So you just inherited shares? Here’s what you need to consider

So you just inherited shares? Lucky you. Or maybe not so lucky. The Great Wealth Transfer is on – $3.5tn in assets will be transferred in Australia by 2050. And a big proportion of this will be shares, given our superannuation system.

Whether you have inherited shares just recently, or you might be about to, or will in the next decade or two. there are several important factors to consider to ensure you manage the inheritance properly, both from a financial and a tax perspective. While this is not financial advice, we hope that in this article, we can provide you with a starting point of things to think about when deducing what to do.

 

The Valuation of the Shares

Obviously you need to know the market value of the shares on the date of the original shareholder’s death. This is important for CGT planning purposes, as it sets the basis for capital gains calculations.

If the company has undergone any stock splits, mergers, or acquisitions since the original owner’s death, make sure you understand how these events affect your holdings. For instance, you may have inherited CSL shares that were owned prior to the 3:1 stock split in October 2007.

The valuation may also play a part in deciding whether to sell them, hold or even buy more. If the company’s multiples suggest it is overvalued, you may decide to sell them. But don’t just look at the P/E or EV/EBITDA multiples. Look at multiples such as the PEG multiple or Price-to-Book.

Even if you are emotionally tied to the shares, it’s essential to research the company’s valuation, as well as its financial performance and prospects. You don’t want to hold onto stock that’s losing value without being aware of it.

Moreover, pay attention to the company’s management and governance. Inheriting shares means you have a stake in how the company is run, and you should stay informed about its strategic direction.

 

Tax Implications

If you sell the inherited shares, you may owe capital gains tax. However, this may not always be the case – if they were bought prior to the introduction of CGT in 1986, you may not be liable to pay tax. Moreover, the most likely scenario is the transfer will be a CGT event and you’ll only pay taxes on any capital gain made from when you personally acquired them.

But if the shares are owned by a trust that you come into ownership of, you may have to pay tax on the gain since that trust acquired the shares. There are ways to offset tax liabilities on shares, such as deducting brokerage costs. Plus, you’ll get a 50% discount if you hold for over 12 months.

The next most important consideration is dividends. If the shares pay dividends, they will be taxed as income when received, and you should report them on your tax return as long as you hold those shares.

Australia has no inheritance tax, but some jurisdictions do, and you may not be able to offset it given Australia has no inheritance tax.

 

Type of Shares

It is important to understand if you shares are ‘ordinary’ or if they are ‘preferred’ or ‘paid up’. We’ve written about that earlier this week. Also understand if your shares are dual class or if they are CDIs.

Some shares may come with restrictions, such as lock-up periods, or may be subject to certain conditions in the shareholder agreement. Make sure you understand these terms.

 

Investment Strategy

Again, we stress this is not financial advice – we recommend seeking professional advice, especially if you inherit wealth to the extent you’ve never had before. But you should consider your investment strategy. Specifically decide whether you want to keep the shares as an ongoing investment or sell them. If the former, then decide if you want a short-term gain, or longer-term appreciation. This will depend on factors like the company’s performance, your financial goals, and your risk tolerance.

If you inherit a large amount of stock in one company, consider whether this leaves your portfolio too concentrated. You might want to diversify into other assets to reduce risk.

 

Emotional and Psychological Factors

Sometimes inherited shares come with emotional attachment, especially if they are tied to a family business or legacy. Or if they are shares that made your family rich – maybe its shares in CSL that were first acquired at its early 1990s IPO. If that’s the case, consider how sentimental value might influence your decision to keep or sell the shares.

If the inheritance is owned by a family trust or super fund, also consider the needs of other ‘heirs’. What do they want out of their investments? The same as you – that’s unlikely.

 

Seek Professional Advice

Yes, we’ve said this a couple of times already, but if you’re unsure about managing the shares or deciding what to do with them, you should a financial advisor to help you make informed decisions. In fact, even if you are sure, a second opinion won’t hurt, especially if you’re net wealth goes up substantially due to the inheritance. At the very least, seek a tax professional. A tax expert can help you understand the specific tax implications of inheriting shares, especially if you’re unsure about how any local or foreign taxes will apply to your situation.

 

Conclusion

If you have inherited shares (or maybe you will soon), there are a lot of things to consider. We hope we’ve provided a starting point to help you get started, but seek professional advice before deciding what to do.

 

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