Beneficial nominee

The default rule about nominees surprises most clients. The workbook states it plainly: under normal law, the nominee holds any property in trust for the legal heirs of the person. A nominee receives; a nominee does not own.

Its illustration: Mr Rich nominates Mrs Rich on a Rs 1 lakh bank fixed deposit. On his death the bank pays her the Rs 1 lakh and is discharged. But she holds it in trust for all his legal heirs. If he died without a Will and his personal law divides the deposit equally between her and their two children, she holds the children's share for them and is accountable to them for that money.

The beneficial nominee is the exception carved out of that rule, and it applies only to life insurance.

The provision. The Insurance Act, 1938 was amended in February 2015 to introduce the concept. Under section 39(7), where the nominee of a life insurance policy is the parent, or spouse, or his children, or his spouse and children, or any of them, the nominee or nominees shall be beneficially entitled to the amount payable by the insurer to him or them.

So the class is closed and short: parent, spouse, children. Anyone else — a brother, a nephew, a friend, a business partner — remains a nominee in the ordinary sense, holding in trust for the legal heirs.

What changes. The workbook's contrast with the same facts: Mr Rich had a Rs 1 lakh life insurance policy with Mrs Rich as nominee and died without a Will. She is beneficially entitled to the Rs 1 lakh without being accountable to the legal heirs, who may include the two children.

The limits of the protection. Two, and both are examinable.

• Nominees can be changed at any time during the policy period, any number of times. A beneficial nomination is not a locked settlement.
• Creditors may still reach the proceeds. The workbook: the creditors of the insured person may be able to lay claim to the proceeds of a life insurance policy even from such beneficial nominees.

That second gap is what the Married Women's Property Act, 1874 closes. A policy bought under the MWP Act creates a trust: the nominees can only be the spouse or children or both, not parents, they cannot be changed afterwards even on divorce, the insured cannot claim any amount under it — survival benefits go to the nominees, not to him — and the declaration must be made only at the time of buying the policy. The workbook's verdict is balanced: since the 2015 amendment, some of the relevance of the MWP Act has been lost, especially given the rigidity of not being able to change nominees; what MWP policies still do is keep the benefits with the nominees despite any claim on the assets of the insured by his creditors.

Where it sits in an estate plan. Chapter 14 records that nomination is not really a component of an estate plan but is important for completing it — the rights of a nominee are generally limited to holding the assets as a custodian until they are transferred to the right legal heirs, with life insurance as the exception.

Mr Rane dies intestate leaving a widow, two adult children, and a brother.

Split three ways under intestate succession, the fixed deposit gives the widow about Rs 6,66,667 of her own and roughly Rs 13,33,333 she must account for. The Rs 1,00,00,000 policy is entirely hers — that is the whole effect of the beneficial nominee rule.

The two rows nominated to the brother are the warning. He is beneficially entitled to nothing: he is a nominee, in law a trustee for those entitled. If he refuses to hand the money over, the heirs are pushed towards a succession certificate from the District Court to compel it.

And the creditor gap. Suppose Mr Rane's business had left Rs 60,00,000 of unpaid debts. Creditors may pursue the Rs 1 crore policy proceeds even in the widow's hands as beneficial nominee. Had he bought that same term policy under the MWP Act, the proceeds would have stayed with her and the children despite those claims — at the price of never being able to change the nomination again.

Chapter 1, section 1.4, under "Nominee and Legal Heirs", introduces it with the Mr Rich example; Chapter 2, sections 2.4 and 2.5, repeat it and set it against the Married Women's Property Act; Chapter 14, section 14.3, places nomination inside the estate plan. Expect a "who is beneficially entitled" question built on the parent/spouse/children class, and a comparison question on beneficial nomination versus an MWP Act policy.

• The class is parent, spouse and children only. A brother, nephew or friend nominated on a life policy is an ordinary nominee holding in trust.
• It applies to life insurance, not to bank deposits, demat accounts or mutual funds. Section 39(7) is in the Insurance Act.
• A nominee is still not an heir in the general case. The beneficial nominee is the exception, not the rule.
• Beneficial nomination does not defeat creditors. The workbook says creditors may still reach the proceeds — that is what the MWP Act is for.
• Beneficial nominations can be changed at any time; MWP nominations cannot be changed at all, even on divorce.
• Under the MWP Act the nominees can only be spouse or children — not parents — and the declaration must be made when the policy is bought, not later.
• February 2015 is the amendment date. A policy question set before it is testing the old trustee rule.