He then placed a corner kick for Sergio Ramos to put the result beyond doubt at 3-0 in the 79th minute.
Midfielder Marcos Llorente also scored from outside the area for Madrid's second goal on the hour.
Losing 3-0, Al Ain defender Tsukasa Shiotani headed in a consolation goal but teammate Yahia Nader scored an own goal in stoppage time to restore the three-goal margin.
Madrid, who have won the last three Uefa Champions Leagues, have now also won the last three Club World Cups. They have three more world titles than the next best, Italian club AC Milan.
"It's been an unforgettable year for me," said Modric, who led Croatia to the World Cup final in July. "It's been perfect. We won the Champions League, I had a spectacular World Cup with Croatia, and now I have won another title with Madrid. It's been a dream year."
Shortly after a deflected pass by Llorente hit the post in the third minute, Al Ain put a scare into Madrid with two chances from Hussein El Shahat.
Goalkeeper Thibaut Courtois had to rush out to impede him from getting a great scoring chance from close range.
Then a mistake by Marcelo left El Shahat alone to round Courtois, only for Ramos to hustle back and block his shot on the line.
But the rest of the match, Madrid lived up to their elite status and the talent gap was evident between the sides.
"This title is merited by my players," Madrid coach Santiago Solari said.
Earlier, River Plate beat Asian champions Kashima Antlers 4-0 for third place.
- AP