Named a nominee for your investments? Know when legal heirs can still claim a share in your mutual funds, shares

Naming a nominee for your investments does not necessarily mean that the nominee becomes the final owner after your death. For investments such as shares, demat securities and mutual funds, the nominee generally receives the assets on behalf of the persons ultimately entitled to them under a valid Will or applicable succession law, experts said.

“There is a general perception that nominee becomes the legal owner after the death of the investor. However, this is not the legal position,” said Jignesh Shah, Partner, Bhuta Shah & Co LLP.

According to Shah, a nominee receives and holds the investment in a fiduciary capacity on behalf of the legal heirs until the asset is distributed as prescribed under the Will or, in the absence of a Will, under succession laws.

Yes. Nomination does not extinguish or diminish the rights of legal heirs, Shah said.

“The process of nomination does not create a separate mode of succession,” he said. A legal heir can claim their rightful share in an investment even when another person has been named as the nominee.

Narinder Wadhwa, MD & CEO, SKI Capital Services, summed up the position: “Nomination determines who can conveniently receive the investment after death; succession law or a valid Will determines who ultimately owns it.”

The nominee may receive the securities or investment from the company, depository, asset management company or other intermediary, but a legal heir can still assert their succession rights, Wadhwa said.

For example, if an investor dies without a Will and the applicable succession law gives the spouse and children specified shares in the estate, those rights do not disappear merely because one child or another person was nominated.

If a valid Will names a person different from the nominee, the beneficiary under the Will ultimately becomes the beneficial owner of the investment, Shah said.

The nominee initially receives the investment from the bank, company, fund or other institution. However, the nominee is then required to hand over the investment to the person entitled under the Will.

Shah explained this with an example. Suppose D owns shares in R Ltd. D nominates A for the investment but names M as the beneficiary in D's Will. After D's death, A will initially receive the investment from R Ltd. Thereafter, A will transfer the investment to M in accordance with the Will.

Wadhwa said the nominee facilitates transmission but does not, merely by virtue of being the nominee, acquire a superior succession claim. If the validity of the Will itself is challenged, the matter may have to be determined by the appropriate court.

Multiple nominees can be registered for an investment. However, the nomination percentage does not necessarily determine the nominees' ultimate beneficial ownership, Shah said.

The percentages primarily govern how the investment is transmitted or paid out by the institution for administrative purposes. The administrative split by the institution cannot necessarily be treated as the final ownership split.