A nominee is not an heir

There is a belief so widespread that it is rarely questioned: that naming a nominee on a bank account, a policy, or a demat account determines who will inherit that asset.

It does not. And the gap between what people assume and what the law provides has caused more family difficulty than almost any other misunderstanding in personal finance.

What a nomination actually does

A nomination is an administrative convenience. It tells the institution — the bank, the insurer, the depository, the fund house — whom to pay when the account holder dies.

That is the whole of its function. It allows the institution to release the amount to a known person and obtain a valid discharge, without waiting for succession proceedings to conclude.

What it does not do is decide ownership. The nominee receives the money. Whether the nominee is entitled to keep it is a separate question, answered not by the nomination form but by the law of succession — that is, by a valid Will, or, in its absence, by the personal law applicable to the deceased.

The nominee, in the language the courts have used consistently, holds the asset as a trustee for those legally entitled to it.

The position is settled law

This is not a matter of interpretation or professional opinion.

In Sarbati Devi v. Usha Devi (1984), the Supreme Court held that a nominee under a life insurance policy does not become the owner of the policy proceeds. The nominee receives the amount; the legal heirs remain entitled to it.

For securities and shares, the position was uncertain for some years, because a decision of the Bombay High Court had suggested that a nominee did acquire ownership. That uncertainty is now over. In Shakti Yezdani v. Jayanand Jayant Salgaonkar, decided on 14 December 2023, the Supreme Court held that nomination under the Companies Act and the Depositories Act does not override the law of succession, and that a nominee does not acquire beneficial ownership. The Court described the nominee's position as that of a trustee or custodian.

The same principle applies across bank deposits, mutual funds, insurance policies, and securities. The statute under which the nomination is made differs. The effect does not.

What this means in practice

Suppose a father names his elder son as nominee on a fixed deposit. He also has a daughter and a younger son. He leaves no Will.

On his death, the bank pays the deposit to the elder son. That payment is lawful, and the bank's obligation is discharged.

But the elder son does not own the money. Under the applicable succession law, all three children are entitled to a share. He holds the amount, in law, on behalf of the estate.

If the family is cooperative, this resolves itself over a cup of tea. If it is not, it resolves itself in court — often years later, at considerable cost, and at the end of relationships that were intact before the deposit matured.

The nomination did not create the dispute. But it created the impression of a decision that was never actually made.

Why a Will is the instrument that matters

A Will does what a nomination cannot: it states who is to own what.

Where a valid Will exists, it governs. The nominee still receives the asset from the institution, but must deal with it in accordance with the Will. Where no Will exists, the estate devolves under the applicable succession law, which may distribute it in a manner the deceased never intended and would not have chosen.

A Will need not be elaborate or expensive. It must be in writing, signed by the testator, and attested by two witnesses who saw the signature. Registration is optional and does not affect validity, though it can assist in proving the document later.

Both are required, and for different reasons

It would be a mistake to read this as an argument against nominations. They serve a real purpose.

Without a nomination, the family may have to produce a succession certificate or letters of administration before the institution releases anything — a process that can take months, precisely when funds are most needed. The nomination is what allows money to move quickly.

The Will is what ensures it reaches the right people.

One provides access. The other provides title. Neither substitutes for the other, and a household that has attended to only one of them has done half the work.

A short review worth doing

Most people, if they check, will find at least one of the following:

A nomination made at the time an account was opened, never revisited since — often naming a parent who has since died, or reflecting a family position that no longer exists.

A nomination made before marriage, or before children, and never updated.

An account, policy, or folio with no nomination at all.

No Will, or a Will made years ago that no longer reflects the assets held or the family as it now stands.

None of these takes long to correct. Nomination forms are available from every institution and can usually be updated online. A Will can be prepared in an afternoon.

What each of them prevents is the situation in which a family, already dealing with a death, must additionally work out what the deceased intended — from documents that were never designed to answer that question.

Rakesh Kumar Baid, FCA

This article is general in nature and does not constitute legal or professional advice on any specific matter. Succession is governed by personal law, which varies, and the position in any particular case depends on its own facts. Please consult a qualified professional before acting.