UAE: Time to write a will to protect your financial investments. Nominations don't work!
Nominee acts merely as a trustee and not as the legal owner of most investment assets
If you thought your nominee would get all your assets and money easily and legally after you are no more, then think again, because it doesn’t work as simply as that!
Most investors would have put at least a bit of thought into how nominations work at the start of their investment journey when they assign nomination to those who will inherit their assets after death.
If you thought your nominee would get all your assets and money easily and legally after you are no more, then think again.
At least that is how nominations are supposed to work for most investments, be it insurance policies, bank accounts, shares, mutual or pension funds – or so, that is what most of us would first think.
The reason being according to most country laws, a nominee is only a custodian and not the owner of your assets, and is legally bound to transfer the assets to the legal heirs.
For most investments, a legal heir is entitled to the deceased’s assets, while in a few cases nominees have sway over them.
Not many of us are actually aware of this legal twist. We assume a lot of things which sounds like they are obvious, but are not true from the legal point of view.
Before we delve deeper into how nomination differs in each investment scenario, let’s quickly brush through the process of nomination and how effective it has been and how vital it still is.
If not, the distribution of assets is governed by the personal law applicable to the deceased. But nomination has proven to be a very effective tool to access assets in case of death.
If there is no nomination, the legal heirs have been having to go through a long drawn and cumbersome process of proving themselves as legal heirs.
A will – if present – supersedes nomination for most assets
Note the will made by the deceased supersedes the nomination for most assets. A will is the 'supreme' document that specifies the exact intentions of the testator to the succession of properties.
So, a will that has been proven valid wields the power to override any arrangements or nominations made during an individual's lifetime.
The will made by the deceased supersedes the nomination for most assets.
The document also includes all properties of the testator that might not have any nominations or options for nomination.
It is also prudent to ensure that the contents of the will are harmonised. From a practical perspective, it is good to have the same persons as the nominees and the legal heirs under the will.
However, a beneficiary is an individual who has a financial interest or stake in the life of the policyholder.
Why is nomination critical?
Nomination is a critical activity which a lot of us miss out, and eventually creates a lot of unwanted hassle for our nearest ones.
There is startling data from the Indian central bank which shows millions of unclaimed deposits lying in banks across the country.
These are deposits which are lying in accounts where the original owner has not claimed the money, or deceased and had not filed nomination details.
This by itself is a proof of how difficult it can be to retrieve your money where there is no nomination done.
From just this one instance you would have understood why it is so important to have a nominee!
How nominations work with different investment asset classes?
Although nominations may work slightly differently with each country and various investment types, here are some parallels on how nominees are assigned in different savings schemes.
• How nominations rules work in life insurance policies
A policyholder can appoint multiple nominees and can also specify their percentages in the policy proceeds.
Nomination in life insurance has one limitation however. As insurance policies are bought to secure your financial dependents, your first choice of the nominee has to be your family members.
So, only an immediate family member, like spouse, parents or children, can become a nominee.
As insurance policies are bought to secure your financial dependents, your first choice of the nominee has to be your family members.
The nominee becomes the beneficiary to ensure that the money reaches the intended person. And in most cases, the beneficiary has to be a legal heir.
Let's say the will says that a portion of the policy proceeds should go to his mother and children, then the wife has to give those proceeds as the will supersedes the nomination.
• How rules of nomination are unique when it comes to stock ownership
Although rules state that the people who can actually 'own' the inheritance are the legal heirs and not nominees, the exception to the rule comes in when dealing with shares.
If a person has been named the nominee to certain shares, they actually 'own' those shares until or unless a specific provision in the will states otherwise.
People who 'own' the inheritance are legal heirs and not nominees, but there is one exception - owning shares!
If there isn’t a will, anyone who has been nominated for the shares will be the ultimate owner of those stocks. Any society’s succession laws on inheritance will not be applicable here.
But nomination needs to be registered with the broker at the start before the investors buy the shares.
• If a person who holds stocks designates a beneficiary prior to their death, then that beneficiary becomes the owner of the stock once the holder passes.
Most legal and financial experts recommend naming a transfer-on-death beneficiary in order to avoid the probate process.
Nominee also has another meaning in share trading
A nominee when trading stocks also refers to a business chosen to manage assets or undertake transactions in, say, securities on behalf of an individual, which still owns the asset in question.
A nominee account is often used by a stockbroker to hold shares that belong to its clients, allowing the stockbroker to buy or sell shares on the client’s behalf.
A nominee when trading stocks also refers to a business chosen to manage assets or undertake transactions.
This gives the stockbroker the necessary control to conduct transactions, while ensuring the client retains all rights over the securities, such as voting rights and dividend entitlements.
The client’s securities are treated as separate (or ring-fenced) from the stockbroker’s own assets and liabilities to protect the client’s investments should anything happen to the stockbroker.
In the case of mutual funds, you can nominate up to three people, who can be registered at the time of purchasing the units.
How nominations apply to mutual fund investments?
All mutual fund investments (though comprising of different investment schemes) will have the same nomination, as long as they are part of a single investor account.
(An investor can have multiple accounts or ‘folios’ and can assign nomination differently for each.)
Even a minor can be a nominee, provided the guardian is specified in the nomination form. You can also change nomination later by filling up a form, which is available on the mutual fund company website.
A non-resident can be a nominee, subject to the exchange control regulations in force from time to time.
• Nominees can vary with different types of bank accounts
Nomination in bank accounts can be done in favour of one person only. Nomination in favour of more than one (up to two persons) is allowed in jointly operated locker accounts with common consent.
One can have separate nominees for different accounts— fixed deposits (FD), savings and recurring deposits (RD) accounts held with the same bank.
Under bank account investments, nominee acts merely as a trustee and is not the owner of assets.
And like it was touched upon before, under bank account investments, nominee acts merely as a trustee and is not the owner of assets.
• Nomination in Public Provident Funds (PPFs) in India
For a public provident fund (PPF), the nominee will only get custody of the amount. The legal heirs will be entitled to own the money in your PPF account. In other words, legal heirs have more sway.
For Indian PPFs, the nominee will only get custody of the amount. The legal heirs will be entitled to the money!
But NRIs have been banned from currently investing in Indian small savings schemes, although those with existing accounts and some others still benefit from it. Read the article below to know who else.
Conclusion and key takeaways!
In these exceptions the nominee becomes the owner of assets and funds. Otherwise, mere nomination is not considered as ownership.
Under mutual funds, bank accounts and other investments, nominee acts merely as a trustee and is not the owner of assets in this case.
The nominee’s job is limited to accepting the money and transferring it to the heirs!
The nominee’s job is limited to accepting the money and transferring it to the heirs in case of death of the nominating person.
In this case, the person’s right as a joint owner would take over his role as a nominee. If a nominee is not willing to pass along the assets to the legal heirs, the case can be taken to court.
However, proofs like a succession certificate or a registered will would be required to prove the truthfulness of the claim.
The best way out of all this confusion is a will. A clear and unambiguous will is the key to this problem as it supersedes everything else.