Don't leave your family's future to chance: A guide to nominating trustees for financial instruments in India

• A nominee acts as a trustee appointed by an individual to ensure that her assets are transferred to her heirs after her death.
  
  
• The nomination process for financial instruments involves filling out a nomination form provided by the financial institution where the investment is made.
  
  
• Despite nomination, one must leave a will to ensure proper succession.

Whenever you complete a form for a new bank account or investment, there is a section where you are required to provide information about a ‘Nominee’. Nomination facility is available for all financial products like bank accounts, life insurance policies and investments like public provident fund (PPF), mutual funds, and shares. In fact, 31 March 2023 was the deadline to fill nomination details for mutual funds – this has now been extended to September 30.

Why is it important to have a nominee?

A nominee acts as a trustee appointed by an individual to ensure that her assets are transferred to her heirs after her death. The nominee is responsible for collecting the assets from financial entities such as banks or fund houses, and distributing them to the heirs as per the instructions provided by the deceased. However, it is crucial to understand that the nominee is not necessarily the beneficiary or heir entitled to the assets, but rather a trustee for the same. Therefore, unless specified in a will or if there are no other heirs, the nominee may not be entitled to the assets or money.

“Nomination has now become compulsory in most investment options and that would need to be done. In the case of past investments too, they are reaching out to complete the nominations. The nominee should be the true intended beneficiary. Else, it creates a problem as the nominee will have to hold the money in custody till the beneficiary comes up to claim it (after the holder is no more),” says Suresh Sadagopan, founder and principal officer, Ladder7 Financial Advisories, a financial planning and wealth advisory firm.

If there is no proper nomination, transferring the assets can become a time-consuming and tiresome process that requires legal procedures. This could lead to delays and extra expenses that can be avoided by having a nomination in place. Numerous women encounter challenges with their deceased husband's accounts because the latter did not update the nominee information.


The nomination process

The nomination process for financial instruments involves filling out a nomination form provided by the financial institution where the investment is made. The form requires the investor to provide the name, address and relationship of the nominee to the investor. The investor can nominate one or more individuals as nominees, and the percentage of distribution of the assets among them can also be specified, depending on the financial instrument in question. After completing the form, it must be submitted to the financial institution for processing. The nomination can be changed or cancelled at any time by submitting a new form.

Let us now look at the nomination rules for different types of financial products.

Bank Accounts: For bank accounts, only one person can be named as a nominee. However, some jointly-operated locker accounts may allow for up to two nominees.

Life insurance: The nominee for a life insurance policy can be any person designated by the policyholder to receive the benefits upon the policyholder's death, and typically includes family members such as children, spouse, parents or siblings; prior to the introduction of Insurance Amendment Act 2015, there was ambiguity around who could be named as a nominee.

Public Provident Fund: A PPF account holder can nominate one or more persons to their account. They must mention the percentage of share in case there is more than one nominee. However, nomination is not permitted for accounts opened on behalf of minors.

Mutual funds: A person can nominate up to three individuals who can claim the units held by the investor, and indicate the percentage each nominee should receive. Percentages must be whole numbers without decimals. If percentages are not specified, the asset management company (AMC) will distribute the units equally among all the nominees.

Shares: It is permitted by law for any person holding securities, including shares of a company, to designate a nominee who will receive those securities upon their death. If the securities are jointly held, only one person can be nominated as the nominee. The law does not impose any limitations on who can be designated as the nominee.

Keep in mind: As mentioned earlier, the nominee is not the default owner of the investment/property but only the custodian of it until the legal heir claims the same. “Therefore if someone wishes to pass on something to a particular individual, nominating that person for 100% doesn't mean s/he will get it. Other legal heirs can claim their share through the legal channel. That is why despite nomination, one must leave a will to ensure proper succession. Otherwise default legal rules prevalent in the country will apply,” says Chenthil Iyer, founder and chief strategist, Horus Financial Consultants, a financial planning firm.

Agrees Sadagopan, “People assume that nomination alone is good enough as an estate planning tool. Wills/ trust will be needed over and above the nominations to guide where the assets should go after the investment holder's lifetime. Most people do not make wills at all thinking their wealth is small and nominations are in place, which is a mistake.”

Nomination is thus important to ensure that your financial assets are in good hands when you are no more.