This tutorial explores key questions about nomination in various financial accounts, covering areas like insurance policies, mutual fund investments, and bank deposits. Let's clarify common doubts surrounding nomination:

1. Is a Legal Heir the Same as a Nominee?
2. Does a Nominee Automatically Receive Funds Upon the Account Holder's Death?
3. Are Nominations Consistent Across Insurance, Mutual Funds, and Bank Deposits?
4. Who Should Inherit Our Wealth in the Event of an Untimely Death?

Who is a Nominee?

A nominee, by legal definition, is a trustee, not the owner of assets. Acting as a custodian, the nominee holds assets in trust, with the obligation to transfer them to the legal heirs as per the law. Typically, the rightful ownership of a deceased person’s assets is assigned to legal heirs, often outlined in a will. In absence of a will, inheritance is determined by succession laws which specify the division of assets among surviving family members.

For example, Section 39 of the Insurance Act ensures that an appointed nominee receives the policy payout. However, this does not imply legal ownership, as the nominee is merely holding funds in trust for the actual legal heirs. In case of a valid will, it overrides other succession laws, clearly defining the distribution of assets.

The Role of Nominees

You may wonder why nomination is essential if it doesn’t grant ownership. Nomination simplifies the transfer process upon the account holder’s death. Without a nominee, legal heirs face procedural hurdles to claim assets, including presenting certificates, proof of relationship, and other documentation. Nomination enables companies to release funds directly to a nominee, simplifying initial steps, although ultimate distribution remains subject to legal succession or a will.

Practical Example of Nomination

Consider Ajay, who nominated his wife for his insurance and mutual fund accounts but did not leave a will. Upon his death, legal succession laws divided his assets equally among his wife and children, despite his nomination. Had Ajay prepared a will explicitly designating his wife as the sole beneficiary, his wishes would have been legally upheld.

Nomination Across Various Financial Instruments

1. Life Insurance:
Policyholders may assign multiple nominees, allocating specific shares of policy proceeds. Generally, family members are the preferred choice for nomination. Under the Principle of Insurable Interest, policyholders who wish to nominate non-family members must demonstrate a valid insurable interest. According to Section 39 of the Insurance Act, nominees can receive the payout but hold no additional rights to the insurance proceeds. A policyholder can alter or revoke a nomination at any time.

2. Mutual Funds:
Investors can designate up to three nominees at the time of purchase, with minors allowed as nominees if a guardian is specified. Nominations are made at the folio level, applying to all units within that folio, including future investments. Non-resident Indians (NRIs) may also serve as nominees, subject to exchange regulations.

3. Shares and Stocks:
If a shareholder nominates a non-family member, such as a nephew, that nominee assumes ownership upon the shareholder's death, unless a will dictates otherwise. For instance, in a landmark case, Justice Roshan Dalvi ruled that a nominee assumes full ownership under the Companies Act and the Depositories Act, which governs share transfers. Hence, the nominee, rather than a legal heir, receives ultimate ownership of shares in absence of a will.

4. Public Provident Fund (PPF):
If no nominee is listed on a PPF account, only a partial amount is payable to legal heirs. Account holders can nominate one or more individuals by filing Form F, but no nomination is permitted if the account is opened for a minor.

5. Bank Savings/Current/FD/RD Accounts:
Bank accounts and fixed deposits also allow nominations. By filing Form DA-1, account holders can appoint a nominee, while Form DA-2 is used for any changes. In a ruling by Justices Aftab Alam and R.M. Lodha, the Supreme Court clarified that nominees in bank accounts have the right to receive funds but do not acquire ownership, as assets remain bound to the Succession Act for distribution among legal heirs.

Summary

Nomination serves a vital purpose in easing the process of asset transfer but does not grant full ownership rights. For clear, unambiguous asset distribution, drafting a will remains essential. It supersedes succession laws, ensuring that assets are allocated precisely as intended by the deceased. Nominees serve as facilitators, ensuring funds reach the correct hands without delay, yet final ownership ultimately rests with legal heirs as stipulated by inheritance laws or a valid will.