Diversifying Highly Appreciated Securities with 351 ETF Conversions-Course recording

Video Transcription

Video Summary

In this webinar, Jonathan Keats, Portfolio Manager at Cambria, discusses Section 351 of the U.S. tax code, focusing on its application for deferring capital gains taxes through converting portfolios into ETFs. Section 351, established in 1954 to encourage incorporation, has recently gained attention for enabling tax-efficient portfolio diversification by contributing appreciated securities in-kind to an ETF, avoiding immediate capital gains taxes. Unlike 1031 exchanges or 721 exchange funds, 351 conversions do not require a lockup period or upfront fees and utilize ETFs' unique in-kind redemption capabilities for tax-efficient rebalancing. Important IRS rules require contributions to be diversified—no single security can exceed 25% and the top five securities no more than 50% of the contribution. Contributions must be exchange-traded, liquid securities consistent with the fund mandate; mutual funds and illiquid securities are excluded. The process involves vetting portfolios for diversification and cost basis reporting to maintain the tax deferral. Cambria has launched multiple 351-structured ETFs, including a Global Equal Weight ETF diversifying beyond concentrated U.S. mega caps. While beneficial for large, tax-sensitive portfolios (typically above $250,000–$500,000 in gains), risks include potential underperformance if concentrated holdings continue outperforming. Participants receive personalized tax basis reporting and benefits from ETFs’ low capital gains distributions. Keats emphasizes ongoing education and availability for advisor support on this innovative tax strategy.

Keywords

Section 351

capital gains tax deferral

ETF conversion

in-kind contributions

tax-efficient portfolio diversification

Cambria ETFs

IRS diversification rules

tax basis reporting

tax-sensitive portfolios