Section 351 conversions for RIAs
Move your SMA book into an ETF without a taxable sale.
Clients locked into appreciated names like NVDA keep their gains deferred and end up in a diversified fund. The catch: the book has to pass the 25/50 test.
No single company or issuer over 25% of the fund. The five largest holdings combined under 50%. That is the first regulatory test for an ETF conversion.
Runs in your browser. Nothing is uploaded.
Learn more: open a section, or skip to the tools ↓
Section 351 says that if you contribute property to a corporation and the contributors control it afterwards, you don't recognize gain on the contribution. Pointed at an exchange-traded fund, that one sentence is the entire product. Your clients' appreciated positions go in, fund shares come out, and the tax on the built-in gain is not paid this year.
Section 351(e) is the sentence that takes it back. If the corporation is an investment company, nonrecognition doesn't apply unless the portfolio going in is diversified. “Diversified” has a statutory definition, and the definition is arithmetic: no more than 25% of the value in the securities of any one issuer, and no more than 50% in five or fewer issuers.
That is the whole mechanism.
Deferral is not elimination. Nothing here avoids tax. It changes when the tax is paid, and who is holding the position when it comes due.
Start with what a conversion actually produces: your model becomes the fund, a ticker with your clients as its first shareholders.
Taxes, first. An ETF redeems in kind: appreciated positions can leave the fund in redemption baskets without the fund recognizing gain, so the embedded gain that came in can be worked down over time rather than distributed to shareholders as taxable capital gains. Paired with tax-lot management inside the fund, that is the second half of the tax case: §351 defers gain on the way in, and the ETF's in-kind mechanics manage it once it is inside.
That is what “getting out of NVDA” honestly looks like. Contribute the position, and the fund can rotate out of it through those same in-kind mechanics: no taxable sale, the concentrated exposure leaves, and the client holds a diversified fund instead. The stock exits; the deferred gain rides along in their fund shares. What felt locked in by taxes ends up diversified.
Then the operational case. One fund replaces many separately managed accounts: the strategy is implemented once, rebalances execute once, and new assets come in without rebuilding the portfolio client by client. It is the scalability the wrapper is known for, and it is also a different job than running accounts. Whether you want that job is the next question.
Everything below this line is us being straight about who that arithmetic serves, who it doesn't, and what it asks of the people it does.
Our job is your best decision, not our best pitch. A conversion stands on three questions: one about your book, one about your clients' accounts, and one about you. All three deserve honest answers before anyone talks terms.
01 · Is there a tax problem to solve?Deferral only helps money that would otherwise owe tax. If most of the book sits in IRAs and 401(k)s, there was never a taxable gain to defer; if the embedded gain is thin, the deferral is real but small. Either way there is no problem worth a conversion: launch the fund the ordinary way, or pick one, and let those accounts buy it with cash. Deferring a small gain costs more than it saves.
02 · Can your accounts qualify?The 25/50 test binds on each contributing account, not on the fund, not on your book, and not on your model. A client with 40% of their account in one stock fails on their own numbers, and pooling with other clients does not rescue them. But it does not sideline them either: the account can be structured. Carve the position out, contribute part of it up to the 25% line, or broaden what that client contributes. One client's concentration never takes the rest of the book off the table. Participation is also each client's own decision: every contributing account signs off on its contribution, and the fund comes together from those individual consents. Coordinating that, account by account, is the work Premier Fund Solutions has the infrastructure and experience to run.
03 · Should you?A yes on the first two questions does not decide the third. The friction is real: legal, custodial, seasoning, every client's consent, the standing cost of running a fund. It has to pay for itself on your numbers, not in principle.
Because on the far side of a conversion, you are an asset manager: a fund to oversee, likely a board seat, an ADV to update, obligations that do not go back in the box if the strategy disappoints. Some advisers want exactly that job. Others discover they wanted the tax outcome and not the work. Structures exist where a platform carries the named-adviser role and much of it (see common questions).
What decides it is the practice you are building and the job you want inside it. Our job is to help you make that call, with a team that has been launching funds for over twenty-five years.
Find out in thirty seconds
Five questions, the same ones the desk asks on a first call, and not a single holding to paste. Your answers pick the conversation worth having next, which isn't always a §351 conversion.
The first three answers route you; the last two sharpen the recommendation.
Screen your models
In-browser toolA model is the right first screen: it tests the strategy you actually run, in seconds, without touching a single client record. What a model cannot be is a transferor. The statute tests each account contributing to the fund, on its own holdings, on the day it contributes. Real accounts drift away from the template, through legacy positions, tax lots nobody wanted to touch, client restrictions, and a decade of partial rebalances.
So this is a screen, not a determination. A model that fails here is a warning, not a verdict, because that drift runs both ways and structuring can change the answer. A model that passes with thin headroom will still see a meaningful share of accounts sit on the wrong side of the line. Measuring that scatter is account-level testing, which happens with the desk under client authorization: custodian data and client consents are not things a public page should ask you to paste.
One edge worth knowing. If an account holds ETFs, the statute tests them on a look-through basis: the ETF's underlying holdings count toward 25/50, not the ETF as one line. This screen treats each ETF as a single position; account-level testing applies full look-through.
One position per line: ticker, market value, cost basis. Basis is optional; without it there is no gain to rank on. The spheres at right populate as you type. There is no submit button and nothing to send.
Add a second model, or load the sample portfolios above, to rank and pool them.
Paste holdings. Spheres populate as you type, sized by weight.
Paste holdings and the verdict resolves as you type.
How long does a conversion take?
Typically four to six months from engagement to conversion day. The long poles are diversification remediation and custodial coordination; both start from exactly the data the desk gathers at the beginning.
Is my book big enough?
Size matters in dollars, not percentages: a conversion defers the embedded gain that actually crosses, against launch costs that are largely fixed. A thin taxable slice of a large book can pencil where a fat slice of a small one doesn't. Fifteen minutes with your rough numbers is usually enough to tell which side you're on.
How does remediation work when an account fails?
Two paths: trim the concentrated positions before contribution (recognizing gain only on the shares sold), or construct each client's contribution as a slice across models so every account independently passes 25/50. The desk models both and shows the tax cost of each path.
Do all contributions have to look alike?
No. Contributions can be homogeneous (accounts that already track one model) or heterogeneous: different strategies, legacy positions, even several advisers' books pooled into one launch. The industry calls that a syndicated 351 exchange. The rules stay the same either way: each account passes 25/50 on its own holdings, and each contributor receives shares equal to the value they bring. After close, the manager repositions toward the target strategy, and the wrapper's in-kind mechanics can work down what doesn't belong rather than distributing it as taxable gains. The more heterogeneous the mix, the more that repositioning matters. It is a planning input, not a blocker.
What can't be contributed?
Restricted securities, most derivatives, and digital assets are generally ineligible. Those positions get carved out of the contribution or handled separately; they take an account off the table only if they are the account.
What happens to my clients' tax lots?
Basis and holding periods carry into the fund shares rather than resetting, but the shape changes. Inside the SMA, each lot carried its own basis and its own gain: sell one, hold another. In the exchange, a client's aggregate basis carries into their fund shares, and the deferred gain spreads across every share they receive. Sell a tenth of the shares and you generally realize a tenth of the deferred gain, whichever old position drove it. Deferral is not elimination. The tax comes due as shares are sold, and lot-level records still matter: they set the basis that carries.
Do all my clients have to participate?
No. Every account joins by its own consent, and non-participants simply keep their SMA, or buy fund shares with cash once the fund is live.
Who runs the fund afterward?
Typically, the strategy stays yours: the adviser serves as the fund's investment adviser, with Premier Fund Solutions' operations infrastructure around it. Other structures exist and other platforms have explored them: a platform serving as the named adviser with you as sub-adviser, or running your strategy as a model. Each splits the work and the obligations differently, and Premier Fund Solutions walks you through which arrangement fits. Whatever the structure, the job § III describes is real, and worth deciding deliberately.
Who else is involved in running the fund?
A fund is a team: an administrator preparing the financial statements, keeping SEC compliance current, and coordinating fund accounting and NAV with specialized technology providers; a custodian holding the assets; a transfer agent; a distributor; an independent auditor; and a board overseeing it all. Fund administration is Premier Fund Solutions' business, the operational core of that team, and the desk coordinates the rest. You bring the strategy; the infrastructure is assembled around it.
What this page can't tell you
Whether any specific client can contribute. Whether their lots behave. Whether the issuer-attribution rules collapse two of your holdings into one. Whether the fund clears RIC diversification afterwards, which is a separate test with separate arithmetic. Whether the contributors will hold 80% of the fund at close. Every verdict on this page is a preliminary screen; the final determination requires tax counsel working from complete account records.
Booking opens the desk panel. Nothing you entered on this page is shared with it unless you tick the box there.