What are the advantages and complications of transferring shares on a full withdrawal?

Advantages of Transferring Shares on Full Withdrawal

Deferral of Capital Gains for Remaining Members

• When appreciated shares are transferred instead of sold, **remaining members do not immediately realize capital gains**.
• The gains are deferred and only recognized when those members fully withdraw from the club in the future. - This can help members manage their tax liabilities and avoid a sudden tax bill.

Portfolio Management Flexibility

• Clubs can trim over-weighted or highly appreciated positions without triggering immediate capital gains for all members.
• Transferring shares can help rebalance the portfolio more strategically than simply selling shares.

Tax Planning for Withdrawing Member

• The withdrawing member receives shares and can choose when to sell, potentially timing the sale for favorable tax treatment.
• The member’s basis in the shares is adjusted according to their club investment, and the holding period is preserved.
• The withdrawn member can control when they trigger the realization of gains by holding on to the shares and selling at a later date.

Possible Complications and Considerations

Complexity in Accounting and Tax Reporting

• The club must accurately track deferred gains for remaining members, which can complicate recordkeeping.
• myICLUB provides the **Deferred Capital Gains Report** to help, but errors can occur if not managed carefully.

Lower Cost Basis for Remaining Members

• Remaining members’ cost basis in the club is **lowered** by the amount of deferred gains.
• When they eventually withdraw, they may face a **larger capital gain** and tax bill than if the shares had been sold at the time of the original withdrawal.

Brokerage Limitations and Fees

• Some brokerages may only transfer whole shares, require members to have accounts, or charge fees for transfers

Tax Basis Adjustments for Withdrawing Member

• The withdrawing member’s basis in the transferred shares may be higher or lower than the club’s basis, depending on their investment history.
• This can affect their future capital gains when they sell the shares.

Summary Table