Making A Will: Nominee Vs Beneficiary

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In this ongoing series on Making a Will, we look at the common myth about a nominee vs beneficiary.

As a continuation of our series on Making a Will, we will focus on some common questions and myths regarding it. One of the common refrains we hear from people is, “we have nominees on all our investment accounts and hence we do not need to make a Will.” While in practice, all financial institutions would make the payments to the nominees, there is a distinction between a nominee in the records of a financial institution and a beneficiary in a Will.

By law, nominees hold all assets that they receive in trust, and as a fiduciary (An individual in whom another has placed the utmost trust and confidence to manage and protect property or money), for all legal claimants under the laws of succession. Let us illustrate this by an example. Mr. A, a Hindu, has 4 Class I heirs as defined in the Hindu succession act of 1956, i.e.,

1) His wife Mrs A

2) Child 1,

3) Child 2.

4) His mother (a class 1 heir as defined in the Act)

He makes a nomination in his bank account in the name of his wife Mrs. A. On the death of Mr. A, in case he passes away intestate, i.e. without a Will, his wife will receive the money as a nominee. However as Mr. A has 4 class 1 heirs- by the Hindu succession act, his wife is legally entitled to only ¼ of the money from the bank, his mother and 2 children can lay claim to ¼ share each, even though Mrs. A receives all the money from the bank! However, if Mr. A makes a Will and names his wife as the sole beneficiary, only his wife and no one else will have a share!

Thus you can see the advantages of naming a beneficiary in a Will, rather than just naming a nominee in each financial instrument. The other advantage of making a Will is also that we name different nominees in different accounts at different stages of our investment cycle – we have noted that in the early investments, we often name our parents as nominees, in some investments our children and in the rest of the cases, our spouses. Making a Will ensures that all the beneficiaries are named in one document and the assets are used for the benefit of the intended recipients of each investment. It is also critical to align your nominees at the time of making a Will with each financial institution so as to ensure that there is no confusion.

Nominations cannot be a super will: The legal view

The Honorable Supreme Court has consistently held the view that a nomination cannot be construed as another mode of succession or something capable of altering the course of succession under law. It has observed that several rigors of succession laws would be rendered inapplicable such as:

  1. If a nomination paper is considered a testamentary instrument, would it be modified by a codicil?
  2. How would one probate a nomination?
  3. Who would witness a nomination as required by law for a Will?

The courts have had the position that a nomination allows the financial institution a legally valid discharge so that they do not remain answerable to any claims of the successors or litigants and shifts the burden of answerability to the nominee. It under this capacity, that the nominee holds the assets. Hence it is clear that the nomination is a mere convenience but naming a beneficiary in a properly written Will is critical.

About Author

Ashok Mathur

Ashok Mathur is CEO, PlaNext, a company that works with established legal firms across India in drafting customized Wills. He has over 18 years of experience in Banking and wealth Management with organizations like Citibank, Hewitt Associates and Fullerton Securities. He is a MBA in finance from Lucknow, and a Certified Financial Analyst from ICFAI. You can find out more at www.PlaNext.co.in.