Partnership Representative--verbiage for bylaws change?
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We are wondering if anyone has copies of verbiage they have used for defining the position of Partnership Representative in their bylaws. We would appreciate not having to reinvent the wheel if the wording already exists and could be shared with us. Thank you, Rita Geary, Women of Wyoming Investment Club Any update on this question? I also see that the Partnership Agreement example section #18 still contains the provision for transfer to interest to a revocable living trust. My understanding is that this has become a problem, at least on a temporary basis. Comments? Linda,
This question has prompted our club to investigate this also. I've
been communicating with Bivio (Laurie Frederiksen), pointing out what I think
are conflicting paragraphs in the sample Partnership Agreement. What I've
said to her is.......
My concern is the wording in two of the paragraphs in the sample Partnership Agreement. Paragraph 18 talks about transfers to a trust.....
Some of your members may have chosen to put their assets into a revocable living trust. If they would like to also put their share of the club into it, it is fine, as long as it meets the criteria spelled out here. To accommodate this, change the name on the partners account to the name of the trust. The social security number should remain the same as the partners social security number.
But paragraph 23 suggests ..........
Death or Incapacity of a Partner. In the event of the death or incapacity of a partner (or the death or incapacity of the grantor and sole trustee of a revocable living trust, if such trust is partner pursuant to Paragraph 18 hereof), receipt of notice shall be treated as a request for a full withdrawal. Payment shall be in accordance with the terms for payment of a full withdrawal (Paragraph 22). It shall be made to the estate of the partner and delivered to the partners last known address.
On one hand, paragraph 18 suggests that a member can elect to establish a trust, but paragraph 23 states the check for the deceased member should be made out to the estate of the partner, which may be in conflict with the terms of the trust. Paragraph 23 further states.......
The death of a club member is a sad experience for clubs. From a business perspective, it is best to handle this in the same way as you would handle a request for complete withdrawal. This includes the date used to value the partners account. You should not use the date of death as the valuation date nor use any other date given to you by the executors of the estate. It is important that your club stay out of the settling of the estate to avoid becoming part of any legal complications you may be unaware of. To do this, make the final check out to "To the Estate of [DECEASED NAME] and deliver it to the partners last known address or to the executor of the estate if you know who this is. Let them determine how the money will be shared amongst the heirs. Do not let your club become part of how the money is distributed. This includes situations where one of the partners relatives wants to "take over" the deceased partners share of the club. Payout the withdrawn members share as noted above, then let the estate distribute the proceeds to the heir. They may then choose to make a new investment in your club if they would like. Clubs sometimes ask about beneficiary forms they can use for their members. For the reasons just given, we recommend against the use of such forms. It is best to have your partnership agreement restrict its obligation to your partners to the terms described in this section.
The bottom line is...... We will be reviewing this issue with our members at the next meeting and recommending amending our Partnership Agreement to disallow trusts. I also think that Bivio should consider amending the sample document.... but they may have a different view. Hope this helps answer your question. Dick Lewis Gentlemen's Mutual Investment Club (GMIC)
Sent: Tuesday, September 25, 2018 11:55 AM
Subject: [club_cafe] Re: Partnership Representative--verbiage for
bylaws change? Any
update on this question? I also see that the Partnership Agreement example section #18 still contains the provision for transfer to interest to a revocable living trust. My understanding is that this has become a problem, at least on a temporary basis. Comments? Not that I know anything, but if the Trust becomes the partner, then wouldn't mailing the proceeds to the trust be consistent with that statement? That said, here is the question that was brought up in our club. What if a member has an revocable living trust, but has not transferred his interest in the partnership into that trust? Any problems? Linda
Well.... I don't have an answer for that but my recommendation is to avoid
trusts, whether they're revocable or irrevocable. As treasurer, I believe in the
KISS principle. Hopefully you know what that is. Right?
Dick
Sent: Tuesday, September 25, 2018 12:58 PM
Subject: Re: [club_cafe] Re: Partnership Representative--verbiage
for bylaws change? Not that I know anything, but if the Trust becomes the partner, then
wouldn't mailing the proceeds to the trust be consistent with that
statement?
That said, here is the question that was brought up in our club.
What if a member has an revocable living trust, but has not transferred his
interest in the partnership into that trust? Any problems?
Linda
Indeed I do. :-) Linda asked: That said, here is the question that was brought up in our club. What if a member has an revocable living trust, but has not transferred his interest in the partnership into that trust? Any problems? Linda Answer: No. Until the legal owner of the asset becomes the trust through transfer or purchase, the ownership remains in the individual. The terms of the trust have no effect on the asset. That is why people with trusts still need a Will to handle assets that are not in the trust. Jack Ranby, Treasurer, Grants Partners Investment Club
All the issues around Withdrawal are exacerbated by the additional emotions swirling both w partners and next of kin. Without sharing private matters, let me make some comments. Consider the process for transfer of stocks and cash to an active account of the partner. W withdrawals of living people, getting that account number is a drawn out process. (With an trust/ estate...hmm). There is a lot going on for the next of kin. There is a lot to be said for minimizing muss and fuss for the Club treasurer. I insisted (for me to remain as treasurer) that partners be prohibited from transferring their shares to a trust. My $0.02. Irina Clements, Treasurer I totally agree. My resignation as club treasurer will be immediate
if the members elect to ignore my recommendation to disallow trusts.
Dick
Sent: Tuesday, September 25, 2018 1:28 PM
Subject: Re: [club_cafe] Re: Partnership Representative--verbiage
for bylaws change?
All the issues around Withdrawal are exacerbated by the additional emotions
swirling both w partners and next of kin.
Without sharing private matters, let me make some comments.
Consider the process for transfer of stocks and cash to an active account
of the partner. W withdrawals of living people, getting that account
number is a drawn out process. (With an trust/ estate...hmm).
There is a lot going on for the next of kin. There is a lot to be
said for minimizing muss and fuss for the Club treasurer.
I insisted (for me to remain as treasurer) that partners be prohibited from
transferring their shares to a trust.
My $0.02. Irina Clements, Treasurer
Irina and Dick clearly have firm beliefs about trusts to which they are entitled; but having a trust as a member of the partnership doesn't need to require any different treatment at the death of the trustor of the trust than if the partnership interest is held as an individual. The partnership agreement can provide that the death of the trustor of the revocable trust is treated as a request for withdrawal. The treasurer would then follow the same procedure that would be used if a living person submitted a request to withdraw. The check would be made payable to the trust and mailed to the subsequent trustee. Using a revocable trust to avoid probate or to administer a person's assets if mental or physical disabilities occur is becoming more common. To preclude membership in an investment club on these grounds is short sighted and may greatly decrease the pool of potential members. Allowing ownership in the investment club partnership by a revocable trust doesn't increase the duties of the treasurer. Jack Ranby, Treasurer, Grants Partners Investment Club Both of Mr. Ranby's messages on this subject are correct. Numerous people have created (and continue to create and update) revocable living trusts to avoid the need (and cost) of probate. Trusts are not just for the rich. Every couple should have one to provide quick, easy, and low cost transfer of assets upon death. Individuals can benefit from a revocable living trust as well. Regarding wills, any good revocable living trust will include a pour-over will. Such a will specifies that any assets not in the trust at time of death shall automatically become part of the trust at death. This is not the only purpose of a will, however. It can also be used to specify who will receive specific assets, whether those assets are in the trust or not. My wife and I have had a revocable living trust since 1996, and it has been updated several times over the years. It was very easy to transfer ownership of our assets into the trust. My interest in my one investment club is NOT in our trust at this time, simply because I didn't set it up that way when I joined the club. If I chose to do so, I certainly could make my club interest part of our trust, but the amount is relatively small, and the pour-over will will make it part of the trust in the event of my death. Don't trust the State to distribute your estate as you would like. The State will distribute your assets according to state law, and the cost of leaving the task to the state may be prohibitive. Find a good attorney who specializes in revocable living trusts and have one drawn up right away. It should cost no more than a few hundred dollars. The peace of mind that it provides is well worth the cost. Note: I am not an attorney. I have to ask, are you all aware of the changes in the IRS treatment of partnerships that have trust(s) as members starting this year? From the sound of your discussion it doesn't seem so. I notice the subject of this thread is "Partnership Representative--verbiage for bylaws change?" so it appears you all should be aware that your ByLaws need to be revised this year to designate a "Partnership Representative, (PR) whose sole function is to represent the partnership in the event of an IRS audit, and if you don't the IRS will appoint one if you are audited!" It seems like the discussion has morphed into benefits to an individual of having a Trust. IClub presented a good webinar discussing the new audit rules in July 2018 that is available for viewing on the BetterInvesting Website. "Understanding the New IRS Audit Rules for Investment Clubs Presented on 7/19/2018 by Doug Gerlach and Russell Malley Effective in the 2018 tax year, the Internal Revenue Service has launched new audit rules for partnerships. These rules address how the IRS would operate if your club was to be audited and how they would collect any resulting tax liability resulting from the partnership's activities. There are significant ramifications to these rules for all investment clubs, especially those that allow living trusts as partners. In this webinar, Doug Gerlach and Russell Malley will provide an overview of the rules for partnerships, along with suggestions for how you can protect your investment club's members under the new IRS rules. View Presentation Presentation Handout (2pp-COLOR)" To summarize if you want to opt out of the new [draconian] IRS rules for auditing partnerships there are steps that you must take. One significant point is that if you have a trust as a partner your partnership can't opt out of the new audit rules and that may have financial consequences for the current partners in the event of an audit of past years. The implication is that your bylaws should not allow a trust as a partner. The sample partnership agreement from BI that I have seen sometimes include the following "16A. Transfers to a Trust. A partner may, after giving written notice to the other partners, transfer his interest in the partnership to a revocable living trust of which he is the grantor and sole trustee." Obviously that wording needs to be removed if the partnership intends to opt out of the new audit rules. I am not a lawyer either, so I won't comment on whether removing that sentence will be enough to satisfy the requirement to not have a trust as a partner. We can spend all day discussing if it's not specifically prohibited then it is allowed. If the bylaws say a trust may not be a partner, end of discussion. Leonard Douglass, Financial Partner SEMI NAIC Model Club -----Original Message----- From: club_cafe@bivio.com <club_cafe@bivio.com> On Behalf Of John W Ranby Trustee PGM Cariboo Trust via bivio.com Sent: Tuesday, September 25, 2018 2:20 PM To: club_cafe@bivio.com Subject: [club_cafe] Re: Partnership Representative--verbiage for bylaws change? Irina and Dick clearly have firm beliefs about trusts to which they are entitled; but having a trust as a member of the partnership doesn't need to require any different treatment at the death of the trustor of the trust than if the partnership interest is held as an individual. The partnership agreement can provide that the death of the trustor of the revocable trust is treated as a request for withdrawal. The treasurer would then follow the same procedure that would be used if a living person submitted a request to withdraw. The check would be made payable to the trust and mailed to the subsequent trustee. Using a revocable trust to avoid probate or to administer a person's assets if mental or physical disabilities occur is becoming more common. To preclude membership in an investment club on these grounds is short sighted and may greatly decrease the pool of potential members. Allowing ownership in the investment club partnership by a revocable trust doesn't increase the duties of the treasurer. Jack Ranby, Treasurer, Grants Partners Investment Club --- This email has been checked for viruses by AVG. https://www.avg.com Mr. Douglass seems spot on to me. I do not, however, begin to understand why the Partnership Representative needs to be addressed in the bylaws any more than the Tax Matters Partner needed to be addressed. I can only speculate, since the next year's return is not yet available, but I anticipate that there will be a spot on the tax return for a partner to sign, or be named, as the 'Partnership Representative'. Do other partnerships have in their bylaws who the 'Tax Matters' partner is? Our partnership agreement has nothing about completing tax returns and which partner will take care of this task. Scott Subject: By-Laws: Partnership Representative; Rev.LivingTrusts; Pour-over Wills The original question of the wording for the IRS Partnership Representative and changes regarding a discrepancy in the "sample" By-laws regarding "trusts" has morphed into a fascinating discussion. Many good points and, for me, an A-HA! moment. Our model club executive board has decided not to grant Trust partners into our membership although we started the process a couple of years ago to allow this. We will be revising our by-laws to make this clear as we address the issue of a Partnership Representative. We, too, were wondering if there was already wording available. On the other side of the coin was the frustration of my husband and me, each individual members of our club, wanting to fund our partnership assets into our Revocable Living Trust. Our combined assets are getting close enough to possibly trigger a probate situation since the assets are not named/funded specifically in our trust. We had to probate in two states my mother-in-law's estate because of a change she made and her trust not properly referred to or funded. Her total estate was about $600,000 and a two-year nightmare trying to get everything settled. This is why we are such advocates of getting everything funded into our trust. My AHA moment: we can change our pour-over will to specifically name our assets in the club partnership to be placed into the trust upon our withdrawal from the club due to the death of one or both of us. We will be checking into this, as I'm not an attorney either. This seems to me to be a way to disengage Trusts from investment clubs and still protect the estate of the partner's share in the investment club. Thank you, Bill Peterson, for pointing out the pour-over will aspect of a "good" trust. Megan McKinlay, Financial Partner ACM Model Club Inland Empire Chapter On Tue, Sep 25, 2018 at 12:54 PM William C. Peterson via bivio.com <user*26072600001@bivio.com> wrote: Both of Mr. Ranby's messages on this subject are correct. From Len Douglas: To summarize if you want to opt out of the new [draconian] IRS rules for auditing partnerships there are steps that you must take. One significant point is that if you have a trust as a partner your partnership can't opt out of the new audit rules and that may have financial consequences for the current partners in the event of an audit of past years. The last part of the last sentence may be wrong. As I read the sentence originally, I thought Len was referring to audits of years prior to 2018. None of the new rules affect years which ended before January 1, 2018. The new rules only cover tax years which begin after December 31, 2018. Re-reading it now, while proof-reading what I've typed below, I think he may actually be referring to current "at the time of an audit" partners and past (2018 and later) years. As to Scott's question below, there are very important reasons why the issue of the Partnership Representative needs to be addressed in the Partnership Agreement. The Representative has the sole authority to negotiate with the IRS and bind the club to any agreement reached without any consultation or input from the club. More specifically, the other members of the club are prohibited by statute from participating in the audit. In fact, the IRS doesn't even have to notify the other members that an audit is underway. Note that you don't name the PR in the Partnership Agreement, but you define what authorities and limits you place on the Representative. The PR for a given year will be named on the 1065 return. Here is where the partnership agreement comes in, though: the agreement may require the PR to provide notice of and updates on audit proceedings, to obtain member votes on various issues and otherwise restrict the activities of the PR. A breach of an obligation under the partnership agreement by the PR may be pursued under contract law, or in some states, possibly as a breach of fiduciary duty. Note, the Representative doesn't have to be a member of the club - the only requirement is that the individual have "substantial presence" in the US. You could name an outside professional as your PR. If you do not name a Partnership Representative, the IRS can choose any member of the club as the Representative. One of the other provisions of the change which may help a club under audit is that the PR may have the ability to "push out" any audit change to the members who were partners during the year under audit. Here are some of the issues you need to consider:
This last point bears further consideration. Under the new Consolidated Partnership Audit Regime, audit changes must be paid by the partnership and/or current members. There is no intrinsic mechanism to push the the changes out to the members during the year under audit. However, a club can modify its PA to include a clause that states that in the case of an audit, The PR has the authority to push out the assessment(s) to the partners during the year under audit. In order for this clause to be binding, it must be enacted before a member who might be subject to it withdraws from the club. In other words, you can't impose this on an ex-member who wasn't a member at the time it was adopted. Another very important point for those clubs who are eligible and wish to opt-out of the new audit rules: the opt-out election must be made each year on a timely-filed return. I hope this helps clarify what is a confusing subject. Ira Smilovitz, EA Mr. Douglass seems spot on to me. I do not, however, begin |
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