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Nomination helps in smooth transfer of assets

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Every time you fill a form for an investment or an asset, you always have to name a nominee of the proceeds of the same for smooth transfer of money in case of an eventuality. However, many feel this is a task and do not name a nominee.

Nomination is generally understood to be an act of officially naming a candidate (friend / relative / legal heir) who will receive the proceeds of investments / assets upon the death of the owner. It is applicable for shares, insurance policies, mutual funds, fixed deposits, bank accounts and so on. In spite of being a simple procedure, it is mostly ignored by individuals.

Other than finding it tedious, many feel that a nominee and legal heir is the same. And hence, in case of an eventuality, the legal heir will take over and so why name a nominee. However, these two individuals may not always be the same.

The definition and use of nomination varies across financial assets. Here's how:

Equities: The law on nomination of equities held in companies has taken a new meaning with perhaps the first interpretation of the provisions governing nomination in the Companies Act, 1956 by the Bombay High Court. It ruled that the rights of a nominee of shares of a company would override the rights of the legal heirs to whom the property may be bequeathed.

The Court opined that under the Companies Act, the relevant section provides that on death of a shareholder, the shares would vest with the nominee. The provision adds that the nominee shall become entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any other disposition, will or otherwise. Therefore, regardless of what is stated in privately executed wills, a company would have to only deal with the nominee as a person now exercising the rights of the deceased shareholder.

Taking note from the above decision, individuals have to be careful in nominating the right person for their demat account(s). More so, care has to be taken to avoid conflicts between bequests made in the will and nominations.

Mutual funds: Barring the above reference, till date for all other assets, a nominee is simply a custodian. Effective from April 1, 2011, nomination is compulsory across all new investments made in mutual funds. In case, an investor does not wish to nominate, then a separate declaration form of the non-intention of making a nomination has to be filed.

In case an investor has failed to provide a nominee, the applicable rules make it mandatory for the mutual fund company to send a request to the unit holder to register a nominee. In case of joint holders in mutual funds all holders have to sign the request for nomination / addition or deletion of the nomination.

In case of death of an investor, transfer of units in favour of the nominee shall be a valid discharge by the asset management company against the legal heirs. Investors should note that every new nomination filed for an existing folio / account will override the existing nominee.

Life insurance: In one of the very early cases on nomination (trustee versus legal heirs), the Supreme Court had held that a mere nomination made in a life insurance policy, under the relevant provisions of the Insurance Act, does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the policy on death. The nomination only indicates the hand which is authorised to receive the amount, on the payment of which the insurer gets a valid discharge of its liability under the policy.

The said amount however, can be claimed by the legal heirs of the deceased in accordance with the succession laws governing the deceased.

Thus, in case of life policies, it is important to have an appropriate nomination in place, to ensure that the proceeds are collected in trust.

Co-operative societies: Co-operative housing society, nomination ensures easy and hassle free transfer of the house. Every member of a society shall nominate a person(s) to whom in the event of his death, his right and interest in such societies shall be transferred. Nomination can be changed at any time. More than one nominee is permissible, provided they are of blood relations.

In case of co-operative societies, it is also necessary that there is a correlation between nomination and will. However, many individuals fear that nomination alone may not give ownership rights to nominees, in the same way as a will would do.

At this point, one can infer that a nomination process with the society would involve the owner, the Providing nominations is one of the most basic and simplest steps towards estate planning. Equally important would be to review nominations on a periodic basis

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