Can We Establish Beneficiaries in Our Club?

by Doug Gerlach

Q. How do we make out beneficiary papers with each of our members? One of our members is going through divorce procedures and this was a question that was brought up.

A. Although many club members may be interested in naming beneficiaries, I've got some bad news for you. If your club is formed as a partnership, then the partners should not attempt to establish beneficiaries for their capital accounts in the club. According to BetterInvesting, ownership interests in a partnership shouldn't be passed on to anyone outside the partnership.

Here's the problem. Since a "beneficiary" might not be recognized by the courts, if the club were to pay out the value of a deceased member's account to that "beneficiary," it would be leaving the partnership open to potential claims from other heirs. If there were any contested issues in the deceased's estate, the partnership could be liable for the amount wrongly paid to the "beneficiary." Or what if the deceased partner's will had other instructions for the disposition of the proceeds from the investment club account?

This is a matter best left for the probate system -- a mistake made in this situation could be an expensive proposition for the club's remaining partners.

So what happens when a club member passes away? Our standard myICLUB recommendation is that you withdraw the member using the same procedures that you usually use in your club for any final withdrawal, making the check payable to the deceased partner (or, if you must, to the "Estate of..."). Deliver the check to the estate of the deceased partner, typically to their spouse or other family member. This ensures that the club doesn't get tangled in any unnecessary dilemmas.

In myICLUB.com, Member Profiles have a field for Emergency Contacts. This should be used to maintain contact information in case of a partner's passing in order to carry out the above instructions. It is definitely not the person to whom a deceased partner's account should be paid out to.

Doug Gerlach is ICLUBcentral's investment club guru, helping clubs and their members to operate more efficiently and more harmoniously. Doug's latest book, Investment Clubs for Dummies is the ultimate guide to starting and running a club, packed with tips and insight about club operations, education and investing. He is the author of several other popular investing books, including The Complete Idiot's Guide to Online Investing and The Armchair Millionaire. Doug was a member of the NAIC Computer Advisory Group's Board of Directors from 1996 to 2004, founded NAIC/BetterInvesting's website in 1995, and has been President of ICLUBcentral, Inc. since 2005.

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