Nomination is the process of appointing a person to take care of your assets in the event of your death. You can appoint a nominee for your bank account, fixed deposit, Demat account, Bank Locker, Life Insurance Policies or even your house. So in the eventuality of death of person, the Bank, Life Insurance Company, Demat participant or Housing Society transfer the same to the appointed person - called Nominee.
The word nominee means a person who holds or acquires right, property or any other kind of liability incurred on behalf of others. Nominee means a trustee. A nominee holds a property on behalf of other legal heirs. Thus, the simple meaning derived from above proposition is that a nominee cannot be a real owner but, in fact a trustee who has legal control of property that is kept or invested for another person, company or organization. Nomination is not a will
Assets:
1. Banks: Savings Account, Fixed Deposit Account, Locker
2. Insurance Companies: Life Insurance Policy claims
3. Investments: Mutual Funds, Demat Accounts with DP, Bonds & Debentures
4. Post Office Investments: Post Office Investment schemes such as NSC, TD, RD, SB, MIS, and SCSS etc.
5. Company Deposits
6. Flat in Housing Society
Nominations in Properties and Financial Assets
After the death of asset holder, after few weeks/months – it’s time to claim their assets and properties. That time, there are lots of paperwork and procedure to be followed. You have to claim them and become easy if Nominations is on record.
1. Bank Accounts: A bank account is the first & liquid financial tool which each one of us gets exposed to. Usually we make nominations in bank accounts, but fail to get it updated with the changes in our life. For example, "most people make their parents their nominee when they are single, but do not get it updated post marriage. On death if there is a nominee, the bank will pass on the deposits to the nominee and will be relieved form its liability. But the nominee is only a custodian of the asset and the legal heirs, if different, can claim their share from the nominee. In an important verdict, in the case of a nominee seeking rights to the assets of his uncle’s bank account, the Gujarat High Court stated 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." In case of joint accounts, the second account holder operates the account and post his/her death, the nominee gets the deposit amount.
Banking Nomination rules 1985
Ø Only single individual can be nominated.
Ø Nomination can be cancelled or changed during the period in which locker is under hire.
Ø In case of nomination of minor, another person has to be authorized on behalf of a minor.
Ø Different forms are there for different types of nomination.
Bank Lockers:
Ø Access to the locker contents (with survivor/nominee clause)
Ø Sole hirer– Nominee can be given access to the locker by the bank. He can also remove the locker contents.
Ø Joint hirers– If the locker is to be operated jointly and one of the hirers dies, then bank can give access to locker contents jointly to the nominee and the surviving hirer. They can also remove the content of the locker.
Documents required by the bank-
(a) An identification certificate of the nominee and death certificate of the locker hirer to be obtained by the bank.
(b) Bank should strive to find out whether there is any court order against opening of bank locker of the hirer.
2. Postal Saving Instruments:
If the depositor dies the amount shall go to the nominee. In case the account is without a nomination at the time of the depositor’s death and the amount due is not exceeding Rs 60,000, the Department of Post Office may pay the same to a person appearing before him, who is entitled to receive it or to administer the estate of the deceased.
3. Life Insurance: A nominee in a life insurance policy acts only as a trustee of the proceeds. Section 39 of the Insurance Act, 1939, states that the insurance company must hand over the amount to the nominee mentioned in the policy. In the 1983 case of Sarbati Devi vs Usha Devi, Honorable Supreme Court has also ruled that "in case of insurance policies, the nominee does not inherit the amount and receives it only as a trustee of legal heirs." Once the insurance company passes on the proceeds to the nominee, then it’s him or her who has to distribute it to the legal heirs as per the Will, if it’s there, else the succession law comes into play.
4. Mutual Funds: In Mutual Funds, the nominee is just a custodian of the investments. On death, the mutual fund proceeds are given to the nominee, who in turn has to distribute it to the legal heirs, if different. In case of joint account holdings, if a joint holder other than the first holder dies, then the units remain in the name of the first holder and he/she has a right to register any other person as a joint holder. But rules are different in case of a D’mat account. Interactions with AMCs have revealed that in such cases, the nomination in a D’mat account superimposes the nomination in mutual funds. But AMCs in general do not scrap the nomination as you always have an option to rematerialize the mutual fund units, i.e. transferring them back to physical units. Then the nomination in your MF scheme will be effective. In case of a joint D’mat account, the second account holder will become the primary holder in case of death. The name of the primary holder can be deleted through a process and if the second holder also dies, the asset goes to the nominee or legal heir in the absence of a nominee. 5. Shares: The rules have been changed here by an Honorable Supreme court ruling in 2012. In a case of wife claiming the shares lying in a D’mat account where a nephew was a nominee, the Supreme Court ruled that "the wife had no right over the shares as the provisions of the Companies Act mandated that the nominee inherit them." This simply means that in a D’mat account the Companies Act overrules even a Will. So in all your D’mat accounts, the nominee will inherit the shares. If you have joint accounts, then the second holder will be the sole owner of the shares and post his/her death, the nominee/legal heir will inherit the shares.
6. Property: The succession of any property goes as per the Will or applicable succession law if the Will is not present. The concept of nomination is not there in general as regards individual self-owned property. But in a Cooperative Housing Society you are the owner of unit of a share in the society in the form of a flat and Society owns entire building and you are pro-rata owner. Due to this type of ownership, you have to appoint a nominee in Cooperative Housing Society. Even here, the appointed nominee is only a custodian and the actual ownership of the flat will go to legal heirs. The succession was clarified by the Bombay High Court in a case of 2009, which dragged almost for 29 years. The high court judgment has 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.
According to law, a nominee is a custodian of the asses and not the owner of the asset. A nominee will hold the amount as a trustee and will be legally bound to transfer it to the legal heirs whose names are mentioned in the will. There are judgments of various High Courts and even Supreme Court on this matter in the case of Indira Wahi.
Rights of nominees and legal heirs
There is a general perception, that the nominee becomes the owner of the asset, once it is transferred in his name or is handed over to him. However, the rule is subject to a few exceptions, that the nominee becomes a trustee to hold the property on behalf of the legal heir. Under the Insurance Act, an insurance company is discharged of its liability, once it pays the amount of claim to the nominee. In the case of provident fund dues and shares in companies, the law provides that the nominee becomes the legal and beneficial owner of such property. It is the responsibility of the nominee, to hand over the claim amount to the legal heir/s. Those who reside in cities, often have their residential properties in cooperative housing societies. Such properties are governed by the cooperative society laws that are applicable in each state.
Form for Nomination
Nomination facility is available at the time of acquiring property or other financial assets. Nomination can be also made later on in the format required by respective institution in the format suggested which may be different. Nominations can be changed at later date.
Who can be a Nominee?
A nominee is appointed by the owner/person and can be anyone to whom the person wants the financial benefits to accrue, in case of his/her death during tenure of asset. General practice is to appoint spouse, children or parents as the nominee.
Earlier, due to lack of regulatory clarity, there were confusions about the actual status of nominees - as legal heirs (other than nominees) too used to make claims on the money. To solve this problem and to ensure that the financial assets & insurance money goes to the real and intended recipients, a concept of Beneficial Nominee was introduced in 2015.
Beneficial Nominees
As per the new law, if any immediate family member (like spouse, children or parents) is made the nominee, then they will automatically become the beneficial owners of the claim benefits and be referred to as ‘Beneficial Nominee’.
This means that the death benefit will be paid to “Beneficial Nominees” and not to any other legal heirs, irrespective of anything.
Therefore, it’s always advisable to nominate an immediate family member as the nominee to ensure that there are no disputes in future between the nominees and legal heirs.
Nomination by Joint Account Holder:-Nomination for joint holders is permitted, however, in the event of death of any of the holders the benefits will be transmitted to the surviving holder’s name. In the case of death of all holders, the benefits will be transmitted to the nominee account.
Minor Nominees
It’s a normal practice for people to appoint their children as beneficiaries of their financial assets & life insurance policies. And rightly so; after all, it’s their future one wants to secure even if one is not around.
But children who are below the age of 18 years of age are not considered eligible to handle claim amounts. Hence, the policyholder needs to assign an appointee (or custodian).
In case of claim arising when the nominee (child in this case) is younger than 18 years, the claim amount is paid to the appointee for “custody” till the minor turns major.
Non-Family Nominees
This might sound strange. Why would you want to make a stranger (or non-family member) as the beneficiary of your financial assets & life insurance policy? This oddity is exactly what leads banks & insurers to not accept strangers (or non-family members) as nominees.
So even though one can nominate distant relatives or even friends, fact is that it will be very difficult to prove ‘insurable interest’. This along with the fact that there is a moral hazard in appointing such a nominee, the Bank or insurance company might refuse the nomination or might ask for further explanations.
Changing Nominees
One should make sure that nomination of something as important as Financial Assets & life insurance is up-to-date and in sync with whom policyholder actually wants to appoint as the beneficiary. A policyholder can change the nominee as many times as he/she wishes but the latest nominee supersedes all previous ones. Given the real purpose of savings & life insurance, one cannot overstate the importance of appointing the right nominee. Therefore, ensure that you have the right person as your nominee. This will ensure that possible future disputes are avoided and the money is paid only to those whom you want.
Minor's Account with Mother as Guardian
Banks are reluctant to open deposit account in the name of minor, with mother as a guardian. Presumably, reluctance to allow mother as a guardian when the father is alive, is based on section 6 of the Hindu Minority and Guardianship Act, 1956 which stipulates that, during his lifetime, father alone should be the natural guardian of a Hindu minor.
Status of a Nominee The provisions of nomination is found in various Acts, Rules Instructions of Regulators like RBI, SEBI, L.I.C., Provident Fund, Gratuity, but the nomination does not create any title or interest in favour of the nominee.
Nominee versus legal heir
A nominee is simply a custodian for most assets, except in case of equities.
Supreme Court in India has ruled that a nominee may not necessarily be the beneficiary of a deceased person’s proceeds; it opened a debate regarding the status of a nominee vis-à-vis a legal heir. The well-known theory is that a nominee is merely a trustee, not the owner. He/she may temporarily possess the money, but will have to hand it over to the heir when the situation arises.
For most investments, the 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/she 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.
Similarly, Reserve Bank of India (RBI) guidelines specifies that the deceased’s nominee would receive the money in the capacity of a trustee of legal heirs. The same applies for all other financial transactions such as public provident fund, mutual funds and others where the nominee plays the role of a trustee rather than the owner.
Under Section 109A of the Companies Act, if the nomination is made under procedure prescribed by law, the nominee will be entitled to become the rightful owner of shares. And, such right shall exclusively favour the nominee and exclude all other persons.
In case of property, the MCS Act (under Section 30) says in event of the death of a member of a society, the shares of the deceased will be transferred to the nominee as “Provisional Member”. But, this transfer cannot result in vesting of the flat with the nominee. He/she is merely a trustee for the deceased’s estate.
Besides these special situations, a will takes precedence over other nominations. The legal heir mentioned in the will is the only person entitled to the deceased’s assets, except in case of equities, where the nominee gets the money.
Therefore, financial planners insist that making a will is a very important part of financial planning. It enables you to distribute your assets in the way you wish to and also reduces the risks of undue litigation or disputes.