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Managing a Highly Appreciated Asset


Early investors, employees, or executives of very successful businesses may eventually find a substantial amount of their wealth concentrated in the stock of one company. The common strategy to reduce that risk is to diversify, but that can trigger substantial taxes. There is, however, a way to diversify a large stock holding without triggering a taxable event.


Provided you are a qualified investor with investments of $5 million or more, you may be able to use an Exchange Fund (not to be confused with Exchange Traded Funds). Exchange Funds are limited partnerships or LLCs that provide qualified investors the opportunity to “exchange” highly appreciated single or multiple stock portfolios for shares in a diversified private fund of securities. Such an exchange does not trigger the taxes that would be payable if the stock(s) were sold.


With an Exchange Fund, your asset(s) are pooled with other assets as part of a partnership fund. Professional managers running the fund will follow a strategy of allowing securities into the partnership that will diversify and balance the risk to its members. They may try to emulate a benchmark like the S&P 500. As a member, you own a share in the portfolio proportionate to your contribution and share in the profits and losses of the fund’s holdings.


Exchange Funds can be a useful tool but they carry unique risks and benefits.

  • They allow you to diversify by contributing your shares to a portfolio of stocks rather than selling
  • Unlike selling, no taxes are incurred for contributing to the Exchange Fund
  • The portfolio’s performance is dependent upon the manager’s skill.
  • Regulations affording the tax benefits may change
  • Stock sales within the fund can trigger capital gains to shareholders
  • Shares may usually be redeemed at anytime but there may be redemption fees especially in the early years
  • Investors lose their voting rights on contributed stock
  • Investors lose the dividends on their stock, receiving instead a payout of net income of the total portfolio
  • Shareholders have a lack of management control
  • Shares have limited transferability and may lack liquidity

There are a variety of Exchange Funds to choose from but they are selective. You need to find a fund suited to your needs that will also accept the stock you are offering.


These are only some of the facts to consider about Exchange Funds. They have special legal, tax, and risk ramifications so discuss them thoroughly with your financial advisor, your CPA and your attorney to determine if they are suited to your needs.


The Menashe Morley Group:  David Menashe is a Senior Vice President and Wealth Management Advisor, and Bruce Morley is a First Vice President and Wealth Management Advisor and John Naviaux is a Financial Advisor for Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer, Member SIPC, and a wholly owned subsidiary of Bank of America Corporation. Investment products are not FDIC insured, are not bank guaranteed, may lose value. The Menashe Morley Group can be reached at 858-381-8113.


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