Let’s face it. No one goes to altar wondering if or how long their marriage is going to last. By the same token, no one joins an investment club thinking about the day that they will withdraw.

Admittedly, comparing a marriage partnership to an investment club partnership is a bit of a stretch. That said, the two have more in common than you might think. Both begin with a “honeymoon” period that is filled with enthusiasm about the potential and future of the new union. Both are likely to hit bumps along the way, as the initial excitement begins to wear off and the partners gain an understanding of the kind of commitment and effort it will take to keep the union intact.

But therein lies the place where the two roads veer off in different directions. Whereas no soon-to-be married couple places themselves in the category of the 50 percent of marriages that end in divorce, investment club partners know there will come a day when they will exit the club. Marriage is designed to be a lifetime commitment; membership in an investment club is meant to help finance a lifetime.

At various times throughout the life of every investment club, the club will face the departure of a member – whether it’s because the member is moving, is no longer able to dedicate the time and effort club membership requires, has decided to retire, or just plain bumps heads with the other members. No matter the reason for a member’s withdrawal, every club should have a plan already in place. ICLUBcentral consultant Rip West is a retired CPA who specialized in the accounting and taxation problems partnerships face. He offers these tips for creating a member withdrawal protocol that will be ready when the club needs it:

1.      Keep in mind that a member’s investment in the club belongs to the member, not the club. As such, he or she should not be penalized.
The original draft of the Investment Club Partnership Agreement that is still in use by most clubs was developed many years ago by BetterInvesting, Inc. That agreement calls for a club to institute a 3 percent penalty on the member who is withdrawing. But times have changed and that penalty – which was used to cover the high cost of brokerage fees in days gone by – is no longer necessary. “Brokerage fees have changed since that time and are much lower, so there’s no longer any need to charge the 3 percent,” Rip says.

It’s also unfair to penalize a member for withdrawing from the club. “Some clubs want to penalize a member who withdraws in order to keep him or her in the club,” Rip says, “but who wants to keep a member who doesn’t want to be there anyway? The cash belongs to the member – let him or her have it.”

2.      Keep your club records current and make sure they are correct before processing a member withdrawal.
“There’s nothing worse than having to go back to a member who has withdrawn from the club and tell them that they owe the club money,” Rip says. “If the club has encountered a big expense or income that has not been recorded, be sure to bring everything up-to-date before processing the member’s withdrawal.”

3.      When withdrawing a member who has not participated for some time, do not deduct the payments he or she should have made, but did not.
“You cannot deduct payments that should have been made, but weren’t,” Rip points out. “Base the withdrawal on what the member has paid in, not what he or she would have accrued had he or she paid monthly dues to date.”

4.      The transfer of stock is a better way to execute a full withdrawal than a cash payment.
“Stock transfer is a win-win situation for the club and the withdrawing member,” Rip says. “The member doesn’t owe taxes until he or she sells the stock and the club enjoys an increased cost-basis on the stock that remains in its portfolio. The club can rid itself of the stock that has the greatest appreciation and doesn’t have to pay the capital gain on it, while the member can defer his or her taxable income on the stock appreciation. And, for the outgoing member, it makes no difference – the capital gains tax will be the same whether he or she takes cash or takes stock and sells immediately.” (For a detailed example, go to: http://www.iclub.com/support/kb/default.asp?page=kb_1153.)

5.      Members do not “own” a proportionate share of every stock in the club’s portfolio, and should not get “their share” of each stock when they withdraw. Rather, members own a share of the total value of the portfolio.
When a member wants to withdrawal from, for example, a 10-member club, the club does not owe that member 10 percent of each stock in the club’s portfolio. The club can choose whichever stock it wishes to transfer to the withdrawing member, as long as the value of the stock is equal to what the club owes that member. “The withdrawing club member is entitled to the value of his or her units – not to a share of each stock in the club’s portfolio,” Rip says. “It’s up to the club to decide how the member will be paid his or her share and to choose which stock to transfer.” (Rip notes that, in the case of a partial withdrawal, the member and the club have to agree on the stock to be transferred.)

6.      If a partner dies, the club should not assume that the withdrawal should be paid to the spouse and should not rely on the “beneficiary designations” that the member has given the club.
If a member passes on, many clubs automatically think that the member’s spouse is the beneficiary – and this assumption could end up hurting the club in the long run. “The club may pay the deceased partner’s share to his or her spouse, only to learn that the partner’s will specifies someone else as the beneficiary,” Rip says. “If someone else has a right to the money, he or she can file a claim against the club.”

The best solution is an easy one – pay the deceased partner’s share directly to his or her estate, or make the check out in his or her name. That way, the responsibility for the distribution will fall to whoever is in charge of the estate.

On that same note, Rip offers one more piece of advice. “If your club has beneficiary forms on file – get rid of them. They are binding in some states, but not in others, and only lead to complications.”

I want to thank Rip and all of his cohorts (Gene, Ira, and Herb) for sharing their expertise during what has been a very well-received five-part series on Expert Tips for Club Treasurers (if you missed any of the previous columns, be sure to visit the Join the Club! section of the Community Forum). Though this series is officially coming to a close, keep in mind that your questions on any investment club topic – including the office of club treasurer – are always welcome.