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The Dalai Lama when asked what surprised him most about humanity, answered:
" Man ----------Because he
sacrifices his health in order to take money.Then sacrifices
money to recuperate his health.And then he is so anxious
about the future that he does not enjoy the present,the
result being that he does not live in the present or future.
He lives as if he is never going to die, and then he dies
having never really lived."
U.S.N.Murty
4th Jan'13.
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How to Pass on your wealth to your next generation
Digumarti Hanumanth Rao
USA
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 aclass. 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 thenominee.
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, forthe 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.
Nomination in Life Insurance
A policy holder 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 maybe 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 your 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 KokaThe’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 there under 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
in the account,” the Bench observed.
Conclusion
Now you know! Taking Personal finance for
granted can be fatal. Just investing knowledge,
isn’t enough to have a great financial life.
You also need to be well versed with basic legal
aspects and make sure you carry out all due
arrangement . Nomination is one important
aspect you should seriously consider, when
checking for the financial products you have
bought or plan to buy in future. Mistakes in
Personal Finance. It’s important to make sure that
your loved one’s do not face legal issues and
only say and think lovely thoughts about you
Digumarti Hanumanth Rao
USA
