Withdrawing club partner
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Withdrawing club partner Bob Atkinson raises some questions about member buy
outs.
We just received our first withdrawal notice
today from a member of our investment club and we have a well defined process
for recognition of the notice, valuation date, methods of payment and timeframe
to pay.
However, it has been suggested by a couple
members " What if one or more on-going members want to buy out the departing
members shares in full and assume the shares accumulated during the
departing members tenure?"
Question 1 -- Is this a viable alternative
for cashing out a departing member
Yes, it is indeed viable. However, you should not have the
purchasing members issue checks directly to the departing members. Have the
purchasing members issue their checks directly to the club, thus earning
additional units at the current valuation. Then use the cash to purchase the
units from the departing members at the same price.
This practice will create all the required records and will
reflect the correct tax basis for all members.
Question 2 -- If not, why not? This does not
seem to have a downside unless it relates to taxes at year
end. I can conceive of no undesirable tax effects triggered by the
use of additional funds from existing members to buy out departing
members.
Before you actually consummate this transaction, I would urge
you to consider paying off the departing members with appreciated stock instead
of cash. Both Jerry and I feel that this method can be more advantageous for the
club and the departing members. I won't make this response any longer by
going into all the ramifications of paying with stock, but you can read Jerry's
excellent discourse on the subject at Jerry's Best on the NAIC Web Site http://www.better-investing.org/clubs/jerrys-best.html
If you would like further clarification on the benefits of
using appreciated stock for payoffs, please come back.
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