Navigating Share portfolio as part of Intergenerational Wealth Transfer

Inheriting a share portfolio as part of Intergenerational Wealth Transfer can be a significant financial windfall, but it also requires careful management. Whether you are navigating tax implications, aligning the portfolio with your investment strategy, or managing cashflow from dividends, it is imperative to have a clear plan.

Understanding Capital Gains Tax (CGT)

There is no inheritance tax as such but Capital Gains Tax (CGT) is a key factor when selling inherited shares. When you inherit shares, the cost at which they are deemed to be inherited (which will later be deducted from your sale proceeds to calculate any capital gain or loss) depends on when the deceased originally acquired them:

The table to show the differences between shares bought before and after 20 September 1985:

To minimise the tax burden, consider selling the shares in smaller parcels over multiple financial years to spread out the gains and stay in a lower tax bracket. This strategy can help reduce the overall tax liability by taking advantage of progressive tax rates.

Managing Income from Dividends

Inherited shares can generate income through dividends, which are taxable in the financial year they are received. If dividends are reinvested directly back into shares, you still owe income tax on them. This can create a cashflow challenge if you do not have enough funds to cover the tax bill. Selling shares to pay the taxes on dividends can create a cycle of additional tax liabilities, as the sale triggers CGT.

To avoid this, you can turn off dividend reinvestment and use the dividends as a source of income or reinvest them into assets that better align with your financial goals. Planning ahead and setting aside funds for the tax bill can help mitigate any unpleasant surprises when it’s time to pay taxes.

Aligning Inherited Shares with Your Financial Goal

Often, inherited shares were purchased with the original owner’s goals in mind, which may not align with your investment strategy. You may inherit shares focused on income generation, while your personal goals are more focused on growth, or the shares may be concentrated in industries or companies that do not align with your values or financial objectives.

Example: John inherited shares in a large energy corporation from his grandfather. While John had never personally invested in the energy sector, he saw this as an opportunity to review his overall portfolio. After considering his financial goals, he decided to sell the inherited shares and use the proceeds to diversify his investments across different industries, including technology and healthcare. By doing this, John aligned his portfolio more closely with his long-term strategy for growth and stability.

You have a few strategies to manage this:

1. Turning off Dividend Reinvestment: You can stop automatic reinvestment of dividends and redirect the cash into other investments that are better aligned with your goals.
2. Selling Shares in Parcels: If you decide to divest from certain stocks, consider selling portions of your holdings over several financial years to minimise CGT. This method allows for more control over your tax liabilities while gradually rebalancing your portfolio.
3. Reinvesting in Other Asset Classes: You might use the proceeds from selling inherited shares to diversify into other asset classes, such as real estate, fixed income or international shares, depending on your risk tolerance and financial goals.

Navigating Family Conversations About Inheritance

Inheriting shares can be emotionally challenging, especially if the investments were important to the deceased. In some cases, discussing estate plans and investment intentions with parents or relatives before the transfer can make the transition smoother. Early conversations help clarify the rationale behind the investments and provide an opportunity to align the inherited portfolio with your future goals.

Additionally, if parents are aware that you might want to divest inherited shares, they can help manage the tax implications during their lifetime, potentially selling shares themselves and distributing the proceeds.

Early Inheritance: Timing and Tax Efficiency

One aspect of estate planning that families may overlook is the potential tax benefits of early inheritance. For retirees, who often have lower marginal tax rates than their working-age children, it might make sense to start gifting shares or assets before death. This strategy can lower the overall tax liability for the family, as retirees can sell assets while benefiting from lower tax brackets.

In cases where beneficiaries plan to use the funds for significant financial goals—such as purchasing a home or funding education—early inheritance can provide liquidity without the added pressure of dealing with tax consequences after death. Retirees can witness the benefits of their bequests while avoiding a large tax burden on their children.

Key Takeaways

1. Tax Planning is Crucial: Understanding CGT and dividend taxation is key to making the most of your inherited shares. Plan your asset sales carefully to minimize tax impacts.
2. Align the Portfolio to Your Goals: Inherited shares might not fit your financial objectives, so be prepared to adjust by selling or reinvesting.
3. Open Family Conversations: Early discussions around estate planning and potential asset liquidation can help reduce future tax burdens and align family members’ expectations.
4. Talk to a Financial Adviser: As financial advisers, it is our responsibility to guide our clients through this important journey, providing the tools and strategies necessary to make informed decisions, minimise tax liabilities, and foster strong financial foundations for their loved ones.

By carefully considering tax implications, cashflow needs, and alignment with your investment goals, you can ensure that your inherited share portfolio is a benefit, not a burden, to your financial future.

For guidance on how to plan your Intergenerational Wealth Transfer, including share portfolios, contact Elliot Watson Financial Planning at 02 4038 1623 or complete our contact form.

The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness regarding your objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.

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Article by Vikas Modgil* – Senior Financial Adviser