Deceased Estate Tax Consequences: Shares & Beneficiaries Guide

disposing of assets in a deceased estate and tax consequences

When a person passes away, it's the job of the executor or administrator of the estate to manage any assets left behind. This role is significant and involves gathering all of the deceased's assets, settling any remaining debts, and then distributing what's left among the beneficiaries. This distribution follows either the instructions set out in the person's will or, if they don’t have a will, the legal requirements set by the Succession Act in their state (the intestacy provisions).

Generally speaking, the executor can choose to either liquidate (sell) some or all of the assets before distributing the cash to each beneficiary, or the executor can choose to transfer the assets directly to the beneficiary.

A very common example of this involves shares. When someone passes, the executor of their will can choose to either to sell some or all of the shares owned by the deceased and pay the proceeds to each beneficiary, or they could transfer the ownership of the shares to the beneficiaries.

What’s crucial to note is that both options attract different tax consequences for both the estate and the beneficiary. And, understandably, most want to pick the option that minimises the tax payable.

Below we consider some of the key factors executors should consider to minimise the tax payable on assets, particularly when dealing with shares the deceased owned. 

How the shares of a deceased estate are handled can vary depending on the types of shares the deceased owned.

 Generally, there will be two types:

The first type of shares usually gives the executor a greater freedom of choice when they are considering whether to dispose of or transfer the shares to the beneficiaries.

For the second type of shares, the constitution or a shareholders agreement will generally outline how these shares will be dealt with upon the death of a shareholder. This constitution or shareholders agreement generally requires that the executor  must sell the shares to the existing shareholders or that the company will buy back the shares.

Even in this instance where the outcome is prescribed, there are still multiple options for the executor to dispose of the shares, both attracting different tax implications once more.

Broadly speaking, there are two key options:

Tax Implications of Selling shares

The core tax issue to consider when an estate or beneficiary transfers or sells shares in a company is the capital gains tax (CGT) consequences.

A CGT event will be triggered when a person disposes of an asset; this includes when a person sells a share.

The sale of the share will give rise to a capital gain if the cost base of the share is less than the capital proceeds from its sale. Alternatively, the sale of a share will give rise to a capital loss if the cost base of the share is more than the capital proceeds from the sale.

The cost base includes the original purchase price and other costs associated with the share which includes acquisition and disposal costs (e.g. brokerage or legal fees).

In simple terms, a capital gain essentially arises where a share is sold for more than the price at which the share was purchased. For example, Jane bought a share for $50 (cost base) and later sold it for $70 (capital proceeds). Since the capital proceeds exceed the cost base, she experiences a capital gain of $20.

On the other hand, a capital loss essentially arises where a share is sold for less than the price at which the share was purchased. For example, Mark purchased a share for $100 (cost base), but later sold it for $80 (capital proceeds). As the capital proceeds are less than the cost base, Mark incurs a capital loss of $20.

Any assessable capital gains a person makes will be added to their assessable income and taxed at their marginal rates. However, any capital losses a person makes can only be used to offset (reduce) their capital gains by the amount of capital losses (and not other assessable income).

That means, for example, if a person earned a salary of $80,000 per year and made an assessable capital gain of $20,000 from selling an asset, the person will pay tax on $100,000 at their marginal rate. If the person then also had a capital loss of $15,000, the capital gain will be reduced by the capital loss to $5,000 and the person will only be required to pay tax on $85,000. 

Most people consider the CGT [ER1] consequences when they dispose of assets they personally own. However, often the executors and/or beneficiaries fail to consider the tax implications and CGT consequences of distributing assets from an estate[ER2] . It may be relevant for executors of an estate to assess the impact of any capital gains received by beneficiaries (or assets that may trigger significant capital gains or losses upon sale) based on the beneficiaries' individual tax situations.

For example, the two options listed above for the sale of shares will have different tax implications for the beneficiaries. Further, if there are multiple beneficiaries of an estate, option 2 may cause different tax implications for each beneficiary.

There is no ‘one size fits all’ approach to help executors determine the most effective tax outcome. Instead, they should consider various factors to determine which option is the most tax effective.  These factors include:

Although people often seek to achieve the most optimal tax outcome, it may not be the best option for the executor to choose. The executor should consider the overall circumstances of the estate assets and beneficiaries.

How Can We Help You?

Our firm is able to assist you with this. If you or your client is acting as an executor of a deceased estate, you are welcome to contact us to discuss the tax implications.