Member Withdrawal - Best Option(s)?
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Member Withdrawal - Best Option(s)? I have been reading in the Cafe about recommended options for clubs to handle a member withdrawal. I am a new treasurer. I've read several things and wonder if they are still true: 1. The best option is usually to transfer appreciated stock with unrealized capital gains to the withdrawing member. 2. If you don't have any appreciated stock to transfer, the next option is likely to pay the withdrawing member in cash (providing you have enough for the payout.) At this time, we are in the position of having just one stock in our portfolio that is in positive territory, and we are reluctant to transfer any of it. On the other hand, we do have cash on hand to pay off the amount due to the withdrawing member. Is this the best course of action? Thank you in advance, Cynthia Are The best course of action is to transfer appreciated stock. You can always buy the stock back immediately after the transfer, establishing a higher cost basis for the club's shares.
The next best course of action is to sell a depreciated stock to raise cash. You get to take a capital loss this year.
Next would be to use cash on hand to fund the withdrawal.
Worst would be to sell appreciated stock or to transfer depreciated stock.
Ira Smilovitz
In a message dated 07/13/09 00:38:27 Eastern Daylight Time, skyfox@bivio.com writes:
Hi Ira, Can you explain why selling appreciated stock and transfering depreciated stock are the worst choices? Thanks, John Rice From: iras1 <iras1@aol.com> To: The Club Cafe <club_cafe@bivio.com> Sent: Sunday, July 12, 2009 10:03:53 PM Subject: Re: club_cafe: Member Withdrawal - Best Option(s)? The best course of action is to transfer appreciated stock. You can always buy the stock back immediately after the transfer, establishing a higher cost basis for the club's shares.
The next best course of action is to sell a depreciated stock to raise cash. You get to take a capital loss this year.
Next would be to use cash on hand to fund the withdrawal.
Worst would be to sell appreciated stock or to transfer depreciated stock.
Ira Smilovitz
In a message dated 07/13/09 00:38:27 Eastern Daylight Time, skyfox@bivio.com writes:
At the risk of quibbling, I would change Ira's first sentence to read "(t)he most tax efficient method for both the member leaving and the members remaining is to transfer appreciated stock." The potential tax implications of transferring appreciated stock versus using existing cash to pay off the leaving member should also be evaluated on the basis of practicality. If a relatively small amount of money or capital gains are involved, sometimes the tax savings may not be worth the additional time and effort to process the stock transfer. Not all actions that minimize taxes make sense for other reasons. Jack Ranby Treasurer, Grants Partners iras1 wrote: > The best course of action is to transfer appreciated stock. You can always buy the stock back immediately after the transfer, establishing a higher cost basis for the club's shares. > > The next best course of action is to sell a depreciated stock to raise cash. You get to take a capital loss this year. > > Next would be to use cash on hand to fund the withdrawal. > > Worst would be to sell appreciated stock or to transfer depreciated stock. > > Ira Smilovitz > > > > In a message dated 07/13/09 00:38:27 Eastern Daylight Time, skyfox@bivio.com writes: > > I have been reading in the Cafe about recommended options > for clubs to handle a member withdrawal. I am a new > treasurer. > > I've read several things and wonder if they are still true: > 1. The best option is usually to transfer appreciated stock > with unrealized capital gains to the withdrawing member. > 2. If you don't have any appreciated stock to transfer, the > next option is likely to pay the withdrawing member in cash > (providing you have enough for the payout.) > > At this time, we are in the position of having just one > stock in our portfolio that is in positive territory, and we > are reluctant to transfer any of it. On the other hand, we > do have cash on hand to pay off the amount due to the > withdrawing member. Is this the best course of action? Thank > you in advance, > > > A Good Credit Score is 700 or Above. See yours in just 2 easy steps! John,
Selling appreciated stock to fund a withdrawal results in the club and the
withdrawee reporting more taxable income to the IRS than has actually been
realized at the time of the sale. This imbalance will be corrected as the
remaining members leave the club, but that could be years down the line. You can
read more about this at
Transferring depreciated stock to a withdrawing member deprives the
remaining members of using the loss on that stock to offset future capital
gains.
Rip West
Saint Paul, MN
If you have the cash on hand to fund the withdrawal, there is no immediate tax impact on the remaining members. The withdrawing member will report a capital gain/loss based on the difference between the cash received and his/her tax basis in the club.
However, you can achieve a better result by using appreciated stock to fund the withdrawal. Let's assume the club uses shares of ABC to fund the withdrawal and the club has a $1000 unrealized gain in the stock. If the club were to sell the stock, each member of the club would receive a share of the gain (in proportion to their ownership percentage) and would pay tax on that gain. By transferring the stock, the gain is locked into the difference between each member's tax basis and current value and won't be taxed until each member withdraws from the club -- perhaps many years from now. The withdrawing member who receives the stock gets it with a cost basis that is equal to his/her tax basis in the club (adjusted for any cash received), so his/her taxable gain is the same as if cash were received. But, if s/he doesn't sell the shares immediately, the tax is deferred until the shares are sold. So the withdrawing member can choose when the tax will be due.
No matter what you choose, bivio will handle all of the tax calculations correctly.
Ira Smilovitz
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Investor Education at Its Best(TM) Baltimore, MD August 6 - 8, 2010 http://www.investor-education2010.org/ In a message dated 09/21/09 11:32:56 Eastern Daylight Time, nkalbrecht@yahoo.com writes:
Hi Kristal,
You have found the most pertinent data on the subject. There is no 'one
best' solution for all withdrawal circumstances. As your research says, you
might be better off transferring appreciated stock to the member. This would be
advantageous if you were ever to sell that stock, since some of the taxable gain
on it would be deferred. If you are hesitant to sell that appreciated stock, it
would still make tax-sense to do so, and use your available cash to increase
your holdings in that company at a higher tax basis. On the other hand, it might
be a good time to review your portfolio and eliminate some of your losers.
As to your question about how the withdrawal will affect others in the
club, the immediate withdrawal will not affect them. If you fail to transfer
appreciated stock, they will be prepaying their taxes if and when that
appreciated stock is sold.
Rip West Saint Paul, MN |
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