Naming a nominee for your investments does not necessarily mean that the nominee becomes the final owner after your death. For investments such as shares, demat securities and mutual funds, the nominee generally receives the assets on behalf of the persons ultimately entitled to them under a valid Will or applicable succession law, experts said.
“There is a general perception that nominee becomes the legal owner after the death of the investor. However, this is not the legal position,” said Jignesh Shah, Partner, Bhuta Shah & Co LLP.
According to Shah, a nominee receives and holds the investment in a fiduciary capacity on behalf of the legal heirs until the asset is distributed as prescribed under the Will or, in the absence of a Will, under succession laws.
Can legal heirs claim a share despite the nomination?
Yes. Nomination does not extinguish or diminish the rights of legal heirs, Shah said.
“The process of nomination does not create a separate mode of succession,” he said. A legal heir can claim their rightful share in an investment even when another person has been named as the nominee.
Narinder Wadhwa, MD & CEO, SKI Capital Services, summed up the position: “Nomination determines who can conveniently receive the investment after death; succession law or a valid Will determines who ultimately owns it.”
The nominee may receive the securities or investment from the company, depository, asset management company or other intermediary, but a legal heir can still assert their succession rights, Wadhwa said.
For example, if an investor dies without a Will and the applicable succession law gives the spouse and children specified shares in the estate, those rights do not disappear merely because one child or another person was nominated.
What if the nominee and Will beneficiary are different?
If a valid Will names a person different from the nominee, the beneficiary under the Will ultimately becomes the beneficial owner of the investment, Shah said.
The nominee initially receives the investment from the bank, company, fund or other institution. However, the nominee is then required to hand over the investment to the person entitled under the Will.
Shah explained this with an example. Suppose D owns shares in R Ltd. D nominates A for the investment but names M as the beneficiary in D’s Will. After D’s death, A will initially receive the investment from R Ltd. Thereafter, A will transfer the investment to M in accordance with the Will.
Wadhwa said the nominee facilitates transmission but does not, merely by virtue of being the nominee, acquire a superior succession claim. If the validity of the Will itself is challenged, the matter may have to be determined by the appropriate court.
What happens if there are multiple nominees?
Multiple nominees can be registered for an investment. However, the nomination percentage does not necessarily determine the nominees’ ultimate beneficial ownership, Shah said.
The percentages primarily govern how the investment is transmitted or paid out by the institution for administrative purposes. The administrative split by the institution cannot necessarily be treated as the final ownership split.
For securities, demat accounts and mutual fund folios under the SEBI framework, Shah said:
- An investor can name multiple nominees and specify the individual share for each nominee.
- If no specific percentage is given, the asset is apportioned equally among the nominees.
- If a nominee dies before the investor, that nominee’s share is distributed proportionately among the surviving nominees.
- An indivisible residual or odd lot after division may be allotted to the first-named nominee.
Wadhwa similarly said that nomination percentages primarily determine how an intermediary transmits or distributes assets and do not by themselves constitute a testamentary disposition or override a valid Will or applicable intestate succession law.
Can nominees and legal heirs challenge each other?
Both nominees and legal heirs can challenge claims in certain circumstances, Shah said.
A nominee could challenge a legal heir’s claim by disputing the validity of the Will, for example, on grounds such as lack of testamentary capacity, coercion or influence, or the existence of a subsequent Will. A nominee could also raise questions where the investment does not form part of the deceased investor’s estate or where the legal heir has not completed the appropriate procedure to substantiate their ownership.
On the other hand, legal heirs can challenge a nominee’s claim by questioning the validity or continued effectiveness of the nomination. They can also file a civil suit seeking recovery of the investment or a declaration that they are the rightful owners under the Will or succession law.
Legal heirs can also challenge situations where the nominee has disposed of the investment in a manner that does not match the estate’s true entitlement, Shah said.
What investors should remember
The key distinction is between receiving an investment and ultimately owning it.
For shares, demat securities and mutual funds, Wadhwa said the legal position can be summarised as: “Nomination determines who can conveniently receive the investment after death; succession law or a valid Will determines who ultimately owns it.”
However, Wadhwa cautioned that this principle should not automatically be applied to every financial product. Life insurance, for instance, can have different provisions. Under Section 39(7) of the Insurance Act, where the nominee is the policyholder’s parent, spouse or child, such a nominee can, subject to the statutory conditions, be a beneficial nominee and may have beneficial entitlement to the insurance proceeds.