Paying off withdrawing members

Michael Carroll on

Our club pays withdrawing members in cash. The idea of
paying them with stock seemed odd and cumbersome, and I
wondered why anyone would bother. Rip West enlightened me
with a comment he made in a recent discussion here. Selling
stock to pay the withdrawing member is a taxable event, with
tax consequences for all club members. Transferring stock
ownership is not. Aha!

Still, I suppose paying off in cash is a lot simpler from
the accounting standpoint. (Isn't it?) And there would need
to be a method for choosing which stock(s) to transfer? (But
then, we need to choose which to sell, anyway, if we pay in
cash.) I wonder if there's been a discussion or magazine
article somewhere of the pros & cons of the different payoff
methods. I'd be grateful for any pointers.

Mike Carroll

Gene Rooks on

Mike, the stock to transfer would be stock that has made good gains, thereby
deferring (but not avoiding) taxes on that gain for both the club's
increased value because of it, and the withdrawing member getting it at a
different tax basis, that won't become his capital gain until he sells it.

My overall take is that a withdrawal of a significant member is a good time
to study and rebalance your portfolio. As mentioned above, you can
transfer all, or only part, of a highly appreciated holding, that may be too
much of your portfolio, and even may be near it's peak, with little upside
left. You can also sell at this time losing stocks, or sluggish performers
whose fundamentals don't look promising, for more cash. Whatever you do,
do what leaves your portfolio in a more balanced state, with more upside all
around.

Wish I could show you the performance chart of our club before and after we
had to trim our overall value 45% to pay out five withdrawals at once. We
had been bobbling along unremarkably, after the pruning our performance shot
up dramatically due to the weeding and feeding we did.

Gene Rooks, SWIM club, Orlando

Rip West on

Mike,

Still, I suppose paying off in cash is a lot simpler from the accounting standpoint. (Isn't it?)

From the accounting standpoint, it's just about as simple to use stock as cash. From a logistic standpoint, it takes a little more to get your broker to transfer the stock.

And there would need to be a method for choosing which stock(s) to transfer?

When I first started using this method, we would make a detailed study about rebalancing, etc before we chose. We finally figured out that we might as well use the most appreciated stocks, to give us the best tax result, and then to rebalance by either buying more of that stock or others, as prudent investment analysis dictated.

Rip West
Saint Paul, MN

Deborah J. Rollins-Thorne on

Rip West wrote:
> Mike,
> �
> Still, I suppose paying off in cash is a lot
> simpler from the accounting standpoint. (Isn't it?)
>
> From
> the accounting standpoint, it's just about as simple to use stock as cash. From
> a logistic standpoint, it takes a little more to get your broker to transfer the
> stock.

I have found it to be very simple to transfer stock. My club
uses Ameritrade. The withdrawing partner needs to open an
account with Ameritrade, which takes about 48 hours to open
it online. Then I go to Ameritrade's website and fill out an
online form, print the form, sign it, and fax it to
Ameritrade. The stock is transfered in the withdrawing
partner's account in 3 to 4 business days later.

Debi

Michael Carroll on

Gene & others,

Ok, this is sounding like it's not as complicated as I
thought, provided the broker will cooperate. I see that
bivio would let me record, when a member withdraws, that he
was paid by transferring stock.

One piece I don't get is Gene's comment that the club is
"deferring (but not avoiding) taxes on that gain for ... the
club's increased value." Deferring until when? If the stock
is transferred, how & when is the club's gain and its tax on
the gain calculated? If it's only deferred until the taxes
are calculated for the year in which the transfer occurred,
how does that differ from selling the stock & giving the
withdrawing member the proceeds? I'm still missing a piece
of the puzzle.

Mike

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