The benefit of nomination is that, in the event of the death of an account holder, the bank can release the account proceeds or contents to the nominee.
As a part of my initial client meetings, I always enquire if proper nomination is made in all their bank accounts, investments, insurance policies and properties. If not done at all or if not updated, I stress upon the need, as well as the reasons, to do it.
A nominee does not become the owner upon the demise of the owner of the asset. However, nomination has its benefits, if done properly. Let us start with discussing the meaning of these terms: Nomination and Nominee.
Meaning of nomination and nominee
Nomination means an appointment or designation of a person to fill an office or discharge a duty. Nominee means a person who has been nominated or proposed for an office. It is used sometimes to signify an agent or trustee.
Rationale behind nomination
The provisions regarding nomination are made with a view to ensure that the estate or the rights of the deceased subject matter of the nomination are protected till the legal representatives of the deceased take appropriate steps.
The general principle, however, remains that the nominee holds the asset in trust and for the actual benefit of the legal heir of a deceased person.
Though a nominee may not be a rightful owner of the asset for which he/she may be nominated, the financial institution and similar entities are discharged of their liability by releasing the asset to the nominee without insisting on a probate order or succession certificate. This legal position, however, would depend upon the nature of the asset. We have explained this understanding in the following sub-heads.
Benefits of Nomination
The benefit of nomination is that in the event of the death of an account holder, the bank can release the account proceeds or contents to the nominee. The nominee holds the proceeds in the capacity of a trustee on behalf of the legal heirs of the deceased, and the bank's liability is duly discharged on payment to the nominee. Nominations in financial assets help in reducing complications and simplifying situations where there are several claimants to a financial asset.
Position of a Nominee in relation to type of asset
i. Insurance Policy
The Insurance Laws provide that if the holder of a life insurance policy nominates his parents, or his spouse, or his children or any/all of them, the nominee(s) shall be beneficially entitled to the amount payable by the insurance company to him or them. Further, where the nominee(s) so elected dies after the person whose life is insured but before the amount is received, the legal heirs of the nominee shall be the beneficiary entitled to the amount which represents the share of the nominee.
The law specifies that, a nominee shall only get such beneficial interest, where the nominee so elected are the parents of the person so insured, or his spouse, or his children, or all/any of them.
ii. Bank Accounts/Fixed Deposits/Lockers
Nomination is required to be made in the accounts in terms of the applicable law. Very often this form is overlooked though the Banks or usually fail to update the nomination post any changes in family situations/members.
The right of a nominee to receive funds of a deposit account or contents of a locker from the bank is absolute. However, a nominee does not get ownership rights, i.e., a nominee does not become the legal heir only because of the nomination.The ownership of the assets shall be determined by the will of the deceased account holder. In the absence of a will, the ownership shall be determined on the basis of a succession certificate obtained from the court or succession laws.
Thus, a nominee is more like a trustee whose task is to receive the funds from the bank and pass them over to the actual legal owners.
iii. Shares and Securities
Interestingly, the rights of a nominee for shares and securities has seen some conflicting judgements by some of our courts.
While it has been held that a nominee is vested with full and exclusive ownership rights in respect of the shares of which he is the nominee, it has also been held that nominations cannot and do not displace the law of succession, nor do they open a third line of succession. Therefore, nominees can only be trustees of the actual legal heirs and beneficiaries under a will.
iv. Property under Co-operative Housing Society
Nomination made with a cooperative housing society does not confer ownership rights of the property on the nominee. Nomination ensures that the estate or the rights of the deceased are protected till the legal representatives of the deceased take appropriate steps. It is always held that the nomination does not override the law in relation to testamentary or intestate succession.
Nomination helps in quick and smooth release of the assets of a deceased family member from banks and financial institutions. Nomination should be made in line with the family succession plan so that the basic object of the nomination made for a particular asset is not defeated. This will avoid any potential conflict amongst the nominee and the legal heirs.The author is Partner at the law firm SNG & Partners.The Great Diwali Discount!
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