Withdrawing Member

Andrew Butler on

I know this topic seems to be discussed a lot but I wanted
to ask a couple specific questions. One of our members is
withdrawing and our bylaws state the valuation date of the
members account is the first meeting following the written
notice of the members withdraw. That's the easy part. My
questions are:

1) As far as Bivio is concerned, I just need to fill out the
withdraw form for the departing member, correct?

2) We have enough cash on hand we can pay him out with cash
and not have to liquidate any stock positions. So, I am
assuming we can just fill out the form and then write him a
check from the cash in the total amount of his account as
valued on the meeting date. Correct?

3) Am I missing anything? Specifically, am I missing
anything that could create a unnecessary tax consequence for
the club or the individual?

Thanks for all your help!

Jim Thomas on

Andrew,

> 3) Am I missing anything? Specifically, am I missing
> anything that could create a unnecessary tax consequence
> for the club or the individual?

If the amount of the withdrawal substantial? Will the withdrawing member
have a significant gain upon withdrawal (is their market value greater than
their tax basis on the member status report)? Does the club hold stocks
that have appreciated substantially.

If so, by paying in cash *all* the club members may be missing an
opportunity to defer taxation on some capital gains.

-Jim Thomas

Leo Cardillo on

I have followed this thread with interest.

Our Club has similar rules to those of Andrew,and we do pay the departing
member in cash. While there are clear tax advantages to stock payment in
lieu of cash, we have always paid in cash. Moreover, our members have always
joined "for life", and we are more than fifty years in existence. I suspect
that when one of our members withdraws, he prefers the cash that is
specified in our Articles of Agreement at that point in time, and that is
the way that we will continue, at least for now.

Best Regards,

Leo
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-----Original Message-----
From: club_cafe@bivio.com [mailto:club_cafe@bivio.com] On Behalf Of Jim
Thomas
Sent: Monday, May 10, 2010 10:52 PM
To: The Club Cafe
Subject: Re: club_cafe: Withdrawing Member

Andrew,

> 3) Am I missing anything? Specifically, am I missing anything that
> could create a unnecessary tax consequence for the club or the
> individual?

If the amount of the withdrawal substantial? Will the withdrawing member
have a significant gain upon withdrawal (is their market value greater than
their tax basis on the member status report)? Does the club hold stocks
that have appreciated substantially.

If so, by paying in cash *all* the club members may be missing an
opportunity to defer taxation on some capital gains.

-Jim Thomas

Rip West on

Hey Leo,

While there are clear tax advantages to stock payment in lieu of cash, we have always paid in cash.

Now what kind of reasoning is that?

I suspect that when one of our members withdraws, he prefers the cash that is specified in our Articles of Agreement at that point in time, and that is the way that we will continue, at least for now.

Your suspicion is probably correct, but I also suspect that the majority of members who withdraw would be willing to take stock [even if they promptly sell it], if they knew that it would benefit the remaining members of the club, and not cause themselves any harm.

I'm really not picking on you, but this is a topic in which I have been interested for a number of years, and I don't find the argument that 'we have always done it this way' to be persuasive.

Rip West
Saint Paul, MN

Jim Thomas on

> I suspect that when one of our members
> withdraws, he prefers the cash ...

The club can still pay with appreciated stock (so the remaining members get
the tax deferal) and the withdrawing member can immediately sell the stock
(so they get the cash).

-Jim Thomas

Leo Cardillo on

By gently airing this laundry, I hope to engender some consideration for change - not an obvious choice as the years go by and by and by....

How does one transfer the stock itself? Is that something that Fidelity can readily accomplish?

Another consideration is that most of us are not ahead in the recent years, so that the cash withdrawal is not quite so onerous. Is that correct?

I appreciate the nudging and further explanations.

You know how it is with old dogs and new tricks....takes patience!

Best Regards,

Leo

From: club_cafe@bivio.com [mailto:club_cafe@bivio.com] On Behalf Of Rip West
Sent: Tuesday, May 11, 2010 12:02 PM
To: The Club Cafe
Subject: Re: club_cafe: Withdrawing Member

Hey Leo,

While there are clear tax advantages to stock payment in lieu of cash, we have always paid in cash.

Now what kind of reasoning is that?

I'm really not picking on you, but this is a topic in which I have been interested for a number of years, and I don't find the argument that 'we have always done it this way' to be persuasive.

Rip West
Saint Paul, MN

Rip West on

How does one transfer the stock itself? Is that something that Fidelity can readily accomplish?

You can check with Fidelity, but with most brokers it's as simple as sending them a letter, telling them the shares, the recipient, and the date as of you want it accomplished.

Another consideration is that most of us are not ahead in the recent years, so that the cash withdrawal is not quite so onerous. Is that correct?

If you have stocks that have appreciated and you make the withdrawal in cash, the remaining members are going to be prepaying their taxes when those appreciated stocks are sold.

Rip West
Saint Paul, MN

John Rice on

Our club has not have anyone withdraw so I am completely green on doing it. I would assume that you will need to pick a day for the transfer that is 4-5 days out for the letter to reach your broker and for them to do the trade. How do you determine how much stock to sell since the price varies and you don't know what it will be when the broker sells it? 100 shares of a stock could be worth $4000 at the time you write your letter but could be $3500 or $4500 or more when the trade takes place. Also, don't you always need to pay him some cash since the shares won't equal what is owed?

John Rice

ABODI Investment Club

From: Rip West <ripwest@comcast.net>
To: The Club Cafe <club_cafe@bivio.com>
Sent: Tue, May 11, 2010 11:26:54 AM
Subject: Re: club_cafe: Withdrawing Member

How does one transfer the stock itself? Is that something that Fidelity can readily accomplish?

You can check with Fidelity, but with most brokers it's as simple as sending them a letter, telling them the shares, the recipient, and the date as of you want it accomplished.

Another consideration is that most of us are not ahead in the recent years, so that the cash withdrawal is not quite so onerous. Is that correct?

If you have stocks that have appreciated and you make the withdrawal in cash, the remaining members are going to be prepaying their taxes when those appreciated stocks are sold.

Rip West
Saint Paul, MN

iras1 on

A withdrawing member's distribution is determined based on the values on the valuation date for the withdrawal. If you transfer stock, the additional cash is calculated as the difference between the stock valuation and the withdrawal valuation on that date. Any change in stock value between the valuation date and the date the shares are actually transferred, whether up or down, belongs to the withdrawing member. No adjustment is made to the cash portion of the withdrawal.

Ira Smilovitz

Join me at InvestEd 2010

Investor Education at Its Best^TM
Baltimore, MD August 6 - 8, 2010
http://www.investor-education2010.org/

In a message dated 05/11/10 15:35:00 Eastern Daylight Time, rice.j1969@att.net writes:

Our club has not have anyone withdraw so I am completely green on doing it. I would assume that you will need to pick a day for the transfer that is 4-5 days out for the letter to reach your broker and for them to do the trade. How do you determine how much stock to sell since the price varies and you don't know what it will be when the broker sells it? 100 shares of a stock could be worth $4000 at the time you write your letter but could be $3500 or $4500 or more when the trade takes place. Also, don't you always need to pay him some cash since the shares won't equal what is owed?

Laurie Frederiksen on

>Any change in stock value between the valuation date and the date the shares are actually transferred, whether up or down, belongs to the withdrawing member. No adjustment is made to the cash portion of >the withdrawal

Which is why we emphasize that if you are transferring shares, you should

make the transfer as close to the valuation date as possible. This means, if you are following

the recommended partnership agreement, that you have about 1 month from the time you

receive the request for withdrawal, to get the shares decided on and the transfer logistics set up.

Laurie Frederiksen

www.bivio.com

Laurie Frederiksen on

Hi Leo,

Better not talk about “old dogs and new tricks” or Rip might start telling us how old he thinks he is.

Of course, none of us believe him. In fact, those of us who have the privilege to work with him are

starting to wonder if maybe he is some sort of wonderful avatar that we get to interact with. This is reinforced

by the fact that when we have an online meeting, Rip always requests to be made a “real person”.

I think the idea of transferring stock in a withdrawal to manage tax reporting of gains is a great one.

I also think it is a tax management strategy that is available to you as the member of a partnership that may be of far

more benefit than thinking you will get much benefit from deducting club expenses.

However, I think it is a little bit more cumbersome process than Rip describes. I’ve opened several financial accounts recently

both for clubs and for myself and with all the protections that need to be in place these days, it gets to be a cumbersome and

annoying process. At least to me it is.

Therefore, I think it’s legitimate to assess the actual magnitude of any tax benefits that might be realized and perfectly fine to

pay a withdrawal in cash if it really isn’t deemed worth the hassle and aggravation of getting stock transferred.

This may be particularly true this year as Capital gains taxes are probably as low as they will be for a while. Deferring them may

not be the best plan.

Laurie Frederiksen

www.bivio.com

Rip West on

You'd have to be a real curmudgeon to disagree with Laurie's post after all the nice things that she said about me. Well, that's me, a real curmudgeon.

Therefore, I think it's legitimate to assess the actual magnitude of any tax benefits that might be realized and perfectly fine to

pay a withdrawal in cash if it really isn't deemed worth the hassle and aggravation of getting stock transferred.

I don't disagree with that. Look and see if you have stocks that have highly appreciated. If you do, you should really consider using them to fund the withdrawal. If the potential gain on the stock you select is minimal, well yes, forget it and pay cash.

This may be particularly true this year as Capital gains taxes are probably as low as they will be for a while. Deferring them may

not be the best plan.

We aren't necessarily talking about deferring capital gains this year. We are talking about deferring them when and if we sell the appreciated stock. That is why I advocate using appreciated stock even if we have enough funds to cash the member out.

Rip West
Saint Paul, MN

Leo Cardillo on

I need to consolidate all this info and my understanding of it, and then discuss with the club. We appear to be missing a better "withdrawal" strategy in certain cases.

This old dog appreciates all the input!

In that regard, "Bite Hard. Life is Short". The "motto" of the Lost Dog Cafe, a local and favorite eatery.

Best Regards,

Leo

From: club_cafe@bivio.com [mailto:club_cafe@bivio.com] On Behalf Of Laurie Frederiksen
Sent: Tuesday, May 11, 2010 6:03 PM
To: 'The Club Cafe'
Subject: RE: club_cafe: Withdrawing Member