Estate & Succession Planning through Wills, Private Trusts & Nomination (II)

“Let life be beautiful like summer flowers and death like autumn leaves” – Rabindranath Tagore

Life is uncertain and ensuring proper estate and succession planning would mean that an already mourning family has one less problem to face for inheritance. In the last issue of The Tax Talk, We have discussed the pattern of Inheritance in case a person dies intestate i.e., without making a will. The unplanned succession process is time consuming & complex and may not ensure the distribution of assets by choice & in an equitable manner. There are numerous instances where lack of succession planning has resulted in irreparably damage to the glory and reputation of the family. In view of all above, Succession planning is a necessity and not an event or an option.

Normally, Nomination, Joint Holding, Will, Private Trust, Family arrangement & settlement, HUF, etc are often considered as a tool of succession after death. However, one needs to understand the intricacies and nuances of all such alternatives.

Nominations & Joint holding options are considered as a succession planning tool by the majority. Various investments like mutual funds, FDs, shares, savings / Current Bank accounts, insurance products, etc have facility of Joint Holder or Nomination. Since it is most commonly used as a tool of succession planning, it needs detailed elaboration:

Nomination:

It is advisable to add the nominee name in the financial product wherever permissible. If an investor has forgotten to add the nominee details in the bank accounts or investments then it can be done at a later stage by submitting the nomination form. Further, the name can be altered or removed thereafter at any point of time through a nomination change or alteration request. It’s not necessary to keep the same nominee in all the investments. One can choose different nominees for different assets.

Adding a nominee in the investments is the mode of ensuring smooth transfer of funds. The nomination facility ensures that the amount is transferred to the nominee without any hassle after the death of its original owner. However, the nomination alone may not be complete for desired succession. There are various myths & misconceptions about nomination as a tool of succession as under:

1. Nomination is a stop gap arrangement. Nomination doesn’t give the person ownership right after the original owner’s death.
2. A nominee is entitled to get the assets only after the death of the owner. Nominee is not the same as a legal heir. A nominee is one who gets the right to claim the asset on the death of the owner. Nominee is a mere custodian or caretaker or trustee of the assets until it is handed over to its legal heir. It is the legal heirs of deceased who have the real ownership rights in the property after the death of its original owner.
3. Nomination results in the transfer of the assets without verification as to its legal ownership. Nominee is merely trustee of the property until it is handed over to its rightful legal heir(s).
4. The duty of the nominee is to act diligently in passing on the possession of the asset to its true beneficiary. Appointment of a nominee may not ensure the succession of assets to the desired legal heir.
5.   If a person dies intestate, the nominee is expected to apportion the amount amongst the legal heirs according to the applicable law. If a person dies after making the will then the nominee has to ensure the transfer of funds to the legal heirs as mentioned in the will.
6. It is advisable to synchronize the legal heir as per the will of the deceased with the Nomination in the assets i.e., the name of the legal heir as mentioned in the will should be marked as nominee in the investment.

 

JOINT HOLDER:
Often people make investment in joint names keeping in mind the concern for its succession. Joint Holder investments can normally be done with following two options:

1. Either or Survivor:
   In this option, either of the joint holders can operate/use the account. After the death of any of the members, the other joint holder would automatically become the sole holder of the account.
2. Former or Survivor:
   In this option, the first holder can only operate/use the account and the second holder cannot use/operate the account till the first holder is alive. Only after the first member dies, the second joint holder would automatically become the sole holder of the account.

Similar to nomination, joint ownership never creates a legal ownership over the asset of the deceased. The ownership is determined solely on the basis of the will (in cases of testamentary succession) or by the intestate law (e.g., the Hindu Succession Act, 1956 in case of Hindus dying intestate or through Indian Succession Act for Parsi, Jew etc dying intestate).

Conclusion:
Though the nomination or joint ownership ensures that the fund is transferred from deceased to the other living person, the legal rights may be an issue in such a case. Nomination or Joint holding may be required to be followed by further process of distribution according to succession law or will. The better mode of ensuring succession planning could be by way of will or Private Trust. We will discuss it in the Next issue of The Tax Talk.

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