How to access assets when breadwinneris incapacitated
We work hard to ensure that our family lives in comfort in the present and in the future.We earn money and invest it. But what if we fail to ensure its smooth transition to our legalheirs? Wealth transmission post-death is a challenging process. What does not gain muchattention is accessing a breadwinner’s investments while she is alive but incapacitated,that is, physically or mentally unfit to manage one’s financial affairs.
Niranjan Vemulkar, co-founder and chief executive officer of Yellow, a digital will-makingplatform, shares an example. “We know of a case where the breadwinner went into acoma. His assets were frozen and a good amount of money was needed to pay thehospital bill. The family had to move court to release some of these assets. But the courtcannot allow transferring or withdrawing all assets in one go. They open the tap in acontrolled manner only for specific purposes,” Vemulkar says. To be sure, anincapacitated person may get better in the future, and a court cannot allow transferringassets of a living person.
While there are laws like the Rights of Persons with Disabilities Act, 2016 and the MentalHealthcare Act, 2017 that offer guardianship provisions to manage an incapacitatedperson’s property, obtaining guardianship can be complex. There is no standardizedprocedure. “The absence of a unified law addressing access to an incapacitated person’saccounts leads to varied procedures based on the type of incapacity, often complicatingthe process and opening avenues for exploitation by dishonest agents,” says SumitAgrawal, managing partner at Regstreet Law Advisors and a former Securities andExchange Board of India (Sebi) officer.
A simple solution is having a joint holding with a reliable family member with an ‘either orsurvivor’ clause. Married couples commonly do it, but this cannot be an option foreveryone. Another option is creating a power of attorney in favour of someone you trust.“It shouldn’t be a blanket PoA. It should come into effect upon a condition, such as amedical or a financial reason. Everyone—be it young or old—should create a PoA alongwith nomination and get it registered,” says Mohini Mahadevia, founder of SOLUFIN, aninvestment and estate planning firm. Notably, the registration is mandatory only for powerof attorney involving real estate. One can create it by reaching out to a legal practitionersuch as a lawyer/estate planner or a consultant. (See graphic for details)
If you have multiple movable and non-movable properties, you can consider creating atrust for better estate planning. In this case, the trust will be authorized to act on yourbehalf if something happens to you within specified conditions.
One may wonder about the role of a nominee in case someone gets incapacitated. In theexisting scenario, a nominee has no role to play in it unless she has the PoA in her favour.Without a court guardianship certificate, nobody can access a living person’s assets.However, Sebi on 2 February released a consultation paper on nomination in which it hasproposed to give more powers to nominees of incapacitated people, suggesting that theycan act on behalf of the latter. The suggestions are in the context of shares, bonds, unitsof mutual funds, real estate investment trusts (REITs), alternative investment funds (AIFs)and other securities held in dematerialized form.
Sebi has suggested that in case of a single nominee of an incapacitated investor, she willbe authorized to conduct transactions. In case of multiple nominees, the investor canspecify which nominee will be authorized to conduct transactions.
If the incapacitated investor has the ‘capacity to contract’, then power of attorney or amandate letter or authorization letter may be used. If the incapacitated person lacks the‘capacity to contract’, a guardianship certificate from a court would be required. In bothcases, a doctor’s certificate, in-person verification by the relevant depository or registrar,the thumb impression of the investor instead of her signature, and online login credentialswill be needed.
How is this different from the existing scenario? Currently, court guardianship is crucial fornominees or legal heirs to transact on behalf of the incapacitated investor. As per Sebi’sproposals, if the owner has the capacity to contract, one does not have to get courtguardianship. In the existing scenario, even with court guardianship, one can only partiallyredeem investments. If the proposals are accepted, the nominee will be able to conducttransactions on behalf of the investor. It is to be noted, on selling assets, the proceeds willgo to the owner’s linked bank account. The nominee will have to follow bankingregulations to withdraw funds from the bank account.
Are Sebi’s proposals in the right direction?
The intent is right, but there could be consequences. “If a nominee sells the securities inthe demat account and redeems the mutual fund investments, it means it has assumedthe stature of the deemed investor even though the investor is alive, thoughincapacitated,” says Rajat Dutta, founder and initiator, Inheritance Needs Services.
He cautions that this may lead to caretakers, caregivers and servants having a field daywhile taking care of the elderly while their children are overseas and they are alone. “Sucha regulation would catalyse fraud and may tantamount to a bac-door entry to successionthrough the nomination route,” he adds.
Vikash Jain of Share Samadhan expresses concerns over the requirement of power ofattorney when the incapacitated person has the capacity to contract. “Sebi hasn’tspecified whether it is special PoA or regular. It seems to be the latter. It would be best ifSebi only permits registered PoA the way it is mandatory for immovable properties. Ageneral PoA which is notarized or merely attested by an authority or authorization letter ormandate letter may create unnecessary disputes in courts among nominees or betweenother legal heirs and nominees”.
That said, experts advise that the Sebi should limit the scope of ‘conducting transactions’on behalf of an incapacitated person. “The nominee should not get a free run, otherwisethe interest of the investor and their legal heirs or beneficiaries will get compromised,”says Dutta.
A better approach would be standardizing the procedure across financial entities for alltypes of incapacity. “A uniform process for nominations and claims in cases of incapacityis crucial. Sebi should ensure that financial institutions are equipped with well-trained staffand effective procedures to authenticate and process such requests efficiently, balancingsecurity with simplicity.” says Agrawal.
Most importantly, simplifying the process of obtaining court guardianship needs attention.
“While the Sebi consultation intends to simplify account operation in cases of incapacity, itshould also address the complexity of obtaining court guardianship certificates,” he says.
Since court guardianship is a time-consuming process and involves physical presence ofa senior official from the financial institution concerned, Vemulkar recommends it bereplaced with two medical certificates. “One by the treating doctor and another by anindependent doctor. The role of a financial institution should be limited to verifying theidentity of the nominee,” he says.
The regulator has sought public comments on its proposals before 8 March.
Consider a joint ownership, conditional power of attorney or a trust to make things easierin case you suddenly go into a vegetative state.
For foolproof estate planning, combine it with a will so that your near and dear ones canclaim the money expeditiously, with minimal paperwork, after you are gone.