351 ETF’s
Having some highly appreciated tech stocks, I have heard that it poses risk, and an undiversified portfolio (this is an etrade acct, not IRA).
Can you give me some pointers on whether a 351 approach, or an options trading (professionals who help unwind the heavy positions) is a good idea, or should I just let these positions grow and gift or let my heirs take the step up. The $ amount is 3 to 4 million.
If the 351 or options methods are appealing, can you recommend any trustworthy firms.
Thank you,
Terry Says
This strikes me as an “out of the frying pan, into the fire” strategy! A form of this “like kind exchange for diversificatgion” been used for years in real estate situations and in insurance policies. The exchange of appreciated stock for newly created ETF has its own set of problems re costs, liquidity, and trust.
First, lets take a look at what is legally involved in a 351 exchange.
Section 351 allows for tax deferral when assets are transferred to a corporation in exchange for that corporation’s stock, provided the transferor owns at least 80% of the corporation following the exchange. Although the concept of Section 351 exchanges has existed for over a century, it has only recently been applied to individual investment portfolios.
The strategy works by pooling the portfolios of multiple investors in a newly created ETF, with the investors receiving ETF shares in return for the assets that they contributed. If the exchange meets the requirements of Section 351, it is tax-deferred for investors. And once inside the ETF ‘wrapper’, assets can be reallocated with no tax impact for the investors via the tax-efficient ETF structure, which makes use of in-kind creation and redemption of shares. In effect, investors can effectively trade a locked up for an ETF that can be managed with little or no tax impact at all!
However, to meet the requirements for tax-deferred treatment under Section 351, each investor’s portfolio must meet a diversification test, where no single asset can exceed 25% of the portfolio’s value and the top five holdings cannot exceed 50% of the overall value. Additionally, certain assets, like mutual funds, alternative assets, and REITs, may not be eligible for exchange, although other ETFs generally are.
And, there is a COST to all of this. Check the fees. And check the liquidity of the ETF — are there restrictions on how much or when you can withdraw some or all of your cash. Those will be hidden in the fine print.
Yes, it saves you tax dollars now — but capital gains taxes are at almost all-time low rates.
If you’re planning to die soon, then definitely don’t do this. Give your heirs the step-up in value and they’ll never have to pay capital gains taxes. And if you want to hold on to those stocks for longer, don’t do this exchange.
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