BackHow to bequeath MFs to children settled abroad
Having a nominee or a joint account holder, and a proper Will make succession planning a simple task
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Most of us get so busy in our daily lives that we take certain things for granted. For instance, succession planning. Most of us don’t even remember to put down a nominee’s name in our mutual fund (MF) folios. In the event of our death, when it’s time for our children to get our MF units transferred to their names, all hell breaks lose. They can’t find the investments, or, if they do, the second holder or a nominee, or both, are missing. And what if there’s no Will? Oh no!
The ill-effects of bad succession planning amplify if you are living in India while your children are settled abroad. In such a case, when an investor passes away, the children have to come to India, go through the investments, get the investments transferred to their names (and in some cases, withdraw the money if they are American or Canadian citizens), and then repatriate the money, if needed.
Here’s how you can plan your MF investments’ succession and ensure that your children get their inheritance, smoothly.
The best way to ensure who gets what after your death is to make a Will. A Will details a list of your investments, properties and belongings and enables you to assign heirs to each of your assets. “This is something that people should definitely do as it removes 90% of the inconveniences in others taking control of your assets (once you are no more)," said Raghvendra Nath, managing director and founder, Ladderup Wealth Management.
You don’t need to list all the individual instruments in the Will because you may be buying and selling your, say, MF schemes. But you could write down your asset classes and choose how you distribute them. Make sure you appoint an executor to your Will if you have more than one heir, and also if your children are living abroad. The executor would work with your heirs and ensure that assets are divided according to the Will, do the paperwork such as filing a probate, submitting documents to the court and fund houses, and ensuring a smooth transmission. Anyone could be your executor—a family member, a close friend, a chartered accountant, or a lawyer.
If you have a property in or your Will is registered in Mumbai, Kolkata or Chennai, you would also require a probate. This is the process of proving and registering the last Will. “This is a document that says that your Will is legal and genuine. Also, it’s better to register your Will in a sub-registrar’s office. You and two witness are required to be present in front of the officer who will then register your Will," added Nath.
In addition to a Will, there are two other basic ways to make sure that your MF units are passed on to your heirs. You could either name a joint holder (preferably in “anyone or survivor" mode) or a nominee.
Nomination is done at the folio level. So, if you have multiple schemes within the same fund house and with the investor holding pattern (first holder/second holder combination), you could—and should—bunch all such investments in the same folio. It is then possible to have the same nomination, bank account mandates and emails to receive communication.
Fund houses allow you to nominate more than one person. So, you could also set how much percentage each of your nominees would get. “These days, fund houses make it compulsory for unitholders to nominate at the time of investment. If investors do not want to do this, they have to explicitly say ‘no’," said the head of client servicing department of a fund house. This fund house has currently recognized “nomination" as the “service activity of the month" and has been sending reminders to all its investors, and especially to those who had invested many years back.
Prateek Pant, executive director, products and services, RBS Private Banking India, said joint holding is better than nominee. “A nominee is a trustee, while joint holding establishes ownership. Joint holding is actually the simplest way that a transmission (transfer of MF units in case of the first holder’s death) can happen," said Pant.
But what happens if you want to leave behind your MF wealth to multiple people? This brings us back to the importance of having a Will. “Since the nature of a nominee in MF investments is that of a trustee, an investor could mention all the heirs in a Will and nominate just one person in the MF application. When the Will gets executed, the nominee (with the executor) would be entitled to divide the money among all rightful heirs," said Gaurav Mashruwala, a Mumbai-based financial planner.
Keep your MF nomination and your Will in sync to avoid future conflicts. If you want to bequeath more to one child than to the other, state the reason in your Will.
If your children are settled in the US and Canada, fund houses won’t allow them to be joint account holders, due to a new rule called Foreign Account Tax Compliance Act (FATCA), which was passed in the US in 2014. To cut a long story short, US residents—citizens, green card holders or anyone who spends a significant number of days in the US every year—are required to disclose all their worldwide income. But since many US investors do not do so, the US government enacted FATCA so that the financial institutions accepting investments from US residents are also made liable for disclosure. Since India is one of the 50 countries that has signed an agreement with the US in this regard, all banks and financial institutions (including fund houses) come under FATCA.
So, if an MF accepts investments from a US resident, it has to ask for all relevant details in addition to the MF application form. The information is then sent to the US tax authorities. Most MFs in India, though, have chosen to comply with FATCA by not accepting application forms where a US resident aims to be an account holder, even jointly.
Assuming that your children are your legal heirs, that you want to pass on your wealth to them, and that they are settled abroad, here’s what you could do (much of this applies even if your children stay in India).
Keep a list of investments handy: “Information is the key," said Dheeraj Vasisth, director, WillSecure.in, an online Will creation platform. “Having all information in one place is one of the biggest tools to have a smooth transfer of assets," he said.
Make a Will: Ensure that the second holders in your MF holdings and nominees are in sync with the succession plan that you lay out in your Will.
Children living in the US or Canada: You could appoint them as nominees. If they are the legal heirs, in the event of your death, the MF will temporarily make them an account holder in the MF, pass the units to them, make them redeem the units, and close the account, to be FATCA-compliant.
Decide your heirs: Have joint account holders or nominations, or both, in your investments. Your children or successors would have a difficult time if you neither make a Will nor appoint nominees in your investments. They will have to figure out your investments, which may involve sending your Permanent Account Number to all MFs (about 45) where you could have possibly invested to ascertain if there are any folios in your name. Once that’s done, they have to get a succession certificate from court after establishing that they are the legal heirs.
You may or may not share your investment list or your succession plan with your loved ones. “That’s a personal choice. You may want to bequeath your investments to your friend, neighbour or caretaker, who may not be your child. Revealing your plans beforehand might lead to complications," said the client service expert quoted above. A Will and good record-keeping is the way around that.
Appoint an executor to the Will: “If the Will and succession plan is clear, it’s easy for the executor. But if there are conflicts with what’s written in the Will and the actual assets to be divided, the executor’s role becomes the key," said Vasisth.
MF investments often form a large part of an investor’s assets. Therefore, it is important that a proper succession path is marked out for these.
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