If a client wants to infuse estate planning documents with religious values or to transmit a particular religious heritage to a child or other heir, one of the most important decisions is the selection of fiduciaries. These fiduciaries should be knowledgeable about the particular faith and sensitive to the specific needs of the heirs in light of religious objectives.
In many instances, the person that fits these criteria will not be the person best suited to handle investment and other fiduciaries responsibilities. This situation calls for two fiduciaries, an individual sensitive to religious concerns and an institutional co-fiduciary.
Your client's selection of fiduciaries will have a profound impact on his or her ability to transmit values. Again, implementation might be simple. Sophisticated client trusts often designate a trust protector with certain specified powers. A special trustee could hold only religious veto powers. Should an action violate the family religious mandate, the special trustee could veto the action.
* Disposition of assets. A secular will may have to be modified to reflect the Baha'i, Jewish, Islamic or other religious laws of inheritance. The Quran and Old Testament include detailed provisions describing how inheritance must be handled. While there is some similarity, they are typically addressed differently when drafting wills.
Advisors need to coordinate these provisions with tax, estate, financial and succession planning advisors, and bring up ethical issues as well. For example, the Christian Orthodox believe that if you do not provide for your family and relatives, it is as if you have disowned the faith.
* Dispute resolution. Estate planning disputes of a religious or spiritual nature are best resolved through mandatory arbitration before a designated religious body, not a secular court. Both Buddhism and the Baha'i Faith, among others, incorporate principles that affect how disputes should be addressed.
The Buddhist theory of Karma provides that everything done in a particular life, as well as in past lives, influences and affects future lives. If you disinherit an heir out of anger, it can create a negative influence that may be carried on through rebirth to the next life. Buddhism would advocate that you act out of compassion.
* Investment standards. The Prudent Investor Act governing any particular trust would not likely sanction following social- or religious-oriented investment goals if they are not expressly permitted under the investment provisions of the governing document. So at the minimum, planners should inquire whether the family desires such modifications and ensure that counsel preparing the documentation tailors the provisions to permit a religious or socially oriented investment strategy.
Religious considerations can affect many parts of the comprehensive estate and financial planning all planners endeavor to provide their clients. With a modicum of inquisitiveness and sensitivity, planners can help concerned clients better tailor their planning and achieve important personal goals.
Martin M. Shenkman, CPA, MBA, PFS, JD, is an estate planner in Paramus, N.J. He sponsors the Law Made Easy website at www.laweasy.com.