MAKE SURE YOUR ESTATE PASSES SMOOTHLY
Don’t delay the drawing up of a will and make it difficult for your family by not leaving clear instructions about your financial assets
Neha Bhasin is worried about sorting the numerous files with documents that detail her parents’ bank account statements, phone bill records, maintenance charges towards gadgets and apartment, pension existence certificate, medical records and more. Her parents, like many others, unfortunately died in 2021 due to Covid complications. The 49-year-old Mumbaikar has been shuttling between Delhi and Mumbai to get a grip on the assets left by her parents.
“I have been married for 25 years and in all these years, I would meet my parents during vacations and family events. We rarely discussed their finances,” she says. Her brother has been settled in Singapore for two decades now. “Our parents were very independent and we were fine till the Covid complications set in and they needed assistance,” she says. The emotional trauma aside, she is facing several challenges to pick up the pieces from the documents left by her parents.
In the past two years, many families have faced new challenges of losing their near and dear ones who haven’t left any clear instructions about their financial lives. Making a will is something that is never a priority, despite knowing for certain that one day one will die. Many people think that they hardly have any financial possessions that require a will, or assume that there is plenty of time before they can draw up one.
Even shrewd businessmen have gambled their way by not having a clear succession plan. Take the oft-cited case of the late Dhirubhai Ambani who, despite his business acumen, didn’t leave a succession plan, which left his sons fighting for his empire. There have been several other business families that have witnessed legal battles and bitterness causing family disputes, which have disrupted business and eroded wealth.
MISCONCEPTIONS GALORE
Most Indians who own a house or have some investments need to realise that these are assets with significant value. They need to prepare clear instructions on how these assets will be handled after them and who will receive what from it. Many asset owners assume that things would smoothly transition to their dependants, and they don’t need to write a will. However, when one dies without leaving a will, there is room for family members to seek the intervention of the court to settle the assets. Given the timeconsuming and expensive legal process, it makes sense to have a clearly written will or make sure your beneficiaries know what you are planning.
In case of financial assets, say a bank account or life insurance, there is scope to define a beneficiary by way of nomination. However, this is not as simple as it may appear, especially
in cases where a nominee may die before the owner of the asset. For instance, there could be a situation where one has made his wife the nominee in his bank account, but she dies before him. Then, there is also the possibility that family members are not aware of who the nominee is. The senior Bhasins had most of their financial assets held jointly with each other as nominees. But, as both died in quick succession, there was no scope to make any subsequent changes to nominees.
In July 2021, replying to a question in Parliament, Bhagwat Karad, the minister of state of finance,said that about Rs 50,000 crore was lying in unclaimed sums with banks and insurance companies. Most of this is due to lack of having nominees with bank accounts and insurance policies. The unclaimed sums with mutual funds, EPFO, demat account and other financial instruments are staggering. Data compiled by Recoversy, a company that helps people recover money from financial institutions (see Unclaimed Investments) tells a sorry story.
Recoversy helps people who have lost documents— regarding their savings and investments—recover such investments. For instance, there are chances that one may have forgotten their investments in a mutual fund or in a bank fixed deposit due to passing of time and may not have an updated document as proof. Moreover, in instances when one moves cities, a forwarding address or contact may not have been recorded, leaving no track or trail of such accounts and financial investments. Over the years, regulators in the financial sector through the KYC (Know Your Customer) process have ensured that account holders have nominees mentioned.
“My father had a chartered accountant I know, but even he is no more and we are trying to piece the trail,” adds Bhasin. She is unable to trace the property document of the flat owned by her parents. And, the group housing society is unwilling to acknowledge her as a rightful heir in the interim till the house documents are sorted. “That my brother doesn’t reside here and is no more an Indian citizen makes things even more challenging,” she says. The absence of a standard nomination process or succession possibility across financial instruments makes it challenging for individuals to effect changes regarding nomination.
➘ GETTING IT RIGHT Nomination is the right given to a person of an investment product to appoint another person to receive the money in case of their demise. In the absence of nomination facility, one can submit a court order or succession certificate to claim access to the financial instrument. Individuals can nominate one or more than one person as the one(s) who will receive the money. The senior Bhasin retired as a PSU employee and was drawing a pension. He also had money in the bank under a joint ownership with their mother, and though they had named her (Neha) as the nominee, they had not updated her surname.
This seemingly small detail doesn’t allow her to access the account. That every financial instrument must have a nominee is a given provision and there have been instances when nominations are done for convenience without thinking of its future consequences. It is common for a young salaried individual to name their parents as nominee when taking life insurance. However, later in life after they are married and have children, and the need for policy proceeds may be significant for his family. But by not changing the nomination, the intended beneficiary doesn’t receive any benefits.
However, a will supersedes all such nominations, which means for a smooth
A NOMINEE IS JUST THE RECEIVER OF THE MONEY; HE HAS TO EVENTUALLY HAND OVER THE MONIES TO THE LEGAL HEIRS AND CANNOT USE THE MONEY UNLESS HE IS THE LEGAL HEIR
transition of financial assets, a will is preferred even if one has nominees mentioned. Then there are certain financial instruments in which nomination works clearly, especially in the case of life insurance, where the concept of beneficial nominee comes into play (see Beneficial Nominee).
As mentioned earlier, the process of nomination itself isn’t as straightforward as it appears to be because different financial instruments have different ways to register and treat nomination. Take the basic bank account where a nomination is mandatory and straightforward, so that the nominee receives the balance from the bank account on the death of the account holder. However, when it comes to a joint account, there can only be one nominee and this nominee can have access to the bank account balance only in case of death of all the joint account holders. So, in a joint account of a couple, where a child is made the nominee, the demise of one parent doesn’t mean that the account proceeds automatically go to the nominee.
In mutual fund investments, although a nomination facility exists, there is a limit to the number of nominees one can appoint in one mutual fund investment folio. There is a provision to specify the percentage of holdings that can go to each nominee in case of the investor’s demise. However, if a mutual fund investment is held by more than a single investor, all of them would be required to make a person the nominee for the investment. “My parents had each other as nominees in some investments, which is making it difficult to access their investments in the absence of a will,” explains Bhasin.
For the surviving family members, it is a big challenge to not just cope with the loss of a dear one; often the long road to accessing finances meant for them becomes difficult to access or comes in late. At a time when several financial transactions and dealings are electronic and digitally stored, some of the nomination issues can be resolved by updating nomination at a single place and it being reflected across all other linked products. But not all financial institutions or products are available digitally and not everyone accesses their financial savings and investments digitally.
Things get further complicated if there are immovable assets in different parts of the country. It is estimated that, on an average, it takes a few months to obtain a probate in uncontested wills, probate being the copy of a will certified under the seal of a court of competent jurisdiction with a grant of administration of the estate of the testator (on whose name the will is made). A lot of time and money is lost, which can impact the successors or beneficiaries of the asset owner.
If you include the elderly who are unable to decide on their own, with reduced decision-making abilities or difficulty to write and communicate; the complications are further compounded. While a will is a good legal document to facilitate easy transfer of assets from owner to beneficiaries, it could also face challenges. So, it is in your interest to have a will in place when you are of sound mind and able to take a clear decision on how you wish your assets to be distributed after your demise.
“I wish my parents had shared their financial holdings to help us know what they owned and how we could use it after them,” rues Bhasin, as she tries to manage the painful and difficult process of finding about her parents' assets. If you do not wish your loved ones to face the challenges faced by Bhasin, check your financial assets and how you wish they are passed on to your dependants and take necessary action.
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A WILL SUPERSEDES NOMINATIONS, MAKING IT A PREFERRED WAY TO TRANSFER WEALTH RATHER THAN LEAVE IT TO CHANCE
Suppose you are given the choice to take Rs 10,000 today or Rs 11,000 after a year? Most people would take Rs 10,000 right away because who knows if there will be money to be taken a year later. Now a financially savvy individual is likely to do the basic math that for Rs 10,000 of today to become Rs 11,000 a year later means that the money has to grow at 10 per cent for a year. Based on this new information, one may opt for the second option if 10 per cent gain is a good deal, and if not, stick to taking Rs 10,000 today and use it the way they feel best.
To understand time value of money (TVM), it is important to know the concept of inflation, which silently erodes the value of your money. Basically, inflation is the economic indicator that describes the tendency of prices to rise, which means that the worth of the rupee today diminishes in value over time. While theoretically, there is a possibility of the value of money going up during a period of deflation, that is something one rarely experiences. So, the chances are that the future value of money is likely to be lower than what it is worth today, unless it beats inflation.
The other factor on which TVM rides is the opportunity cost—a bird in hand is worth two in the bush. The money you have in hand today could be used to invest in other avenues to achieve a higher return, which is the opportunity cost of the money. When making financial decisions, it is important to factor in concepts around TVM so that you know your money's worth. Of course, for opportunity cost to work in your favour, you need to put the money to work such that it earns you a higher return than inflation to hold on to the value of money at a later date.
IN PRACTICE
TVM comes in handy when making financial decisions—taking a loan, loan repayments, annuity products that pay out money spanning several years or regular investments. For instance, in case of investment options, the ones that return your money soon are better than the ones that defer payments till maturity many years in the future. Assume you have the option to invest Rs 10,000 in two investment schemes—one in which you get Rs 3,000 a year for the first four years and the other in which you receive Rs 12,000 at the end of the fourth year.
You receive Rs 12,000, which is Rs 2,000 more, in both the investment schemes, yet the first offers you a better return as it hands over the money to you earlier. TVM allows you to make the decision to opt for the first scheme in this case. An example of such a product is a pension scheme that pays you a fixed sum in regular periodicity versus another scheme where you get the payment in lumpsum. When you know the growth rate, number of years the money is being invested for and the current value of the money or periodic investments, you can find out the future value. The reverse is also possible.
There are online calculators that can help you find out TVM outcomes to make informed investment, spending as well as savings decisions. Use these tools to have the upper hand when it comes to your money and get the most out of it.
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CHANCES ARE THAT THE FUTURE VALUE OF MONEY IS LIKELY TO BE LOWER THAN WHAT IT IS WORTH TODAY, UNLESS IT BEATS INFLATION