Pre-empt disputes between nominee, legal heirs by drafting a will

A nominee's job is only to hold a deceased's asset temporarily until the legal heirs claim it

Understanding the distinction between a nominee and a legal heir has become crucial, especially in the light of a recent Supreme Court (SC) judgement. The apex court ruled that being named as the nominee in share or debenture certificates does not by default entitle a person to inherit those assets.

Shashank Agarwal, advocate, Delhi High Court, says, “The Supreme Court has clarified that the nominee does not get absolute title to the shares. The absolute title to them shall vest only in the legal heirs.”

Nominee versus legal heir

The question that arises is, what’s a nominee’s role? Aaushi Doshi, associate partner, IndiaLaw LLP, says, “A nominee is a trustee or custodian who holds the deceased’s property for disposal according to the law. A nominee protects the instruments until the deceased’s legal heirs or representatives take appropriate steps to claim their right over the shares and/or interest.”

Anyone of legal age and sound mind can be a nominee. “This may encompass legal heirs, immediate family members, extended family, or friends,” says Harsh Pant, associate, MVAC Advocates & Consultants.

The difference between a nominee and a legal heir is often misunderstood. Diksha Tyagi, associate at TAS Law, says, “An individual who inherits an asset legally is the legal heir. Their ownership rights are typically specified in a will or arise according to the Hindu Succession Act or the Indian Succession Act. Sometimes, the nominee and the legal heir can be the same individual.”

Nominee’s limitations

The next question is whether a nominee can challenge a will. Agarwal says, “A nominee may or may not be the legal heir. If the nominee is not a legal heir or does not have rights granted in the deceased’s will, he cannot challenge the will.”

Swarajit Dey, associate partner, AQUILAW, adds, “Although there’s no statutory provision directly addressing this, a person with an interest in any of the properties in the will, including legal heirs and/or beneficiaries to the will, may challenge a will on grounds like fraud, coercion, undue infl­uence, suspicion, and so on.”

Rights of those dwelling abroad

NRIs, foreign citizens, or overseas citizen of India (OCI) can be appointed nominees. However, Foreign Exchange Management Act (FEMA) regulations need to be kept in mind. They impose certain restrictions on asset transfers, including limits on cash outflows from India and transfer of shares (in any business) between residents and NRIs.

Inheritance of assets

Who can inherit what assets? “Mutual funds, shares, insurance policies, bank deposits, and the Public Provident Fund are inherited by the legal heirs,” says Doshi.

Fixed deposits (FDs) and bank accounts can be held singly or jointly. Joint holding (in the case of two or more holders) is operated as ‘jointly’, ‘either or survivor’, ‘former or survivor’, and ‘anyone or survivor’.

Upon the death of an FD or bank account holder, the transfer of assets depends on the account’s mode of operation. “However, nomination principles cannot supersede succession laws, meaning the surviving holder acts as a custodian for the assets until the legal heirs claim them,” says Keshav Singhania, private client leader, Singhania & Co. LLP. The legal heir and the nominee finally decide how to transfer the property.

Note that nominating a beneficiary is mandatory in an Employee Provident Fund (EPF) account. “The nominee specified will inherit the funds, and the legal heir will not have a claim to it. According to EPF rules, it is mandatory to appoint a family member as the nominee,” says Pant. Alternatives may be selected if no family member is available.

According to Singhania, in real estate, a nominee acts as a representative for the legal heirs of the deceased until the rightful heirs come forward to seek a transfer.

Drafting a Will is crucial

To prevent disputes between nominees and legal heirs, a person should outline his intentions regarding asset distribution via a will. “By stating explicitly in the will how assets should be distributed and how the nominations align with this plan, one can pre-empt potential conflicts between nominees and legal heirs,” says Aviral Kapoor, partner, Alagh and Kapoor Law Offices.

Insurance payouts

Legal heir VS nominee

The Insurance Laws (Amendment) Act 2015 states that only when nominees are the parents, spouse, or children of the policyholder, they are considered beneficial nominees, with actual interest in the policy

In other cases, a nominee, under Section 39 of the Act, merely acts as an authorised recipient for the insurance payout, relieving the insurer of its obligations
 

Such a nominee has no beneficial interest
 

Legal heirs can claim the sum under succession laws