"My mother's estate is soon to be dispersed and I am being asked if I would like my proportion in shares or cash. Given the current state of the stock market, what should I choose?"
- Question from Kim, Box Hill South, VIC
Top answer provided by:
Daniel Wilson
Hi Kim,
Firstly, I am sorry for your loss.
It is great that you’re taking the time to consider your options during this difficult period, as there a few key things to consider.
Understand the history of the shares – watch out for tax!
If the shares you are inheriting have increased in value since they were purchased by your mother, you may be subject to Capital Gains Tax (CGT) if you sell them. This tax is based on the difference between the purchase price and the sale price. It's crucial to know when the shares were bought and for how much.
Pre-CGT Shares: If the shares were purchased before September 20, 1985, they are exempt from CGT, meaning you can sell them without tax implications. If you decide to keep them, the value of the shares on your mother’s passing date will be used as the purchase price when calculating any future gain.
Post-CGT Shares: If they were purchased after this September 20, 1985, you may owe tax if you sell them for more than what your mother paid.
Hint: if any of the shares you are considering selling were purchased in the last 12 months, you may pay more tax than if you were to sell them more than 12 months after they were purchased.
To reduce Capital Gains Tax, one of several strategies you can adopt may be to spread the sale of the shares over several financial years, which could reduce your taxable gain each year. However, this must be weighed up with the risk that the shares could drop in value before you end up selling them.
A tax agent such as an accountant can help you accurately determine your position.
What are your goals?
If you have determined the tax bill is manageable, the next step is to have a think about your goals.
Balancing your lifestyle goals and investment considerations can be tricky. You may want the cash for personal goals such as travel, education funding, a new car, renovations or helping loved ones, but this needs to be weighed up with the financial impact of these goals.
From a financial perspective, there are a few things to consider:
Personal Debt: If you have debt, like a mortgage, one option you may consider is using the inheritance to pay down that debt. This provides a guaranteed return by saving you interest that is not tax deductible, which is hard to match with investments elsewhere. Once the debt is repaid, this may then create options for you to invest in a more tax-effective manner if you wish to invest in the future.
Comfort with Holding Shares: Are you comfortable with the idea of holding shares, knowing that they can experience significant fluctuations in value? If you’re more conservative, there might be other investments better suited to your risk tolerance.
Structure for Holding Shares: If you’re receiving shares as part of an inheritance, they may be passed to you personally or through a Testamentary Trust. Depending on your situation, there may be other tax-effective structures to invest in, like using the cash to invest within superannuation.
Investment Timeframe: Holding shares is typically a long-term strategy. If you anticipate you may need the funds in the short term, keeping the shares might not be ideal, as their value could drop unexpectedly.
Timing the market is difficult: While the market has had a strong run for a few years now as you have indicated, trying to get out at the top and back in at the bottom is extremely difficult. If you decide that receiving the shares is appropriate for you, it may be best to commit to holding them for the long term.
Dividing the Estate: You have mentioned that you will be receiving a portion of the Estate, indicating there are other beneficiaries. It is important to be clear on how the shares will be divided with other beneficiaries to prevent any unnecessary conflict.
Additionally, it is important to note that if any shares are sold within the Estate prior to distributing the proceeds, any capital gains tax will be payable by the Estate, which can reduce the entitlement left to distribute to other beneficiaries. This is different from transferring the shares to each beneficiary to sell individually, in which case they would pay tax in their personal capacity.
Share Portfolio Considerations
If you decide to keep the shares, there are a few key principles to check within the portfolio:
Diversification: Check that the shares are spread across different sectors of the market (e.g., finance, healthcare, energy). Having too much in one sector can increase risk, so diversification helps reduce that.
Asset Class Exposure: Do the shares represent only Australian companies, or are they diversified internationally? Do you already have exposure to shares? Ensuring you maintain a diverse portfolio across asset classes, including property, fixed interest, and international shares can better manage risk.
Dividend vs. Growth Shares: Are the shares more income focused or growth focused? Some shares provide regular income (via dividends), while others focus on capital growth (i.e. an increasing share price). If you need income from your investments, dividend-paying shares might be more suitable. If you’re focused on long-term growth, then shares in companies that reinvest their profits might be more appropriate.
Key Takeaways
Here’s a quick checklist to help you make an informed decision:
- Understand the tax implications of selling shares. A big tax bill may answer your question pretty quickly!
- Determine any pressing needs for cash (e.g., debt repayment, personal expenses).
- Consider whether shares align with your investment strategy and risk tolerance.
- If you keep the shares, ensure they are diversified across sectors and are suited to either your income or growth needs.
- Consider other asset classes, like property or fixed interest, to balance your portfolio.
- Determine if you have the right time horizon and the appropriate structure holding the shares going forward.
Unfortunately, there is no straight forward answer, but I hope these points provide you with a few key concepts to consider.
All the best,
Daniel Wilson.
*The above is general information only and does not take into account your personal objectives, financial situation or needs. You should consider whether it is appropriate for you before making any decisions and seek personalised advice if needed.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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