BI > OCTOBER 2005

Transferring Vs. Selling Shares

Saying Goodbye to Norm Hill

One of the original members of the Mutual Investment Club of Detroit passed away in July. Norm Hill was 88 and a devoted member of the club. Until his health began to fail a couple of years ago, Norm was a regular attendee of our association's national convention. While he couldn't attend regular club meetings because he was living in Texas, Norm always called with ideas and expressed his views on holdings.

While he had made some partial withdrawals in the past few years, his account was still substantial and he was the holder of more units than anyone else in the club. It was with sadness that members had to say goodbye to such a loyal partner who proved the benefits of regular investing with a small amount each month being put in the club.

"Fred (Russell) got us together and suggested we spend $10 a month and invest in stock," Norm said in a 2001 article about the club's beginnings. Russell also taught them to invest using spare cash that otherwise would go toward luxuries.

"That became my philosophy," he said. "It wasn't my money -- I had already spent it.

"Cancel one of your trips. Cancel a dinner out and put the money into a stock. Spend your spare money on stock instead of the other stuff you can do without and still be happy. Remember, you can't make a lot just saving money, what with inflation and taxes, unless you invest in stocks for the long run and let them grow for you."

Norm certainly benefited from that philosophy. To satisfy the partnership agreement, the club had to decide at its August meeting what securities to sell and what stocks to transfer to settle his account with the estate.

With his assets in the club being quite large, a lot of selling would have to be done that could result in capital-gains taxes for the remaining partners. If stock was transferred, there would be no additional tax consequence for his estate, and taxes on the other members could be deferred until the club was completely liquidated or the members withdrew.

A lot of thought has to go into the process. Some people think the best thing to do is to transfer stocks that have a paper loss. This isn't the case.

If a club needs to raise cash, it's usually better to sell stocks with a loss so that remaining partners can take the tax loss. Holdings that have resulted in large capital gains are the best ones to transfer to a withdrawing partner or to the estate of a deceased partner. In addition, the club should perform stock studies to determine which holdings have the most potential for price appreciation from the current price.

At the August meeting, members discussed the best approach to settle the account, with transferring shares to the estate being the preferred method. The Mutual Investment Club of Detroit has been in operation for 65 years and has a long-term view of holding stocks, so as you might imagine it holds several stocks with a low cost basis.

The club needed to transfer the securities into the estate's account by the end of the month so that if the executor decided to sell the securities, he or she could do it on the same date that the stocks would be valued for the next month's statement. Since there's no way of knowing the exact price of stocks at a future date, I advise transferring less in stock than the account's value to eliminate the necessity of having the estate reimburse the club once the transfers have occurred. The difference can be made up in cash after the club's next meeting.

By taking all this into consideration, we transferred shares of different stocks that had combined capital gains of more than $1.4 million. A figure of this size may be difficult for smaller clubs to grasp. But using the process described here can be beneficial to other clubs facing a similar situation.

There's no advantage in transferring stocks that have a paper loss. It's better to sell those shares.

Kenneth S. Janke, Sr., is a chairman emeritus of NAIC's Board of Trustees and a member of the magazine's Editorial Advisory and Securities Review Committee.