Why adding a nominee to your Demat account is just not enough
In India, a Demat account is a popular way to hold securities like shares, bonds and mutual funds. While investors pay great attention to their portfolio performance, they often overlook the importance of a nominee. The Securities Exchange Board of India (SEBI) made it mandatory in 2019 to have a nominee for a Demat account. However, the role of a nominee is often misunderstood, and investors mistakenly believe that by naming a nominee for their Demat account, they have protected their financial legacy. In this article, we will discuss the limitations of Demat nominations and the importance of a well-drafted will for protecting your financial legacy.
Understanding the limitations of Demat nominations
A nominee is someone who will receive the assets in case the original owner of the asset passes away. When a person opens a Demat account, they are required to name a nominee for the account. The nominee would get legal ownership of the securities held in the account in the event of the death of the account holder. However, the nominee does not become the legal heir of the deceased account holder. The nominee merely acts as a trustee or a custodian for the assets and is required to distribute the assets to legal heirs as per the succession laws.
The limitations of Demat nominations are more apparent when we consider the complexities of Indian succession laws. Indian laws on succession and inheritance vary based on the person’s religious faith (Hindu, Muslim, Christian, etc.) and the location (state) of the person. The succession laws can be difficult to navigate and are often subject to complex family dynamics like divorce, remarriage, or disinheritance. In such cases, the nominee may face legal challenges in distributing the assets to the rightful heirs.
Another limitation of Demat nominations is that a nominee cannot inherit assets that are not held in a Demat account. For example, if a person has fixed deposits (FDs) or real estate, the nominee of the Demat account cannot claim those assets. In such cases, the nominee would have to go through a lengthy and expensive legal process to claim the assets, which could result in the assets being distributed to unintended beneficiaries.
The importance of a will
A will is a legal document that outlines the distribution of assets after a person’s death. A will can provide clarity on the distribution of assets and can prevent legal disputes between family members. A will can also be used to ensure that assets are distributed according to the person’s wishes, even if they differ from the succession laws.
A well-drafted will should clearly specify the beneficiaries and the assets that each will receive. It should also name an executor who will oversee the distribution of assets and ensure that the will is executed as per the person’s wishes. The executor could be a family member or a trusted friend, or a professional executor like a bank or a lawyer. An executor is responsible for gathering all the necessary documents, paying off debts and taxes, and distributing assets to the beneficiaries.
A will can be changed or updated anytime during a person’s lifetime. A person may change their will if they have a change in marital status, the birth of a child, or any other reason. A will should also be reviewed regularly to ensure that it is up-to-date with any changes in laws or personal circumstances.
Conclusion
In summary, while adding a nominee to your Demat account is mandatory, it is not sufficient to protect your financial legacy. A nominee does not become the legal heir of the assets and merely acts as a trustee. Furthermore, a nominee is restricted to inherit only Demat assets and cannot claim assets that are not held in a Demat account. A well-drafted will can ensure that all assets are distributed according to the person’s wishes and can prevent legal disputes between family members. A will can be updated anytime, and it is essential to review it regularly to ensure that it is up-to-date with any changes in laws or personal circumstances.