Why Nominations Are Must In Any Financial Transaction?

While most of the financial institutions have made it mandatory for investors to fill in the nomination details, yet it has been the most ignored aspect of investment than anything else. The urge to complete documentation and proceed with investments force investors to simply ignore the need and basic requirement of nomination. 

At the same time, people continue to nominate same person for years without considering the life changes that one goes through such as marriage, becoming a parent or death of existing nominee. Despite being a powerful tool to help transfer of assets, it is seldom used by anyone. 

Understanding Nomination

Nomination is a process of authorizing a person as a nominee by the owner or prime holder of the asset. This authorization is meant to ensure that the asset is duly received by the nominee in the event of the death of the owner or holder of the asset. A nomination simplifies the claim process for the authorized person in case of an unfortunate event caused to the owner. In absence of these details, a legal heir is required to complete lengthy legal formalities even if he/she is the rightful claimant of the wealth. Thus, nomination is the best mode to keep things simple throughout the investment tenure. 

Function of Nomination

It should be noted that a nominee does not necessarily become the owner of the asset. Rather nomination empowers nominee to receive funds from financial institutions or banks as a trustee, after which, a will or Indian Succession Act, decides the lawful distribution of those assets. 

At times huge sums of money remain unclaimed due to the absence of nomination or unawareness of legal heirs about the whereabouts of investments by the deceased owner. This can be understood from the glaring unclaimed amount of Rs 4,426.72 crore as on December 31, 2015, with Life Insurance Corporation of India (LIC) that in itself should be an eyeopener. 

Nomination Does Not Supersede Will

It is important to underline that nomination only facilitates transfer of asset, whereas Will takes precedence over nomination during distribution of assets. Let’s understand the functioning of will and nomination using this example. 

• Case A - Raj nominated his brother Rajeev to receive all of his mutual fund holdings in case of his death. However, Raj also made a Will, where he clearly stated that all of his mutual fund holdings should be distributed equally among his children and wife. In this case, Rajeev will only have the right to receive mutual fund proceeds, which is required to be distributed in accordance with Will. 

• Case B - Raj nominated Rajeev and died without leaving a will. Now, in this case, the assets will be distributed in accordance with the Indian Succession Act. However, if there are no legal heirs of Raj then Rajeev will qualify to retain the assets with himself. 

There is an exception to the rule that nominee under shares and debentures gets the entitlement to the assets, unlike other financial assets. 

Final Takeaway

After knowing the above points, the importance of having a nominee is well understood. After all, it is better to enable legal heirs to have rightful ownership of assets rather than leaving them into years of struggle to claim the same. Lastly, do not forget to review and update nominations wherever required to match it with changed life circumstances, if any. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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