Is There a Difference between a Legal Heir and a Nominee?

Vijay Kuppa
Vijay Kuppa
vijay@orowealth.com

What is a Nominee?

Is Legal heir and Nominee the same? Will your Nominee get the money on your death? Did you think that your nominee is the person, who will get all the money legally from your Life Insurance Policy and Mutual funds’ investments?

Not many of us are actually aware of this legal twist. We assume a lot of things which sounds like they are obvious, but are not true from the legal point of view.

Today, we all concentrate on nominations in financial products.

For whom are we earning? For whom are we investing? Whom do we want to leave all our wealth to, in case something happens to us? It might be your children, your spouse, parents, siblings etc., or just a subset of these.
You also might want to exclude some people from your list of beneficiaries!

So you think you will nominate person X in your Insurance policy, and when you are dead and gone, all the money goes to person X and he/she becomes the sole owner? It does not work that way.

Let us see how it actually works:

As per law, a nominee is a trustee, not the owner of the assets. In other words, a nominee is only a caretaker of your assets.

The nominee will only hold your money/asset as a trustee and will be legally bound to transfer it to the legal heirs.
For most investments, a legal heir is entitled to the deceased’s assets.

For instance, Section 39 of the Insurance Act says the appointed nominee will be paid, though he may not be the legal heir.

The nominee, in turn, is supposed to hold the proceeds in trust and the legal heir can claim the money. A legal heir will be the one who is mentioned in the will. However, if a will is not available or written, then the legal heirs of the assets are decided according to the succession laws, where the structure is predefined on who gets how much.

For example, if a man during his lifetime executes a will and in the will, he mentions his wife and children as legal heirs, then after his death, his wife and children are the legal owners of his assets. It is essential that one needs to execute a will. It is the ultimate source of truth and replaces the succession law. The nominee can also be one of the legal heirs.

Important Things to Remember while Appointing a Nominee:

• Mention the Full Name, Address, age, relationship to yourself of the nominee.
• Do not write the nomination in favor of wife and children as a class.
• Give their specific names and particulars existing at that moment.
• If the nominee is a minor, appoint a person who is a major as an appointee giving his full name, age, address and relationship to the nominee.

Why Do People Appoint Nominee?

So you might be wondering if the nominee is not the sole owner, why does such a concept exist in the first place?
It is pretty simple. When you die, you want to make sure that the Insurance company, Mutual fund or your Shares should not stay with the companies and go to someone you trust, and who can further help, in process of passing it to your legal heirs.

Otherwise, if a person dies and has not nominated anyone, your legal heirs will have to go through the process of producing all kind of certificates like death certificates, proof of relation etc. The whole process is highly time to consume! (The process needs to be repeated for each legal entity – The insurance company, the mutual funds, for the shares, for the real estate…)

So, to simplify, if a nominee exists, such hassles are avoided, since the company is bound to transfer all your money or assets to the nominee.

Example of Nomination:

Akash was 58 years old who died recently in an accident. As his children were settled, he wanted to make sure that his wife is the sole owner of all the monetary assets. This includes his insurance policy and mutual funds. So during his lifetime, he nominated his wife as a nominee in his term insurance policy and mutual funds investments. However, after Akash’s death, things did not turn up the way he wanted. The reason being Akash did not leave a will. Though his wife was the nominee in all his movable assets, as per the law, his wife, along with children, were the legal heirs and all of them had the equal right to Ajay’s assets.

One simple step that could have saved the situation was that Ajay should have made a will that clearly stated that only his wife was entitled to get all the money and not his children.

Nomination in Life Insurance:

A policyholder can appoint multiple nominees and can also specify their shares in the policy proceeds. Nomination in life insurance has one limitation, as insurance policies are bought to secure your financial dependents, your first choice of the nominee has to be your family members. In case you want to nominate a non-family member like a friend or third party, you will have to show/PROVE the insurance company that there is some insurable interest for the person. This happens because of a Clause called PRINCIPAL OF INSURABLE INTEREST in insurance. Note that provision of nomination in life insurance is related to Section 39 of the Insurance Act.

Note that according to the LIC website –

A nomination is a right conferred on the holder of a Policy of Life Assurance on his own life to appoint a person/s to receive policy money in the event of a claim by the assured’s death. The nominee does not get any other benefit except to receive the policy money on the death of the Life Assured.

A nomination may be changed or canceled by the life assured whenever he likes without the consent of the Nominee.

Make sure, you have a nominee for your policy for easy settlement of the claim, if you do not have any nominee mentioned in the policy, it can turn out to be a disaster for your dependents to get a claim.

Nomination in Mutual Funds

In the case of mutual funds, you can nominate up to three people, who can be registered at the time of purchasing the units. While filling in the application form, there is a provision to fill in the nomination details.

Even a minor can be a nominee, provided the guardian is specified in the nomination form. You can also change nomination later by filling up a form, which is available on the mutual fund company website.

Nomination in mutual funds is at folio level and all units in the folio will be transferred to the nominee(s). If an investor makes a further investment in the same folio, the nomination is applicable to the new units also.
A non-resident Indian can be a nominee, subject to the exchange control regulations in force from time to time.

Nomination in Shares:

In the case of stocks, it does not work the usual way, if a will does not exist.

In his verdict, Justice Roshan Dalvi struck down a petition filed by Harsha Nitin Kokate, who was seeking permission to sell some shares held by her late husband.

The Court noted that as she was not the nominee, she had no ownership rights over the shares. Ms. Kokate’s lawyer had argued that as she was the heir of her husband who had died intestate (without a will), she should have ownership rights of the shares, and be able to do anything with them as she wished.

In this case, Ms. Kokate’s husband had nominated his nephew in favor of the shares. Justice Dalvi, however, noted that under the provisions of the Companies Act and the Depositories Act, which govern the transfer of shares, the role of a nominee was different.

A reading of Section 109(A) of the Companies Act and 9.11 of the Depositories Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares, which includes the ownership rights thereunder in the nominee upon nomination validly made as per the procedure prescribed, as has been done in this case.

It means that if you have not written a will, anyone who has been nominated by you for your shares will be the ultimate owner of those stocks. The succession laws on inheritance will not be applicable here but, in case, you have made a will, that will be the source of truth.

Nomination in PPF:

Let us highlight the importance of a nominee once again. If you have put in Rs 10 lakh in your public provident fund (PPF) account and you have not nominated anyone then your legal heirs will get a maximum of Rs 1 lakh only!

Yes, now you understand why it is so important to have a nominee!

You can nominate one or more persons as a nominee in PPF. Form F can be used to change or cancel a nomination for PPF. Also, note that you cannot nominate anyone if you open an account for a minor.

Nomination in Saving/Current/FD/RD Account in Banks:

FD’s also come with nomination facility. While opening a new account, there is a column for nomination in the same form and you should fill it. You can nominate two persons with a first and second option. Note that in case you have not done any nomination till now, you should request Form No DA-1 from your Bank which is used to assign a nominee in the future. (Examples of ICICI Bank, HDFC Bank, Canara Bank) .

In the same way, to change/cancel the nomination, you need to fill up Form no DA-2.

About Corporate Fixed Deposits:

According to the famous case, A Bench of Justices Aftab Alam and R M Lodha in their verdict said that the money lying deposited in the account of the original depositor should be distributed among the claimants in accordance with the Succession Act of the respective community and the nominee cannot claim any absolute right over it.
Section 45ZA(2)(Banking Regulation Act) merely put the nominee in the shoes of the depositor after his death and clothes him with the exclusive right to receive the money lying in the account. It gives him all the rights of the depositors so far as the depositor’s account is concerned. But, it by no stretch of imagination make the nominee the owner of the money lying in the account, the Bench observed.

Conclusion

Just investing knowledge, is not enough to have a great financial life. You also need to be well versed with basic legal aspects and make sure you carry out all due arrangement. You should be well aware of the difference between a nominee and a legal heir and make arrangements accordingly.

Vijay Kuppa
Vijay Kuppa
vijay@orowealth.com

Vijay co-founded ORO Wealth after 6 years of investment experience in equity and fixed-income markets and was managing a $1.5 bn investment portfolio focused on Indian markets in his previous role at L&T’s Treasury. He has an MBA from IIM Ahmedabad and a degree in Chemical Engineering from IIT Bombay.

5 Comments
  • Avatar
    Pritam
    Posted at 15:58h, 04 May Reply

    I am married and have a son. 1) Can I make a will that my all movable and immovable property will be transferred to my married sister in case of my death? 2) can I nominate my sister as nominee for my POSTAL LIFE INSURANCE or life insurance or Term Insurance? 3) and on the basis of my “will” she will get sum assured of all insurance?

    • Gaurav Chakraborty
      Gaurav Chakraborty
      Posted at 07:09h, 10 May Reply

      Hello Pritam, It would be great if we can have a call and discuss these points. Please reach us on +919167451886.

  • Avatar
    Krishnaraj Vijayakumar
    Posted at 13:45h, 28 May Reply

    I guess nominee can be any person trusted by the depositor irrespective of blood related or not.

  • Avatar
    Nikhil Mehta
    Posted at 03:30h, 28 September Reply

    Regarding nominee in life insurance there is an ammeddement in act in 2015 which says if the nominees are parents, spouse or children’s then, they become beneficial nominee and are absolute owner of the money recd,
    The term beneficial nominee has been incorporated in this amended act. Kindly refer.

  • Avatar
    kuldip singh
    Posted at 14:38h, 15 October Reply

    if nominee is wife and she will get all money. then she will given to all money to legal heirs??

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