Tax concerns keep clients tethered to concentrated stock positions, and that’s a problem.
Many clients hold large, highly appreciated stock positions. The problem is simple: selling may create a large capital gains tax bill. So, how can tax professionals steer clients away from an overconcentrated portfolio, unmanaged investment risk, and a cycle of tax paralysis? Section 351 ETF exchanges are a viable and attractive option.
Key Takeaway: Tax professionals can help clients see that the real issue is not only investment concentration. The issue is a planning problem where tax cost, portfolio risk, and timing all need to be addressed together.
Section 351 ETF exchanges defer capital gains while improving diversification.
A Section 351 ETF exchange may allow a client to contribute appreciated securities into an exchange-traded fund without triggering immediate capital gains tax when the transaction is structured properly.
Rather than selling the securities first, the client may transfer eligible appreciated securities to an ETF in exchange for ETF shares. If the exchange is structured to satisfy Section 351 requirements, the client may defer capital gains. The result is a path toward diversification that does not trigger a tax event.
Key Takeaway: Properly structured transactions reduce exposure to a single position, avoid an immediate tax hit, and continue to deliver benefits, i.e., tax efficiency, commonly associated with ETFs.
Give clients a clear path to move from concentration to diversification.
Concentrated positions can become emotional. A client may have built wealth through one company, inherited a large holding, or watched one stock grow for years. That history can make the position hard to sell.
Taxes add another barrier. Even when diversification is the right move, clients may delay because they do not want to realize a gain all at once.
A Section 351 ETF exchange leads to a more diverse set of options. Tax professionals can reduce concentration and associated risks, defer capital gains, and move clients’ assets into a portfolio that is easier to manage.
Key Takeaway: Tax professionals can solve two problems at once with this strategy: the tax problem that prevents action and the investment risk created by inaction. For the right client, a thorough explanation of this portion of the broader strategy can facilitate action and open up opportunities for next steps in the planning process.
Tax professionals are often the first to spot the right opportunity.
This is a planning-driven strategy. It should not be treated as a product pitch.
Tax professionals are in a strong position to identify clients who may benefit because they often see the full tax picture before anyone else does. They know which clients hold low-basis positions. They understand the size of the unrealized gain. They can also evaluate whether the client’s tax situation makes a taxable sale difficult.
That insight matters. A wealth manager may see the concentration risk. A tax professional may see why the client has not acted. When both perspectives come together, the client gets a better planning conversation.
Key Takeaway: Tax professionals can add value by identifying low-basis, concentrated holdings and raising the possibility of a more tax-efficient transition before the client is forced to make a rushed decision.
The ideal client has a large, low-basis position and a clear tax problem.
A strong candidate is usually a client with a concentrated position of $1 million or more, large unrealized gains, and a clear hesitation to diversify because of taxes.
The client may own a large single-stock position. The position may have appreciated sharply. The client may understand the need to diversify but resist selling because the tax bill feels too high.
Those facts create the planning opportunity. The larger the unrealized gain and the more concentrated the position, the more important it becomes to evaluate whether a Section 351 ETF exchange may offer a better transition path.
Key Takeaway: The best candidates are not simply wealthy clients. They are clients whose investment risk and tax exposure are tied together in a way that prevents normal diversification.
The bottom line is that tax deferral can create real planning value.
A Section 351 ETF exchange can help deliver real tax alpha when it is used for the right client and structured correctly.
The strategy may allow the client to defer gains, reduce portfolio risk, and improve long-term outcomes without forcing an immediate taxable sale. That combination can be valuable for clients who have outgrown a concentrated position but cannot justify the tax cost of selling all at once.
For tax professionals, this creates a practical advisory opportunity. When a client has a large, appreciated position and no clear exit plan, the conversation does not have to end with “sell and pay the tax” or “hold and accept the risk.” There may be a better planning path.
Key Takeaway: Tax alpha means more than lowering taxes. It means improving the client’s after-tax outcome by using the right structure at the right time.
The next step is to identify clients who fit the profile.
Tax professionals who work with high-net-worth clients should look for large, appreciated holdings that have become difficult to sell. These positions often appear on brokerage statements, estate planning reviews, charitable planning discussions, and year-end tax planning conversations.
If a client fits the profile, Baker Wealth Strategies can help evaluate the facts and coordinate next steps with the appropriate third-party managers.
The goal is simple: help the client move from tax paralysis to a clear, coordinated plan.
Key Takeaway: If a client holds a large, low-basis position and avoids diversification because of taxes, the situation deserves a closer look.
Contact Baker Wealth Strategies to take the next step forward.
Baker Wealth Strategies works alongside third-party managers who offer Section 351 ETF exchange programs.
Our role is to help evaluate whether the client may be a fit, review timing considerations, coordinate with the appropriate managers, and support the planning and implementation process.
To get started, get in contact today.
– Jennifer Baker, CPA, CFP®, RICP
Baker Wealth Strategies
