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title: It's Not What You Make, It's What You Keep
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Twin Oak ETF Company
[Tax Efficiency](https://twinoak.com/section-351#tax-efficiency) [Custom ETFs](https://twinoak.com/section-351#seeding-etf) [About](https://twinoak.com/section-351#future-relationship)
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[Tax Efficiency](https://twinoak.com/section-351#tax-efficiency) [Custom ETFs](https://twinoak.com/section-351#seeding-etf) [About](https://twinoak.com/section-351#future-relationship)
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# “The Case for a Section 351 Exchange”
Why taking your portfolio of publicly traded securities and using them to seed an ETF can be cost effective and have great estate planning properties.
Disclosures and Risk: There are risks involved with investing including loss of principal. Please see our full risk disclosures below before investing.
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### The Impact of Improving Net Returns
See the power of compounding when tax drag is minimized.
This calculator is for illustrative purposes only and is not a guarantee or projection of future results. No investment strategy can protect against market risk or loss. Consult with a qualified financial advisor.
Initial Investment ($):
Annual Gross Return (%):
Annual Tax Drag (%): 2% 3% 4%
Number of Years:
Calculate Impact
Final Value (No Tax Drag): $0.00
Final Value (Tax Drag): $0.00
Total Difference (No Tax vs Tax Drag): $0.00
## Exchange Traded Funds and Tax Drag
Return Reduction due to tax burden was 1.96% and 1.88% in 2020 & 2021 respectively.
Capital Gains Distributions .12% vs 3.72% active, 2.11% index1
1Moussawi, Rabih and Shen, Ke and Velthuis, Raisa, The Role of Taxes in the Rise of ETFs (November 18, 2019). Available at SSRN: [https://ssrn.com/abstract=3744519](https://ssrn.com/abstract=3744519) or [http://dx.doi.org/10.2139/ssrn.3744519](http://dx.doi.org/10.2139/ssrn.3744519)
[Open Full Study in New Tab (SSRN)](https://ssrn.com/abstract=3744519)
## Given ETFs and taxation, what is seeding and how do we seed one?
## Refresher on ETFs
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## We believe the future of the Client-Advisor relationship will revolve around ETFs
### Legacy Forming
- The Section 351 Exchange allows a tax-free transfer of appreciated securities, minimizing immediate tax burdens for the donor.1
- Creating a custom ETF provides a single, defined investment vehicle for future generations, simplifying management and transition.
- Allows the original asset owner to set the strategic direction and investment guidelines, building a lasting investment philosophy.
### Long-Term Solution
- ETFs, due to their in-kind creation/redemption mechanism, naturally minimize capital gains distributions, which is critical for long-term compounding.
- The structure is resilient to common portfolio events (like advisor changes or large withdrawals) that often trigger tax events in traditional mutual funds.
- The cost basis of assets contributed via the 351 exchange carries over, but the structure facilitates future tax management.2
### Great Estate Planning Properties
- Upon the death of the owner, shares of the ETF receive a step-up in cost basis, effectively erasing accumulated capital gains for the heirs.3
- The ETF shares are easily transferable and divisible among beneficiaries, making the inheritance process smoother than transferring individual stock lots.
- The tax-efficiency inherent in the ETF structure preserves more wealth over the lifetime of the trust or estate.
1, 2 Not tax advice.
3 Not always the case, not tax advice, consult with a Tax advisor.
## ETF engineered for you/your client
"With our engineering mindsets, we take great care in customizing a solution for you and your clients needs"
### Important Investment Risk Disclaimers
\*\*Disclosures and Risk\*\*
There are risks involved with investing including \*\*loss of principal\*\*. There is no assurance that the objectives of any strategy or fund will be achieved or will be successful. \*\*No investment strategy can protect against market risk or loss\*\*. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be either suitable or profitable for a client’s portfolio.
Unlike mutual funds, \*\*exchange-traded funds (ETFs) trade like stocks\*\*, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value (NAV), and are not individually redeemable directly with the ETF. \*\*Brokerage commissions and ETF expenses will reduce returns\*\*. ETFs are subject to specific risks, depending on the nature of the underlying strategy of a fund, which should be considered carefully when making investment decisions. For a complete description of a fund’s principal investment risks, please refer to the prospectus.
\*\*Short duration fixed income investments are not risk-free\*\* and may be subject to market fluctuations, interest rate risk, and credit risk. A strategy focused on short-term bonds may underperform longer duration strategies in declining rate environments. Capital preservation is not guaranteed.
\*\*Investments in fixed income securities\*\* may lose value due to changes in interest rates, credit ratings, and market conditions.
\*\*Options are not suitable for all investors\*\*. There are risks involved in any option strategy. Individuals should not enter into option transactions until they have read and understood the option disclosure document titled "\*\*Characteristics and Risks of Standardized Options\*\*," which outlines the purposes and risks of option transactions. This booklet is available from your Financial Advisor or at [http://www.theocc.com/about/publications/character-risks.jsp](http://www.theocc.com/about/publications/character-risks.jsp).
\*\*Diversification and asset allocation strategies do not ensure a profit\*\* and cannot protect against losses in a declining market.
The information provided on this site \*\*does not constitute tax advice\*\*. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any any other jurisdiction.
Artificial Intelligence Content Disclosure
The content on this page was generated in part with the assistance of \*\*artificial intelligence\*\*. AI-generated information may be subject to limitations or inaccuracies and users should not rely solely on AI-generated content for investment decisions. In particular, Twin Oak ETF Company predominantly leverages AI for formatting and design elements with occasional syntax enhancements. Twin Oak ETF Company has implemented formal controls to supervise the use of AI and taking into consideration applicable regulatory requirements and concerns related to the use of AI in establishing the process for this content generation. For more information regarding the use of artificial intelligence, please reach out to [info@twinoak.com](mailto:info@twinoak.com).
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