Beneficiaries in Investment Clubs
A reader asks.............
Would you have any information with regard to how beneficiaries of investment club members are treated, i.e. how they are addressed in the Bylaws?
The treatment of beneficiaries in an investment club has gone through many gyrations. When the NCA software first came out, there was a spot to designate a beneficiary. Then, it was pointed out by lawyers that this was probably not a good idea, since an interest in a partnership is personal property, not an insurance policy that pays a death benefit to a designated beneficiary. It was further pointed out that a club could get into serious trouble, if it were to pay a designated beneficiary, when the will called for some other disposal.
So, I thought the question had been solved, once and for all. Just don't do it - i.e. designate a beneficiary in an investment club. Then some states adopted what is called Pay-on-death or Transfer-on-death statutes which would seem to allow paying an investment club interest directly to a designated beneficiary. This would allow the payment to avoid probate, which is probably not a significant problem anyway. It is unclear just what happens if the member lives in one of those states and the partnership was formed in a state that did not have such a statute. It is also unclear what happens if the reverse were true.
I am still firmly of the belief that investment clubs should not get involved in this issue. Let the partners perform their own estate planning to avoid probate, if that is their wish, and let the investment club pay the interest off to the estate of the deceased member.
Rip West
Saint Paul, MN