Wealthy US families have used ETFs to cut their tax bills, but the taxman has noticed
Wealthy families in the US have used more than than $20bn so far to seed ETFs, in a move which allows them to avoid the tax implications of selling assets. But the tax authorities have caught on and the implications for the ETF market could be “seismic” (Jeremy Suyker/Bloomberg)
Good morning. How the other half live is a topic of constant fascination to many, and perhaps just as much to us at AOX when we look at the investment decisions made by family offices.
So let’s look at one of the latest hot trends coming out of the US: 351 conversions.
At its core, this is when a family office makes a lump-sum contribution of seed capital towards launching an ETF.
Why would they do this? The same reason they do many things: tax benefits.
Based on our analysis of SEC filings, the number of 351 conversions went up by 250 per cent between 2024 and 2025.
It has gone up again in 2026 to date by more than 12 per cent.
Obviously 2026 isn’t over yet, but the trend is that the number will rise again this year.
By some estimates the amount of money that has been used as seed assets so far is more than $20bn.
To go into a bit more detail on how these work (the name comes from section 351 of the Internal Revenue Code), if you hold an unrealised gain and you’re worried about the tax implications of selling the assets then you can transfer them into a newly-formed ETF in exchange for shares, thus deferring the gain (and the tax).
What do we know about the ETFs being seeded?
A sizable proportion - about 35 per cent - are explicitly global ETFs or US equity ETFs. A handful are fixed income or multi-asset, and some, such as the Triad Total Return Income & Downside Protection ETF, have quite niche ambitions.
Not all of them are actually up and running yet, and some of them have quite mysterious names — like Goaltender ETF, Moonvest ETF or Warther ETF — but if the prospective ETFs are anything to go by, some big fund managers are looking to get in on this action, including Dimensional and Baillie Gifford.
So far, so good, right?
Well the US Treasury has cottoned on and, together with the Internal Revenue Service, has issued a ruling that aims to end “novel investment fund strategies that purport to produce tax results that may be inconsistent with the purpose and proper application of the relevant federal tax rules”.
Treasury secretary Scott Bessent says: “Our message on these conversions is clear: they don’t work under existing law.”
Brent Sullivan, a tax analyst and editor of the Tax Alpha Insider newsletter, says that as far as new activity is concerned, this would “chill” the aggressive end of the spectrum but “folks doing plain vanilla conversions seem ebullient”.
In fact he says he would be “pretty nervous” for aggressive 351 conversions which had already taken place.
Sullivan adds that the rule could have a big impact on the ETF market: “It will make investors, advisers and sponsors deliberate about what partners they each work with, how new ETFs come to market and transactions post-launch.
“It's seismic because all of that was pretty loosey-goosey before the ruling. Now, the industry seems to be coalescing around best practices.”
