You’re an executor and are thinking that the easiest and most efficient way to administer a deceased estate is to sell the assets and divide the proceeds among the beneficiaries. You’re also feeling a bit of pressure from the emotions and financial need of beneficiaries. But is selling the assets the way to go?
Ellen Bradley, Senior Associate at Bradley Allen Love (BAL Lawyers), says it’s important to seek legal and accounting advice before making any decision on whether to sell or not to sell. This is a complex area of law, and not seeking advice can land beneficiaries with unwanted tax consequences.
An executor ordinarily has the power to sell or transfer estate assets (either by Will or at Law). “It’s rare that “The Tax Man” offers us dispensation from paying tax,” says Ellen. “However, where a person has died, there is some relief. Roll-over relief is available when assets are transferred, or ‘passed’, to beneficiaries, which means Capital Gains Tax isn’t immediately payable. The Tax Man allows you to defer paying tax until a subsequent disposal. In contrast, when estate assets are sold, Capital Gains Tax will generally be payable on the sale.”
Capital Gains Tax can be substantial depending on how much the asset has increased in value since it was purchased or improved. Let’s say Lucy died in 2019 with 500 shares in a particular bank. The value of the total shareholding when Lucy died was $36,500. Lucy bought the shares in 2005 for $20,000 ($40 per share). They have increased in value by $16,500.
If the executor transferred the shares to the beneficiary, the estate wouldn’t have to pay Capital Gains Tax on the transfer. The beneficiary would enjoy the assets with the benefit of regular dividend payments. The beneficiary would inherit the initial cost base of $40 per share. If the beneficiary later sells the shares, this is the cost base which would be used to calculate the Capital Gains Tax payable. In this example, Lucy may strategically time the sale of the shares in a year where her assessable income is low, thereby effectively managing the Capital Gains Tax otherwise payable.
However, if the executor sells the shares, the estate would be required to pay tax on that disposal. This would effectively reduce the value of what the beneficiary receives.
“This is just one scenario,” says Ellen. “Assets bought before capital gains tax was introduced in September 1985 are treated differently.”
The main residence of the deceased is one asset which, if sold within a certain timeframe, will be exempt from Capital Gains Tax. The general rule is that if a deceased person would have been entitled to disregard a capital gain while they were alive, that right continues in the estate for two years.
Deciding how estate assets are dealt with is a matter for the executor. This is the case even though the beneficiaries may have their own priorities and preferences for liquid funds.
Selling estate assets, while perhaps an easy and efficient way to approach the estate administration, isn’t always the best course of action. Executors should seek legal and accounting advice before exercising their powers of sale. The professional costs of such advice is an estate expense, payable by the estate and not the executor personally.
Wills and estates is a complex area of law and BAL Lawyers has a team of solicitors who specialise in this field. You can reach BAL Lawyers on (02) 6274 0999.
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