Life is uncertain; death on the other hand despite the uncertainty of its arrival is certain. And that is one valid reason why everyone should prepare for it in all possible ways. This brings one to the important topic: Estate Planning.
Estate Planning refers to the act of bequeathing a person’s real and personal wealth, including ancestral and self-acquired to the rightful heirs as per the statutes laid in the relevant succession laws and the case of self-acquired properties, an estate owner’s own will.
Let us examine an important part of estate planning – The nomination facility of financial instruments and investments.
Who is the nominee?
Most financial investments and other instruments like insurance policies can carry the name of one or more nominees. The primary holder of a bank account, an insurance policy, Demat account, and mutual funds that carry a nomination facility, state the name of a person who is the nominee. After the death of the primary holder, a nominee receives the ownership or the proceeds of the assets. There can be more than one nominee and each nominee gets a predetermined ratio of shares during the division of asset value.
Who can be a nominee?
Any person with a sound mind can be named as a nominee by the primary asset holder. A nominee can be a lawyer, a friend, a close relative, or a legal heir of the primary estate owner.
Nominee vs Legal heir
In common parlance, most people nominate their legal heir’s name in all their financial documentation. However, it is interesting to note that though legal heirs can be named a nominee, a nominee need not be a legal heir. In short, a nominee is only a trustee of the estate that includes all the real and material wealth of the primary estate holder. On the contrary, a legal heir can be either class 1 or class 2 legal heir as per the statutes of the succession acts. A class 1 legal heir includes a widow, mother, sons, and daughters including adopted children, sons and daughters of predeceased sons, and sons and daughters of predeceased daughters.
The confusion that a nominee and legal heirs are the same is clarified through differences in their rights. But this confusion is largely due to the misconception that a nominee is normally regarded as the legal heir. However, the rights and duties of a nominee are largely limited to the fiduciary capacity of a trustee.
Rights and responsibilities of a nominee
The nominee has the right to claim the financial assets or the proceeds thereof to be transferred in their name. As per Indian laws, a nominee can hold the property of the deceased until they are legally obligated to transfer it to the legal heirs.
To quote an example; A man nominates his wife as the nominee for his policy. After his death, he is survived by his wife, mother, son, and daughter. In this case, the wife is just one of class 1 legal heirs and a nominee named by the deceased. She is legally bound to share the proceeds equally with other legal heirs, in absence of a will and as per the ratio of asset distribution prescribed in case the will was executed by the deceased.
A nominee has the responsibility to safeguard the wealth that was assigned to them till it can be legally transferred in the name of the legal heirs. In case the legal heirs are minor, the property of the deceased has to be distributed in their favor by the nominee when they attain a majority and complete 18 years. If any of the proceeds need to be used for the benefit of legal heirs till they can claim the property proceeds, a proper record of the transactions has to be maintained. Quoting the previous example, if the widow of the deceased has to spend money on taking care of the children and mother of the person, then a record has to be maintained to prove that funds were utilized for the benefit of the legal heirs.
Will vs nomination
A nomination is a facility to appoint a person to receive, protect and distribute the wealth of a person after their death. A will on the other hand is the supreme testament of the deceased’s intention to distribute his wealth.
The deceased person in his will can bequeath his self-acquired property to anyone he chooses; the beneficiary in the will need not be class 1 legal heirs. However ancestral properties cannot be willed to anyone and can be claimed for undivided ancestral property shared up to the fourth generation of the male lineage.
Sale of assets
Unless a nominee is the only class 1 legal heir entitled to a hundred percent shareholding of the deceased’s properties, a nominee cannot sell or transfer the assets to a third party without the consent of all the other legal heirs.
In the case of inherited ancestral property, the legal heirs can sell the asset after a change of name for ownership via a succession certificate. The consent of all the legal heirs in the joint undivided value of the property has to be taken before the sale or transfer is executed.
In the case of property inherited through the execution of the will of a deceased person, the beneficiary can sell the asset value to the extent awarded to him through the will.
Minor as nominee
A minor can be named as a nominee provided a guardian’s details are given. For example, if a person wants to nominate his minor son’s name in his bank accounts, mutual funds, and insurance policies, the details of a guardian have to be shared.
It is wise to choose a guardian of high moral values in such cases so that proceeds can be passed on to the minor whenever they attain the majority.
Change of nominee
Any person can change the details of the nominee by updating the same with the records of the concerned financial intermediary. In the case of FD and bank accounts, the concerned bank is informed by way of a letter of intent to change the details and fill up a nomination form duly signed by the asset holder. Similarly, life insurance, mutual funds, and Demat account nomination details can be updated by contacting the respective institution and following their procedure for updating nominee details.
Who cannot be a nominee?
In a larger sense, anyone of sound mind with the power to contract who has been deemed fit to handle one’s estate can be a nominee. However, under the laws of the Gratuity Act and EPF provisions, only family members specifically class 1 legal heirs can be nominated to receive the said proceeds.
Nomination for different financial assets
Bank accounts and Fixed deposits can be nominated only in favor of one person. However different nominees can be named for different accounts or term deposits held in the same bank.
Mutual Funds allow the nomination of up to three persons for each folio held with an asset management company. The percentage of share in assets has to be specified at the time of the nomination.
Life insurance policyholders have the flexibility to appoint multiple nominees under the same policy. The percentage in which the benefits are distributed is outlined in the nomination details.
Gratuity and EPF proceeds can be nominated in favor of family members who are regarded as the class 1 legal heirs like spouses, parents, and children. In the case of gratuity, if a female employee has nominated her parents as the nominees before marriage, then the name of the spouse is not automatically included as a family after the marriage of such an employee. A change of nomination with all the details of new family members has to be updated in this case.
Demat account holdings can be nominated in favour of three different people. The shares held in a Demat at the time of the death of the Demat account holder will be transferred as per the percentage of shareholding benefit designated by the account holder.
Except for bank accounts and fixed deposits related to banks, most of the other investments and insurance policies have the benefit of multiple nominees, in some cases, the number is limited to three.
Although depending on an individual’s perspective about their legal heir’s needs, a person may nominate more than one person, it is always a good practice to nominate a single person, preferably a spouse or an elderly parent, and assist them with a will that depicts the complete clauses and the outlines the procedure of distribution of the assets.
Other nominee trivia
Nomination cannot be changed after the death of the deceased. A nominee is only a trustee of the assets and will have to transfer the ownership of the property to legal heirs in due course.
If a nominee dies before the primary asset holder, then new nomination details have to be updated. In absence of any such update, the legal heirs of the asset holder will receive the money as per the will. In case there is no will and the nominee is also dead, then assets are distributed equally after establishing the identity of the legal heirs and after they apply for a succession certificate.
Importance of nomination
To sum up, it is important to nominate a person who can receive the assets and pass them on amongst one’s legal heirs despite writing a will. It is not only important to distribute the assets, but also to complete all the social and legal obligations, on behalf of the deceased, after their death in a manner that they would have outlined for their obituary services.