Sheena is late for the meeting with her lawyer Imran. Imran had sounded anxious over the phone, she recalls. When she finally reaches Imran’s office, Imran’s secretary hands her a judgment that Imran has asked her to.
As she reads it, her eyes well up in grief and she cannot help but tumble in the spiral of self pity – Sheena cannot stake a claim over the Rs. 2.7 Crore worth shares that Ziyan, her husband had owned before his untimely death. She would not inherit the shares – Ziyan had appointed his nephew as a nominee with his share broker.
The Bombay High Court in its judgment in Harsha Nitin Kokate vs The Saraswat Co-op Bank Ltd. noted that since Harsha (Nitins wife) was not the nominee as filed with the Broker (Saraswat Bank); she had no ownership rights over the shares. Ms. Kokate’s lawyer had argued that since she was the legal heir to her husband who had died intestate (without a will), she should have ownership rights of the shares, and be able to do anything she wished with them. But the High Court noted that under the provisions of the Companies Act and the Depositories Act, which govern the transfer of shares, the role of a nominee was different.
A reading of Section 109(A) of the Companies Act and 9.11 of the Depositories Act makes it abundantly clear that the intent of nomination is to vest the property in the shares (which include the ownership rights thereunder) with the nominee, once such nomination has been made as per the procedure prescribed; as had been done in this case.
This essentially means that if you have not written your will, anyone who has been nominated by you for your shares will be the ultimate owner of those shares. The succession laws on inheritance will not be applicable in this case.
Does that mean that the nominee will get the money under all circumstances? What about laws of inheritance? Do they lose their relevance?
Read on and let me help you understand the scenarios that can exist under various asset classes.
I bet, all of you thought that once you had nominated someone under your policy, the nominee would be naturally and of course legally entitled to the inheritance. Wasn’t that why all of these Asset Fund Managers, Life Insurers asked for a nomination?
What’s on this page?
Well, you weren’t wrong, but you weren’t completely right either.
We tend to assume a lot of things which sound like they are obvious, but are not true from a legal point of view. We tend to think nominating X in our Insurance policy will ensure that all the money goes to X and they would become the sole owner. Alas, that is not objective truth.
Isn’t that like a kick in the groin? It leaves us with some hard questions – Who are we earning for? Who are we continuously investing for, sacrificing the present for the distant future – the SIP that hurts at times, and yet we downgrade our lifestyle but keep that recurring deduction intact. Who would inherit all the wealth we create? Haunting as the question might seem, I promise you by the end of this article, you will have all the answers you seek.
So, how exactly did we tumble down this faulty line of thinking? Why do we assume our nomination will ensure our wealth goes to our children/ spouse/ parents? And by that logic our nomination will categorically ensure exclusion of specific people? It is our Fund Managers/ Insurers obsession with filing a nomination for our portfolio that has led us down this faulty line of thinking.
But there’s a catch. While this line of thought is not completely right, it is not completely wrong either.
Who do you think is a Nominee? Take a minute, ponder over the question before you proceed.
Legally a nominee is a trustee, not the owner of the asset. Read that again, she is a trustee i.e a caretaker of the assets. The nominee will only hold your asset as a trustee and will be legally bound to transfer it to the legal heir when the need arises.
For most investments, a legal heir is entitled to the deceased’s assets. Even Section 39 of the Insurance Act says, the appointed nominee will be paid, though he may not be the legal heir. The nominee, in turn, is supposed to hold the proceeds in trust. The legal heir can stake their claim on the money, at any time. A legal heir is one who is mentioned in the will. However, if a will is not made, then the legal heirs of the assets are decided according to the Succession laws of the country. It is prudent to note that the structure of succession laws is predefined i.e who gets how much is defined, by law.
It is therefore crucial that one executes a will. It is the ultimate source of truth (individual truth) and replaces the succession law (societal truth).
But, doesn’t that raise one simple question, you might wonder. If the nominee does not become the sole owner of the asset, why does the concept of a nominee exist at all?
The answer is pretty simple actually.
In the absence of a nominee, the legal heir has to produce the death certificate, proof of relationship and other such documents to validate the death. She then has to substantiate the deceased’s relationship with herself. Not only is the entire process extremely cumbersome, but the nominee has to go through the process individually with every Fund Manager/ Insurer/ Real Estate authority.
The presence of a nominee ensures the legal heir does not have to go through all of these hassles. The company simply transfers ownership of the asset to the nominee and moves out of the picture. Whatever happens after this is between the nominee and the legal heir.
LIC alone has unclaimed funds to the tune of Rs. 21539 Crores. Would you want all of your wealth to lie with the Fund Manager, unclaimed? Wouldn’t you want the assets to atleast get out of the hands of the Fund Manager? All of your struggles through life, the bigger car you wanted to buy, the weekend home; Shouldn’t it amount to something? Well that is precisely where the nominee helps. A nominee works as a parking lot for your funds, till the time they are eventually claimed by the legal heir.
Nomination and a will :
Ajay, a 58 years old man recently died in an accident. He was survived by his children who were settled abroad and wife Neeta. Ajay wanted to ensure that Neeta didn’t need to downgrade her lifestyle after him and since his children were already settled, he nominated her as the sole owner of all his monetary assets. This included his insurance policy and mutual funds. However, after Ajay’s death, things did not turn out the way he wanted because Ajay did not leave a will. Though his wife was the nominee in all his movable assets, as per the law, his wife and children, were the legal heirs and all of them had equal rights to Ajays assets. While Neeta’s dispute was resolved easily, everyone is not that lucky.
Having a will against his wife’s name would have ensured she was the one entitled to get all the money and not his children.
Nomination in Life Insurance :
A policyholder can appoint multiple nominees and can also specify their share in the policy proceeds. Nomination in life insurance has one limitation though, as insurance policies are bought to secure your financial dependents, your first choice of nominee has to be your family member. In case you want to nominate a non-family member like a friend or third party, you have to prove that this nominee has insurable interest in your wellbeing – Insurance works on the Principle of insurable interest.
LIC’s website defines Nomination as a right conferred on the holder of a Policy of Life Assurance on his own life, to appoint a person to receive policy money in the event of the policy becoming a claim by the assured’s death. The Nominee does not get any other benefit except to receive the policy money.
A nomination may be changed or canceled by the life assured whenever she likes without the consent of the Nominee.
Make sure you have a nominee for your policy for easy settlement of the claim, if you do not have any nominee mentioned in the policy, it can turn out to be a long drawn disaster for your dependents to get a claim.
Nomination in Mutual Funds :
In case of mutual funds, you can nominate up to three people, who can be registered at the time of purchasing the mutual fund units. While filling in the application form, there is a provision to fill in the nomination details.
Even a minor can be a nominee, provided the guardian is specified in the nomination form.
You can also change your nomination later by filling up a form which is available on the mutual fund company website.
Nomination in mutual funds is at the folio level and all units in the folio will be transferred to the nominee. If an investor makes a further investment in the same folio, the nomination is applicable to the new units also.
A non-resident Indian can be a nominee, subject to the exchange control regulations in force from time to time.
Nomination in PPF :
How about another shocker now. Been long since we started on this information journey, hasn’t it?
So, if you have Rs 10 Lakh in your public provident fund (PPF) account but have no nominee registered, your legal heirs are entitled to a maximum of Rs1 lakh on your death. I kid you not.
Still not sold on the nominee argument?
While you can nominate one or more persons as your nominee in PPF, you cannot nominate anyone if you open an account for a minor. Form F can be used to change or cancel a nomination for PPF.
Nomination in Saving/Current/FD/RD Account in Banks :
FD’s also come with a nomination facility. While opening a new account, there is a column for nomination in the same form that you need to fill. You can nominate upto two people with first and second option.
Fresh nomination can be requested by filling Form No. DA-1, and a change/ cancellation can be requested by filling Form No. DA-2.
As per a famous case, a Bench of Justices Aftab Alam and R M Lodha in an order said that the money lying deposited in the account of the original depositor should be distributed among the claimants in accordance with the Succession Act of the respective community and the nominee cannot claim any absolute right over it.
Section 45ZA(2)(Banking Regulation Act) merely put the nominee in the shoes of the depositor after his death and clothed him with the exclusive right to receive the money lying in the account. It gave him all the rights of the depositors so far as the depositors account was concerned. But, it by no stretch of imagination made the nominee the owner of the money lying in the account, the Bench observed.
CONCLUSION :
Now you know, Taking Personal finance for granted can be fatal!!!
Just investing knowledge is not enough to have a great financial life or an afterlife, for that matter.
You also need to be well versed with basic legal aspects and make sure you carry out all due arrangements .
Nomination is one important aspect you should seriously consider, when checking for the financial products you have bought or plan to buy in the future.
To ensure your loved ones keep remembering you with fond memories even when you are not around, ensure you make a will and nominate appropriately.
Finally, let’s end with some important pointers to note while filling the nominee information –
- Mention their full name, address, age, relationship with you.
- Do not write the nomination in favor of the wife, children as a class. Be specific with names and particulars existing at that moment.
- If the nominee is a minor, appoint a person who is a major as an Appointee giving her full name, age, address and relationship to the nominee.
