Your estate is the sum of everything you own—your home and other real estate, current and savings accounts, investments, life insurance, car, furniture, personal possessions and so on. Estate planning fulfills your wishes by making a detailed plan of the division of your estate in advance (who, what, when, how and how much), amongst the ones you want to give after your demise. Most Indian families don’t believe in estate planning. A few people also believe that filling up a nomination form is enough. However, that is not true. A nominee acts like a trustee. The insurance, mutual fund or your shares will be passed on to the nominee who can further help in the process of handing it over to your legal heirs. Otherwise, the legal heirs will have to go through a cumbersome process of producing all kinds of certificates such as death certificate, proof of relation, etc.
Generally, people have a notion that the spouse is the automatic nominee and hence all assets will flow to him or her. Unfortunately, this is not true. Though all assets will be transferred to your spouse, as per Hindu Succession Act—your siblings, parents and children can claim their share of assets from your pool of assets. According to law, a nominee is a trustee, not the owner of the assets and will be legally bound to transfer it to the legal heirs.
Importance of will
For most investments, a legal heir is entitled to the deceased’s assets. A legal heir will be the one who is mentioned in the will. However, if a will is not made, then the legal heirs are decided according to the succession laws, where the structure is predefined on who gets how much. The succession laws are quite complicated and no one would want their families to go through lawyers and courts for the assets of their beloved deceased family members.
Nominee can also be one of the legal heirs. Nominee can be changed at anytime by informing the company concerned. If the nominee is a minor, appoint an adult as an appointee giving his full name, age, address and relationship to the nominee. An investor has the option to register more than one nominee and specify the percentage of amount for each nominee. However, if the percentage is not specified, equal shares will go to each nominee.
General rules of nomination
Nomination in life insurance: Nomination is a right conferred on the holder of a life insurance policy on his own life to appoint a person/s to receive policy moneys in the event of a claim on the insured’s death. The nominee does not get any other benefit except to receive the policy moneys on the death of the policy holder. Insurance (Amendment) Act 2015 has created a ‘beneficial nominee’ category which includes only close relatives of policyholders. Now if policyholder nominates his father, mother, spouse or children in an insurance policy, they become beneficial owners of claim proceeds.
Nomination in EPF: In Employees’ Provident Fund, the nominee is the person who will inherit the fund and not the legal heir. As per rules, in EPF account one has to appoint his family member as nominee.
Nomination in shares: Under the provisions of the Companies Act and the Depositories Act, the role of a nominee was different. 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 includes the ownership rights there under, in the nominee upon nomination validly made as per the procedure prescribed.
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 mutual funds: Here nominee is a trustee. While filling in the application form, there is a provision to fill in the nomination details. You can also change nomination later by filling up a form which is available on the mutual fund company website. Nomination in mutual funds is at 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.
By Nitesh Buddhadev
The writer is founder and CEO, Nimit Wealth Management. Source: Tax Guru