A Nomination in your financial assets holds good for your estate distribution. After your demise, the institution will transfer the asset to the Nominee if you have appointed one. In the absence, the asset will be distributed according to the Will, if you have written one. But if there is no Will, the process of claiming assets can be quite painful for your heirs. The institution demands host of documents to establish the relationship between the claimant and you. Among all documents it’s the Succession Certificate which takes time, generally months, and till then the assets lies in the custody of institution. This can hurt your family financially if you have left some obligation to be met by them.To remove these hurdles a Nomination is very effective because the institution liability is till the transferring of the asset to the Nominee you have appointed. But a Nomination in itself is not a complete estate plan.In the eyes of law a Nominee is only a custodian of your assets and the legal heirs inherit it. Even if you appoint one legal heir as a Nominee, the final distribution take place through Will or through Succession Law. In past there has been many instrumental decisions by various courts which helps in understanding the role of Nomination.
Here I have highlighted the role of Nomination in various financial assets and what different court ruling says about it:
1. Bank Accounts
Banking may be the first exposure for you as you start earning. A Nomination here will ensure the bank pass on the custody of your funds to the person you have appointed. But in savings account the nominee act only as a trustee for legal heirs. If he/she is different or more people have their share, then they have a right to claim. In an important verdict in the case of a Nominee seeking rights to the assets of his NRI uncle bank accounts, the Gujarat High Court ruled that “The nominee to a bank account does not have the rights of a legal heir of the original account holder. Hence, he cannot claim money or deposits lying with the bank on the death of the original account holder.” Things are not simple even in case of joint bank accounts where in the event of the death of one of the account holders, the right to the deposit proceeds does not automatically devolve on the surviving joint account holder, unless there is a survivorship clause such as “either or survivor,” or “anyone or survivor,” or “former or survivor,” or “latter or survivor”. Not many are aware of this fact.
2. Mutual Funds
In mutual funds also the role of nominee is same as other financial assets where legal heirs finally inherit the asset. In case of joint holdings the units are transferred to the second holder after submitting relevant documents. However, if joint holder other than first dies then the units remains in the name of first holder and he/she has a right to register any other. But things rules are different when mutual funds can be held in a demat. In such cases the Nomination of your demat account will become effective for mutual funds unit held in there.
3. Life Insurance
The story is no different and here too the legal heirs inherit the proceeds. As per Section 39 of the Insurance Act, 1939, the life insurance company must hand over the amount to the nominee mentioned in the policy. The nominee then has to distribute the amount as listed in the policyholder’s Will. If there is no Will, individual succession laws come into play. In 1983 case of Sarbati Devi vs Usha Devi, Honorable Supreme Court has ruled that “In case of insurance policies, the nominee does not inherit the amount and receive it only as a trustee of legal heirs“.
In general, there is no concept of Nominee in property as one has the ownership. But it comes into picture with reference to the Co-Operative Housing Societies where you are allotted a share in the society in form of the flat and so you are asked to provide a Nominee. Here also, the Nominee will be merely a caretaker and the house real ownership will go to the legal heirs. The implications of this rule is that among all legal heirs if one is made a Nominee then he/she alone cannot claim the full ownership as all legal heirs will have equal share in the property. In a case of 2009 which was dragging for 29 years, the Bombay High Court Judgment ruled that “Mere nomination to the co-operative housing society does not give the nominee exclusive rights of ownership to the flat – and neither are the rights of other legal heirs lost by such nomination. So on demise of the owner of the flat it is the legal heir and not the nominee who bequeath it”.
The rule is different when it comes to shares. Here the companies act will prevail over a Will and so the transfer of shares will be according to the act. As per it, the depository nominee. i.e. Nominee in your demat account will inherit the shares. In case of joint accounts, the second holder in demat account will be the sole owner of the shares and after his/her death the Nominee inherit them. Thus, if you have written a Will for your shares to be passed on to legal heirs, then it will not happen. In a court case of a wife, where she is not a Nominee, claiming the ownership of shares of her deceased husband the Honorable Supreme Court Judgment in 2012 has ruled that “The wife had no right over the shares as the provisions of the Companies Act mandated that the nominee inherit them”.
What Should You Do Then?
A Nominee may not be the legal heir in most of your financial assets but it is necessary. The primary reason is that if you have a Nomination in place then the financial institution will hand over your assets to him/her. One of the best way to remove the layer of succession is to make Nominees in your financial assets as you want your assets to be distributed. So if you want that your children inherit your mutual funds investment equally then makes them Nominee in equal percentage in all your mutual funds investments. Similarly goes for other financial assets. Then make a Will accordingly. This process ensures that after you, your loved one inherit your assets as per your wishes. Since your financial assets may change in ownership, you should review Nominations periodically.
Have you made Nominee in all your financial assets? Are you aware of the Succession Laws?
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