Transfer of Securities to Withdrawing Member
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Transfer of Securities to Withdrawing Member A reader
asks.......................
We understand the value of transferring
appreciated stock to a member withdrawing from the club. However, the
timing issue has been a stumbling block for us. It is my understanding
that the actual transfer must occur as simultaneously as possible with the
valuation date. Our members do not understand why that is necessary. Is it
necessary, and if so, please help me explain why.
I'm gratified that you understand the value
of using appreciated stock for member withdrawals. Jerry and I have been
preaching this technique for a long time, as a way for a club to postpone
recognition of taxable income and, also, as a technique that can be favorable to
the withdrawing member.
In my opinion, it is always desirable to have the
valuation date as close to the withdrawal date, be it a stock withdrawal or
cash. When you prepare a withdrawal statement, you are determining the member's
value as of a particular point in time. Some agreements give the club nine
months from that date to actually make the payment. I believe this is manifestly
unfair. The member gets no return on his investment for those nine
months.
In the case of stock being transferred, there is an
additional layer of uncertainty. Say that you compute a member's withdrawal to
be $1,000, and you decide to pay that with 22 shares of XYZ with a current
market of $45 per share, and cash of $10. So you give instructions to your
broker to transfer the 22 shares to the member's account, and you cut a check
for $10. In our less than perfect world, it sometimes takes the broker an
inordinate amount of time to complete the paper work. Assume it takes two weeks
to do this, and by that time the price of the stock has fallen to $30. Do we
still transfer only the 22 shares now worth $660?
There is no absolute, right-or-wrong answer. It is
extremely important that your agreement spell out exactly what is to happen in a
case like this. As you can see, it is also very important that the valuation
statement be prepared as closely as possible to the time that the transfer is
made.
My own personal preference is that all the parties
understand that, for all intents and purposes, the withdrawing member 'owns' the
stock from the date of withdrawal on. This means that he/she benefits from
increases in the stock price and is at risk for decreases in market value. It is
this window of risk that makes it so important that the calculation of the
withdrawal amount and the actual transfer take place as closely as
possible.
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