Why Indians need more than just a nominee to secure their legacy

Why writing a Will is critical to ensure smooth transfer of assets

As the December 31, 2023, deadline for appointing nominees to various financial accounts approaches, there is a pressing need to clarify a pervasive misconception that often leads to confusion.

The nomination process for demat accounts, fixed deposits (FDs), bank accounts, and mutual fund (MF) investments is a well-established practice in India. However, the commonly-held belief that nominating someone as a nominee implies that they automatically become the legal heir to one's assets, is far from accurate.

According to Indian law, a nominee is a caretaker of the assets, not a legal heir. To ensure the proper transfer of funds/assets to their designated owner, a legally-valid will is essential.

Also read: Sebi extends deadline to add nominees for mutual fund account holders

Significance of nomination

Nominations play a vital role in India's financial landscape. Nomination streamlines the asset transfer process, ensuring that the account holder's intentions are clearly laid out. Without a nominee, legal heirs may encounter procedural delays and administrative complexities when trying to access assets. Nomination guarantees that in the event of the account holder's demise, the assets are protected and can be efficiently transferred to the legal heirs.

It is important to update the nomination regularly, especially if there are changes in one’s life or the nominee’s circumstances. For example, in the event of a marriage or divorce, one must update their nominations and add / remove the spouse / ex-spouse. Similarly, if an existing  nominee dies or becomes incapacitated, a new nominee should be named.

Also read: Updating nomination in jointly-held investments can be a pain; here’s what you need to do

Role of a nominee

A nominee, whether for a demat account, bank account, an FD, or an MF, serves a specific purpose. They are merely custodians of the assets until they are transferred to the rightful heirs. This distinction becomes significant when the deceased has legal heirs or when an individual wishes to distribute assets differently from what the nomination form specifies.

A nominee does not inherit the assets or hold legal ownership; their role is that of an intermediary in the process.

Another common misconception is that nomination supersedes the legal inheritance laws. Legal heirs, as defined under the Hindu Succession Act, 1956 (or other relevant laws depending on one’s religion), have a legitimate claim to the deceased person's assets. Legal heirs include spouses and children, however one’s assets may devolve on one’s parents, and other close relatives. All legal heirs have an equal right to the deceased's assets, and nomination alone does not supersede this legal right. If there are conflicting claims, the legal heirs recognised by law will prevail.

Here's an example to understand the role of a nominee better. Anita, a 28-year-old working woman, has significant financial assets in a demat account, FDs, and MFs. Before she got married, she named her father as the nominee for all her financial accounts as she wanted him to get all her assets in case of her demise.

Tragically, Anita passed away in a road accident a few years after getting married. Complexities around the distribution of her assets arose as she died without a will. Anita's legal heirs post her marriage, according to the Hindu Succession Act, included her husband and two children, meaning that her father was no longer entitled to her assets.

As Anita did not have a will, her assets were distributed according to the law, i.e., equally between her husband and children. Had she prepared a legally valid will, she could have clearly outlined how she wanted her assets to be distributed.

Also read: Why putting down nominations is important… and why it still doesn’t work

The need for a will

A will (the last will) is a legal document that outlines how a person's assets should be distributed after his / her death. Unlike a nomination, a will provides clear instructions for asset distribution.

A will also allows for the appointment of an executor, who will oversee the asset distribution, ensuring that the wishes of the deceased are honoured.

By combining the nomination with a well-crafted will, individuals can have peace of mind knowing that their assets will be managed and distributed per their wishes.