I wonder how many of us are
aware of this legal twist……... Read on
Will your Nominee get the
money on your death?
Did you think that the nominee is the person, who will get all the money legally from your Life
Insurance Policy and Mutual funds investments?
Yes! That is exactly what you
think if you are not aware of the legal aspects.
We assume a lot of things
that sound like they are obvious, but are not true from the legal point of
view.
Today, we all concentrate on
nominations in financial products.
- For whom are we earning?
- For whom are we investing?
- Who, do we want to leave all our wealth to, in
case something happens to us?
It might be your children,
your spouse, parents, siblings, etc., or just a subset of these. You also might want to exclude some people
from your list of beneficiaries! So, you think you will nominate person X in
your Insurance policy, and when you are dead and gone, all the money goes to
person X and he/she becomes the sole owner? You are wrong, dude!
It does not work that way. Let
us see how it actually does!
What is a Nominee?
According to law, a nominee is
a trustee, not the owner of the assets. In other words, he is only a caretaker
of your assets.
The nominee will only hold
your money/asset as a trustee and will be legally bound to transfer it to the
legal heirs.
For most investments, a legal
heir is entitled to the deceased’s assets.
For instance, 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 and the legal heir can claim the money.
A legal heir will be the 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, where the structure is predefined on who gets how much.
For example, if a man during
his lifetime executes a will... In the will, he mentions his wife and children
as legal heirs, then after his death, his wife and children are the legal
owners of his assets.
It is essential that one needs
to execute a will.
It is the ultimate source of
truth and replaces the succession law.
The nominee can also be one of the
legal heirs.
Important: Mention
the Full Name, Address, age, and relationship to yourself of the nominee. Do not
write the nomination in favor of the wife and children as a class. Give their
specific names and particulars existing at that moment. If the nominee is a
minor, appoint a person who is a major as an appointee giving his full name,
age, address, and relationship to the nominee.
Why is the concept of a Nominee?
So, you might be wondering, if
the nominee does not become the sole owner, why does such a concept of a
nominee exist at all?
It is pretty simple. When you
die, you want to make sure that the Insurance company, Mutual fund, or your
Shares should at least get out of the companies and go to someone you trust, who can further help, in the process of passing it to your legal heirs.
Otherwise, if a person dies
and has not nominated anyone, your legal heirs will have to go through the
process of producing all kinds of certificates like death certificates, proof of
relation, etc., not to mention that the whole process is really cumbersome! (For
each legal entity! The insurance company, the mutual funds, the shares, for
the real estate).
So, to simplify, if a nominee exists,
these hassles do not happen, since the company is bound to transfer all your
money or assets to the nominee.
The company then goes out of the scene & then, it is between the nominee and legal heirs.
Example of Nomination: Vijay
was 58 years old and died recently in an accident. As his children were
settled, he wanted to make sure that his wife is the sole owner of all the
monetary assets. This includes his insurance policy and mutual funds. So,
during his lifetime, he nominated his wife as a nominee in his term insurance
policy and mutual funds investments. However, after Vijay’s death, things did
not turn up the way he wanted. The reason being Vijay did not leave a will.
Though his wife was the nominee in all his movable assets, as per the law, his
wife, along with his children, were the legal heirs and all of them had an equal right to Vijjay’s assets.
One simple step which could
have saved the situation was that Vijay should have made a will that clearly
stated that only his wife was 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 shares in
the policy proceeds. Nomination in life insurance has one limitation, as
insurance policies are bought to secure your financial dependents, your first
choice of the nominee has to be your family members. In case you want to nominate a
non-family member like a friend or third party, you will have to show/PROVE to the
insurance company that there is some insurable interest for the person. This
happens because of a Clause called PRINCIPAL OF INSURABLE INTEREST in
insurance. Note that the provision of nomination in life insurance is related to
Section 39 of the Insurance Act.
Note that as per the LIC website:
The nomination is a right
conferred on the holder of a Policy of Life Assurance on his own life to
appoint a person/s to receive the 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 on the death of the Life Assured.
A nomination may be changed or
canceled by the life assured whenever he 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 disaster for your
dependents to get a claim.
Nomination in Mutual Funds:
In the case of mutual funds, you
can nominate up to three people, who can be registered at the time of
purchasing the 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
nominations later by filling up a form that 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(s). 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 Shares:
Quiz for you: Now
you know what a Nominee means and who actually gets the money. So, if there is
a husband H, with wife W and nephew N, and he has nominated his nephew N to be
the nominee of his shares in the Demat account, who will have the legal right to
own the shares after the husband’s death? If your answer is wife, you are wrong in
this case!
In the case of stocks, it does not
work the usual way, if a will does not exist.
In the verdict, Justice Roshan
Dalvi struck down a petition filed by Harsha Nitin Kokate, who was seeking
permission to sell some shares held by her late husband.
The Court noted that as she
was not the nominee, she had no ownership rights over the shares. Ms. Kokate’s
lawyer had argued that as she was the heir of her husband who had died
intestate (without a will), she should have ownership rights of the shares, and
be able to do anything with them as she wished.
In this case, Ms. Kokate’s
husband had nominated his nephew in favor of the shares. Justice Dalvi, however, noted that under the provisions of the Companies Act and the Depositories Act,
Acts 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 the nomination is to vest the property in the shares which
include the ownership rights thereunder in the nominee upon nomination
validly made as per the procedure prescribed, as has been done in this case.
It means that if you have not
written a will, anyone who has been nominated by you for your shares will be
the ultimate owner of those stocks... The succession laws on inheritance
will not be applicable... but, in case, you have made a will, that will be the
source of truth.
Nomination in PPF:
Let me give you some shock
first. If you have Rs 10 lakh in your public provident fund (PPF) account and
you have not nominated anyone for your PPF account, your legal heirs will get a maximum of Rs 1 lakh only!
Yes, it is so important to
have a nominee, now you get it.
You can nominate one or more
persons as nominees in PPF. Form F can be used to change or cancel a nomination
for PPF. Also, note that you cannot nominate anyone if you open an account for a
minor.
Nomination in
Saving/Current/FD/RD Account in Banks:
FDs also comes with a nomination
facility. While opening a new account, there is a column for nomination in the
same form and you should fill it out. You can nominate two persons with the first and
second options. Note that in case you have not done any nominations till now, you
should request Form No DA-1 from your Bank which is used to assign a nominee in the future. (Examples of Banks like ICICI Bank, HDFC Bank, and Canara Bank).
In the same way, to
change/cancel the nomination, you need to fill up Form no DA-2.
Read about Corporate Fixed
Deposits:
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 gives him all the rights of the depositors so far as the
depositors' account is concerned. But, it by no stretch of the imagination makes the
nominee the owner of the money lying in the account, the Bench observed.
CONCLUSION:
The 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. It’s important to make sure that your
loved ones do not face legal issues.
