Will your Nominee get the money on your death?- Legality
Will your Nominee get the money on your death?
Did you think that your nominee is the person, who will get all the money legally from your Life Insurance Policy and Mutual funds investments? Ha!
That is exactly what you’d think if you aren’t aware of the legal aspects.
We assume a lot of things which sounds like they’re obvious, but are not true from the legal point of view. Today, we’ll 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’re wrong, dude ! It doesn’t work that way. Let’s 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 whose 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. Nominee can also be one of the legal heirs.
Important Mention the Full Name, Address, age, relationship to yourself
of the nominee. Do not write the nomination in favour of “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 nominee?
So you might be wondering, if the nominee does not become the sole
owner, why does such a concept of “nominee” exist at all? It’s 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, and who can further help, in
process of passing it to your legal heirs.
Otherwise, if a person dies and hasn’t nominated anyone, your legal heirs
will have to go through the process of producing all kind 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, for the shares, for the real estate..) . So, to
simplify, if a nominee exists, these hassles don’t happen, since the
company is bound to transfer all your money or assets to the nominee.The
company the goes out of scene & then, it’s between nominee and legal heirs.
Example of Nomination
Ajay was 58 years old who 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 Ajay’s
death things didn’t turn up the way he wanted. The reason being Ajay did
not leave a will. Though his wife was the nominee in all his movable assets,
as per the law, his wife, along with children, were the legal heirs and all of
them had equal right to Ajay’s assets.
One simple step which could have saved the situation was that Ajay
should have made a will which clearly stated that only his wife was
entitled to get all the money and not his children.
IMPLICATIONS OF NOMINATION ARE DIFFERENT FOR EACH CATEGORY !!
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 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 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 provision
of nomination in life insurance is related to Section 39 of the Insurance
Act. Note that as per LIC website
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 policy moneys 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 moneys on
the death of the Life Assured. A nomination may be changed or
cancelled 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 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 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. 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
demat account, who will have the legal right to own the shares after
husband’s death? If you answer is wife, you are wrong in this case! In 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 favour 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 includes 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 maximum of Rs1 lakh only! Yes,
it’s so important to have a nominee, now you get it. You can nominate
one or more persons as nominee 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
FD’s also come with nomination facility. While opening a new account,
there is a column for nomination in the same form and you should fill it.
You can nominate two persons with first and second option. Note that in
case you have not done any nomination till now, you should request Form
No DA-1 from your Bank which is used to assign a nominee in future.
(Examples of ICICI Bank , HDFC Bank , 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 clothes 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’s account is concerned. But it by no
stretch of imagination make the nominee the owner of the money lying.