Latest / Trillions / 351 Conversions: Smart Tax Alpha Strategy or Loophole in the Code?

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351 Conversions: Smart Tax Alpha Strategy or Loophole in the Code? · Trillions

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news, Bokerhillions.
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  Speaker 2: I'm Joel Webber and I'm Eric Belchernas.
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  Speaker 3: Nobody likes to pay taxes, but some people are really
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  Speaker 3: good about reducing their liabilities. And that's a thing about ETFs.
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  Speaker 3: They have some tax efficiencies. Shall we say, what is
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  Speaker 3: it about ETFs that make them so special? In the
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  Speaker 3: text front?
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  Speaker 2: This is one of the big attributes because if you're
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  Speaker 2: in a four one K plan, you're already tax deferred,
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  Speaker 2: so you're loving life. But if you're outside of a
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  Speaker 2: four wing K plan in a brokerage account, taxes are
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  Speaker 2: pain because every time you sell, you got to pay
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  Speaker 2: tax on the capital gains. And you still do that
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  Speaker 2: with ETFs. But what ETFs do that, especially as better
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  Speaker 2: of the mutual funds, is they generally don't distribute capital
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  Speaker 2: gains distributions unless you sell, so I actually think they're
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  Speaker 2: taxed more properly. Mutual funds, on their hand, are unfortunate
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  Speaker 2: in that whenever they sell, they have to cash somebody
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  Speaker 2: out and that triggers the capital gains and the people
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  Speaker 2: in the fund then are hit with a tax bill.
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  Speaker 2: So that's why mutual funds a huge reason why especially
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  Speaker 2: advisors really love ETFs. They just hate getting a tax
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  Speaker 2: bill when they didn't do anything. Now that I think
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  Speaker 2: that's the fair way to get taxed. However, there's a
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  Speaker 2: new evolution and even a wing of the ETF market
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  Speaker 2: that's evolving using the ETF for even more tax deferral.
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  Speaker 2: So this is a three point fifty one exchange. It's
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  Speaker 2: ETFs that are sort of custom made or bespoke for
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  Speaker 2: somebody to sort of take big gains in a stock
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  Speaker 2: they have and they and the stock has kind of
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  Speaker 2: taken over their portfolio, and they can move it into
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  Speaker 2: the ETF with a diversified basket of securities and defer
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  Speaker 2: paying taxes on it in effort to diversify their portfolio.
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  Speaker 2: And this is a trend that's growing. There's about eighty
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  Speaker 2: five to ninety of these now, and especially in the
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  Speaker 2: last year or two, they have about eighteen billions, So
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  Speaker 2: they're not big, but they're a pound for pound growing
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  Speaker 2: very quickly. And there's people who specialize in helping clients
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  Speaker 2: do this. And you know, if you talk to an advisor,
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  Speaker 2: you know, rich people almost tay paying taxes more than
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  Speaker 2: they like good returns. I mean, it's like they hate it.
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  Speaker 2: So obviously there's a lot of demand for this, and
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  Speaker 2: it's a questionable whether it is an abuse of the
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  Speaker 2: tax code or just an interpretation. And so I think
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  Speaker 2: that's what we're going to discuss today.
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  Speaker 3: Because there was a recent story from Bloomberg News called
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  Speaker 3: headline the latest tax dodge for the ultra rich is
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  Speaker 3: a customized ETF and there was a group of reporters
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  Speaker 3: on that, two of whom are joining us today, Deniza
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  Speaker 3: Takova and Zacharymeider, and we're going to just gus the
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  Speaker 3: three fifty one conversion with them, this time on trillions
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  Speaker 3: tax dodge. Denita, Zach what can aw trillions?
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  Speaker 4: Thanks for having us.
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  Speaker 5: It's great to be here.
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  Speaker 3: So one person who I was hoping to join is
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  Speaker 3: Justin Alis. She's in London. We were unable to include her.
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  Speaker 3: She's the lead byline on this story, So shout out
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  Speaker 3: to Justina for all of her reporting. Denis, I'm going
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  Speaker 3: to start with you, what is this three to fifty
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  Speaker 3: one conversion that we just talked about?
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  Speaker 4: So three fifty one conversions existed in a tax code
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  Speaker 4: for more than a century. It's been something that's been
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  Speaker 4: around for a very long time. What you can use
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  Speaker 4: it for is to transfer property to a corporation in
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  Speaker 4: exchange for shares. It's been used very differently in the ATF.
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  Speaker 4: There was a big ETF rout change in twenty nineteen.
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  Speaker 4: We've talked about it in many different things like leverage
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  Speaker 4: gtfs and other products, but it made it easier for
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  Speaker 4: that conversion to be part of a ETF. And what
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  Speaker 4: happens is that if I have a very concentrated portfolio,
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  Speaker 4: if I've invested all in magnificent seven, if it's most
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  Speaker 4: of my portfolio, and I want to diversify some of
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  Speaker 4: those gains, some people have been going to three fifty
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  Speaker 4: one conversions and they've been swapping parts of the portfolio
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  Speaker 4: after they become an ETF to replace some of the
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  Speaker 4: holdings with the goal to have a tax deferral, but
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  Speaker 4: also the potential to ultimately avoid taxes if, for example,
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  Speaker 4: those gains are passed onto the next generation through step up.
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  Speaker 3: Basis, Zach, isn't this the tax code's fault?
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  Speaker 5: Well, you're assuming there's a problem, yeah.
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  Speaker 3: Exactly, But what is it about the tax one hundred years? Like,
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  Speaker 3: what is the loophole that suddenly exists here?
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  Speaker 5: So as with as always a case with tax what
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  Speaker 5: happens is you you have different rules that were conceived
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  Speaker 5: for different purposes at different times that now people are
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  Speaker 5: kind of finding new ways to use to work together
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  Speaker 5: to get results that no one would have contemplated back
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  Speaker 5: when they created the rules in the first place. So
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  Speaker 5: the three fifty one conversion thing, the idea was like,
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  Speaker 5: if I own a bunch of of you know, machines,
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  Speaker 5: and I want to create a corporation to like, you know,
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  Speaker 5: own the widget factory, I can contribute these assets in
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  Speaker 5: exchange for stock in the corporation without having to have
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  Speaker 5: a tax realization event. Totally makes sense, not what we're
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  Speaker 5: talking about here. Then ETFs have this magical ability, which
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  Speaker 5: I'm sure we've talked about many times. They have a
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  Speaker 5: magical ability to be able to sort of get rid
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  Speaker 5: of assets and get new ones without incurring a capital gain.
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  Speaker 5: And so when you combine these two things together, you
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  Speaker 5: have this like amazing opportunity which is like I've got
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  Speaker 5: some video and video stock. It went way up. If
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  Speaker 5: I sold it, I would have to pay a lot
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  Speaker 5: of tax. Maybe I can just stick it in an ETF,
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  Speaker 5: have the ETF sell it and in exchange for something
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  Speaker 5: else I want to own, and I can just put
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  Speaker 5: off paying a tax bill for some indefinite amount of time.
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  Speaker 3: Eric, when did you first hear about three fifty one conversions.
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  Speaker 2: Three years ago?
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  Speaker 3: Maybe?
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  Speaker 2: I mean they've been around. I think the first one
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  Speaker 2: was twenty nineteen, twenty twenty. But there's a lot of
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  Speaker 2: ETFs now that pop up that came from somewhere else,
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  Speaker 2: like some separate managed Some advisors just convert a separate
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  Speaker 2: account into an ETF. It's hard to tell that it's
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  Speaker 2: a three fifty one. They don't have like some new thing.
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  Speaker 2: A lot of times, if it's a name that's like
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  Speaker 2: sounds like I don't know, some fancy pants advisor like
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  Speaker 2: Clearbridge or something, I'm like, Okay, that's probably a three
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  Speaker 2: point fifty one. Whereas if it's something like you know,
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  Speaker 2: Parlay Shares, that's probably a legit you know, issuer launching
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  Speaker 2: new digen leverage products, you know. Like So generally, when
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  Speaker 2: I see a name like that, I'm like, Okay, that's
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  Speaker 2: probably some kind of a person sitting on something that
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  Speaker 2: wants to use the ETF. First of all, if you
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  Speaker 2: put your Navidia shares into this three fifty one, and
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  Speaker 2: all of a sudden you're now in a diversified portfolio,
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  Speaker 2: which again I think technically is the law allows, although spiritually,
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  Speaker 2: as you said, it was more for small businesses. If
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  Speaker 2: you do that and then you sell that fun, say
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  Speaker 2: in ten years, you are still paying a tax based
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  Speaker 2: on when you've bought Navidia. So in that regard, you
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  Speaker 2: are I say, dodging paying tax at the time that
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  Speaker 2: you want to get rid of Navidia, but you're not
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  Speaker 2: dodging it completely. Is that right?
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  Speaker 5: Oh? That's absolutely right?
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  Speaker 3: So how far can you kick the tax can down
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  Speaker 3: the road.
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  Speaker 5: When you're talking about three fifty ones? To set up
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  Speaker 5: a whole ETF, it's kind of a big deal. If
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  Speaker 5: you've got ten thousand dollars of gains from playing around
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  Speaker 5: in the stock market, you cannot afford to create your
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  Speaker 5: own custom ETF to lay off some of those gains.
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  Speaker 5: This works really well if you have one hundred million
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  Speaker 5: dollars worth of of stock.
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  Speaker 3: Is there a number in between those two numbers that
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  Speaker 3: I might inspire too?
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  Speaker 5: So some of these deals are like one guy or
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  Speaker 5: a couple families. Some are more syndicated. You round up
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  Speaker 5: a whole bunch of people with like a million dollars
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  Speaker 5: worth of stock each. So either way though, we're talking
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  Speaker 5: about people who are a fairly decent money.
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  Speaker 3: Yeah. Give us an example, Danitza from the story, who
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  Speaker 3: is one of the most noteworthy examples.
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  Speaker 5: Yeah.
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  Speaker 4: So we start with the hot Pocket family, the Mirage family.
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  Speaker 3: Pocket as in the Snack.
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  Speaker 4: As in the Snack, it's a as far as we know,
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  Speaker 4: billionaire family that did their own three fifty one conversion.
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  Speaker 4: It was more than five hundred million that was seeded
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  Speaker 4: with We know that the majority pockets. Yeah, we know
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  Speaker 4: that the majority of that money comes from the family.
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  Speaker 4: We've reported also on Gabe Podkin, which was obviously a
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  Speaker 4: well known named part of the game Stop Saga with
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  Speaker 4: his hedge funds. Eric was talking about the first three
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  Speaker 4: fifty one conversions. We actually speak to Rory Riggs who
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  Speaker 4: says that he was the first one to do it.
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  Speaker 4: Obviously it's kind of hard to define, but he did
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  Speaker 4: it I think twenty eighteen, twenty nineteen. What he said
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  Speaker 4: at the time it was very vague, very confusing. He
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  Speaker 4: actually ensured the three fifty one conversions. Most of the
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  Speaker 4: conversions now are not really insured because I guess it's
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  Speaker 4: a pretty straight forward procedure. By the time, it was
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  Speaker 4: very unclear. He said that actually the insurer came to
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  Speaker 4: him and he was like, let's do this. So he
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  Speaker 4: has four ETFs like that that are done with Syntex advisors.
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  Speaker 4: That's something that Eric also said. A lot of those
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  Speaker 4: ETFs you can find the name of the advisors, and
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  Speaker 4: it's like, that's clearly something normal people don't really do
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  Speaker 4: in a ETF filing. But he did four of those ETFs,
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  Speaker 4: and he puts some of his money in each of those.
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  Speaker 4: But then he worked with other investors and client of
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  Speaker 4: his to see that DF as well.
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  Speaker 3: Eric. The name of the ETF is the m ig
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  Speaker 3: meg Core ETF. The ticker is Migo. When you look
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  Speaker 3: at Migo, what do you see Because this is a
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  Speaker 3: new ETF. Right when we talked about this, a little
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  Speaker 3: bit like with that one, I've even crossed your radar.
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  Speaker 3: It sounds so inoquous. It's just like Migo. There seems
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  Speaker 3: like there could be a million different ETFs that had
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  Speaker 3: that name.
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  Speaker 2: I remember seeing it and I got to be honest,
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  Speaker 2: you know, as a kid raised on movies and TV
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  Speaker 2: in the eighties, it says meg corn. I thought of
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  Speaker 2: top Gun. There's also a top Gun ETF, by the way,
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  Speaker 2: that is a legit active fund. Maybe this is like
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  Speaker 2: somebody using the word meg as like a metaphor for active.
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  Speaker 2: Either way, what I assume is it's one of these
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  Speaker 2: conversions like an advisor, or it's somebody who's working with
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  Speaker 2: a white label issuer and they're too small to like
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  Speaker 2: run their own ETF, because if you look at like
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  Speaker 2: title or ETF architect or exchange trait of concepts and
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  Speaker 2: you look at their lineups, it's a bunch of really
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  Speaker 2: small names you never heard of, and so I would
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  Speaker 2: just put it in that category, but I wouldn't have
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  Speaker 2: there's nothing to say that it's at three fifty one.
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  Speaker 2: If you look at the holdings, it's very diversified. It
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  Speaker 2: holds fifty stocks. Well, actually two of them are ets
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  Speaker 2: owns VU the cues, and then a bunch of stocks
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  Speaker 2: like Google, Microsoft, Blackstone, Eli, Lilly. Kind of looks like
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  Speaker 2: kind of a mix between maybe like a advisor account,
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  Speaker 2: you know, because you've got two ETFs and then a
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  Speaker 2: bunch of stocks. This is probably not the kind of
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  Speaker 2: fun where you're going to see a lot of inflows.
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  Speaker 2: Because it's not really trying to do anything. I don't
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  Speaker 2: think it's marketing itself, and so looks like the only
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  Speaker 2: inflows that have happened have been like heartbeat trades, which
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  Speaker 2: are probably trying to do something with the games that
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  Speaker 2: are embedded there. You know, it is up a little bit.
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  Speaker 2: So yeah, that's my initial thought. But again there's no
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  Speaker 2: tag on it that says it's a three fifty one exchange.
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  Speaker 3: What would happen if I tried to buy a share
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  Speaker 3: of Migo?
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  Speaker 2: You would buy a share Amigo. I mean, if I
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  Speaker 2: look at the volume, it's really pathetic. This thing barely
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  Speaker 2: trades even though it has seven hundred million. In fact,
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  Speaker 2: the volume per asset to this has probably got to
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  Speaker 2: be one of the widest margins I've ever seen. Like,
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  Speaker 2: let's just say, like on Monday, it traded six hundred
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  Speaker 2: and ninety one shares. I mean, that's that's like nothing.
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  Speaker 2: I think, you're not even like, if you trade like
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  Speaker 2: less than a million shares a day, you're struggling. So
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  Speaker 2: six hundred and ninety one is really really bad. However,
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  Speaker 2: every now and then it sees a day with a
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  Speaker 2: million or two. That's clearly not a real flow. That's
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  Speaker 2: a purposeful inkind redemption, and that would be a heartbeat trade.
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  Speaker 2: So I guess the lego people don't. It doesn't matter,
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  Speaker 2: Like if somebody were to buy this, like you eat fine,
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  Speaker 2: you know the ats very very well. It's you know,
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  Speaker 2: standardized and durable and easy to use for anybody, and
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  Speaker 2: you don't have to use it, like if you bought
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  Speaker 2: it or not, it wouldn't matter. It can still live
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  Speaker 2: on and just be for this one person and.
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  Speaker 3: For this one person or this family for instance. What's
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  Speaker 3: their end game, whether the various scenarios that this could
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  Speaker 3: take from here.
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  Speaker 4: Yeah, I mean the first thing because Eric said, oh eventually,
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  Speaker 4: maybe not everyone wants to pass this. Maybe it's no
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  Speaker 4: step up basis, but they're versifying your position without realizing
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  Speaker 4: taxes is a pretty good benefit. It gives me the
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  Speaker 4: flexibility to talk to do a lot of tax planning,
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  Speaker 4: like maybe I want to realize the games, but maybe
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  Speaker 4: I want to realize it at my home pace at
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  Speaker 4: the right time when I have particular losses. To Job said,
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  Speaker 4: you know, we talk a lot about tax alpha, but
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  Speaker 4: there are so many sophisticated techniques that you can use
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  Speaker 4: to do that right now, so I don't know. Tax
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  Speaker 4: engineering has evolved a lot, so having the timing and
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  Speaker 4: flexibility to that is great. And you know that's another
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  Speaker 4: major benefit that I think gets lost.
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  Speaker 3: You just use the phrase tax alfo. Can you break
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  Speaker 3: that down, Like what does that mean to you?
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  Speaker 2: Yeah?
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  Speaker 4: In the industry, Yeah, tax alpha is financial strategies that
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  Speaker 4: are aimed at minimizing your tax bill. Of course, they
• 13:31
  Speaker 4: aim at also delivering strong returns, but the returns they
• 13:34
  Speaker 4: focus it's after tax returns. So they were like, yeah,
• 13:38
  Speaker 4: we can deliver you gains, but you're after tax gains
• 13:41
  Speaker 4: will look extra good. And they're like long short tax
• 13:44
  Speaker 4: aware strategies, which is kind of the evolution of direct
• 13:48
  Speaker 4: indexing and SMAs. They're exchange funds. There's so many different
• 13:51
  Speaker 4: tools that over the past decade or so have really
• 13:55
  Speaker 4: lowered minimums, and that's argument people make. Indeed, a lot
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  Speaker 4: of high where the individuals can reach them now, a
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  Speaker 4: lot of retail folks can reach them now, So those
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  Speaker 4: strategies are really optimizing your tax bill in the end.
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  Speaker 3: Okay, so we talked about how there could be millions
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  Speaker 3: of dollars. Maybe one family that has an excess of
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  Speaker 3: five hundred million dollars. That does this Zach, You mentioned
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  Speaker 3: a word syndicate, like imagine, maybe I don't have that
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  Speaker 3: much money, but I have less money. How did that
• 14:36
  Speaker 3: manifest itself in the reporting and where did that take
• 14:39
  Speaker 3: you guys?
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  Speaker 5: Yeah, so a lot of these three fifty ones are
• 14:42
  Speaker 5: a money manager or somebody like that will go around
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  Speaker 5: to a bunch of their clients and say, hey, if
• 14:47
  Speaker 5: you've got a million bucks and you want to get
• 14:50
  Speaker 5: the advantage of this, you can put it in this
• 14:51
  Speaker 5: pot and we'll kind of gather them all up and
• 14:54
  Speaker 5: we'll create one ETF. So that kind of spreads the
• 14:57
  Speaker 5: you know, the cost, the kind of administrative cost of
• 14:59
  Speaker 5: setting thing up over a larger number of people.
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  Speaker 3: And is it clear yet how common that is versus
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  Speaker 3: maybe like one benefactor or one source of the seed money.
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  Speaker 5: I'm not sure we have a strong view. I think
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  Speaker 5: it looks like probably most of them are some kind
• 15:17
  Speaker 5: of they're either syndicated or they're maybe from a private
• 15:21
  Speaker 5: fund where we assume there's probably multiple investors, and then
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  Speaker 5: there's only been a couple I think where it really
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  Speaker 5: looks like it's probably just one or two people.
• 15:30
  Speaker 4: And we've seen more and more financial advisors get involved
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  Speaker 4: into this, and obviously they construct relatively like maybe similar
• 15:36
  Speaker 4: portfolios for their clients, so it makes sense that some
• 15:39
  Speaker 4: of those will be pulled. And like, if you and
• 15:41
  Speaker 4: me both have exposures to Magnificent seven, maybe we can
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  Speaker 4: combine our assets and do something like that. But I
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  Speaker 4: would say, yeah, like many of them are syndicated.
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  Speaker 2: I want to talk about one of the pushbacks here
• 15:52
  Speaker 2: to the article, and I brought this up on etfi
• 15:54
  Speaker 2: Q with Zach because it's good for to like kind
• 15:57
  Speaker 2: of unpack this. So you know, everybody likes that ETFs
• 16:02
  Speaker 2: democratize things, right, even this particular administration is trying to
• 16:06
  Speaker 2: democratize privates and all kinds of things. They want the
• 16:09
  Speaker 2: little guy to have the same access. One of the
• 16:12
  Speaker 2: pushbacks here is, hey, look this, this exchange fund concept
• 16:15
  Speaker 2: has been going on in the very ultra rich world
• 16:19
  Speaker 2: of private banking for a long time, and they did
• 16:22
  Speaker 2: the same thing. It's just the top point one percent
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  Speaker 2: or like the ultra ultra rich. Now it's becoming democratized,
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  Speaker 2: where like, okay, maybe people a little less ultra rich.
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  Speaker 2: But I think Schwab might even be having some participation
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  Speaker 2: in this, which means even regular retail could participate. Isn't
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  Speaker 2: that good? Like, in other words, shouldn't everybody have access
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  Speaker 2: to this tax quote dodge or should all of it
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  Speaker 2: be shut down? Because I don't recall seeing a lot
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  Speaker 2: on like the exchange funds concept. It's like, I know,
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  Speaker 2: once it gets in ETF, it sort of becomes like
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  Speaker 2: mainstreamed and like it's like easy to find and track
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  Speaker 2: and look for. But the private banking world I believe
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  Speaker 2: has been doing this.
• 17:04
  Speaker 5: For a while. Yeah, I mean yeah, So the earlier
• 17:07
  Speaker 5: iteration of this idea was the exchange fund, which, to
• 17:10
  Speaker 5: your point, I think eric is truitionally seen as pretty expensive.
• 17:14
  Speaker 5: It would be like Goldman Sachs or Morgan Stanley would
• 17:16
  Speaker 5: go around and try to round up money into one
• 17:18
  Speaker 5: of these, and the concept there was similar. You got
• 17:21
  Speaker 5: a bunch of rich people. Let's say I'm some guy
• 17:23
  Speaker 5: who I'm in a former executive at an industrial company,
• 17:26
  Speaker 5: so I've got a ton of stock in this one company,
• 17:28
  Speaker 5: and you're a former executive at a tech company. You've
• 17:31
  Speaker 5: got a ton of stock in that company. So we
• 17:33
  Speaker 5: find a bunch of these people who have kind of
• 17:35
  Speaker 5: diverse a group that's diversed but everyone's very concentrated. You
• 17:39
  Speaker 5: put all your money into one big partnership, or put
• 17:42
  Speaker 5: all your stock into one big partnership, nobody sells anything.
• 17:45
  Speaker 5: But now suddenly I've got a much more diversified exposure.
• 17:48
  Speaker 5: So the difference with the three point fifty one that
• 17:50
  Speaker 5: take makes it like way more powerful in a certain way,
• 17:54
  Speaker 5: in addition to being probably lower fees and access to
• 17:57
  Speaker 5: more people, is that the ETF can go out and
• 18:00
  Speaker 5: get rid of those stocks and bring in other ones.
• 18:03
  Speaker 4: We currently identified one hundred and five ETFs and the
• 18:06
  Speaker 4: assets under management are more than twenty billion, So you
• 18:09
  Speaker 4: can do the math of how big is the average
• 18:12
  Speaker 4: three fifty one conversion. It is indeed the case that
• 18:15
  Speaker 4: if you go to those platform that offer it, often
• 18:18
  Speaker 4: the minimums are a few hundred thousand, which obviously it's
• 18:22
  Speaker 4: very accessible to retail investor. But what we've seen so
• 18:25
  Speaker 4: far is that a lot of the people using them
• 18:28
  Speaker 4: are indeed in kind of a higher income bracket than
• 18:32
  Speaker 4: someone who would contribute hundred thousand. And another point I
• 18:35
  Speaker 4: want to make is that our story focuses on people
• 18:39
  Speaker 4: like We mentioned the Mirage family, we mentioned Rory Riggs,
• 18:42
  Speaker 4: we mentioned Gay Plotkin, these are all people who have
• 18:45
  Speaker 4: potentially easy access to the big banks and can put
• 18:47
  Speaker 4: their money into exchange funds and all the fancy private
• 18:50
  Speaker 4: asset products. But clearly they're choosing this very transparent platform
• 18:55
  Speaker 4: like ETF. Filing has so much information you can find
• 18:57
  Speaker 4: all of that. So if all those people are using
• 19:01
  Speaker 4: that type of vehicle to convert their assets, perhaps their
• 19:04
  Speaker 4: benefits are a little bit better or at least in
• 19:07
  Speaker 4: certain cases than what the banks can offer you.
• 19:09
  Speaker 2: And then I think, you know, another pushback here, not
• 19:13
  Speaker 2: a pushback, but it's more just like and I think
• 19:15
  Speaker 2: Joel kind of hit it with the first question was
• 19:16
  Speaker 2: basically like, if you're a fiduciary, whether an asset manager
• 19:20
  Speaker 2: or an advisor, tax alpha is your job. You know,
• 19:24
  Speaker 2: you're you know, there's programs of software that help you
• 19:27
  Speaker 2: do tax loss harvesting and whatnot. And people go in
• 19:30
  Speaker 2: and out of stocks and ETFs. In December, we see
• 19:33
  Speaker 2: a ton of flows into spy because people are going
• 19:35
  Speaker 2: to hide out there for a month and then leave
• 19:38
  Speaker 2: in a month later, and that's tax loss harvest thing.
• 19:41
  Speaker 2: I guess just give us the if that's your fiduciary job,
• 19:46
  Speaker 2: and obviously you're just going to push that until the
• 19:49
  Speaker 2: government tells you no. And so I guess let's just
• 19:52
  Speaker 2: start there, which is that, Okay, fine, this is a
• 19:57
  Speaker 2: something that's happening. All of the advisors and asset men
• 20:00
  Speaker 2: just trying to help their clients, which is their job.
• 20:03
  Speaker 2: But it's getting to a point where it's like questionable
• 20:05
  Speaker 2: whether it's breaking the spirit of the tax code. Where
• 20:09
  Speaker 2: does the government stand on this in terms of the
• 20:12
  Speaker 2: Treasury and the irs.
• 20:15
  Speaker 5: That's a great question. And Denisa and I were at
• 20:18
  Speaker 5: a conference just the other day where we heard from
• 20:21
  Speaker 5: the two people who are kind of making that decision.
• 20:23
  Speaker 5: There's two Treasury officials who were sort of giving a
• 20:26
  Speaker 5: talk to Wall Street lawyers about where do we stand
• 20:29
  Speaker 5: on these newfangled tax alpha concepts, And one of them
• 20:33
  Speaker 5: that they spend a lot of time talking about was
• 20:35
  Speaker 5: three fifty ones, and they pretty much, I'd say, it's
• 20:37
  Speaker 5: fair to say, Denisa, they made it clear that they're
• 20:41
  Speaker 5: not trying to attack all three fifty ones exactly, but
• 20:44
  Speaker 5: they don't like some of the more aggressive moves. And
• 20:47
  Speaker 5: what they talked about specifically was sort of three fifty
• 20:52
  Speaker 5: one ETFs and within that they were saying, and I
• 20:56
  Speaker 5: remember remembering this now, they said they were concerned about
• 21:01
  Speaker 5: people contributing assets with an intent to get rid of them,
• 21:09
  Speaker 5: or assets that didn't really fit with the mission, the
• 21:13
  Speaker 5: stated mission of the three fifty one. So there's a
• 21:17
  Speaker 5: lot of stuff in the tax code that basically says, yeah,
• 21:20
  Speaker 5: sure you can do a three fifty one, but it
• 21:21
  Speaker 5: shouldn't be an attempt to achieve diversification. Now, all that
• 21:27
  Speaker 5: we've been talking about this whole episode has been using
• 21:29
  Speaker 5: a three fifty one to achieve diversification. So it's kind
• 21:32
  Speaker 5: of like a fine line here, but suffice to say,
• 21:36
  Speaker 5: Treasury has seen stuff that they think is probably going
• 21:38
  Speaker 5: too far.
• 21:39
  Speaker 2: Just on this achieved diversification. We had Brent Sullivan, I
• 21:42
  Speaker 2: call him the tax man. He is the tax taxing everything.
• 21:46
  Speaker 2: You should go to his LinkedIn or Twitter his next level. Anyway,
• 21:51
  Speaker 2: he said this achieved diversification. I didn't totally realize this,
• 21:55
  Speaker 2: but maybe I interpret him wrong. He says that wasn't
• 21:58
  Speaker 2: the spirit of the code, Like you shouldn't be using
• 22:01
  Speaker 2: it to achieve diversification. But isn't that what almost all
• 22:04
  Speaker 2: these are doing? Like wouldn't they all be suspect if that's.
• 22:07
  Speaker 5: The exactly I mean, I think what happened here is
• 22:09
  Speaker 5: a couple of times policymakers said, well, we don't like
• 22:12
  Speaker 5: this achieving diversification thing. We're going to write out these
• 22:15
  Speaker 5: rules that kind of prevent what we think is the problem.
• 22:19
  Speaker 5: And of course tax layers looked at those rules as like, okay,
• 22:21
  Speaker 5: well here here are the rules of the game. How
• 22:23
  Speaker 5: can we gain them? And so, yeah, thanks for the
• 22:27
  Speaker 5: signposts exactly, and like let's go right up to that
• 22:29
  Speaker 5: line and then maybe use some other tricks you didn't
• 22:32
  Speaker 5: think about to even kind of go beyond that. And so,
• 22:35
  Speaker 5: for instance, there's a rule like I think one position
• 22:38
  Speaker 5: can't be more than twenty five, right, and then maybe
• 22:42
  Speaker 5: the overall number of positions has to be I think
• 22:44
  Speaker 5: at least eleven. So there's all these rules of like
• 22:47
  Speaker 5: how to how they define diversified. Well, you can do
• 22:50
  Speaker 5: a lot with that, particularly for instance, if you borrow
• 22:53
  Speaker 5: money to add some other stuff into the pot before
• 22:57
  Speaker 5: you do it, right, So there's a lot of tricks
• 22:59
  Speaker 5: you can play that really achieved the goal diversification without
• 23:05
  Speaker 5: running a foul of the black letter of the law.
• 23:07
  Speaker 3: And so if someone was going to maybe change the rules,
• 23:13
  Speaker 3: would that end up looking like and where would that
• 23:17
  Speaker 3: come from? Would it be from Treasury?
• 23:18
  Speaker 4: I just wanted to say that for the Treasury is
• 23:22
  Speaker 4: like really those things that are pushing the rules. And
• 23:25
  Speaker 4: the thing that Zach mentioned is stuffing is the fact
• 23:28
  Speaker 4: that investors borrow money to kind of sidetrack those diversification rules.
• 23:33
  Speaker 4: There is also sequential seating, which you're using a couple
• 23:36
  Speaker 4: of ETFs to do that. So just generally the versification rule,
• 23:41
  Speaker 4: I guess was fine with the Treasury as long as
• 23:43
  Speaker 4: people don't push the boundaries and become extra creative to
• 23:47
  Speaker 4: surpass it. And when it comes to what the Treasury
• 23:49
  Speaker 4: can do is something we've been covering for a long time.
• 23:53
  Speaker 4: The conversation about this started at the start of the year,
• 23:56
  Speaker 4: at least as far as we know, is that they've
• 23:58
  Speaker 4: been talking about issuing Guydance. So the main and kind
• 24:02
  Speaker 4: of the thing that a lot of people in the
• 24:03
  Speaker 4: industry worried about is labeling this transaction of interest, which
• 24:07
  Speaker 4: will be then heavily reviewed by the IRS. And obviously
• 24:10
  Speaker 4: it's kind of a name you put for transaction that
• 24:13
  Speaker 4: could potentially be tax avoidance or some type of tax dodge.
• 24:16
  Speaker 4: So every time Treasure officials review IRS officials review the filings.
• 24:20
  Speaker 4: They're like, oh, we have to double check this because
• 24:22
  Speaker 4: clearly it is problematic. Of course, that's kind of the
• 24:24
  Speaker 4: most severe measure they could take, and we're not sure
• 24:27
  Speaker 4: if that's something they said everything that was on the table.
• 24:31
  Speaker 4: We're looking at all those measures, but there could be
• 24:34
  Speaker 4: different measures that stop that. The parts of the transaction
• 24:37
  Speaker 4: they're worried about, and they're worried about people changing the
• 24:40
  Speaker 4: holdings too fast. We have reporting about people changing the
• 24:43
  Speaker 4: in the first few days. They're worried about people changing
• 24:46
  Speaker 4: too many of the of the initial holdings. We have
• 24:49
  Speaker 4: reporting about that. But that said, many many of the
• 24:52
  Speaker 4: three fifty one conversions don't break those rules. So I
• 24:56
  Speaker 4: guess the ideal thing for the treasure in the industry
• 24:58
  Speaker 4: is to kind of stop those bad try score to
• 25:00
  Speaker 4: prossings who are trying to avoid those rules and changing that,
• 25:04
  Speaker 4: and maybe that could be done through guidance. And I
• 25:06
  Speaker 4: guess that's the agreement now that if something is then
• 25:09
  Speaker 4: is going to be gind us like, it's not like
• 25:10
  Speaker 4: Congress will pass actual legislation to change this.
• 25:13
  Speaker 3: Yeah, Congress can fascinate Yah, Yeah, I love these three
• 25:16
  Speaker 3: words transactions of interest that just is like such a
• 25:21
  Speaker 3: great catch all for how they think about this.
• 25:23
  Speaker 2: One thing about this just taking a big step back.
• 25:25
  Speaker 2: I sometimes grapple with this because on one hand, I'm like,
• 25:29
  Speaker 2: you know, ETFs, probably the investors who use ETFs trade
• 25:33
  Speaker 2: a lot, Like we're talking seventy trillion dollars in volume
• 25:37
  Speaker 2: a year. There's a lot of capital gains being triggered there,
• 25:40
  Speaker 2: that's being paid. They probably pay a lot of taxes.
• 25:44
  Speaker 2: I think capital gains are like ten percent of tax
• 25:48
  Speaker 2: income for the government, so it's a pretty good amount.
• 25:51
  Speaker 2: And I'm like, you know, this is just part of
• 25:55
  Speaker 2: what people do, and you can't avoid it unless you die.
• 25:59
  Speaker 2: Like when you die, then all your tax liabilities are
• 26:02
  Speaker 2: gone and your kids don't have to pay them, but
• 26:05
  Speaker 2: you're dead. So it's not like, you know, some people
• 26:08
  Speaker 2: are using that like like that's your way out of it.
• 26:12
  Speaker 2: Like that's a pretty dark, like dark kind of concept
• 26:15
  Speaker 2: there that Okay, yeah, fine, don't have to pay taxes
• 26:17
  Speaker 2: if you pass away, But does anybody really want to
• 26:20
  Speaker 2: do that anyway. I do think that the bigger picture
• 26:23
  Speaker 2: here is the stock market has been such a massive
• 26:27
  Speaker 2: source of wealth and of the wealth gap that the
• 26:31
  Speaker 2: top one percent own half of the stock market now
• 26:34
  Speaker 2: and they've gotten like fabulously rich. And then because we've
• 26:37
  Speaker 2: been covering Trump accounts, are trying to get the other
• 26:39
  Speaker 2: fifty percent of Americans in the stock market because they've
• 26:42
  Speaker 2: been left behind of all these exorbitant gains. And so
• 26:46
  Speaker 2: I do kind of understand, I think from a holistic
• 26:49
  Speaker 2: point of view, like, hey, look, you made a ton
• 26:51
  Speaker 2: of money. Just sell this the damn stock and pay
• 26:54
  Speaker 2: the taxes. Like you're going to get money too. It's
• 26:57
  Speaker 2: not like they're going to take all the money. And
• 26:59
  Speaker 2: the gun then would take that money and do something
• 27:02
  Speaker 2: with it in the government. Right, So that's the issue
• 27:05
  Speaker 2: here is that even if you do pay it later,
• 27:08
  Speaker 2: the government could have taken that money and done something
• 27:11
  Speaker 2: with it immediately, whereas you take it and you're able
• 27:14
  Speaker 2: to compound and earn even more. So that that's really
• 27:17
  Speaker 2: the problem here, right. It's more just a because I
• 27:20
  Speaker 2: was at the Bogel Heads conference and this guy he
• 27:23
  Speaker 2: made a good point, is like, listen, just pay your taxes,
• 27:26
  Speaker 2: like you know, it's not like all of the money
• 27:30
  Speaker 2: you have a gain. So that's good. Bogel said the
• 27:32
  Speaker 2: same thing. He was like, if you have to pay
• 27:34
  Speaker 2: capital gains, that's good. It means you made money. Is
• 27:36
  Speaker 2: there a philosophical thing going on here too?
• 27:39
  Speaker 3: I think it's kind of a game, right, which is
• 27:42
  Speaker 3: how do I see if I can try something and
• 27:46
  Speaker 3: maybe pay less? And that to me is like Wall
• 27:49
  Speaker 3: Street loves a good game and that is the game,
• 27:51
  Speaker 3: and there's experts for that game, and if you can
• 27:53
  Speaker 3: find them and figure out something like, see if you
• 27:56
  Speaker 3: can do it.
• 27:57
  Speaker 4: I mean, there are many layers to this, but generally
• 27:59
  Speaker 4: we know that financial advisors have been struggling to kind
• 28:01
  Speaker 4: of justify fees for a very long time. Deriveing alpha
• 28:04
  Speaker 4: that's better than the market than buying s and P
• 28:07
  Speaker 4: five hundred front has not been easy. So there is
• 28:10
  Speaker 4: an element of that where financial advisors have really been
• 28:12
  Speaker 4: selling tax ALFA and it's become this thing where it's
• 28:15
  Speaker 4: just like, oh, this is where you need really need
• 28:18
  Speaker 4: us and people, you know, people are worried about taxes.
• 28:21
  Speaker 4: I tell you about taxes and you suddenly get very interesting.
• 28:24
  Speaker 4: So there is that aspect of that, and also a
• 28:26
  Speaker 4: lot of those approaches, as much as they could be
• 28:29
  Speaker 4: available as low as fifty hundred thousand, they're actually effective
• 28:34
  Speaker 4: if you are high network individual. We've talked a lot
• 28:36
  Speaker 4: about the democratization of those, but often the benefits at
• 28:40
  Speaker 4: a very low kind of investment level are not that big.
• 28:42
  Speaker 4: The point where you generate those benefits is where the
• 28:45
  Speaker 4: numbers get serious and we get like kind of a
• 28:48
  Speaker 4: six figure above eight figure and above to actually get
• 28:51
  Speaker 4: the benefits. And the thing that really really complicated this
• 28:55
  Speaker 4: debate is that a lot of those companies are very
• 28:57
  Speaker 4: aggressive with advertising, and even the Treasury this is something
• 29:01
  Speaker 4: we mentioned, they said, we saw an ad that you
• 29:04
  Speaker 4: can save three hundred thousand in taxes on one million investment.
• 29:08
  Speaker 4: And I think this is where the boundary of like, oh,
• 29:12
  Speaker 4: it's our fuduciary duty to maximize your tax saving. It's
• 29:15
  Speaker 4: our re fuducary duty to do all of that. But
• 29:17
  Speaker 4: where it got complicated is that we got very smart
• 29:20
  Speaker 4: about tax optimization, about tax planning and tax engineering, but
• 29:24
  Speaker 4: people also advertise it in the wrong ways. Like some
• 29:28
  Speaker 4: firms are like, oh, we're saying, oh, it's tax self,
• 29:31
  Speaker 4: we're working on your returns. But some firms are really
• 29:34
  Speaker 4: pushing the boundaries with advertisement, and I think that's where
• 29:38
  Speaker 4: it draws public backlash and clearly regulators are not excited
• 29:43
  Speaker 4: about it.
• 29:43
  Speaker 3: Should you ever see a ticker that is e R,
• 29:48
  Speaker 3: I see, I'm pretty sure that's going to be Erics
• 29:52
  Speaker 3: three fifty one convert, So just be on the lookout.
• 29:55
  Speaker 4: We're so excited. Yeah, we'll be asking you for a comment.
• 29:58
  Speaker 3: You can call me. I don't know if I'll have
• 29:59
  Speaker 3: an to help you out, Eric, but you can at
• 30:01
  Speaker 3: least call me and let me know what's coming.
• 30:02
  Speaker 4: Okay, it better be big. We're we're rooting for you.
• 30:06
  Speaker 2: I'm not old for rich. I'm like I'm a thousand eer. Okay, Okay,
• 30:11
  Speaker 2: we're going to find a product for then you'll know
• 30:15
  Speaker 2: it'll be truly democratized.
• 30:17
  Speaker 3: Okay, Denita Zach, thanks for joining us.
• 30:20
  Speaker 4: Great to be here, Thanks for having us.
• 30:29
  Speaker 3: Thanks for listening to Trillions Until next time. You can
• 30:31
  Speaker 3: find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify,
• 30:36
  Speaker 3: or wherever else you'd like to listen. We'd love to
• 30:38
  Speaker 3: hear from you. Hit us up on social. Trillions is
• 30:41
  Speaker 3: produced by Magnus Hendrickson and Kishav Pondia. Bye.