Nomination is such an important aspect of investments, yet too many people take it lightly.  Enough attention and seriousness is not provided whenever an investment advisor asks, ‘who would you like to make your nominee of these investments?’  There may be different reasons to it, such as signature of a nominee is not required, only name and permanent account number (PAN) is required to be mentioned.  So it doesn’t occupy much importance and space in people’s mind whenever such a question is asked.  In the following paragraphs, let’s try to reason out why it is very important and it should occupy a larger space in mind while making investments.

Nomination is a process of appointing a person to take care of assets of investor in the event of death.  Nomination is permitted even in case, where investment in an asset is jointly held by 2 or more people,  but the benefits will only be transmitted in case of death of all the holders.  The nominee appointed has to be an individual only. Only one person can be appointed as a nominee. It is not compulsory to appoint a nominee for each investment. Non-individuals including society, trust, body corporate, karta of Hindu undivided family (HUF), holder of power of attorney cannot nominate.

A minor can also be a nominee. In such a case, the guardian will sign on behalf of the nominee and in addition to the details of the nominee, the name; address and photograph of the guardian must also be submitted.  Under the Indian Legal context, a minor is a person who has not yet attained the age of 18 years.

Scenarios where people appoint minors as nominee

1. Out of emotional urge, mother or father appoints minor as a nominee keeping spouse as a guardian
2. Father and mother are joint holders of the investment and hence are left with no option but to appoint minor child as a nominee
3. Due to unhealthy relationship or other reasons spouse intends to pass on the wealth to the child instead of other spouse

Now let’s look at pros and cons of keeping a minor a nominee in each scenario

Scenario 1

In this scenario it is completely unadvisable to keep minor as a nominee. The investor is only making things tough for his/her family. After death of the sole holder, spouse will have to open a bank account, obtain a PAN number and do whole lot of formalities before claiming the money. If the investor is absolutely adamant about the child receiving the money, then it is better that he / she mentions the same in his will. To summarize in this scenario there are only cons if a minor is appointed as a nominee

Scenario 2

In our view this is the best way of estate planning. After the death of the first holder, the second holder becomes the sole owner and takes control of the investments. If both the holders die at the same time the appointee will become the guardian and will take care of the money till the child becomes major. It is interesting to note that a bank account can be opened in the name of the minor as a sole owner or jointly with the guardian. The pro in this scenario is that the estate planning is done to ensure that the asset is passed at each stage of transition. The set back is the challenge to have a right appointee. The guardian as appointed will have to ensure that all the processes are followed and with right paper work all the assets are transmitted in the name of the minor and subsequently to give away the rights when the child becomes major

Scenario 3

This is a scenario of dispute and has different facets to it. The guardian and minor act provide different laws for Hindu and Muslim community. As per the act right of the natural guardian is placed higher than the right of the testamentary guardian. Testamentary guardian is the person who is appointed by the father or mother. So for example if a father appoints a guardian to take care of the child after his death, the rights will not be transferred to the guardian but to the mother who is the natural guardian of the child. Again here it is advisable that the investor mentions the provisions of his assets in the will.

To summarize a nominee has no right over the assets unless it is specified under the will or nominee happens to inherit the assets.  This makes a nominee a mere custodian of the assets and a contact point for the investments. Nominee should be appointed keeping in mind how fast the assets can be transmitted and how the rights can be preserved as per the will.