Nomination under various financial assets need a review

Nomination is a good concept, but it has its own limitation— ‘the nominee is only a trustee’ rule. (FatCamera)


Covid has brought us face to face with our own sense of mortality. Among the many new things we have learned to focus on, the most critical is the ease of succession.

As of today, when successors inherit properties in India, they would need to go through a long & expensive court process to finalise their title on the assets.

Let us take my own example. If I were to die today without leaving a ‘will’, then as per the personal law that governs me, my assets would be shared equally among my spouse and two children. But I have made a will where I have left all my assets to my spouse and only if she predeceases me then equally to my two children. I have also nominated my wife for my assets.

Nomination is a good concept, but it has its own limitation— ‘the nominee is only a trustee’ rule. As I nominated my wife, it would allow her to get quick and easy access to those assets in an economical manner. But she will only get it as a trustee and she will remain accountable to my two children till she gets my will probated in court.

But life insurance policies are exempt from this rule. Section 39 of the Life Insurance Act was amended in 2015 to provide that if there is no will (which is most of the time) and if the spouse or parent or children are nominee(s), then they will get final title to the policy amount. So, in my life insurance policy where my wife is a nominee, she will not only get quick access to the funds payable under the policy, but will also not be accountable to my two children for that money.

This is just for life insurance policy. But for other assets, a nomination is just a way to get access to the asset but not ownership. In fact, friction could be created if the nominee is different from the successors.

These difficulties in succession are one reason the number of unclaimed assets that are lying in the system exceeds 1 trillion. This figure underlines the need for a different approach. This is highlighted in the white Paper “Reimagining Nomination – making succession smoother & simpler” ( published by Association of Registered Investment Advisers (ARIA). The white paper is written by Pramod Rao (who was the then group general counsel of ICICI Bank) acting in his personal capacity, with inputs from ARIA.

The primary recommendation in the white paper is to make changes in the law such that nominations can become a third way to succession (similar to the life insurance policy rule) apart from the existing two ways, namely personal law and through a will.

There is also a variation and inconsistent treatment of nominations among the seemingly identical categories of financial assets. This has emerged from different laws, periods of enactment, etc. Certain variations are quite progressive, and certain provisions, not so. For e.g. the Government Provident Fund scheme has a progressive provision in terms of recognizing the concept of successive nominations. That is, recognizing an alternate set of nominee(s) in case the first named nominee(s) predecease the holder. There are also not-so-progressive provisions when it comes to provident products such as compulsorily naming family members as nominees which can be a problem for those who are estranged from their family. Moreover, the definition of ‘family’ reflects the patriarchal times in which the provisions were enacted as it will not allow a male member to designate his in-laws as nominees even though they may be dependent on him. All asset classes, particularly financial assets, require review, reconciliation, and upgrading to incorporate the recommendations made in the white paper.

The white paper makes many other recommendations such as centralized reporting of death, centralized death claim processing, pro-active outreach by the issuing entities, among others.

We have an ultra-modern capital market and banking infrastructure, and in this 75th anniversary of our independence, we need to free our citizens from the tyranny of their personal laws and provide ease of succession as it is a particularly essential element of ease of living, so that hard earned monies can be truly passed on easily.

*Harsh Roongta is the chairperson of ARIA and runs a Sebi registered investment advisory firm.

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