The current rules at most, if not all, brokers are as follows: They will make an internal transfer between any two accounts (as long as not prohibited by law). They will not make an external transfer to an account that is not titled exactly the same as the originating account. The one exception is a transfer to a recognized charity.
My club has regularly transferred stock to members in full withdrawals and occasionally for a partial withdrawal. For instance, last year we decided we were overweight in Apple, but we couldn't agree on selling some. Instead, we took a large block of shares and transferred them proportionally to each member. Each of our members had to open a personal account at the broker to receive their shares. They could then immediately transfer them to a different broker, if that was where they had their "regular" account.
Interesting. I am not an expert on this by any means, but Bivio has a help page where it is explained better than I can do. It seems to me the difficult part is making certain the brokerage can transfer shares from your club to an individual in your club. Some brokerages require an investment account with them, some require an investment account at another brokerage, etc. So check with your broker first and check Bivio.
Thank you for your kind words. A couple of years ago we gave the family stock instead of cash and they had a terrible time with it, I really do not remember what he did but he recommended we not do that, which is why we have not.
Dick/Diana--Your losses are very real and you have my deepest sympathy. The same has happened to our club. A lot of clubs that were started in the 80s and 90s are going through this process. In truth, you do benefit from the standpoint that you will pay taxes now on the realized gains of the stock sales. This will go into your equity account with your partnership (presuming that is the legal structure of your club) and when you withdraw from your club, you will not pay taxes on those gains. Now there is something to be said about deferring your tax payments to as far into the future as possible, but given the circumstances, you did what you had to do. Do explore the option of paying withdrawals with appreciated stock, rather than selling it to raise the cash. However, it can be complicated to transfer shares to a member, so check with your broker to see what it requires for the transfer of shares from your club to an individual.
I do not see you as being rude. But I lost two very good friends. We paid their families as we should, as I would like my family to be paid, but, and I admit I am not up on rules, but how does this benefit others, not just me, that have been members for 40 plus years. Our club has members that have belonged from a couple of months to years. We sold just enough to pay for those that left. As I said please explain.
First, let me apologize as this will sound rude but your comment sounds selfish, especially to those of us with a recent loss of a loved one or
serious medical issues. Again, I'm sorry if this sounds offensive.
You DID receive a benefit when the club sold appreciated stock. That's the purpose of a growth investment, right? And each member shared the benefit in proportion to their ownership interests, so tax brackets aside, you shared the benefit equally.
Because the club sold stocks at a gain you have a current year tax increase and related impacts, but the option to transfer shares to the estate when a partner dies are more complex than most clubs want to tackle.
Did the timing of the sale fit your personal situation, no. I'm certain the family did not enjoy the timing of the death, either.
If surprise gains from the death of a partner represent a risk you are not willing to accept going forward, you might consider withdrawing from the club, receive your units in shares of stock, then you can control when you realize the remaining gains on your personal circumstance.
I have been a long time member of Poors Pupils for many years. In the last couple of years we have had members pass away who have also been members for many years with assets of well over $100,000.00. We have been a successful club and were able to sell stock to pay our members families the amount they were valued.
When the stocks are sold the money goes into our club treasury, we then write a check to the family. Now, I realize me personally is being hit with a large tax bill, without me having any benefit of the money that was gained from the selling of the stocks.
What advice can you give me and other members of our club, there are just a couple that have invested a lot of money and I really do not want to have a large tax implication, if I do not realize a benefit. The members that have passed away, do not pay as much in taxes as I, a survivor with no financial benefits. I have a financial burden through no fault of my own.
Could you comment on this situation.
Diana Evans
--
Mark Eckman
Mark Eckman on
Diana - While the purpose of clubs vary, (some are more social, some more educational,) but all clubs are legal entities that have a business purpose of earning income by buying securities and selling them later at a higher price. The resulting gain is a benefit to every member of the club. Assuming your club keeps winning securities and prunes losing securities, the sale to pay the families was most likely a gain, or you used the opportunity to harvest some losses to offset the gains. Either way, that realizes a financial benefit to the club members in the form of income. Your club then passed the proportional share of those gains to your club member in cash.
Do you believe you should never pay taxes, or that the club should never realize gains? Please tell us why you feel disadvantaged by the club fulfilling its purpose.
I do not see you as being rude. But I lost two very good friends. We paid their families as we should, as I would like my family to be paid, but, and I admit I am not up on rules, but how does this benefit others, not just me, that have been members for 40 plus years. Our club has members that have belonged from a couple of months to years. We sold just enough to pay for those that left. As I said please explain.
First, let me apologize as this will sound rude but your comment sounds selfish, especially to those of us with a recent loss of a loved one or
serious medical issues. Again, I'm sorry if this sounds offensive.
You DID receive a benefit when the club sold appreciated stock. That's the purpose of a growth investment, right? And each member shared the benefit in proportion to their ownership interests, so tax brackets aside, you shared the benefit equally.
Because the club sold stocks at a gain you have a current year tax increase and related impacts, but the option to transfer shares to the estate when a partner dies are more complex than most clubs want to tackle.
Did the timing of the sale fit your personal situation, no. I'm certain the family did not enjoy the timing of the death, either.
If surprise gains from the death of a partner represent a risk you are not willing to accept going forward, you might consider withdrawing from the club, receive your units in shares of stock, then you can control when you realize the remaining gains on your personal circumstance.
I have been a long time member of Poors Pupils for many years. In the last couple of years we have had members pass away who have also been members for many years with assets of well over $100,000.00. We have been a successful club and were able to sell stock to pay our members families the amount they were valued.
When the stocks are sold the money goes into our club treasury, we then write a check to the family. Now, I realize me personally is being hit with a large tax bill, without me having any benefit of the money that was gained from the selling of the stocks.
What advice can you give me and other members of our club, there are just a couple that have invested a lot of money and I really do not want to have a large tax implication, if I do not realize a benefit. The members that have passed away, do not pay as much in taxes as I, a survivor with no financial benefits. I have a financial burden through no fault of my own.
Could you comment on this situation.
Diana Evans
--
Mark Eckman
--
Mark Eckman
Robert Shaw on
I think we should be careful about how we think about our club.
We are an educational entity, an investment entity, a circle of friends, and perhaps other things as well.
I believe we need to separate these functions in our thought process.
If someone dies, or otherwise leaves a club, their share needs to be distributed.
If they have passed away we can all be sad about their passing.
But how their share is distributed can have a deleterious impact on the rest of the club.
And selling assets to pay in cash will reduce the amount of money the club has to invest - thus reducing the club's future potential return.
How it is distributed will NOT have an impact on the amount of taxes owed by the recipient.
That is determined by the recipients tax basis in their club holdings.
If the amount of money is relatively minor paying the departing member in cash is the easiest and the resultant tax consequences are likely minor for the rest of the club
But if the amount of money is large, selling assets in order to make the payoff in cash can create significant tax consequences for every other member of the club.
If you really are a circle of friends, friends don't create unnecessary problems for their friends; especially tax problems.
Yes, it is a little extra work sometimes to create an extra account, and sometimes a lot of extra work, but the benefit to the remaining members can be significant.
Diana - While the purpose of clubs vary, (some are more social, some more educational,) but all clubs are legal entities that have a business purpose of earning income by buying securities and selling them later at a higher price. The resulting gain is a benefit to every member of the club. Assuming your club keeps winning securities and prunes losing securities, the sale to pay the families was most likely a gain, or you used the opportunity to harvest some losses to offset the gains. Either way, that realizes a financial benefit to the club members in the form of income. Your club then passed the proportional share of those gains to your club member in cash.
Do you believe you should never pay taxes, or that the club should never realize gains? Please tell us why you feel disadvantaged by the club fulfilling its purpose.
I do not see you as being rude. But I lost two very good friends. We paid their families as we should, as I would like my family to be paid, but, and I admit I am not up on rules, but how does this benefit others, not just me, that have been members for 40 plus years. Our club has members that have belonged from a couple of months to years. We sold just enough to pay for those that left. As I said please explain.
First, let me apologize as this will sound rude but your comment sounds selfish, especially to those of us with a recent loss of a loved one or
serious medical issues. Again, I'm sorry if this sounds offensive.
You DID receive a benefit when the club sold appreciated stock. That's the purpose of a growth investment, right? And each member shared the benefit in proportion to their ownership interests, so tax brackets aside, you shared the benefit equally.
Because the club sold stocks at a gain you have a current year tax increase and related impacts, but the option to transfer shares to the estate when a partner dies are more complex than most clubs want to tackle.
Did the timing of the sale fit your personal situation, no. I'm certain the family did not enjoy the timing of the death, either.
If surprise gains from the death of a partner represent a risk you are not willing to accept going forward, you might consider withdrawing from the club, receive your units in shares of stock, then you can control when you realize the remaining gains on your personal circumstance.
I have been a long time member of Poors Pupils for many years. In the last couple of years we have had members pass away who have also been members for many years with assets of well over $100,000.00. We have been a successful club and were able to sell stock to pay our members families the amount they were valued.
When the stocks are sold the money goes into our club treasury, we then write a check to the family. Now, I realize me personally is being hit with a large tax bill, without me having any benefit of the money that was gained from the selling of the stocks.
What advice can you give me and other members of our club, there are just a couple that have invested a lot of money and I really do not want to have a large tax implication, if I do not realize a benefit. The members that have passed away, do not pay as much in taxes as I, a survivor with no financial benefits. I have a financial burden through no fault of my own.
Could you comment on this situation.
Diana Evans
--
Mark Eckman
--
Mark Eckman
Dick/Diana Evans on
I really do appreciate the emails I am receiving. Please excuse me for not being knowledgeable, in the tax world. I still fail to see how I, or anyone else in my club, benefited by selling stocks to pay off our friends, members to the amount of $1300 - $1900. I probably need a Investment Club Book for Dummies, but when we purchase a stock we pay broker fees, and when we sell a stock, in our club the one that leaves pays the brokers fees for selling, but the rest of us pay taxes on selling. Our club fortunately have some smart ladies in it and we are successful, as a club, is that a wrong thing? We make money as a club, not as individuals. I truly am missing something here, I guess.
On Tuesday, March 9, 2021, 9:34:52 AM EST, Robert Shaw via bivio.com <user*27509400001@bivio.com> wrote:
I think we should be careful about how we think about our club.
We are an educational entity, an investment entity, a circle of friends, and perhaps other things as well.
I believe we need to separate these functions in our thought process.
If someone dies, or otherwise leaves a club, their share needs to be distributed.
If they have passed away we can all be sad about their passing.
But how their share is distributed can have a deleterious impact on the rest of the club.
And selling assets to pay in cash will reduce the amount of money the club has to invest - thus reducing the club's future potential return.
How it is distributed will NOT have an impact on the amount of taxes owed by the recipient.
That is determined by the recipients tax basis in their club holdings.
If the amount of money is relatively minor paying the departing member in cash is the easiest and the resultant tax consequences are likely minor for the rest of the club
But if the amount of money is large, selling assets in order to make the payoff in cash can create significant tax consequences for every other member of the club.
If you really are a circle of friends, friends don't create unnecessary problems for their friends; especially tax problems.
Yes, it is a little extra work sometimes to create an extra account, and sometimes a lot of extra work, but the benefit to the remaining members can be significant.
Diana - While the purpose of clubs vary, (some are more social, some more educational,) but all clubs are legal entities that have a business purpose of earning income by buying securities and selling them later at a higher price. The resulting gain is a benefit to every member of the club. Assuming your club keeps winning securities and prunes losing securities, the sale to pay the families was most likely a gain, or you used the opportunity to harvest some losses to offset the gains. Either way, that realizes a financial benefit to the club members in the form of income. Your club then passed the proportional share of those gains to your club member in cash.
Do you believe you should never pay taxes, or that the club should never realize gains? Please tell us why you feel disadvantaged by the club fulfilling its purpose.
I do not see you as being rude. But I lost two very good friends. We paid their families as we should, as I would like my family to be paid, but, and I admit I am not up on rules, but how does this benefit others, not just me, that have been members for 40 plus years. Our club has members that have belonged from a couple of months to years. We sold just enough to pay for those that left. As I said please explain.
First, let me apologize as this will sound rude but your comment sounds selfish, especially to those of us with a recent loss of a loved one or
serious medical issues. Again, I'm sorry if this sounds offensive.
You DID receive a benefit when the club sold appreciated stock. That's the purpose of a growth investment, right? And each member shared the benefit in proportion to their ownership interests, so tax brackets aside, you shared the benefit equally.
Because the club sold stocks at a gain you have a current year tax increase and related impacts, but the option to transfer shares to the estate when a partner dies are more complex than most clubs want to tackle.
Did the timing of the sale fit your personal situation, no. I'm certain the family did not enjoy the timing of the death, either.
If surprise gains from the death of a partner represent a risk you are not willing to accept going forward, you might consider withdrawing from the club, receive your units in shares of stock, then you can control when you realize the remaining gains on your personal circumstance.
I have been a long time member of Poors Pupils for many years. In the last couple of years we have had members pass away who have also been members for many years with assets of well over $100,000.00. We have been a successful club and were able to sell stock to pay our members families the amount they were valued.
When the stocks are sold the money goes into our club treasury, we then write a check to the family. Now, I realize me personally is being hit with a large tax bill, without me having any benefit of the money that was gained from the selling of the stocks.
What advice can you give me and other members of our club, there are just a couple that have invested a lot of money and I really do not want to have a large tax implication, if I do not realize a benefit. The members that have passed away, do not pay as much in taxes as I, a survivor with no financial benefits. I have a financial burden through no fault of my own.
Could you comment on this situation.
Diana Evans
--
Mark Eckman
--
Mark Eckman
ira smilovitz on
Here's what you are missing. As of today, your investment in your club is worth $x and your tax basis (what you've contributed and what you've already paid tax on) is worth $y. The difference ($y - $x) is what you will have to pay tax on in the future. When you sell a stock, for whatever reason, the amount of the gain is taxed now rather than later. and the future tax goes down by the amount that is taxed now. When you consider the full length of your membership in the club, the total amount taxed doesn't change, only the timing. Now if you want to think that you are being penalized by having to pay the tax now vs. later, you are right to an extent. That's why giving appreciated stock is the preferred option. The current gain for the remaining members in the transferred stock is locked away as future taxed gain. Nothing the club does between now and the date you withdraw from the club will make that gain taxable "now".
By the way, there really isn't any good reason for having the withdrawing member pay any sales commissions, especially in the modern environment of sub $10 commissions.
I really do appreciate the emails I am receiving. Please excuse me for not being knowledgeable, in the tax world. I still fail to see how I, or anyone else in my club, benefited by selling stocks to pay off our friends, members to the amount of $1300 - $1900. I probably need a Investment Club Book for Dummies, but when we purchase a stock we pay broker fees, and when we sell a stock, in our club the one that leaves pays the brokers fees for selling, but the rest of us pay taxes on selling. Our club fortunately have some smart ladies in it and we are successful, as a club, is that a wrong thing? We make money as a club, not as individuals. I truly am missing something here, I guess.
I think we should be careful about how we think about our club.
We are an educational entity, an investment entity, a circle of friends, and perhaps other things as well.
I believe we need to separate these functions in our thought process.
If someone dies, or otherwise leaves a club, their share needs to be distributed.
If they have passed away we can all be sad about their passing.
But how their share is distributed can have a deleterious impact on the rest of the club.
And selling assets to pay in cash will reduce the amount of money the club has to invest - thus reducing the club's future potential return.
How it is distributed will NOT have an impact on the amount of taxes owed by the recipient.
That is determined by the recipients tax basis in their club holdings.
If the amount of money is relatively minor paying the departing member in cash is the easiest and the resultant tax consequences are likely minor for the rest of the club
But if the amount of money is large, selling assets in order to make the payoff in cash can create significant tax consequences for every other member of the club.
If you really are a circle of friends, friends don't create unnecessary problems for their friends; especially tax problems.
Yes, it is a little extra work sometimes to create an extra account, and sometimes a lot of extra work, but the benefit to the remaining members can be significant.
Diana - While the purpose of clubs vary, (some are more social, some more educational,) but all clubs are legal entities that have a business purpose of earning income by buying securities and selling them later at a higher price. The resulting gain is a benefit to every member of the club. Assuming your club keeps winning securities and prunes losing securities, the sale to pay the families was most likely a gain, or you used the opportunity to harvest some losses to offset the gains. Either way, that realizes a financial benefit to the club members in the form of income. Your club then passed the proportional share of those gains to your club member in cash.
Do you believe you should never pay taxes, or that the club should never realize gains? Please tell us why you feel disadvantaged by the club fulfilling its purpose.
I do not see you as being rude. But I lost two very good friends. We paid their families as we should, as I would like my family to be paid, but, and I admit I am not up on rules, but how does this benefit others, not just me, that have been members for 40 plus years. Our club has members that have belonged from a couple of months to years. We sold just enough to pay for those that left. As I said please explain.
First, let me apologize as this will sound rude but your comment sounds selfish, especially to those of us with a recent loss of a loved one or
serious medical issues. Again, I'm sorry if this sounds offensive.
You DID receive a benefit when the club sold appreciated stock. That's the purpose of a growth investment, right? And each member shared the benefit in proportion to their ownership interests, so tax brackets aside, you shared the benefit equally.
Because the club sold stocks at a gain you have a current year tax increase and related impacts, but the option to transfer shares to the estate when a partner dies are more complex than most clubs want to tackle.
Did the timing of the sale fit your personal situation, no. I'm certain the family did not enjoy the timing of the death, either.
If surprise gains from the death of a partner represent a risk you are not willing to accept going forward, you might consider withdrawing from the club, receive your units in shares of stock, then you can control when you realize the remaining gains on your personal circumstance.
I have been a long time member of Poors Pupils for many years. In the last couple of years we have had members pass away who have also been members for many years with assets of well over $100,000.00. We have been a successful club and were able to sell stock to pay our members families the amount they were valued.
When the stocks are sold the money goes into our club treasury, we then write a check to the family. Now, I realize me personally is being hit with a large tax bill, without me having any benefit of the money that was gained from the selling of the stocks.
What advice can you give me and other members of our club, there are just a couple that have invested a lot of money and I really do not want to have a large tax implication, if I do not realize a benefit. The members that have passed away, do not pay as much in taxes as I, a survivor with no financial benefits. I have a financial burden through no fault of my own.
Could you comment on this situation.
Diana Evans
--
Mark Eckman
--
Mark Eckman
MJ Boyd on
Ira - can you explain what you mean by "The current gain for the remaining members in the transferred stock is locked away as future taxed gain."
Where I think this gets confusing for most is that there are actually two views you need to look at these transfers/transactions from - the club and the individual member.
For an individual member, when they leave the club, that is a taxable event to the individual. They have effectively sold their shares in the club and receive cash or stocks in return. As Ira notes, the realized gain would be value/worth less your tax basis (what you've paid in). If you receive stocks, your tax basis for those stocks would be your tax basis in the club. For appreciated stocks, that is likely not the same as the club's tax basis in those shares (what the club paid the brokerage for them).
For the club, if stocks held are sold for cash to pay the member leaving, the club has a taxable event which members likely share proportionately. If appreciated stocks are transferred to the member leaving, the club total value and total shares decline proportionately, so there is no value impact to the club overall, but the club's total tax basis declines (but not as much as the value declines). That would also decrease any unrealized gains the club has, effectively reducing the amount "to pay tax on in the future." It seems to go beyond just locking the future tax gain away, but actually transferring it away to the leaving member and out of the club.
This makes me think that transferring appreciated stock as a strategy to effectively transfer club tax gains away from continuing members.
Thanks for any insight.
Michael Boyd, Treasurer
Salt Pond Investment Club
From: club_cafe@bivio.com <club_cafe@bivio.com> On Behalf Of ira smilovitz via bivio.com Sent: Tuesday, March 9, 2021 3:51 PM To: club_cafe@bivio.com Subject: Re: [club_cafe] Bivio tax question
Here's what you are missing. As of today, your investment in your club is worth $x and your tax basis (what you've contributed and what you've already paid tax on) is worth $y. The difference ($y - $x) is what you will have to pay tax on in the future. When you sell a stock, for whatever reason, the amount of the gain is taxed now rather than later. and the future tax goes down by the amount that is taxed now. When you consider the full length of your membership in the club, the total amount taxed doesn't change, only the timing. Now if you want to think that you are being penalized by having to pay the tax now vs. later, you are right to an extent. That's why giving appreciated stock is the preferred option. The current gain for the remaining members in the transferred stock is locked away as future taxed gain. Nothing the club does between now and the date you withdraw from the club will make that gain taxable "now".
By the way, there really isn't any good reason for having the withdrawing member pay any sales commissions, especially in the modern environment of sub $10 commissions.
I really do appreciate the emails I am receiving. Please excuse me for not being knowledgeable, in the tax world. I still fail to see how I, or anyone else in my club, benefited by selling stocks to pay off our friends, members to the amount of $1300 - $1900. I probably need a Investment Club Book for Dummies, but when we purchase a stock we pay broker fees, and when we sell a stock, in our club the one that leaves pays the brokers fees for selling, but the rest of us pay taxes on selling. Our club fortunately have some smart ladies in it and we are successful, as a club, is that a wrong thing? We make money as a club, not as individuals. I truly am missing something here, I guess.
I think we should be careful about how we think about our club.
We are an educational entity, an investment entity, a circle of friends, and perhaps other things as well.
I believe we need to separate these functions in our thought process.
If someone dies, or otherwise leaves a club, their share needs to be distributed.
If they have passed away we can all be sad about their passing.
But how their share is distributed can have a deleterious impact on the rest of the club.
And selling assets to pay in cash will reduce the amount of money the club has to invest - thus reducing the club's future potential return.
How it is distributed will NOT have an impact on the amount of taxes owed by the recipient.
That is determined by the recipients tax basis in their club holdings.
If the amount of money is relatively minor paying the departing member in cash is the easiest and the resultant tax consequences are likely minor for the rest of the club
But if the amount of money is large, selling assets in order to make the payoff in cash can create significant tax consequences for every other member of the club.
If you really are a circle of friends, friends don't create unnecessary problems for their friends; especially tax problems.
Yes, it is a little extra work sometimes to create an extra account, and sometimes a lot of extra work, but the benefit to the remaining members can be significant.
Diana - While the purpose of clubs vary, (some are more social, some more educational,) but all clubs are legal entities that have a business purpose of earning income by buying securities and selling them later at a higher price. The resulting gain is a benefit to every member of the club. Assuming your club keeps winning securities and prunes losing securities, the sale to pay the families was most likely a gain, or you used the opportunity to harvest some losses to offset the gains. Either way, that realizes a financial benefit to the club members in the form of income. Your club then passed the proportional share of those gains to your club member in cash.
Do you believe you should never pay taxes, or that the club should never realize gains? Please tell us why you feel disadvantaged by the club fulfilling its purpose.
I do not see you as being rude. But I lost two very good friends. We paid their families as we should, as I would like my family to be paid, but, and I admit I am not up on rules, but how does this benefit others, not just me, that have been members for 40 plus years. Our club has members that have belonged from a couple of months to years. We sold just enough to pay for those that left. As I said please explain.
First, let me apologize as this will sound rude but your comment sounds selfish, especially to those of us with a recent loss of a loved one or serious medical issues. Again, I'm sorry if this sounds offensive.
You DID receive a benefit when the club sold appreciated stock. That's the purpose of a growth investment, right? And each member shared the benefit in proportion to their ownership interests, so tax brackets aside, you shared the benefit equally. Because the club sold stocks at a gain you have a current year tax increase and related impacts, but the option to transfer shares to the estate when a partner dies are more complex than most clubs want to tackle. Did the timing of the sale fit your personal situation, no. I'm certain the family did not enjoy the timing of the death, either.
If surprise gains from the death of a partner represent a risk you are not willing to accept going forward, you might consider withdrawing from the club, receive your units in shares of stock, then you can control when you realize the remaining gains on your personal circumstance.
I have been a long time member of Poors Pupils for many years. In the last couple of years we have had members pass away who have also been members for many years with assets of well over $100,000.00. We have been a successful club and were able to sell stock to pay our members families the amount they were valued.
When the stocks are sold the money goes into our club treasury, we then write a check to the family. Now, I realize me personally is being hit with a large tax bill, without me having any benefit of the money that was gained from the selling of the stocks.
What advice can you give me and other members of our club, there are just a couple that have invested a lot of money and I really do not want to have a large tax implication, if I do not realize a benefit. The members that have passed away, do not pay as much in taxes as I, a survivor with no financial benefits. I have a financial burden through no fault of my own.
Could you comment on this situation.
Diana Evans
--
Mark Eckman
--
Mark Eckman
Linda TerHaar on
One point about timing -- there is no taxable event until stocks are actually sold, whether by the club or the former member. The withdrawing member receiving stock does not have a taxable event simply by withdrawing. It's only when they sell stock transferred to them that a taxable event occurs, and there's nothing that says they must sell the stock immediately. Our club has operated on that principle for withdrawing members for some time now.
Ira - can you explain what you mean by "The current gain for the remaining members in the transferred stock is locked away as future taxed gain."
Where I think this gets confusing for most is that there are actually two views you need to look at these transfers/transactions from - the club and the individual member.
For an individual member, when they leave the club, that is a taxable event to the individual. They have effectively sold their shares in the club and receive cash or stocks in return. As Ira notes, the realized gain would be value/worth less your tax basis (what you've paid in). If you receive stocks, your tax basis for those stocks would be your tax basis in the club. For appreciated stocks, that is likely not the same as the club's tax basis in those shares (what the club paid the brokerage for them).
For the club, if stocks held are sold for cash to pay the member leaving, the club has a taxable event which members likely share proportionately. If appreciated stocks are transferred to the member leaving, the club total value and total shares decline proportionately, so there is no value impact to the club overall, but the club's total tax basis declines (but not as much as the value declines). That would also decrease any unrealized gains the club has, effectively reducing the amount "to pay tax on in the future." It seems to go beyond just locking the future tax gain away, but actually transferring it away to the leaving member and out of the club.
This makes me think that transferring appreciated stock as a strategy to effectively transfer club tax gains away from continuing members.
Here's what you are missing. As of today, your investment in your club is worth $x and your tax basis (what you've contributed and what you've already paid tax on) is worth $y. The difference ($y - $x) is what you will have to pay tax on in the future. When you sell a stock, for whatever reason, the amount of the gain is taxed now rather than later. and the future tax goes down by the amount that is taxed now. When you consider the full length of your membership in the club, the total amount taxed doesn't change, only the timing. Now if you want to think that you are being penalized by having to pay the tax now vs. later, you are right to an extent. That's why giving appreciated stock is the preferred option. The current gain for the remaining members in the transferred stock is locked away as future taxed gain. Nothing the club does between now and the date you withdraw from the club will make that gain taxable "now".
By the way, there really isn't any good reason for having the withdrawing member pay any sales commissions, especially in the modern environment of sub $10 commissions.
I really do appreciate the emails I am receiving. Please excuse me for not being knowledgeable, in the tax world. I still fail to see how I, or anyone else in my club, benefited by selling stocks to pay off our friends, members to the amount of $1300 - $1900. I probably need a Investment Club Book for Dummies, but when we purchase a stock we pay broker fees, and when we sell a stock, in our club the one that leaves pays the brokers fees for selling, but the rest of us pay taxes on selling. Our club fortunately have some smart ladies in it and we are successful, as a club, is that a wrong thing? We make money as a club, not as individuals. I truly am missing something here, I guess.
I think we should be careful about how we think about our club.
We are an educational entity, an investment entity, a circle of friends, and perhaps other things as well.
I believe we need to separate these functions in our thought process.
If someone dies, or otherwise leaves a club, their share needs to be distributed.
If they have passed away we can all be sad about their passing.
But how their share is distributed can have a deleterious impact on the rest of the club.
And selling assets to pay in cash will reduce the amount of money the club has to invest - thus reducing the club's future potential return.
How it is distributed will NOT have an impact on the amount of taxes owed by the recipient.
That is determined by the recipients tax basis in their club holdings.
If the amount of money is relatively minor paying the departing member in cash is the easiest and the resultant tax consequences are likely minor for the rest of the club
But if the amount of money is large, selling assets in order to make the payoff in cash can create significant tax consequences for every other member of the club.
If you really are a circle of friends, friends don't create unnecessary problems for their friends; especially tax problems.
Yes, it is a little extra work sometimes to create an extra account, and sometimes a lot of extra work, but the benefit to the remaining members can be significant.
Diana - While the purpose of clubs vary, (some are more social, some more educational,) but all clubs are legal entities that have a business purpose of earning income by buying securities and selling them later at a higher price. The resulting gain is a benefit to every member of the club. Assuming your club keeps winning securities and prunes losing securities, the sale to pay the families was most likely a gain, or you used the opportunity to harvest some losses to offset the gains. Either way, that realizes a financial benefit to the club members in the form of income. Your club then passed the proportional share of those gains to your club member in cash.
Do you believe you should never pay taxes, or that the club should never realize gains? Please tell us why you feel disadvantaged by the club fulfilling its purpose.
I do not see you as being rude. But I lost two very good friends. We paid their families as we should, as I would like my family to be paid, but, and I admit I am not up on rules, but how does this benefit others, not just me, that have been members for 40 plus years. Our club has members that have belonged from a couple of months to years. We sold just enough to pay for those that left. As I said please explain.
First, let me apologize as this will sound rude but your comment sounds selfish, especially to those of us with a recent loss of a loved one or serious medical issues. Again, I'm sorry if this sounds offensive.
You DID receive a benefit when the club sold appreciated stock. That's the purpose of a growth investment, right? And each member shared the benefit in proportion to their ownership interests, so tax brackets aside, you shared the benefit equally. Because the club sold stocks at a gain you have a current year tax increase and related impacts, but the option to transfer shares to the estate when a partner dies are more complex than most clubs want to tackle. Did the timing of the sale fit your personal situation, no. I'm certain the family did not enjoy the timing of the death, either.
If surprise gains from the death of a partner represent a risk you are not willing to accept going forward, you might consider withdrawing from the club, receive your units in shares of stock, then you can control when you realize the remaining gains on your personal circumstance.
I have been a long time member of Poors Pupils for many years. In the last couple of years we have had members pass away who have also been members for many years with assets of well over $100,000.00. We have been a successful club and were able to sell stock to pay our members families the amount they were valued.
When the stocks are sold the money goes into our club treasury, we then write a check to the family. Now, I realize me personally is being hit with a large tax bill, without me having any benefit of the money that was gained from the selling of the stocks.
What advice can you give me and other members of our club, there are just a couple that have invested a lot of money and I really do not want to have a large tax implication, if I do not realize a benefit. The members that have passed away, do not pay as much in taxes as I, a survivor with no financial benefits. I have a financial burden through no fault of my own.
Could you comment on this situation.
Diana Evans
--
Mark Eckman
--
Mark Eckman
--
PPlease consider the environment before printing this e-mail.