When it comes to estate planning or succession planning, ensuring clarity of word and intent in the legal document is key to ensuring that your heir(s) do not face any complications when it is executed.
Today, we will discuss the difference between and nominees, especially when it comes to inheritance and how timely planning can help eliminate hurdles for your family in case of sudden death.
Who is considered as legal heir?
Under Indian law, those considered as legal heir include the spouse, and parents of the deceased. In case the deceased does not have immediate relatives, their grandchildren will be considered as the legal heir; and if there are no grandchild(ren) then the sibling(s) of the deceased as considered as legal heirs.
Notably, in the absence of a , a legal heir certificate becomes an important document to identify and establish relationship of the legal heir with the deceased.
Who is a nominee?
Nominees are usually named or designated by a bank account holder as the receiver of the account’s funds in the case of their demise. The aim is to ensure smooth settlement and transfer of assets from the bank without need for legal intervention.
Notably, however, a nominee does not have to be the legal heir and can act as the trustee for the legal heirs, i.e. in case of . The account holder usually designates a trusted person as nominee, which can include children, spouse, sibling, family member, or relative.
What is the difference between nominee and legal heir?
- While a nominee is designated to receive assets or funds upon the account holder’s death, a legal heir is entitled to the as per law or a will. Sometimes, the nominee and legal heir can be the same person.
- Nominee have limited rights and usually act as custodians for the legal heirs who have complete ownership rights over the assets.
- The role is the key difference here, as a nominee is responsible for managing and transferring , while a legal heir is the beneficiary of the assets.
- Notably, you can change or update your nominee at any time, but a legal heir once chosen cannot be revoked, according to ClearTax.
Can nominees contest inheritance of legal heirs?
“Anyone is free to contest the inheritance of legal heirs, including . However, a nominee cannot claim ownership rights due to the nomination. That being said, the legal heirs would be able to prove their right to such estate, by way of relation (for intestate succession) or will (for testamentary succession),” according to Bijal Ajinkya, Partner at Khaitan & Co.
He added that the legal heirs’ right to estate is not impacted by naming of nominee, subject to certain exceptions — such as life insurance policy.
Explaining further, Tanmay Patnaik, Partner – Private Client Practice at Trilegal that under the the Insurance Act, 1938, certain “beneficial nominees” (such as the spouse, children, or parents of the policyholder) may be treated as having beneficial entitlement to policy proceeds. He however added that judicial interpretation on whether such provisions override succession law not fully settled by the . “For insurance policy proceeds, it is recommended to nominate those individuals who are intended to be the ultimate beneficiaries, and to draft the bequest of the life insurance proceeds under the Will accordingly,” Patnaik advised.
Nikita Seth, Legal Associate at Jotwani Associates noted that a will allows individuals to deviate from statutory succession laws to choose . “If a person dies without a Will, assets are distributed based on personal laws, such as the Hindu Succession Act or Muslim Shariat laws,” she added.
What happens in case there is no will?
According to Patnaik, the legal heirs retain ultimate entitlement to assets regardless of nomination. He further added that if nominees fail or refuse to transfer the assets, the are entitled to initiate civil proceedings to recover the same. “In practice, many financial institutions now expressly communicate to nominees that the nominee’s role is limited to receipt and facilitation of transfer to the rightful heirs,” he said.
Ajinkya noted that when it comes to minor , a major (parent, sibling, etc.) will hold the asset in a trust as nominee. “If the nominee, does not transfer the assets to the rightful legal heirs, being the minor children – then the minor children, through their legal representatives will have to seek enforcement of title against the nominee,” he added.
Seth concurred that for minors, assets can be held in a fixed deposit or other secure form until they attain majority (age). She added that this is applicable across assets for:
- Bank deposits: Nominee receives money as trustee for legal heirs.
- : Nominee does not become absolute owner.
- National Savings Certificates: Legal heirs have superior rights.
- Insurance, property, shares, and funds.
What can you do to ensure inheritance for your spouse/children is smooth?
- Seth suggests that a be executed and registered that clearly defines asset-wise distribution. “A registered will clearly expresses testamentary intentions and supersedes nominations in determining ownership, though nominees may still receive assets initially as trustees,” she added.
- For minor children, it is also advisable to appoint a clear financial guardian and / or caretaker in the will. It should also specify how assets should be managed until children attain majority, Seth suggested.
- She further noted that a can be created under Indian Trusts Act, 1882 a reliable trustee (reliable person). “Align nominations with succession. The most effective protection is to ensure that nominees are also the legal heirs or beneficiaries under a will and avoid mismatch between names of intended beneficiaries vs. nominees,” she added.
- Patnaik concurred, “A well-drafted Will should clearly identify assets and specify the intended beneficiaries and proportions. Correspondingly, nominations for each asset should ideally mirror the testamentary intent reflected in the Will.”
- He added that it is also advisable to periodically review and update both Wills and nominations following major life events such as , births, or deaths in the family.