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Tax Efficient Bequests


Estate planning is often avoided or postponed even by those who are diligent in addressing other areas of their personal finance, but planning for what happens with your wealth after your passing helps ensure that not only is your wealth distributed according to your wishes, but that it is distributed in an effective manner.


An important consideration in any estate plan will be the effect tax has on the inheritance received by the eventual beneficiaries. While the tax rules around estate planning can get quite complex, there are a few basic concepts that can assist in determining the likely outcomes for your beneficiaries which can be used to inform your discussions with your adviser when formally putting your plan in place.

Capital gains tax (CGT) usually applies where an asset which was acquired on or after 20 September 1985, the date CGT was introduced, changes ownership. However, any capital gain or loss can be disregarded where an asset owned by a deceased person passes to their executor/ administrator of their estate or a beneficiary or where the asset passes from the executor/ administrator to a beneficiary.

In addition, any assets you acquired before 20 September 1985 are generally not subject to the CGT rules and so your estate would not have any CGT to pay whether they were sold or passed to a beneficiary.

In essence, this means that you could bequeath your share portfolio to a beneficiary without raising any CGT liability and the beneficiary would be able to continue to invest the whole of the portfolio which might provide a substantially better outcome than if the portfolio had been sold, the CGT paid on the applicable gains and the net proceeds distributed to the beneficiary.

It is important to note that where the beneficiary receives the shares rather than the proceeds from the shares, they will have a CGT liability when they themselves dispose of the shares. The cost base that they use to calculate the capital gain will depend on whether the shares were originally acquired by the deceased before or since the introduction of the CGT regime on 20 September 1985.

For assets which were held as pre-CGT assets by the deceased, the cost base for the beneficiary will be the value of the asset on the date of death. For post-CGT assets, the cost base will be the deceased’s acquisition costs. This means that for post-CGT assets which are distributed to a beneficiary of the estate, the gain made by the deceased will be subject to CGT but only when the beneficiary sells the asset.


“In essence, this means that you could bequeath your share portfolio to a beneficiary without raising any CGT liability and the beneficiary would be able to continue to invest the whole of the portfolio…”


About

David O’Connell

bio-picDavid O’Connell is a Senior Technical Consultant with the BT Financial Group. BT Financial Group is one of Australia’s leading wealth management organisations. We strive to delight our customers through providing innovative products and services to help manage, preserve and create wealth. Our offering includes investment, superannuation and retirement income products, investment administration services, financial advice, private banking and insurance solutions across some of Australia’s most trusted and respected financial services brands.

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Miriam built up a share portfolio over many years. The cost base of the portfolio is $100,000 and all the shares are post-CGT. On her death she leaves her entire estate to her only son, Nathan, which includes the portfolio, now worth $500,000.

Nathan is also the executor and has the option of transferring the shares into his name or to sell the shares, have the estate pay the CGT and transfer the net proceeds to himself. Due to other income within the estate, the top marginal tax rate applies and even with the 50 per cent general discount for owning the shares for more than 12 months, the net proceeds would be $406,000.

If those net proceeds are then used to acquire investments with the same returns as the original shares, there will be less dividends received and less dollar value capital growth. If the respective investments were sold after 10 years, at five per cent capital growth per annum Nathan would be $40,600 better off taking the share portfolio than taking the cash. In addition, assuming five per cent dividends over the period, he would have received an extra $59,100 in dividends.

If Nathan was able to spread the gains over a number of years or wait until he had less income, the benefits realised in taking the portfolio over the cash would be greater still.

If you believe that this is a strategy which may be beneficial to your beneficiaries, you should have your estate planning reviewed to see if it is appropriate in your circumstances and if so, how to implement it. It is important to get specialised advice as there are a number of exceptions and qualifiers to rules as laid out here. As an example, there are some beneficiaries such as foreign residents and some tax-exempt entities where the gain is not disregarded even if they receive the asset directly.

While the treatment of an investment property is the same as for the shares above, there are special rules which may apply to the property where the deceased has used it as a family home at some stage or the beneficiary intends to do so when inherited. Finally, the treatment described only applies to assets which are personally held and does not apply to assets held through a superannuation fund or through any other trust structure.

Putting in the time and effort into developing a proper estate plan can provide significant financial benefits to your trustees as well as ensuring that your wishes are properly documented, which can help avoid potential family disputes later on.