scorecardresearch5 key legal aspects of nomination in financial assets

5 key legal aspects of nomination in financial assets

Updated: 12 Oct 2023, 04:06 PM IST

Recent regulations from authorities like SEBI and IRDA have made the nomination process for financial assets more crucial, but misconceptions still exist, necessitating a detailed exploration of its legal aspects and significance.

The nominee, when appointed, receives the asset as a trustee, responsible for safeguarding the owner's specific investments.

The nominee, when appointed, receives the asset as a trustee, responsible for safeguarding the owner's specific investments.

In recent times, various regulatory authorities such as SEBI, IRDA, and others have mandated the nomination process for different financial assets. While investors are increasingly recognizing the importance of nominations, there exist misconceptions surrounding this critical facility. Therefore, let's comprehensively delve into various key aspects and get clarity on the legal aspects of nomination and its significance in the context of financial assets.

Nomination vs succession law

Nomination is the legal right vested in the holder of an investment to designate a person who will receive it in the event of the holder's demise. The nominee, when appointed, receives the asset as a trustee, responsible for safeguarding the owner's specific investments. However, it is essential to understand that the final ownership and heirs are determined in accordance with the laws governing the owner's succession. Consequently, the nominee exercises control over the investment as a trustee on behalf of the legal heirs or designated individuals. The nominee's role is limited to receiving the proceeds from the investment, not owning the asset. In legal proceedings, established judgments consistently uphold the rights of legal heirs over nominees.

Applicability of nomination

The nomination facility is exclusively available to individuals and is not applicable to entities such as Hindu Undivided Families (HUFs), trusts, or corporate entities. Nomination can be established at the time of making an investment or contracting insurance, or it can be added at a later date. Nominees can be individuals, companies, or trusts. Notably, minors can be nominated, but in such cases, a guardian must be specified. For Non-Resident Indian (NRI) nominees, repatriation rules apply, and individuals can designate multiple nominees by defining the respective percentages.

Nomination rules by asset type

It's important to recognize that the primary purpose of nomination is to facilitate the seamless transfer of proceeds upon the holder's demise, rather than serving as a mechanism for estate distribution. Transferring the proceeds of a financial investment or asset to the nominee represents a legitimate discharge of the payer's obligations. Consequently, any legal heir seeking to claim the proceeds must provide substantiating evidence. Although a legitimate will takes precedence over a nomination, the payer can fulfil their liability by transferring the proceeds as per the holder's nomination. Importantly, the nominee does not inherit the status of a legal heir through nomination.

Exceptions to the "nominee is a trustee for the legal heirs" rule

Despite the general rule that nominees act as trustees for legal heirs, certain financial assets fall under the category of "beneficial nominees" with legal rights to the proceeds. These exceptions are defined by specific Acts:

The Insurance Act, 1938: An amendment in February 2015 introduced the concept of "Beneficial Nominee" for Life Insurance Policies. If the nominee is the parent, spouse, children, or a combination thereof, they become beneficial owners of the payout. In such cases, legal heirs do not have a claim to the money. Furthermore, if the nominee passes away, the amount goes to the legal heir of the nominee. For instance, if a daughter is the nominee, and both the insured and the daughter pass away, the money goes to the daughter's legal heir, typically her husband, rather than the insured's son or wife.

The Employees' Provident Fund (EPF) Act: Under this Act, subscribers can appoint immediate family members, including spouses, parents, and children, as nominees in their Provident Fund accounts. In the absence of a nomination, the proceeds are distributed among legal heirs.

Married Women's Property Act (MWPA)

As mentioned earlier, life insurance policies pay out to nominees as beneficial owners rather than trustees for legal heirs. However, nominees can be changed at any time during the policy period. It is worth noting that creditors of the insured person may attempt to claim the proceeds of a life insurance policy, even when "beneficial nominees" are designated.

To mitigate such risks, married individuals can opt for life insurance policies under the Married Women's Property Act, 1874 (MWP Act). Under this act, the nominee can only be the spouse or children (or both, excluding parents) of the insured person. The declaration under the MWP Act must be made at the time of purchasing the policy, and the nominees named at that time acquire all rights to the claims in the policy. Crucially, nominees cannot be changed after the policy's purchase, even if the insured person divorces their spouse. The insured person also loses any claim to the amounts payable under the policy. Any survival benefits from an MWP policy are paid to the nominees, not the insured person.

In conclusion, understanding the legal implications of nomination in financial assets is paramount for investors. While nomination streamlines the transfer of assets upon the holder's demise, it does not supersede succession laws. Familiarity with the specific rules governing different asset types and awareness of exceptions, such as beneficial nomination or the Married Women's Property Act, can empower individuals to make informed decisions regarding their financial investments and nominations.

Vivek Goel, Co-founder and Joint Managing Director at Tailwind Financial Services

First Published: 12 Oct 2023, 04:06 PM IST