Withdrawal fees
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Withdrawal fees A user asks a question about withdrawal
fees.........
What is the most common withdrawal fee for
investment clubs. Our club has a 2% fee plus any expenses incurred such as
brokerage fees. Some members think it should be much more. I noticed some
on this site had a 3% fee. Is that common??
There is no, one correct answer as to what percent, if
any, should be charged as a withdrawal fee. The early NAIC model partnership
agreement called for a 3% fee. Presumably, this was to cover commission costs.
It should be noted that at the time that agreement was drawn, commission costs
were much higher than they are at the present time. Accordingly, many clubs
charge no withdrawal fee at all. Others charge the amount of actual costs
incurred to effect the withdrawal. Still others believe that members should be
discouraged from using the investment club as a savings account, and charge a
much stiffer fee, especially in the early years of a member's participation.
Each club must come to grips with the issue in such a way as to be consistent
with the philosophy of the members.
For what it is worth, my club uses appreciated stock to
pay off a departing member. The member is encouraged to open an account with the
club's brokerage firm. If this is done, we can transfer the stocks at no cost,
and therefore, charge no fee to the departing member. Other clubs handle the
situation entirely differently.
So, I am afraid that I have to give you the unequivocal
answer, 'it all depends'. <g>
Thanks for the question. I hope my response gives you
something to think about, even though it doesn't solve the problem for
you.
My investment club charges 3% for a member withdrawing.
At the present time we have two members leaving the club. The remaining
members plan to buy the combined shares of the departing members. As Treasurer,
I will run evaluation statements and the total value of the departing members
will then be divided among the remaining members. The funds collected from
the remaining members will be deposited in the bank account to allow
withdrawal. Is this workable? I do not plan to include the 3% in the
price the remaining members pay.
There are several issues at work here that would best be analyzed
individually.
First, is the issue of a withdrawal fee. Many clubs charge a
withdrawal fee for one of two reasons. Some charge a withdrawal fee
to discourage frequent or repetitive withdrawals. Yet others charge a
withdrawal fee to reimburse the club for the expense of liquidating that persons
share of the club, whether those expenses are incurred either now or in the
future. For more information please see 'Withdrawal Fees - Why and how much?'
Secondly, is the issue of remaining members 'buying out' withdrawing
members. What is commonly referred to as a buyout really isn't a
buyout at all. Money and units should never pass directly
between individual members. In all but some very limited
situations, the transfer of units from one individual to another would cause a
long term accounting nightmare that would best be avoided. The
way around these problems is to have the remaining members invest additional
funds into the club and then the club pay the withdrawing member with cash,
liquidating that members units. Please see
'Should one or more members "buyout" a withdrawing
member?'
And finally, the inclusion of the withdrawal fee "in the price the
remaining members pay". IF the withdrawal fee
is charged of the withdrawing members to reimburse the club for the future cost
of liquidating investments that have already been made and IF
one or more remaining members pay in additional funds so that the club
doesn't have to liquidate investments at this time, then it only seems
appropriate that those members making additional payments be given credit for an
appropriate amount of that withdrawal fee charged of the withdrawing
member. Having said that, the accounting entries to handle such a
credit properly are just a bit confusing.
Let me demonstrate with an example. Member A
withdraws. His account in the club is worth $1000 before
being charged a 3% withdraw fee. Therefore, the club pays Member
A $970 cash. Members B & C want to contribute
additional funds so that the club isn't forced to sell any of its
investments. Each is willing to contribute one half of the required
funds. How much does each have to contribute? How do we enter this
transaction so that these two members receive credit for the withdrawal fee
charged of Member A? In other words, we want Members B & C to
pay in a total of $970 (the amount paid out to Member A) but we want
Members B & C to receive a total of $1000 worth of units (the value of
Member A's account). It's really quite easy, have Members B
& C each pay $485 to the club ($485 x 2 = $970) but actually enter a
payment for each in the amount of $500. Then enter a offsetting member fee
for each in the amount of a NEGATIVE $15. By doing
this Member B & C will each receive $500 worth of units while paying in
$485.
In short, your plan to raise cash from member payment to the club to
pay off a withdrawing member is workable. As always, be sure to
follow your club's partnership agreement whenever processing member payments and
withdrawals.
Thanks for using bivio!
Disclaimer: the statements above are opinions of the author and are not
official statements from either bivio or the IRS. These statements are not
intended to replace professional tax or accounting advice. When in doubt, follow
the advice of your local tax advisor or accountant who is familiar with your
particular circumstances. |
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