Investment, Uncategorized

What are the roles and rights of a nominee?

Would you ever let go of 35,000 crore? No! Right? But that’s exactly what thousands of investors have done. In February this year, the total amount of unclaimed deposits transferred to the Reserve Bank of India (RBI) by public sector banks was 35,012 crore. The RBI has now announced that it will launch a centralized portal that will share the details regarding such deposits and their beneficiaries.

One of the reasons this happens is that account holders do not appoint a nominee who will handle their account after their death or the legal heirs are not aware of the investments. This is why the government has been pushing for nomination facilities for all financial assets over the past few years. In June 2022, Sebi made nomination mandatory for all mutual fund folios, and the deadline for this has recently been extended from 31 March to 30 September 2023.

Nomination makes the process of transfer of ownership easier as without one; the legal heirs may have to undertake a long and tedious process of proving themselves as the rightful beneficiaries. This can also be extremely time-consuming as the process can vary depending on the type of asset, and the legal heirs will have to do this separately for each one.

Nominee versus legal heir

A nominee is a person who will hold an owner’s assets in trust after the latter’s death. They will be the custodian of the asset till it is transferred to the legal heirs. They are not the owners of the asset and are duly bound to make sure the asset goes to the rightful beneficiary. If the deceased person has a Will, the proceeds are paid out according to the desires stipulated in it. However, if the owner dies intestate that is without a Will the assets are distributed according to the personal law applicable to the deceased. So, in case of the Hindu Succession Act, the nominee will have to hand over the assets to the Class-1 and Class-2 heirs.

A nominee collects the assets from the financial institution and distributes it to the heirs based on the owner’s instructions. If you want the nominee to also get part of your property, you will have to specify this in your Will as a nominee is not automatically entitled to the assets. Suppose a person holding a fixed deposit (FD) in a bank dies, the bank will then hand over the proceeds to the nominee after they submit proof of their identity and the death certificate. The nominee will then transfer the proceeds to the heirs. If there is no nominee, the heirs will have to go for a probate or succession certificate that they will have to obtain from a civil court and then hand these over to the bank to be able to claim the money from the FD. So nomination helps to avoid any delay in transfer of assets.

You can also appoint a legal heir as your nominee but the stipulations of your Will will override the nomination. Say, Mr. X has appointed his wife as a nominee for his term plan, but has stated that the money should be divided equally among his children and parents, and then the wife will have to share the proceeds accordingly. In this example, if only Mrs. X is the nominee as well as legal beneficiary, the other legal heirs can challenge the Will and question why their interests have been deprived. To avoid such hassles, it’s best if you name all your legal heirs in your Will, stating what you would like or not like to bequeath to them and the reasons for doing so.

However, things aren’t always black and white. “Until 2020, the concept of nominee was quite settled as only a caretaker of an asset. But a Supreme Court judgment in 2020 considered a case regarding securities where it stated that the intent of the owner was to create absolute ownership in favor of the nominee and that prima face the securities will vest in their name. This changed the landscape a bit in regard to securities as now a nominee can also be considered as an owner,” says Nisha Ojha, senior associate at Wadia Ghandy & Co.

This can complicate matters if a nominee dies after getting an asset and before they can hand it over to the legal heirs. In such a case, the heirs of the nominee could also stake a claim.

Who to appoint nominee?

You can appoint anyone as a nominee, from your spouse and parents to even a distant relative and friend. You can also appoint a minor as a nominee after providing detailed information about his or her guardian. However, every financial instrument has its own rule regarding eligibility of the nominee. For instance the Employee Provident Fund Organization only allows a family member to be nominated. This is because the proceeds from your EPF will go directly to the nominee and not your heirs. However, in case of a mutual fund investment, you can even nominate the central and state governments, a local authority or a religious or charitable trust. But you cannot nominate any society, body corporate, partnership firm, Karta of Hindu Undivided Family, or a Power of Attorney holder.

In the case of insurance, there is a concept of ‘beneficial nominee’ that was introduced in 2015. According to this, a policyholder can name the spouse, parents or children, separately or together, as beneficial nominees. They will not merely be trustees, but treated as ultimate beneficiaries of the proceeds payable by the insurer. However, if the nominee is different than the ones mentioned above, then the general rule will prevail and the nominee will only be considered as a custodian.

Most savings and investment instruments allow you to have multiple nominees and define the share that you like to distribute to each of them, adding up to a total of 100%. If you fail to mention the percentage share, the claim settlement will be made equally among all of them. For joint assets, a nominee can be changed only after the consent of both owners.

You can also appoint a citizen of another country as your nominee. This is helpful in cases where children have settled abroad and gained the citizenship of a different nation. “To ensure a smooth transfer of ownership and avoid taxation issues, it is best for the foreigner to have an Indian PAN number. This is because the assets being sold or redeemed will be taxed according to Indian laws before the proceeds can be transferred in their name,” says Raj Lakhotia, Founder of DilSeWill.

Limitations of a nominee

A nominee’s actions are constrained by the wishes in a Will or the financial instrument that is under their trust. For instance, a nominee cannot withdraw an investment before its lock-in period. “They can withdraw early only in case of partial withdrawal or if the institution. lets you break the lock-in period. The nom nee might need to pay a penalty in such a case,” says Nikhil Varghese, co-founder of Yellow, an estate planning digital platform. If there are two or more nominees and their views differ, it will be over-ruled either by the wishes of the legal heirs or the majority of the other nominees.

While you can appoint a minor as a nominee, you should also have a reliable guardian for them. If the minor thinks that the assets due to them have been misappropriated, they can file a case against their guardian after becoming an adult. “The child will have three years to challenge any decision taken by the guardian when they were a minor,” says Ojha

By Namrata Dadwal, ( Courtesy: The Economic Times )

How to choose a nominee?