Synopsis–Regrettably, the words ‘nominee’ and ‘heir’ are commonly understood to be synonymous. However, from a legal standpoint the two concepts are entirely different. Considering nominees to have similar rights as heirs can sometimes have disastrous consequences.
Try and remember the first time you opened a fixed deposit with your bank. Among the many details that your banker would have requested you for, you would have also been asked to give the details of a ‘nominee’. Many people opening bank accounts or starting to invest don’t really understand the concept of nomination. They often consider it to be a simple arrangement wherein post their death, the nominee receives the property in respect of which he/she had been nominated. But, this is not entirely the case.
Regrettably, the words ‘nominee’ and ‘heir’ are commonly understood to be synonymous. However, from a legal standpoint the two concepts are entirely different. To better understand this concept let us consider the following example.
‘A’ has two sons – ‘S1’ and ‘S2’. While opening his first fixed deposit of Rs 50,000, A names S1 as his nominee. Later on, at the time of opening his second fixed deposit of Rs 30,000, A nominates S2 as his nominee. The simple question which arises from the given factual scenario is, upon A’s death will S1 and S2 be entitled to receive the sums for which they were nominated?
The answer to this question is both yes and no. While it is true that S1 and S2 would receive Rs 50,000 and Rs 30,000 from the bank respectively, they are not entitled to enjoy the benefits of the said amounts. In the capacity of a nominee, they are only to receive and hold the said amounts in trust till the time these amounts are lawfully divided and transferred to A’s heirs or the beneficiaries under A’s Will. The ultimate distribution of the said amounts would happen as per A’s Will or as per the personal law applicable i.e. by means of intestate succession when A has not made a Will. To further clarify this, if we assume that A is a Hindu who died without leaving behind a Will and no other heir (as defined under the Hindu Succession Act 1956) apart from S1 and S2 then though S1 and S2 were to receive Rs 50,000 and Rs 30,000 respectively as nominees, after succession, they would be the rightful owners of Rs 40,000 each.
This distinction is something people must keep in mind while appointing their nominees for various assets/accounts. Considering nominees to have similar rights as heirs can sometimes have disastrous consequences. Consider a situation where S1 appoints A as a nominee to his insurance policy with the intent that the proceeds from the said policy would adequately provide for A in case S1 was to pre-decease him. Unfortunately such a nomination would be of no benefit to A because the proceeds from S1’s policy, in the absence of any Will by S1, would finally be enjoyed by S1’s legal heirs i.e. his son, daughter, widow, mother etc. Therefore, though S1 would be under the impression that he had adequately provided for his father, this would not be the case because as per Hindu Succession Act 1956, the father is eligible for succession only if there exists no other heir as mentioned above.
In essence, a nominee does not have the absolute title to property/asset in respect of which the nomination was made and nomination can never override the law of succession. The underlying intent behind appointing a nominee is to simply protect the subject matter of nomination till the time legal heirs/representatives of the deceased take appropriate steps for acquiring the deceased’s estate.
Therefore, whenever one intends a specific asset to be inherited by a particular person, in addition to appointing that person as nominee, it is advisable to execute a Will specifically bequeathing that asset to the nominee. Even in cases where the nominee would qualify as a legal heir (under the applicable personal law), it is better to execute a Will specifically bequeathing that asset to the nominee. This is because in cases of intestate succession, there often exists more than one legal heir. In such a situation, the properties of the deceased are divided between all the heirs which would mean that even though the nominee is an heir, he may still have to share that particular asset with other legal heirs.
Nominations are not limited to bank deposits or insurance policies and can be made for various purposes/properties under different legislative enactments. It is therefore paramount that the concerned parties consult a licensed legal professional for proper guidance.
The aforementioned does not constitute legal advice.
(Dr. Neelam Rani is an Associate Professor (Finance) at the Indian Institute of Management, Shillong and Samarth Saxena is a practicing advocate at Bombay High Court. Views expressed are personal.)
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