In India, it is common practice to assign a Nominee to one’s bank accounts, company shares, mutual funds, etc. Most people assume that in doing so, their accounts are protected and will automatically go to the entrusted Nominee should anything happen to them. But the truth is, this isn’t entirely accurate. Without a proper understanding, this common misconception can have serious financial implications for your loved ones.

Who Is A Nominee?

As per Indian law, a Nominee is only a trustee of an asset. Therefore, naming someone as the Nominee means that this person will only be able to act as a representative or custodian of that particular asset until the Beneficiary/ies is/are established as per the Will or, in the absence of a Will, the legal heir(s) as per the the applicable succession laws (personal laws). In short, a Nominee does not automatically become the legal owner of the asset.

The Difference Between A Nominee & A Beneficiary In A Will

Fact: A Beneficiary named in a Will supersedes the Nominee of an asset. The problem arises when there is no Will to go by.  In this case, the applicable succession laws come into effect, leaving the Nominee vulnerable to being displaced by someone whom the testator may not have intended to give the asset.

A Nominee Is No Substitute For A Will

Having a Nominee can be extremely beneficial in easing the time and effort required to pass on the asset to the legal heir(s).  That said, it does not exempt the need to make a Will and express your specific wishes in this regard, as illustrated in the example below:

Smriti, a successful young professional living in Bengaluru, named her mother as the Nominee on her bank account. She subsequently got married to a well-to-do businessman, with whom her relationship had soured, but they never got divorced. Unfortunately, Smriti passed away suddenly in a car accident. Even though her mother was intended to be the Beneficiary and named as the Nominee on Smriti’s bank account, without a Will, per the Hindu succession law, Smriti’s estranged husband was named the legal heir to the account.

It is commonplace to find many such instances, where a simple lack of understanding is the cause of unforeseen consequences that unfortunately become a burden on the family of the deceased. In this case, the entire situation could have been avoided if Smriti had created a Will and aligned her wishes with the nomination on her bank account.

Will vs Nomination

There are some instances in which the Nominee does in fact become the legal owner. To understand this better, we have summarised the role of a nomination vs a Will for the following commonly held assets:

Table

Asset ClassNomineeBeneficiary in a WillBank accounts and depositsTrusteeLegal ownerMutual fundsTrusteeLegal ownerCompany sharesTrusteeLegal ownerProperty in cooperative societyTrusteeLegal ownerPF, pension and gratuityLegal owner. Not permitted to appoint non-family membersLegal owner, if there is no valid nominationLife insuranceLegal owner. Not permitted to appoint non-family membersLegal owner, if there is no valid nomination

Considerations For Appointing A Nominee

• A Nominee must be appointed at the time of opening an account or making any investment.
• Include the complete details of the Nominee as per KYC, accompanied by KYC documents, to avoid any confusion in case there is a claimant with a similar name.
• A Nominee must be an individual.
• A minor can be nominated. However, the name and address of the guardian of the minor Nominee(s) should also be provided.
• The nomination can be canceled, or changed, at any time. You don’t even have to inform the original Nominee.
• The nomination forms must be signed by all joint holders, irrespective of the mode of operation of the investment/deposits.

The Bottom Line

If you take away anything from this article, it should be the understanding that it is not simply enough to name a Nominee on your assets. You must also create a Will and confirm that the Beneficiary for the same asset matches the nomination. Doing this will ensure that your assets will be inherited by the person you intended, not via succession laws that may not align with your wishes.

Create a Yellow Will and align your wishes with the Nominees on all your accounts today.

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