Nominee Vs Legal Heir Vs Owner

We often confuse a nominee as the owner of our financial assets after our death. We cannot be more wrong than this.

Let us understand the difference between a nominee, owner, and a legal heir.

Meaning of 'Nominee'

The literal meaning of a nominee is someone nominated for a job, position, or award.

Why to appoint a nominee on your financial assets

Appointment of a nominee ensures that there is an interim arrangement to take care of legal and financial matters of the deceased till the time his wealth can be divided among his legal heirs.

Role of a Nominee

Nominee does not have an “absolute” ownership of the assets —the money in the bank account —for instance. They are only the custodians of this property till the time a legal heir claims it. Legally put, a nominee does not get an interest, title or ownership in assets of the nominators.

After the death of a person, all their assets—-including the fund in his various bank accounts, PF account, PPF account, FDs, RDs, etc.— always go to their legal heirs. This division is made according to the will. In case they have not left a will, laws of succession will apply, according to their religious faith. In case the person is a Hindu, for instance, the Indian Succession Act, 1925, will come into play.

In that sense, the role of the nominee is of an intermediary. The nominee basically receives and distributes the funds on behalf of others. So, the proceeds from financial assets will first go to the nominee and NOT to the legal heir of the deceased. However, the nominee gets the money only as a trustee. In case the legal heirs of the deceased claim the money, then the bank will not hold the money to be given to the nominee. However, the nominee will only act as the trustee of the money until they are legally bound to pay the legal heirs.

Is a nominee a legal heir too?

A nominee may or may not be the legal heir of a person. Supposing a person nominates his son as the nominee in his PF account. Also suppose that the deceased has not left a will— known as dying intestate in legal parlance. In this case, the son is the nominee as well as the legal heir of the deceased. It is another matter that the list of legal heirs of a person is quite long and there might be several other Class-1 heirs with their respective legal claims.

Supposing the deceased leaves a will and leaves all his property to his wife. In this case, the son would remain just a nominee and not the legal heir. That said, a person can give away all his self-acquired property to a person of his choice. The same rule is not applicable on his ancestral property. Laws of inheritance apply in division of such property.

Liquidating Assets by Nominee

If the investor is alive, then-nominee cannot break the fixed deposit. However, in case of the death of the depositor, the nominee can withdraw the money from the investor’s account after providing identification proof.

Is nomination mandatory?

In most cases, appointing a nominee is an optional choice. However, it is in the interest of an account holder to appoint a nominee. This will ensure the transfer of assets takes place in a smooth manner with a custodian in the form of the nominee taking care of the business.

What if you don’t appoint a nominee?

Since banks won’t force you to appoint a nominee, should you still take the trouble? The answer is, definitely. Nomination is one of the several means to facilitate for a hassle-free transfer of assets post your demise. Even if you have not added a nominee in your bank account, you can do so anytime by visiting a branch or conducting the activity online. Also, you have the option to change your nominee anytime you want.

Add a Legal Heir as your Nominee

Banks insist on you add a family member as your nominee at the time of opening of bank accounts, etc. This is done primarily to avoid dispute and confusion. It is also in your own interest to nominate a person who is among your legal heirs, legal or intended.

The only challenge with a legal heir being a nominee is that as your family keeps growing, you may not be regularly updating the nominees / legal heirs. So, you may end up in a tricky situation where, say, one child is a nominee and the other is not. 

This is quite a possibility because we do not when we may die. Such a situation may not be best suited for a family after our death and can create ripples if families are not cohesive.

Nominee is Not the Legal Heir

The mere act of nomination does not provide a nominee any right in your assets. Nomination that way is no substitute for making a will. In case you want your self-acquired properties to go to a person who is not your legal heir, you would have to specify this in your will.

A Minor Nominee

Minor nominee would require a custodian. If you have made a young person the nominee in your bank account or insurance policy, their legal guardians would be decision makers till the nominee attains adulthood.

Death of a Nominee

In case the nominee dies before the legal heir of the asset, the nomination needs to be immediately updated. If one of the multiple nominees die, then that nominees share will be equally distributed among the surviving nominees.
What if the nominee dies after your death but before receiving the asset amount? In that case, neither can the nominee be changed, nor the funds be given to the nominee. The only option in that case is that the amount is paid to the legal heirs after necessary paperwork assuming that there never ever was a nominee.

Nominee Fails to pay its Role

There could also be cases where nominee receives the amount but fails to hand it over as per the will. In such cases, legal heirs have no option but to file a suit in the civil court against the nominees for recovery of their share. And we know how complex this can get, especially in India. To avoid such hassles, it is very important that the nominee is extremely trustworthy.

Updating Nominee Details

Remember to ensure this as an annual activity that you check all your bank accounts, mutual fund portfolios, stock trading accounts etc. and ensure that the nominees are not only allocated but just in case you want to change any nominees. 

However, some special events in life (some of them listed below) definitely deserve a review of the nominee status. 

- Change in Marital Status

- Birth of Children

- Death of the nominee

As families

Inform the Nominee

It is very important to inform the nominees before nominating or changing them. There should be a record of all financial assets for each nominee so that they are aware of their responsibilities in case of your untimely death.

Summary

Nominee is not a legal heir. Nominee is also not an owner of the asset. Nominee is a designated caretaker of the asset. Make sure all your financial assets have nominees. 

Regards

Manoj Arora
Official Website