Nomination - a must but not adequate

This post may come as a surprise to many of you.  Nomination is one of the important aspects of investing but it is never taken seriously. Remember how many times have you just filled in the nomination details without knowing its implication?

Why nomination is a must?

Nomination is necessary since it allows, in the event of your death, transfer of your wealth or in case of insurance the claim amount to the person who has been assigned by you to take care of your wealth. 

 

You can make nomination for bank accounts, fixed deposits, mutual fund investments, insurance claims, provident funds, shares, etc.  In short for all your financial investment, nomination facility is available.

If you have not made any nomination and in the event of your death, it will be cumbersome for your legal heirs to take control of your investments.  They will have to apply to each institution separately and prove their right to your investments.  Further, the wealth will be divided between your legal heirs based on the succession laws. 

 

If you have made a nomination, the amount gets transferred directly to the nominee in the event of your death and the process is fairly simple with nominee to prove his identity.

Must but not adequate

So once you have nominated a person, can you rest assured that everything has been taken care of?  Does he become the owner of the amount transferred to him in the event of your death?

The answer to both the questions is no.  Nomination does not tantamount to ownership or legal right.  Nominee is like a trustee who has been entrusted to take care of the funds in the event of the death of the owner till the funds gets transfer to the rightful owner.  Thus it is important to note that nominee and legal ownernership is two different things.

Let me clarify this with an example.  

You have a term insurance plan for which you have nominated your wife.  In the event of your death, your wife will receive the proceeds of insurance claim.  However, she will not be the owner of the amount received.  If you have made a will and you have mentioned your spouse to be a rightful owner, then she will be the owner of the insurance claim.  However, if you have not made any will, though your wife will initially receive the claim proceeds, subsequently it will be divided between your legal heirs as per the succession laws.

A person may be a nominee but it does not ensure that he is the legal owner unless it has been legally transferred to him as per the will or as per the succession laws. 

This applies to all kinds of investment such as provident fund, mutual funds and bank deposits.  However, there is one exception to this.  In case of share or debenture investments, the nominee becomes the legal owner.  This is so since it has been expressly specified in the Companies Act that nominee

“…shall become entitled to all the rights in the shares or debentures of the company to the exclusion of all other persons” (Section 109A). 

This has also been confirmed by Bombay High court recently.

Thus only nomination is not adequate.  You should also make a will to ensure smooth transfer of your wealth.

The next question in your mind will be why nomination is required at all if the will eventually defines the legal owner?  The answer being having a nomination makes it easier for your legal heirs to claim a right on your wealth.  Otherwise, it will be a very cumbersome process.  Moreover, for investments such as shares and debentures, nominee becomes the legal owner.

Hence it is necessary to ensure that you have nomination and will in place to reduce burden on your dependents in the event of your death.  In case you have not made the nomination, you can obtain the nomination form from the concerned institution / bank and fill it up. You can also mention more than one nominee and can specify their share.

Where you aware about the difference between nominee and legal owner?  Do post your comments below.