Tax question

[Dr P]

I was wondering if someone could help me with this question regarding investment groups.  My family created an unofficial group a few years ago, where we pooled some money and purchased a number of stocks.  My siblings and I would like to purchase shares from my mother to reduce her market risk.  Are there any tax implications in the transfer of stocks from one family member to another?

A follow-up question would be, is it a bad idea to have such a group, for any liability or IRS reasons?

 

Thanks for the help.

[MPMD]

just gift tax stuff is my guess so likely not a big deal unless you are dealing with an estate of considerable size.

would need to know more about the group. is it some kind of official company like a partnership or an LLC?

[ENT Doc]

Yeah, what form did this group take? FLP? Joint brokerage?

[MPMD]

And not to be harsh but your post invites all kinds of other questions.

1. Why did you pool your money?

2. If the group is "unofficial" who actually owns the stock?

3. What does an "unofficial group" mean?

4. If your mom wants to decrease her exposure why can't she just sell the stock that she owns? Is this not a publicly traded company or something?

5. Liability might very well be an issue. I wouldn't see much point in owning something like this with family unless it was a business generating some kind of income.

[Dr P]

We didn't set up any official LLC or partnership at the beginning as it was a pretty small initial investment.  We've been filing taxes by dividing the capital gains based on percent ownership.  Over the years we've considered creating an LLC or an FLP, but haven't set one up yet.  Let me know if it doesn't sound Kosher to have this sort of arrangement.  It only represents about 10% of my portfolio, and I would definitely pull the money out if this is increasing my chance of an audit.

In terms of the transfer of shares, one approach may be to cash out money that is not yet invested, which will decrease the overall value of the group and won't require us to purchase shares from my mom.

 

[Dr P]

MPMD, good questions.  We set this up several years ago, prior to any of us having much experience in the market.  And prior to me discovering WCI.  Now, all of my money goes into index funds, but back then, we thought of this as a way to diversify investments in a number of stocks.  It was also a fun thing to do as a family. Since then, I've sort of considered it money that we can "play around with" while the heavy lifting is done by the index funds.

[MPMD]

Dr P wrote:

MPMD, good questions.  We set this up several years ago, prior to any of us having much experience in the market.  And prior to me discovering WCI.  Now, all of my money goes into index funds, but back then, we thought of this as a way to diversify investments in a number of stocks.  It was also a fun thing to do as a family. Since then, I’ve sort of considered it money that we can “play around with” while the heavy lifting is done by the index funds.

Click to expand...

I mean that all sounds fine, just doing it as a family pool doesn't seem to make much sense or have really any advantages I can see.

Does one person actually own the shares officially? B/c if so divvying up capital gains based on fractional ownership only works if the person who owns them is actually paying the taxes.

I'm not a tax professional so cant comment on audit likelihood. My guess would be very low.

 

[StarTrekDoc]

someone owns the account -- who is it?

My hope is the lowest earning income adult!

I suppose an easy calculation would be using turbotax and pull out the numbers on the cost of any distributions/gains and proportionally have folk pay that back to the primary owner.   All this works if the family is all good with it.

We do this with our parents charitable donations.  The highest income child takes their donations and files and dad takes the standard deduction.

With the upcoming tax reform, we may expand this to the entire extended family in pooling the charitable deductions

[Zaphod]

I would make it official. This wont be the last time someone wants to make some changes, pull out money, etc.....While its not that difficult to do the math, at some future point there may be a dispute and you'd really wish you had something written and a simple way (divest shares, etc...) to resolve issues that took as much emotion and personal subjectivity out of the equation as possible.

[Dr P]

Thank you.  I appreciate the advice.

[jz]

An investment group is a for prophet entity.  You need a title, constitution, and must pay cap gains taxes.  It is fun and easy to belong to an investment group while the market runs up;  meetings get depressing and tense during the bear markets.