Prepare a management letter for our client George Spencer who is the sole Executer and Beneficiary of his father’s estate (AP Spencer Dec’d).George wants to know if he should sell the shares in the estate or transfer the shares to himself and then sell them.
The untimely death of your father means that you are the sole executor and beneficiary of AP Spencer Dec’d, an estate that he had developed. In his lifetime, Alexander P Spencer spent a considerable part of his active life diversifying his investment portfolios in the Commonwealth Bank and the National Australian Bank (Lam, & Humphreys, 2017). For the period ranging from 12th September 1991 to 14th November 1997, he made a substantial investment in terms of share purchase at the Commonwealth Bank amounting to $29,635. As a shrewd investor, Alexander P Spencer also diversified his investment risks by purchasing shares worth $2,420 at the National Australia Bank. As the sole executor and beneficiary of AP Spencer Dec’d, you have been earning off $200,000 a year in terms of the interest rate and the bonuses accruing from the inherited shares (Woellner, Barkoczy, Murphy, Evans & Pinto, 2012). However, your decision to sell shares either directly or by first transferring them to your name before selling them needs sober considerations in terms of the prospective incurred costs.
As the sole executor of AP Spencer Dec’d, you will have to keenly consider the taxation aspect applicable to the inherited shares and whether you intend to hold the inherited shares under your portfolio for a long time before selling them. In this case, it is imperative to note that the inherited estate shares from Alexander P Spencer are subjected to a cost base in terms of the price that is expected to be paid by the original owner of the shares (Cockburn, 2017). Legally, the existing legal frameworks in Australia requires that shares purchased before 20th September 1985 can be sold or transferred without attracting the capital gain tax (CGT) (Norbury, 2017). However, for the shares purchased or acquired after 20th September 1985, they will be subjected to capital gain tax (CGT) for all the undertaken transactions.
Considering that a significant portion of the shares you have inherited from your father were purchased after the 20th September 1985, then all the transaction you will undertake will be subjected to a capital gain tax. In this case, if you choose to transfer the inherited estate shares to your portfolio before selling them, then the cost base for the inherited shares will be computed in terms of the market value of the respective amount of shares at the date of death of your father (Weisbord, Horton, & Urice, 2018). This implies that you will be subjected to a double taxation burden in terms of the capital gain tax. Furthermore, it is essential to note that you will be liable for paying the cost base for the inherited shares in terms of CGT given that a huge chunk of them were purchased after the operationalization of the capital gain tax act post 20th September 1985 (Sawyer & Sadiq, 2017). This implies that as the sole executor of the inherited estate shares, the burden of meeting the incurred CGT will be transferred to you in the absence of the deceased original owner.
Furthermore, before transferring the shares to your name, your capital gains or losses in the estate’s income tax returns will be assessed to determine the legitimate amount of tax you are supposed to pay (Blakelock & King, 2017). Considering that the cost base of the inherited shares, in this case, will be the same as the deceased, then logic implies that you will end up also inheriting the deceased cost base. In essence, this implies that you will pay the cost that would have been incurred by Alexander P Spencer upon providing the needed valid documentation such as the deceased death certificate. Despite incurring such amount of taxes in terms of CGT when transferring the inherited shares to your name, it is essential also to note that you will be subjected to similar conditions and requirements when selling them. Therefore, at the point of you finally selling the inherited shares, you would have incurred high tax costs that can be avoided if you chose the shortest transaction route of selling the inherited estate shares directly.
On the other hand, you will only be subjected to a single tax burden in term of the capital gain tax when you directly sell the shares. Comparably, this will be a significant relief in terms of the incurred costs and the involved paperwork. For instance, it should be pointed out that you should brace yourself for long and tedious paperwork and processes if you choose to first transfer the inherited shares to your name before proceeding to sell them (Blackburn & Bulsara, 2018). However, you can be able to eliminate such unnecessary and unwarranted inconveniences by selling directly the shares that you have inherited from your father. Therefore, adopting the decision to sell the shares directly will significantly save you in terms of incurred costs and the consumed amount of time. Considering that other than the capital gain tax there are other costs associated to the whole process of transferring and selling the shares, it will be prudent for a less-costly alternative to be undertaken given that other costs such as normal brokerage fees, premiums and share sale services will be applicable to each of the undertaken transaction. Therefore, basing on the total cost burden incurred at the end of each transaction, it is advisable that you should consider directly selling the inherited shares other than first transferring them to your name before selling them.
In this case, the decision to directly sell the shares will save you from the cost base of shares in terms of the accrued capital gain tax that would have been paid by you having inherited the shares from your deceased father (Beyer, 2017). Furthermore, you should also prioritize selling the shares in the estate to save yourself from the tedious paperwork and documentation that you will have to meet in the process of transferring the inherited shares to your name before selling them. It is on this basis that it is highly recommended for you to sell the shares in the estate.
Beyer, G. (2017). Intestate Succession: What Every Texas Estate Planner Needs to Know.
Blackburn, P., & Bulsara, C. (2018). “I am tired of having to prove that my husband was dead.” Dealing with practical matters in bereavement and the impact on the bereaved. Death studies, 1-9.
Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data matching. Proctor, The, 37(6), 18.
Cockburn, T. (2017). Equity in estate litigation. Trusts & Trustees, 23(10), 1066-1088.
Lam, D., & Humphreys, J. (2017). Estates and tax: Costly mistakes in using deceased estates exemptions from duty. LSJ: Law Society of NSW Journal, (38), 84.
Norbury, M. (2017). Caratti and the deceased estate. Taxation in Australia, 52(3), 159.
Sawyer, A. J., & Sadiq, K. (2017). Reflections on New Zealand’s ‘Experience’with Capital Gains Taxation.
Weisbord, R. K., Horton, D., & Urice, S. K. (2018). Wills, Trusts, and Estates: The Essentials. Wolters Kluwer Law & Business.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2012). Australian taxation law. CCH Australia.
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