Why Nomination Doesn’t Guarantee Inheritance: What You Need to Know

All of us work, save, and invest to take care of our future financial requirements, and want to bequeath the rest to our loved ones or intended beneficiaries after our time on earth is over. In the process of creating wealth, many of us do not pay attention to ensuring that the assets go to those it is meant for.

Two of these tools, wills, and nominations, serve distinct yet complementary roles in personal financial planning.

This guide aims to clarify these concepts, emphasizing their importance and offering practical advice to ensure your assets and loved ones are protected according to your wishes.

Understanding Nomination vs. Inheritance

What is a Nominee?

A nominee is a person you name with a bank, mutual fund, insurer, or broker to receive the money first if you pass away. Think of the nominee as a caretaker or trustee. The institution pays the funds to the nominee promptly, so your family can access them without lengthy paperwork. In most cases, a nominee does not become the owner. Final ownership goes to your legal heirs or as written in your will. Keep your nominee details updated and keep copies of forms.

What is Inheritance?

Inheritance refers to the person or entity that legally owns your assets after your death. If you have a will, your assets go as per your will. If you do not have a will, your assets will pass according to succession laws, which determine the legal heirs. Examples of assets include bank deposits, mutual funds, shares, property, and jewellery. Nomination facilitates a quick release, while inheritance determines who ultimately retains the asset. To align both, write a clear will, keep the nomination consistent with it, and store documents safely. For learning and comparison purposes, you may also explore Bondbazaar before making a decision.

What is a Will?

A will is a comprehensive document that specifies how your assets, including both real and personal property, should be distributed after your death.

It is a testamentary declaration that not only outlines who receives your assets but can also specify guardians for minors and instructions for the management of your assets.

Contrary to common misconceptions, a will covers more than just real estate—it encompasses all your possessions and investments.

The Indian Succession A of 1925 provides the legal framework for wills, ensuring that your final wishes are honoured, irrespective of your religious or cultural background.

The execution of a will involves appointing an executor, a trusted individual responsible for administering your assets as per your directives.

Nomination: A Tool for Immediate Asset Transfer

While a will outlines the distribution of your assets posthumously, a nomination serves as a mechanism for the immediate transfer of certain assets upon your demise.

Nominations are particularly relevant for financial products like insurance policies and bank accounts.

A nominee is designated by you to receive the proceeds of these accounts directly from the institution, bypassing the longer legal process typically associated with will execution.

However, it's crucial to understand that a nominee is essentially a caretaker of the asset until it is legally transferred to the rightful heirs as identified in the will or by law.

The Supreme Court recently observed that the nomination process did not override the succession laws.

There have been similar observations too by other courts which, in effect, means a nominee holds assets/shares/deposits in a fiduciary capacity and is answerable to all claims made under the succession law.

The Distinction Between Wills and Nominations

Scope and Application: A will encompass all your assets and provide detailed instructions for their distribution. In contrast, a nomination pertains only to specific assets like insurance policies, bank accounts, and certain investments.
Legal Effect: The instructions in a will take precedence over nominations in the event of any discrepancies. While a nominee may initially receive the asset, the distribution must ultimately align with the will's terms or the legal heirship structure in its absence.
Flexibility and Revocability: Both wills and nominations offer flexibility; they can be updated or changed as your personal circumstances or preferences evolve.
Immediate Access vs. Probate Process: Nominations allow for immediate access to certain assets, providing financial support to nominees without the wait associated with the probate process. A will, however, may require validation through a legal process before assets are distributed according to its terms.

Preparing A Will

Comprehensive Inventory: Begin with a detailed inventory of your assets to ensure your will covers everything you own.
Selecting an Executor: Choose someone reliable and capable of managing the estate according to your wishes.
Guardianship: If you have dependents under legal age, appointing a guardian is crucial for their care and management of their inheritance.
Regular Updates: Life events such as marriage, the birth of children, or the acquisition of new assets necessitate updates to your will to reflect your current wishes.

Nominations simplify the process of transferring specific assets to your intended recipients, ensuring they have immediate financial support.

It's a simple yet effective way to manage certain aspects of your estate, complementing the broader directives outlined in your will.

Integrate Wills and Nominations into Your Succession Plan

Understanding and utilising both wills and nominations are fundamental to a holistic estate planning strategy.

A well-crafted will ensures your assets are distributed according to your precise wishes, while nominations provide immediate support to your loved ones.

Together, they form a comprehensive approach to legacy planning, ensuring that your financial and personal affairs are in order, offering peace of mind to both you and your beneficiaries.

Frequently Asked Questions (FAQs)

Does a nominee automatically inherit my assets after my death?

A nominee usually gets temporary custody, allowing funds to be released quickly. Final ownership is determined by your will or by succession laws if you do not have a will. The nominee must hand over assets to the legal heirs or as directed by the court or will.

Can a nominee and legal heir be different people?

You might name a nominee for quick access and have a different legal heir in your will. In that case, the nominee receives the funds first but must transfer them to the legal heir. To avoid confusion, many people keep nominations and will in sync.

Is a nominee the same as a beneficiary?

A nominee is a receiver or caretaker for the quick transfer of assets. A beneficiary is the individual named as the final owner in your will or under succession law. Some products use the term beneficiary within policy contracts. Refer to the product document to understand how the term is defined.

What happens if I have no will but have nominated someone?

The nominee will receive an initial payout, but succession laws determine the final ownership. In some instances, legal heirs may need to provide documents such as a legal heir certificate, succession certificate, or probate. Writing a basic will can reduce delays and disputes.

How do I ensure my nominee also becomes my legal heir?

Make a clear will that names the same person as beneficiary. Keep nomination forms aligned with the will. Update after major life events such as marriage, birth, or divorce. Store copies safely and inform the family where documents are kept. Review yearly.

Can a legal heir challenge a nominee’s claim in court?

Since nomination is mainly for receipt, a legal heir can challenge if the nominee refuses to hand over assets. Courts follow the will first, or succession laws, if there is no will. Good records and aligned nominations will reduce disputes.

Is nomination legally binding under Indian law?

Nomination is binding on the institution to release funds to the nominee. It does not usually override a will or succession laws to determine final ownership. Some products may have special rules in their own laws. When in doubt, maintain consistency between the nomination and the will and seek legal advice.