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Tax Strategies for Berkshire hathaway Employees With Concentrated Stock Positions

For Berkshire hathaway employees who have experienced significant market appreciation, the thought of rebalancing their portfolio can be daunting. The large embedded capital gains in their holdings often create a powerful disincentive to sell, leading to a 'tax-locked' portfolio. While an investor may have a well-diversified portfolio on the whole, a single, highly appreciated stock can still represent an uncomfortable level of risk. In these situations, the conventional wisdom of simply selling the position is often prohibitively expensive from a tax perspective. However, a little-known but powerful tool—the Section 351 exchange—may offer a strategic and tax-efficient solution.

Consider Michael, a successful professional with a total investment portfolio of $5 million. The majority of his assets are in a broadly diversified mix of mutual funds and exchange traded funds (ETFs). However, his portfolio also includes a single stock position valued at $500,000, which he acquired years ago for $100,000. While this single stock represents only 10% of his total portfolio, its low cost basis and unrealized gain of $400,000 make him hesitant to sell. A sale would trigger a tax bill of roughly $95,200, reducing the capital available for reinvestment and diversification. Michael's situation is common; he understands the importance of diversification, but the tax cost of achieving it feels punitive.

This is precisely the kind of scenario where a Section 351 exchange can provide a strategic advantage. This tax provision, as outlined in the Internal Revenue Code, allows for a tax-deferred transfer of property to a corporation in exchange for its stock, provided certain conditions are met. As Kevin Landis, a finanial advisor with Wealth Enhancement notes, 'A Section 351 exchange could help investors with appreciated assets achieve tax-efficient diversification.'

The core of the strategy is rooted in the tax code itself. IRC Section 351(a) states: “No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.” The gain is not eliminated, but deferred, as the investor's original cost basis carries over to the new corporate shares. This is a critical distinction from a traditional sale.

For the exchange to be valid, two main requirements must be satisfied:

Diversification: The portfolio being transferred must be diversified according to the IRS's 25/50 test. This means no single holding can represent more than 25% of the total value, and the top five holdings cannot exceed 50%. Since Michael's $500,000 single stock position is only 10% of his total $5 million portfolio, his entire portfolio passes this test.

Control: The investor must have at least 80% control of the newly formed corporation immediately following the exchange. In practice, this is often achieved by multiple 'seeding' investors transferring assets at the same time to establish an ETF, or by an investor with a significant enough portfolio acting as the primary seeder of a new fund.

By working with an ETF sponsor that facilitates these exchanges, Michael can transfer his entire $5 million portfolio into a newly formed ETF. He would receive ETF shares in return, and his $400,000 unrealized gain would not be taxed. Within the ETF wrapper, the fund manager could then sell Michael's single stock and reinvest the proceeds into other securities to align with the fund's mandate. Due to the in-kind creation and redemption process of ETFs, this internal rebalancing does not trigger a taxable event for Michael. He has successfully diversified away from his single-stock risk and preserved the full $500,000 of market value.

Tyson Mavar, a Senior Vice President and Financial Advisor with Wealth Enhancement, emphasizes the importance of a holistic approach to these complex strategies. 'For clients with significant embedded gains, the goal is always to optimize after-tax returns,' Mavar says. 'A Section 351 exchange is a prime example of a strategy that, when executed correctly, can help preserve capital that may otherwise be lost to taxes, allowing it to continue working for the client over the long term.'

While the benefits are clear, it's important to acknowledge the limitations. The number of ETFs currently accepting such exchanges is limited, and these funds may have higher expense ratios than their more established counterparts. There's also the risk of an inadvertent tax treatment failure if the rules are not strictly followed. However, for an investor like Michael, the ability to defer a substantial tax bill and gain immediate diversification makes the strategy compelling. It is a powerful tool for advisors to help their clients escape the 'tax-locked' state and realign their portfolios with their long-term financial goals.

Key Resources:

IRC Section 351(a): https://www.law.cornell.edu/uscode/text/26/351

IRS Treasury Regulation 1.351-1(c)(5): This regulation details the diversification test, often referred to as the 25/50 test, which is crucial for the strategy to be valid.

Kitces.com: 'Using Section 351 Exchanges To Tax-Efficiently Reallocate Portfolios' by Ben Henry-Moreland (March 12, 2025). This article provides a comprehensive overview of the strategy's mechanics and use cases.

Cambria Tax Aware ETF (Ticker: TAX): As one of the first ETFs to publicly announce the use of Section 351 exchanges, its prospectus and fund information offer a real-world example of the strategy in practice.

Longview Advantage ETF (Ticker: EBI): Another example of a new fund launched via Section 351, demonstrating the increasing adoption of this strategy by ETF sponsors.

Other ideas if you own a highly appreciated stock

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Articles you may find interesting:

- Donating highly appreciated stock to a public charity.

- Contributing appreciated stock to a Donor-Advised Fund (DAF).

- Gifting highly appreciated stock to a family member in a lower tax bracket.

- Upstream gifting of appreciated stock to an older family member for a step-up in basis.

- Using tax-loss harvesting to offset capital gains.

- Entering into a variable prepaid forward contract.

- Reinvesting capital gains into a Qualified Opportunity Fund (QOF).

- Holding the stock until death to receive a step-up in basis for heirs.

How does the merger of the Johns Manville Employees Retirement Plan into the Berkshire Hathaway Consolidated Pension Plan specifically affect the retirement benefits for current employees at Johns Manville? In what ways can eligible employees of Johns Manville leverage the benefits of this merger to maximize their retirement planning?

Impact of Merger on Current Employees' Retirement Benefits: The merger of the Johns Manville Employees Retirement Plan into the Berkshire Hathaway Consolidated Pension Plan does not decrease the pension benefits previously earned by employees under their prior plans. Employees continue to receive the same benefits with the same payment options as provided by their prior plan. Any previous payment elections, beneficiary designations, and qualified domestic relations orders remain effective. This consolidation also maintains the insurance of pension benefits through the federal Pension Benefit Guaranty Corporation.

What are the implications for employees of Johns Manville if they choose to retire early prior to their Normal Retirement Age? How do the specific conditions set forth in the Berkshire Hathaway Consolidated Pension Plan guide early retirees from Johns Manville in making informed decisions regarding their benefit options?

Implications of Early Retirement: Employees of Johns Manville who choose to retire early, before their Normal Retirement Age, can still receive benefits. However, these benefits are adjusted based on the age of retirement. If an employee retires at 60, for instance, their monthly benefit payment from the plan will be reduced by a certain percentage for each month that the benefit payments start before the Normal Retirement Age. This reduction compensates for the longer period over which benefits are expected to be paid.

Given the unique characteristics of the Merged Plan, what should employees at Johns Manville consider when calculating their Average Final Salary, and how does this calculation impact their retirement benefits? Additionally, how is Covered Compensation factored into this adjustment, and what strategies can employees employ to ensure accurate calculations?

Calculation of Average Final Salary and Covered Compensation: When calculating the Average Final Salary for retirement benefits, it includes the highest-paid, five consecutive years out of the last ten years of employment. This calculation impacts the retirement benefits as it forms part of the formula used to determine the pension amount. Additionally, Covered Compensation, which refers to the average of the Social Security wage bases, is used to adjust portions of the salary in the benefits calculation, ensuring that the benefits align with national wage growth trends.

How can employees of Johns Manville navigate the various options available for retirement benefit payments outlined in the Berkshire Hathaway Consolidated Pension Plan? What key points should Johns Manville employees consider regarding the selection of forms of payment and potential tax implications in retirement?

Navigating Retirement Benefit Payment Options: Employees of Johns Manville need to consider the form of payment for their retirement benefits, as different options can have different tax implications and affect monthly income. Options typically include lump sums, annuities, or a combination. Employees should consider their financial needs, tax situation, and life expectancy when choosing the form of payment. Consulting with a financial advisor could be beneficial.

For employees at Johns Manville, what steps should they take to stay informed about their accumulated service and benefit service credits, particularly in relation to the changes brought about by the merger into the Berkshire Hathaway Consolidated Pension Plan? How do vested rights impact their eligibility for retirement benefits?

Staying Informed About Service Credits: To manage the transition and keep track of their service credits post-merger, Johns Manville employees should regularly review their service and benefit statements, maintain communication with the plan administrator, and attend any informational meetings or seminars offered by Berkshire Hathaway. Understanding how service credits are calculated and tracked ensures that employees can accurately plan for retirement.

What is the process for reemployment under the Terms of the Merged Plan for former employees of Johns Manville, and how can they ensure their accumulated benefit service is credited effectively upon rehire? What are the implications of this reemployment on their retirement benefits, particularly concerning their previous employment history?

Reemployment and Accumulated Benefits: Reemployed former employees of Johns Manville should verify how their accumulated benefits are treated upon their rehire. Generally, benefits accumulated during previous periods of employment will be credited upon rehire, but specific plan provisions should be consulted to confirm how reemployment affects accrued benefits and eligibility for additional benefits.

What do the terms of the Berkshire Hathaway Consolidated Pension Plan dictate regarding disability retirement benefits for eligible employees at Johns Manville? How should employees approach the application process for disability benefits, and what criteria do they need to be aware of to qualify?

Disability Retirement Benefits: Eligible employees of Johns Manville who become disabled according to the terms of the plan may qualify for disability retirement benefits. The process involves a determination by the plan administrator, and employees must meet specific criteria outlined in the plan documents to qualify. Understanding these criteria and the required documentation is crucial for accessing disability benefits.

How can employees of Johns Manville ensure they have adequate protection for their beneficiaries under the retirement provisions outlined in the Berkshire Hathaway Consolidated Pension Plan? What specific steps can employees take to secure these benefits, and how can they keep their beneficiary designations updated?

Beneficiary Protections: Employees should regularly review and update their beneficiary designations to ensure that their retirement benefits are distributed according to their wishes upon their death. This includes making any necessary changes following life events such as marriage, divorce, or the birth of a child.

How does participation in the Merged Plan differ for salaried and hourly employees of Johns Manville, and what specific eligibility criteria apply to each group? How can understanding these differences improve retirement planning for employees across the different classifications?

Differences in Participation for Salaried and Hourly Employees: The eligibility and benefits might differ between salaried and hourly employees under the Merged Plan. Understanding these differences helps employees make informed decisions about their retirement planning and benefit utilization.

How can employees of Johns Manville contact the Local Benefits Administrator for assistance regarding their retirement benefits and the contents of their plan documents? What are the recommended methods of communication for inquiries or requests regarding their Merged Plan benefits?

Contacting Local Benefits Administrator: Employees should contact their Local Benefits Administrator for any inquiries or assistance regarding their retirement plan. Keeping the contact information updated and consulting the administrator for guidance on plan provisions and benefit claims is advised for navigating their retirement benefits effectively.

With the current political climate we are in it is important to keep up with current news and remain knowledgeable about your benefits.

Berkshire Hathaway offers both a traditional defined benefit pension plan and a defined contribution 401(k) plan. The defined benefit plan provides retirement income based on years of service and final average pay. The 401(k) plan features company matching contributions and various investment options, including target-date funds and mutual funds. Berkshire Hathaway provides financial planning resources and tools to help employees manage their retirement savings.

Berkshire Hathaway has agreed to a $10 million settlement in a long-running pension dispute involving Acme Brick. The company continues to offer comprehensive retirement benefits, including a defined benefit pension plan and a 401(k) plan. In today's political climate, it is important to stay informed about these benefits.

Berkshire Hathaway does not typically offer RSUs or stock options as part of its employee compensation packages, focusing on other forms of financial incentives and benefits.