September 10, 2019

Nominee V/s Legal Heir | What is the difference?

Toral Shah
Partner of GBCA & Associates LLP

Nominee V/s Legal Heir | What is the difference?

By CA Toral Shah and Khushbu Chedda

All of us have heard the saying – ‘Nothing is certain but Death and Taxes’. So how much ever we do not like to deal with taxes, we have to manage them. Similarly, though death is not a pleasant topic to think or talk about, we have to understand that it is an eventuality. It is important that we plan our estate such that our near and dear ones do not have to run from pillar to post for the wealth that we have left behind for their welfare. Many people think that they can nominate someone for their investments and assets and they have finished the task. That is not enough! The concept of legal heir In law, an heir is a person who is entitled to receive a share of the deceased’s property, subject to the rules of inheritance. The inheritance may be either under the terms of

  •  A Will (testamentary succession)
  •  By succession laws if the deceased had not prepared a Will (intestate succession) In case of a valid Will, succession is as per Will itself. In absence of a Will, the law on intestate succession (determination of legal heir) for different communities in India is different which is be explained below:

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The concept of nomination

The concept of nomination is very common is respect to various assets. Nomination is the right conferred upon the holder of an asset to appoint one or more persons who will be entitled to receive assets upon the death of the holder. Provisions with respect to nomination are found in many statutes including those concerning with banking, insurance, provident funds, co-operative societies, companies and so on.

Nominee to hold but Legal heir to own

On a holistic interpretation of judicial precedents over the years and the position of law on this point now, it can be settled that Legal heir is the ultimate, rightful owner of the assets of a deceased individual (either through intestate or testamentary succession); A person who is named nominee of the assets of the deceased, shall actually receive and hold the assets of the deceased (till the matter of inheritance or succession is decided) immediately upon the demise of the individual. However, there are exceptions to this. The position of nomination for various asset classes is explained below

Class of Asset  Details
1.  Employee Provident Fund When one opens an EPF account, a nomination has to be given. The nominee will inherit the fund. The legal heir has no right on it. As per the EPF rules one has to appoint a family member as nominee.
2. Public Provident Fund The nominee gets only custody of the amount. The legal heirs are entitled to own it.
3. Deposits with a bank The legal heirs will get the ownership of the deposits on the death of the account holder. The nominee will again be just a custodian.
4. Mutual Funds The legal heirs get the mutual fund units. Mutual fund houses ask us to fill out a nomination form. But nominees are only custodians.
5. Shares On the death of the sole shareholder/all joint shareholders, nominee becomes entitled to all the rights in the shares of the company to the exclusion of all other persons. There has been a bit of confusion on the transfer of ownership of shares after the death of the owner due to differing judicial views on the matter. Some courts have held the nominee to be the ultimate owner while others have held him to be merely custodian. Hence, it is advisable that the Will of the Testator should contain provisions relating to bequest of his interest in shares and, as far as possible, the legatee should be the nominee of the Testator.
6. Shares of co-operative society The legal heirs will get the ownership rights in case of death of the original owner. The nominee will again be just a custodian
7. Life Insurance In case of life insurance, the claim amount goes to the legal heirs or beneficial nominees (if any) after the death of the insured. If a policy holder names his parents, or spouse, or his children, or his spouse and children, or any of them, as the nominee, such person(s) shall be called the beneficial nominee. They shall not act as a mere caretaker or trustee but shall in fact be treated as the ultimate beneficiary of the monies payable by the insurer, to the exclusion of other legal heirs. However, it is not mandatory to nominate a beneficial nominee, and if the nominee is a person other than those specified above, the general rule would prevail, and such nominee would hold the monies as a caretaker/ trustee for the legal heirs

Takeaway

Accumulating assets/wealth is important, but it is equally important to ensure that your inheritance is passed on smoothly to your heirs. A Will is a ‘supreme’ document that specifies the exact intentions of the testator with respect to the succession of his assets. A Will wields the power to override or supersede any arrangements or nominations made during an individual’s lifetime. It is, therefore, critical to ensure that an individual, despite making nominations, also creates a Will. Many people defer preparing their Will for a variety of reasons and ultimately it might be too late. It is also prudent from a practical perspective, to ensure that contents of the Will are harmonized, that is the nominees and legal heirs under the Will should be the same persons to avoid any legal dispute.

Disclaimer: The write-up is based on our interpretation of various prevailing laws, rules and regulations as on date. The information contained in this write up is to provide a general guidance to the intended user. The information should not be used as a substitute for specific consultations. We recommend that professional advice is sought before taking any action on specific issues. No part of this document should be distributed or copied by anyone without express written permission of the publisher.

4 Thoughts to “Nominee V/s Legal Heir | What is the difference?”

  1. Avatar Ajay A. Ahuja says:

    Can a Nominee be held accountable for an act conducted by him/her, while in possession of the property/assets, but unacceptable to the Legal Heirs?

  2. Avatar KAUSHIK BAVISHI says:

    VERY IMPORTANT ARTICLE IN ONE`S LIFE.
    ACCUMULATION OF WEALTH MAY BE DIFFICULT IN ONE`S LIFE
    BUT ADMINISTRATION AFTER YOUR LEAVING THIS EARTH IS
    MORE DIFFICULT UNLESS YOU TIMELY PREPARE YOUR WILL
    AND DONT RELY ONLY ON NOMINATION.

  3. Avatar Ramesh pallavoor says:

    ARTICLE BRINGS OUT THE SHODDY JUSTICE SYSTEM. ONLY INDIA HAS RUBBISH LIKE THIS. HAVE TO LIVE WITH THIS. GOOD ARTICLE THOUGH. WELL EXPLAINED.

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