We all know that life is short and unpredictable. In this short journey, we all take lot of investment and financial decisions. We earn, save and invest money in various financial products like; Bank Fixed deposits, real estate properties, Shares, Mutual Funds, Insurance policies etc.,
For many of us, our lives revolve around our loved ones. But, What happens to your financial assets if you meet your end unexpectedly? What will happen to your investments? Who will own your assets after you are no-more?
Death is certain. It’s a fact. No human gets to predict when or how they will meet their maker in the end, which is why ensuring the care and protection of our loved ones is one of the most important decisions we must make and execute before a tragedy befalls us.
So, how to ensure your assets are properly distributed to your loved ones? What options do we have?
The first thing that comes to our mind would be, Nomination. You can declare a nominee(s) for your investments and your nominee can claim the ownership of your investments or assets after your death.
Is it so simple and straight-forward? No. What if, your nominee is not a legal heir. In such a case, can a legal heir who is not a nominee, claim his/her share in your investments? Are these rules same for all types of financial products? Let’s understand..
Nominee Vs Legal Heir & Importance of WILL
1) Life Insurance & Nomination :
We buy Life Insurance to ensure that our loved ones are taken care of financially when we are no longer there. It is very important to have a proper nomination, to ensure that in the event of death, the life insurance policy’s claim money goes into the right hands.
Old Rule :
- The nominee of a life insurance policy is just a care-taker! Only the legal heirs have the right on ‘claim money’. Yes, you read it correctly. The nominee of your life insurance policy was supposed to distribute the money to the insured’s legal heirs (if they were different from the nominees).
- For example : If you nominate your brother as a nominee to your life insurance policy, he has to distribute the claim money to your legal heirs ; your spouse or children. This can easily lead to legal tussles over the distribution of death proceeds.
- Another example can be; If you nominate your spouse as a nominee to your life insurance policy, he/she can claim policy money. But, other legal heirs also have the right on the claim money.
New Rule :
- As per the new nomination rule (2015), the concept of ‘Beneficial Nominee‘ has been introduced. Beneficial nominees are direct dependents of the policy holder i.e., Spouse, children or parents.
- As per Insurance Laws (Amendment) Act, 2015 – If an immediate family member such as spouse / parent / child is made as the nominee, then the death benefit will be paid to that person and other legal heirs will not have a claim on the money.
- If you (policyholder) nominate your spouse, children or/and parents, they would be Beneficial Nominees. No one else can claim your life insurance policy monies. For example : If you nominate your spouse as beneficial nominee, no one else (even other legal heirs) can have right on the death claim proceeds.
- So, the concept of beneficial nominee is like a WILL.
- Kindly note that this new rule is not applicable for life insurance policies that are taken under MWP (Married Women’s Property) Act.
- Kindly also read – ‘What is Assignment of Life insurance policy? Assignment Vs Nomination‘.
- Even as per the new rule, you can nominate any person other than beneficial nominees as your nominee, but do note that your nominee has to distribute the claim money and your legal heir(s) have their right on the money.
- In the absence of a nomination, the insurance company discharges the claim amount to the Class I legal heir, that is, to son, daughter, spouse and mother. If you have a WILL, the proceeds will be distributed according to the wishes that you have stated in your WILL.
- In case, you owe someone money, your creditors can still recover their dues by attaching your property, including life insurance policies. Their rights supersede that of beneficial nominees.
2) Nomination Rules for Bank Fixed Deposits, Mutual Funds, Bonds etc.
If you have invested in bank fixed deposits, mutual funds or bonds, you would have nominated at least one individual as your Nominee for those investments. Kindly note that nominee is again just a Care-taker of these investments. He/she has to receive the asset/money from the concerned bank or financial institution and transfer/distribute that to Legal owners. Your legal heirs have rights on these investments.
3) Employees Provident Fund (EPF)
Upon the death of an EPF member, the Employee Provident Fund amount is paid to the nominee that was nominated at the time of opening of the account. If there was no nominee assigned then the EPF amount is paid to the immediate members of the family.
4) Shares (Stocks / Direct Equity)
There has been so many different court judgments on, ‘who can own the shares after the demise of original shareholder’. Is it a nominee or a legal heir?
Old judgement : As per previous high-court judgement, if there is no WILL, the nominee can own the shares after the demise of original share-holder / investor. It has been quoted that Company law is different to law of succession i.e., legal heirs can not claim their right over them. (Shares are governed by Companies Act.)
Recent Court Judgement : The Supreme Court has consistently been in favor of ‘law of succession act’, meaning the Companies and Depositories Act cannot take precedence over the laws of succession. Also, based on the recent Bombay High Court Judgment (2015-16), it has been clarified that Nominee of Shares is only a Trustee and temporary care-taker of these investments. Legal heirs as per the law of succession are the right owners.
We know that anything and everything can be challenged in the Court of Law. Accumulating assets/wealth is important, but it is equally important to ensure that your inheritance is passed on smoothly to your heirs. So, how to ensure that your assets and investments are passed to the beneficiaries as originally intended by you?
Above points clear states that ‘nomination is only a means and not an end’. Legally, the Law of Succession (legal heirs) is given more importance than rules of nomination. Is there any better option than these two??
‘Draft a WILL‘. Yes, WILL supersedes all laws, rules and regulations. WILL overrides the nomination in case its different. A Will is a legal document that clearly sets out your wishes for the distribution of your assets after your demise. It puts an end to most of the possible legal tussles.
Kindly make sure that your WILL and Nominations give same direction for your different Assets / investments. This will avoid any potential conflicts among the beneficiaries or legal heirs. For example : If you write a WILL making your children as beneficiaries on your life insurance policy, it is also advisable to make them as Nominees in that particular policy.
Continue reading other related articles;
- What is e-WILL?
- How to write a WILL? (Sample WILL)
- All you need to know about ‘the last WILL & Testament’
(Facebook Featured image courtesy : Legaldesk.com) (Post first published on : 17-February-2017)