Appointment under various financial assets requires review

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

From today, when successors inherit properties in India, they have to go through a lengthy and costly legal process to finalize their title to the assets.

Take my own example. If I died today without leaving a “will”, then according to the personal law that governs me, my assets would be divided equally between my spouse and my two children. But I made a will where I left all my property to my wife and only if she dies before me, then also to my two children. I also named my wife for my assets.

Appointment is a good concept, but it has its own limit — the “candidate is only a director” rule. As I named my wife, this would allow her to quickly and easily access these assets in an economical manner. But she will only get it as a trustee and she will remain responsible to my two children until she has 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, parent or children are designated, they will obtain the definitive title of the policy. amount. So in my life insurance policy where my wife is a nominee, not only will she have quick access to the funds payable under the policy, but she will also not be liable for that money to my two children. .

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

These succession difficulties are one of the reasons why the number of unclaimed assets in the system exceeds 1 trillion. This figure highlights the need for a different approach. This is highlighted in the white paper “Reimagining Nomination – making succession smoother & simpler” (https://bit.ly/3nELZJj) published by the Association of Registered Investment Advisers (ARIA). The white paper is written by Pramod Rao (who was then General Counsel of ICICI Bank Group) acting in his personal capacity, with input from ARIA.

The main recommendation of the white paper is to make changes to the law so that appointments can become a third way of succession (similar to the life insurance rule) apart from the two existing ways, namely personal law and by will.

There is also variation and inconsistent treatment of nominations among seemingly identical categories of financial assets. This comes from different laws, periods of enactment, etc. Some variations are quite progressive, and some layouts are not. For example, the Government Provident Fund scheme has a progressive provision in terms of recognizing the concept of successive appointments. That is, to recognize an alternate set of candidates in the event that the first nominee(s) dies before the incumbent. There are also some not-so-progressive provisions with regard to pension products, such as the mandatory nomination of family members as candidates, which can be a problem for those who are estranged from their families. Additionally, the definition of “family” reflects the patriarchal era in which the provisions were enacted as it will not allow a male member to nominate his in-laws as candidates even though they may be dependent on him. All asset classes, especially 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 death reporting, centralized processing of death claims, proactive outreach to issuing entities, among others.

We have a state-of-the-art capital market and banking infrastructure, and on this 75th anniversary of our independence, we must free our citizens from the tyranny of their personal laws and ensure ease of succession because that is a particularly essential to well-being, so that hard-earned money can be passed on easily.

* Harsh Roongta is the chairman of ARIA and runs an investment advisory firm registered with Sebi.

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