Investing in various assets is a diligent way to build wealth and secure a stable financial future for ourselves and our loved ones. However, life is unpredictable, and it is our moral duty to ensure that our assets are passed down to our loved ones. Planning the transfer of your mutual funds and other investments can prevent financial strain on your family and avoid legal complications.
Understanding Nominee and Legal Heir
What is a Nominee?
A nominee is a person you designate to inherit your mutual fund units. This could be a family member, spouse, child, or even a friend. Choosing a responsible nominee can spare them from legal battles to claim the investments. You can nominate up to three people and specify the percentage of claims for each. Nomination can be changed at any time by submitting a new nomination form.
Who is a Legal Heir?
A legal heir is someone who inherits your investments according to succession laws, regardless of whether a will exists. Legal heirs usually include your spouse, children, and parents. In the absence of a will, legal heirs are determined through succession laws, which may require additional documentation and legal formalities.
| Feature | Nominee | Legal Heir |
| Definition | A person designated to receive assets upon the demise of the account holder | A person who is entitled to inherit assets as per the succession laws. |
| Role | Trustee or caretaker of the assets until the legal heirs are determined. | The rightful owner of the deceased's assets. |
| Legal Rights | Holds no ownership rights, and acts as a custodian. | Has legal ownership rights over the assets. |
| Appointment | Named by the account holder in financial documents (e.g., bank accounts, insurance policies). | Determined by the succession laws (e.g., Hindu Succession Act, Indian Succession Act). |
| Authority | Limited to managing and disbursing the assets to legal heirs. | Full authority to claim and utilize the inherited assets. |
| Succession Law | Not governed by succession laws. | Governed by respective succession laws. |
| Example | Named in a bank account nomination form. | Includes spouse, children, parents, or other relatives as per the will or succession law. |
Who Has the Upper Hand?
While a nominee is the custodian of the assets, a legal heir holds the ultimate ownership. The legal heir can claim the mutual funds from the nominee as they are legally entitled to inherit them. It is crucial to regularly update your beneficiary information after significant life events like marriage, divorce, or the birth of a child.
Joint Ownership and Solo Ownership of Mutual Funds in India
Joint Ownership
In India, mutual funds can be bought through a joint account or a solo account. In joint ownership, legal claims can be made by:
- Joint account holders
- Nominees
- Legal heirs
Upon the unfortunate demise of a partner, mutual fund units are transferred to the surviving partner. If all joint holders pass, the units are transferred to the nominee or, if no nominee is registered, to the legal heir. This method requires careful tax and estate planning.
Solo Ownership
In solo ownership, the designated nominee claims the mutual fund units upon the passing of the owner. The nominee manages or distributes the units according to the owner's wishes. Without a nominee, the legal heir is entitled to the units. Legal heirs are identified through a will or succession laws.
Importance of Designating a Nominee
Failure to designate a nominee leads to probate, a legal process for validating your will and distributing assets under court supervision. Probate is time-consuming and expensive, causing delays in transferring mutual funds to your legal heirs.
Conclusion
Ensuring the smooth transfer of assets like mutual funds is crucial for your family's financial security. Understanding the roles of nominees and legal heirs aids in making informed decisions about asset distribution. Regularly updating beneficiary information is essential, as failing to designate a nominee can lead to probate proceedings. By addressing these aspects, you fulfill your moral duty to safeguard your family's financial well-being amidst life's uncertainties.
Take action today to review your nominations and ensure your loved ones are protected.
Happy investing!
