What’s the Difference Between 351 Exchanges and Exchange Funds?

Core Insights - The article discusses the growing popularity of 351 exchanges and exchange funds as tax-deferral and diversification strategies for high-net-worth clients, particularly in the context of rising equity valuations and stock compensation [1][3][4] Group 1: 351 Exchanges - A 351 exchange allows advisors to transfer a client's diversified portfolio into an actively managed ETF without triggering immediate capital gains, accommodating liquid long securities like equities or fixed income [2][7] - There are no strict eligibility exclusions or holding periods for 351 exchanges, making them more flexible compared to traditional exchange funds [7] - The initial costs to launch a new ETF through a 351 exchange range from $70,000 to $80,000, covering startup and legal fees [8] Group 2: Exchange Funds - Traditional exchange funds require 20% of holdings to be in real assets, such as real estate, and are limited to accredited investors with a minimum investment of $100,000 and a seven-year lock-up period [4][6] - Exchange funds typically have high fees and are often structured as limited partnerships, with a common minimum investment of $1 million [6] - Unlike 351 exchanges, exchange funds remain private and do not become publicly traded [10] Group 3: Advisor Considerations - Advisors must consult with tax and legal experts when implementing these strategies due to their complexity and costs [3] - Both strategies require a long-term commitment, with advisors needing to trust the ETF manager's execution of the investment strategy [11] - Advisors are encouraged to explore other tax-sensitive strategies, such as using options or transferring appreciated securities to charities [11][12]