See this BetterInvesting article in May 2006 BITS for more discussion of club withdrawals. Always follow your Partnership Agreement. It's possible that some of the details of what's explained below may be different for your club if your partnership agreement doesn't follow BetterInvesting's sample agreement. On the other hand, some of what's in that sample agreement no longer makes as much sense as it did 50+ years. For example, the fixed 3% fee on cash withdrawals (origionally intended to cover typical brokerage commissions of that bygone era) isn't very appropriate any longer, given today's much lower commissions. (Click here for more about this.) Withdrawals come in several flavors, each with its own need for specific guidelines. Voluntary Full Withdrawal - In this instance, the partner will be expected to send or bring a letter of intent to be presented at the upcoming meeting. His withdrawal value will be determined at the valuation following that meeting. Payout method will be at the discretion of the club, and will consist of all cash, part cash and securities, or all securities, give or take a small cash difference. See further explanation below. Voluntary Partial Withdrawal - Again, the partner will present a letter of request for a partial withdrawal of his account. In most cases, this will be for a cash need. There are different tax considerations for transferring securities on partial withdrawals, so it is not recommended that securities be used for these. It can be done in the rare instance that would be desired, and the securities chosen should be acceptable to both the club and the partner. After all, he will still be with you and is your friend, right? Unit values withdrawn will be based on the valuation following the meeting at which it is requested, see below on Transferring Stock. Death or incapacity of Partner - Notification of death or incapacity should be treated as if a letter requesting a Voluntary Full Withdrawal was received. The club should not assume anything as to whom these funds should be paid. In most cases, a payout in the name of the partner can be done, and it will then be the executor's responsibility to see that it goes where it should. In a case of incapacity, the club may need to determine who the partner's legal guardian or representative is, and if the proceeds are not issued directly to the partner, copies of the authority to do otherwise should be retained. If the club has any doubts about a particular instance, you may wish to consult an attorney. Automatic Termination - Hopefully this will seldom come up. Most members, if they lose interest or don't have time or investment funds to devote to the club will voluntarily resign. However, if a partner quits coming and quits contributing, he should be terminated usually within 2 or 3 months. It is not acceptable for the club to maintain a passive account for him. A rule of thumb incorporated in the by-laws could be if two meetings/payments are missed, notice is given that termination will be effected at the third missed meeting unless they attend and catch up. Some clubs have a mistaken clause that delinquent payments need to be made up or deducted from a terminated partner’s proceeds when they are paid out. This is quite frankly, nonsense. If the partner is 2 or 3 months behind, what good is it going to do for him to give you a check for those payments, which you then have to credit toward him to purchase units, and then return to him in the payout? If he hasn’t paid those months, he hasn’t bought any more units. Certainly the treasurer shouldn’t be crediting him for any payments he hasn’t made. He is entitled to any value gain of the units he does own in the interim. His termination payout should be based on the units he legitimately owns, less any expenses or equitable fees your PA calls for. You should not also subtract payments he did not make.When to pay - Clubs need to recognize that each partner's capital account is his money, not the club's money. When a withdrawal is done, it should be completed as soon as possible after the effective valuation date. Some clubs have an old idea they should be allowed to defer payment for 60 or even 90 days. Do you want that applied when you retire? Or don't you think you might want your money as soon as possible to use or invest as you wish? Some PA’s allow for an initial payment of 80% of the value quickly, allowing a little more leeway in funding for the remainder. This is a debatable topic, and not recommended. If you do allow for spread out payouts, treat each one as a partial withdrawal based on the most recent valuation, until the final one. Funding Withdrawals - The club has to either come up with cash or transfer securities to the withdrawing partner. There is no such thing as 'buying out' his interest. He withdraws his interest in the club. If others put in more money or a new member comes on board with a large payment, it buys them new units at this month's value, not his old units. The option of transferring stock is always preferable, from a tax point of view, if the club holds any highly appreciated stock. It enables the remaining partners to continue deferring their share of the capital gain on the transferred stocks until they eventually withdraw from the club, or the club disbands. It also enables the withdrawing partner to continue deferring his gain from investing in the club until such time as he sells the transferred stock. Selling or transferring stock should take no longer than a computer entry or phone call to sell, or a letter to the broker to transfer the number of stocks selected by the club. The number of shares to transfer will be based on their value on the effective valuation date of the withdrawal. If cash is more desirable from the club's standpoint and they don't have it on hand, then they will have to sell something, preferably a losing stock for the capital loss tax benefit. If the club elects to sell stock to raise cash to fund the withdrawal, it should be done after the meeting when the withdrawal is accepted, and before the next valuation date. By doing so, any the tax liability will be shared by all members, including the one withdrawing.Transferring Stock - Your broker can advise you of their requirements for transferring stock from the club to a withdrawing member. Usually it takes a letter of instruction from the club’s agent including the account number and coding of the withdrawing member’s own account. However, the broker may require notarized or medallion guaranteed signatures from all partners on the letter of instruction as well as other information (perhaps, for example, a copy of the partnership agreement with original signatures). Although many investment club partnership agreements provide for transfering stock on the signature of just one partner, the Securities Transfer Association has rule 3.07 ("Transfer to Individual Name of Partner") which allows the broker the option to require signatures from all partners when transferring stock to a partner. (You can read these rules here). A transfer works most smoothly if the withdrawing partner has, or opens, an account with the same broker the club does business with. Often a broker will be happy to set one up for them. In the absence of the partner having a broker’s account of his own to transfer these securities to, the only other way to do it is actually request certificates from your broker to be put in his name. This is more costly and time-consuming. While it is the club options to make these decisions, it's also in the club's best interest to complete the transfer as quickly and efficiently as possible. An often misunderstood thing about transferring stocks is when to determine the value of these stocks being transferred. Prices change every day, and it takes some time to complete the process of transfer. The answer is simple. The value of the stock transferred is its value on the effective valuation date of the withdrawal. If his total account value is $2500, and JNJ stock is $60 on the withdrawal valuation date, the club should transfer 40 of their JNJ shares to him plus $100 cash less costs. It matters not whether the stock goes down to $50 or up to $70 by the time the stock gets intohis account. It is ‘his’ stock from the valuation date. Withdrawal Fees - Often a debatable topic, and unfortunately the sample PA most clubs use contains a clause about retaining 3% of the payout. Some clubs have an even higher percentage. There is really no reasonable justification for keeping in the club any part of the partner's capital account. Remember, you may be withdrawing someday. Certainly any costs, broker fees, etc., involved in selling or transferring securities should be deducted as fees against the withdrawal payout. A very small withdrawal fee, say $25, is not totally out of line, but even this is debatable. Go by your PA, but if it seems exorbitant or unfair, then by all means, amend it. If you are still in the process of drawing up your initial PA and by-laws, give this careful, fair, consideration.
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