Is Legal heir and Nominee the same?
Many of us are doing financial planning and investing in various asset class. But we don't know the basic difference of Nominee and legal Heir, or most of the time we don't even fill this area while investing.
Well through this Blog/ Article I will try to highlight the importance of Nominee in various Assets (investment areas) and will try to differentiate between Legal heir.
Nominee: A nominee is somebody who will receive the asset upon the death of the owner/holder.
Legal Heir : means any
person, male or female, who is entitled to succeed to the property of a
deceased person under a will or as per the succession laws.
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 think if you are not aware of the legal aspects.
We assume a lot of things which sounds like they are obvious, but are not true from the legal point of view.
Today, we all 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 are wrong, dude !
It does not work that way.
Let us 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 who 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 a nominee exist at all ?
It
is 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 has not 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 do not happen, since
the company is bound to transfer all your money or assets to the
nominee.
The company then goes out of scene & then, it is 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 did not 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
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 :
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 favor 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 :
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 is so important to have a nominee.
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.
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 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 :
Taking Personal finance for granted can be fatal!!!!!
Just investing knowledge, is not 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 ones do not face legal issues
and only say and think lovely thoughts about you when you are not
around, rather than crib & grumble.
Sources:
Various publications
Disclaimer: The
information provided herein is based on publicly available information and
other sources believed to be reliable, but involve uncertainties that could
cause actual events to differ materially from those expressed or implied in
such statements. The document is given for general and information purpose and
is neither an investment advice nor an offer to sell nor a solicitation. While
due care has been exercised while preparing this document, we do not warrant
the completeness or accuracy of the information. We will not accept any
liability arising from the use of this material. The recipient of this material
should rely on their investigations and take their own professional advice.
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