Nominee vs.Legal Heir: Who Trumps The Inheritance Game

Nominee receives the assets only in capacity of a trustee for the legal heirs.

Many people believe that naming a nominee for their Bank Accounts, Policies and Mutual Fund Investments will ensure that the nominee inherits the proceeds after the demise of the account/policy holder. However, this common misconception has fuelled countless disputes, Court cases and family conflicts. In reality, a nominee is merely a trustee, a caretaker who collects the assets for the benefit of the legal heirs or beneficiaries of the deceased.

Role of Nominee

Appointing a nominee is important and often mandatory, because it allows institutions like banks, insurance companies or mutual fund houses to quickly transfer the funds to the nominee after the death of the account/policy holder, without needing a succession certificate or other legal formalities. But this convenience does not make the nominee the owner. The nominee collects and holds the assets/proceeds in trust for the rightful beneficiaries named in the Will of the deceased and in the absence of a Will, for the legal heirs under the succession laws applicable to the deceased.

Illustrative Example 

Suppose X, a Hindu male, passes away, leaving behind:

M (mother)

F (father)

W (wife)

S (son) and D (daughter)

F is the nominee in X’s bank account. Let us consider three possible scenarios:

Scenario 1: X leaves a Will and bequeaths the funds to M

The bank will release the funds to F as the nominee. However, F holds the funds as a trustee, and the ownership rights lie with M, as specified in the will.

Scenario 2: X leaves a Will and bequeaths the funds to F

In this case, F is both the nominee and the beneficiary. He holds the funds as trustee and also has ownership rights . Therefore, he is entitled to retain the funds.

Scenario 3: X dies intestate (without a Will)

Even in the absence of a Will, the nominee cannot be treated equivalent to an heir or legatee. Under the Hindu Succession Act, the legal heirs of X are are M, W, S, and D and not F. The bank will transfer the funds to F as the nominee. However, F will hold the funds as a trustee and distribute it equally to M, W, S, and D.

Exception: Beneficial Nominee in Life Insurance

Insurance Act were amended in 2015 and a distinction between "collector nominee" and "beneficial nominee" was introduced by way of Section Section 39(7) and (8) specifically for Life Insurance Policies.

In view of the amendment, only if the "Life Insurance Policy" holder nominates an immediate family member, like spouse, parents or child, the nominee is beneficially entitled to the policy proceeds. In such cases, the nominee not only collects but also owns and benefits from the policy proceeds to the exclusion of other legal heirs, unless there is a Will which specifies otherwise.

Illustratively, if X nominated F as a nominee in his life insurance policy, then F would collect and own the policy proceeds to the exclusion of all the legal heirs, provided there is no Will to the contrary. However, if X nominated a non family member as a nominee in his Life Insurance Policy, the said nominee will continue to be a trustee for the legal heirs/beneficiaries and have no ownership right to the policy proceeds. The beneficial nominee concept applies only of an immediate family member is named as nominees in a Life Insurance Policy and not to Bank Accounts, term deposits, mutual funds or other policies.

Judicial Uncertainty

Despite the categorical amendments, there have been conflicting judgments on the interpretation of the rights and entitlements of the beneficial nominee in Life Insurance Policies. Some High Courts have held that in view of the 2015 amendments, the "beneficial nominee" is entitled to collect and own the policy proceeds to the exclusion of other legal heirs, while other High Courts have maintained that nominee acts only as a trustee and the succession laws prevail as amendments in Insurance Act cannot create a new mode of succession. So far there has been no definitive ruling on the issue by the Supreme Court interpreting the amendment.

Key Consideration

In view of the above, the most secure approach to designate beneficiaries for your assets like, Bank Accounts, Policies, mutual funds, is to execute a clear and legally valid Will specifying the intended beneficiaries. Mere nominations cannot guarantee that the assets will benefit the nominee.

In the absence of a Will, all the legal heirs of the deceased retain the right to claim their share from the nominee.

Disclaimer

This blog is for informational purposes only and does not constitute legal advice. Please consult a qualified lawyer in your jurisdiction for advice regarding your specific legal issue.