Episode summary
351 Conversions: Smart Tax Alpha Strategy or Loophole in the Code? | Trillions
Trillions
· · 31 min · Hosts: Joel Weber, Eric Balchunas · Guests: Density Tsekova, Zachary Miner
Summary
ETFs already offer tax advantages, but the episode focuses on a newer tactic: 351 conversions, which let wealthy investors move concentrated stock positions into customized ETFs and defer capital gains taxes. The host and the guests explain that the structure combines an old tax provision with ETF mechanics, creating a way to swap out appreciated stock while keeping the tax bill off to the side for years.
The guests say the strategy is growing quickly, with roughly 85 to 105 vehicles and about $18 billion to more than $20 billion in assets, though many are still small and trade lightly. They discuss examples tied to the Mirage family behind Hot Pockets, Rory Riggs, and Gabe Plotkin, and note that some conversions appear syndicated while others are seeded by a single wealthy holder. The practical appeal is flexibility: investors can diversify, realize gains later, and potentially manage taxes around losses or estate planning.
The tension is regulatory. Treasury officials have signaled they are not trying to shut down every 351 conversion, but they are worried about versions that seem designed mainly to achieve diversification or that push holdings changes too far. The guests say the likely response would come through IRS and Treasury guidance, possibly by labeling certain structures as transactions of interest, rather than through new legislation.
Key takeaways
- The host says ETFs are being used not just for tax efficiency, but for extra tax deferral through 351 conversions that move concentrated stock into diversified baskets.
- The guests say the market has grown to roughly 85 to 105 ETFs and more than $18 billion to over $20 billion in assets, but many funds still trade sparsely.
- The guests cite the Mirage family behind Hot Pockets, Rory Riggs, and Gabe Plotkin as examples of wealthy users of customized ETF conversions.
- Treasury officials are described as uneasy with deals that appear to use 351s mainly to achieve diversification or that rapidly change holdings after launch.
- The guests say the likely government response would be IRS and Treasury guidance, not new legislation from Congress.
Notable quotes
“they have a magical ability to be able to sort of get rid of assets and get new ones without incurring a capital gain”
“This is one of the big attributes because if you're in a 401k plan, you're already tax deferred. So, you're loving life”
“What you can use it for is to transfer prop property to a corporation in exchange for shares”
“they pretty much I'd say it's fair to say, Denisa, they made it clear that they're not trying to attack all 351s”
How the episode opens
Bloomberg Audio Studios podcasts, radio, news. — Welcome to Trillians. I'm Joel Weber. — And I'm Eric Belchunis. — Nobody likes to pay taxes, but some people are really good about reducing their liabilities. And that's a thing about ETFs. They have some tax efficiencies, shall we say? What is it about ETFs that make them so special on the tax front?
This is one of the big attributes because if you're in a 401k plan, you're already tax deferred. So, you're loving life. But if you're outside of a 401k plan in a brokerage account, taxes are a pain because every time you sell, you got to pay tax on the capital gains.
And you still have to do that with ETFs. But what ETFs do that especially is better than mutual funds is they generally don't distribute capital gains distributions unless you sell. So I actually think they're taxed more properly.
Mutual funds on the other hand are unfortunate in that whenever they sell they have to cash somebody out and that triggers a capital gains and the people in the fund then are hit with a tax bill. So that's why mutual funds a huge reason why especially adviserss really love ETFs. they just hate getting a tax bill when they didn't do anything.
Now, that I think that's the fair way to get taxed. However, there's a new evolution and even a wing of the ETF market that's evolving using the ETF for even more tax deferral. So, this is a 351 exchange.
It's ETFs that are sort of custommade or bespoke uh for somebody to sort of take uh big gains in a stock they have and they and the stock has kind of taken over their portfolio and they can move it into the ETF with a diversified basket of securities and defer paying taxes on it in effort to diversify their portfolio.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- 351 conversion etfs
- tax efficiency
- irs scrutiny
- concentrated stock
- ultra-rich tax strategy
Companies and tickers mentioned
- Hot Pockets
Watch the episode
Watch “351 Conversions: Smart Tax Alpha Strategy or Loophole in the Code? | Trillions” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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