Taxing the Legacy: Understanding Shares and Tax in Estate Planning

For many professionals, especially those in mining and resources, shares are more than just investments. They’re a reflection of years of hard work, loyalty, and strategic planning. Whether it’s through Executive Share Schemes (ESS), other employer-issued equity or simply direct shareholdings, these assets often form a significant part of a person’s wealth. But what happens to those shares when someone passes away? And more importantly, how are they taxed?

Let’s explore the tax implications of inherited shares, whether they’re part of an ESS or a broader portfolio, and what executors and beneficiaries need to know to manage them wisely.

Understanding the Tax Landscape

In Australia, shares held at the time of death are generally subject to an automatic capital gains tax (CGT) rollover from the individual to the individual’s deceased estate. This means there is generally no immediate tax event occurring when someone dies. Instead, the tax implications arise later either when the estate sells the shares or when a beneficiary eventually disposes of them.

If the shares are transferred to an Australian resident beneficiary by the deceased estate, the beneficiary generally inherits the cost base and purchase date(s) of the deceased (unless they are pre-1985 assets), which makes it important to ensure good record keeping for all your investments.

For most assets acquired prior to the 20^th of September 1985, these shares will have a new cost base equal to the market value of the asset on the date of death.

Note that tax complications may apply to assets bequeathed to non-resident beneficiaries, which may require specialist tax assistance.

Who Pays the Tax?

This is one of the most common questions we hear. The short answer is it depends.

If the shares are sold by the estate, the estate pays tax on the capital gain. If they’re transferred to a beneficiary, the beneficiary pays tax on the capital gain when they sell. In either case, the executor plays a key role in managing the process. They may need to lodge a final tax return for the deceased and a separate return for the estate, depending on the circumstances.

It’s also worth noting that any income received after death, such as dividends and some ESS-related amounts, may need to be included in the estate’s tax return. The Australian Taxation Office (ATO) has specific rules around posthumous income, and it’s important to get this right to avoid penalties or delays.

Cash vs. Shares: What’s the Better Option?

If you’re a beneficiary of a deceased estate, you might be given a choice: take the shares or receive a cash payout (you may also be offered a blend of these choices). Each option has its pros and cons.

Taking the cash

Taking the cash is straightforward. The estate sells the shares; the estate pays the CGT and gives you the balance. You don’t have to worry about future tax obligations, and you get immediate access to the funds to use as you wish.

The main drawback is that you will likely receive less, as the trustee will have needed to pay some tax on the disposal of any relevant assets.

Taking the shares

Taking the shares could be more appealing.

You would inherit the shares with the CGT cost base and purchase price of the deceased, and effectively accept the future CGT cost of selling those shares.

One reason why this may be appealing is that, depending on the nature and quality of the shares, you may be able to maximise your dividend income stream from the shares. Another reason is that you, as the beneficiary, may have the ability to shelter the CGT cost of selling in your own name better than might be possible in the deceased estate (e.g. if you, as the beneficiary, were retired and had minimal taxable income, you might be able to use your lower marginal tax rates to minimise the tax cost).

The obvious drawbacks of taking the shares are:

You will likely have a future CGT cost if and when those shares are eventually sold.
Your ability to choose the shares you receive will be limited by the shares held by the deceased. This may impact on the balance of your portfolio.

Of course, the above comments depend on your personal financial goals, your tax position, and your comfort with managing investments. We would recommend speaking with a tax adviser and financial advisor before making a decision.

What About ESS Shares?

ESS shares add another layer of complexity. If they’re fully vested and held in the deceased’s name, they’re treated like any other asset from a tax perspective. But if they’re unvested or restricted, they may not be considered part of the estate until they vest. That means the executor may need to work with the employer or scheme administrator to understand the conditions attached.

Often there will be specific rules in the ESS plan documents that apply to the death of participants and these would need to be understood by the executor. Broadly, some sort of vesting and taxing point will occur upon death and this may impact the final date of death return of the deceased, along with future estate tax returns.

Executors should request a full statement of ESS holdings and clarify any conditions that apply.

Managing a Share Portfolio After Death

Executors have a significant responsibility when it comes to managing shares. They need to identify all asset holdings, including ESS plans, listed and unlisted shares and property and determine how each is treated.

It’s not just about ticking boxes. Executors need to make informed decisions about whether to sell or transfer shares, and that means understanding the tax implications, liquidity needs, and estate planning goals.

In addition, there will likely be legal ramifications involved with administering a deceased estate and, as such, involving an experienced estate lawyer would also be recommended.

Planning Ahead

If you’re an executive or investor thinking about your legacy, now’s the time to plan. That might mean transferring vested shares into a trust or SMSF, documenting your holdings clearly in your estate plan, or reviewing and updating your investment structure.

Timing matters. So does working with a tax adviser and financial advisor who understand the nuances of ESS and general share portfolios. They can help you model different scenarios, coordinate with your legal adviser, and make sure your family isn’t left with unexpected tax burdens.

Final Thoughts

Whether you’re planning ahead or managing the estate of a loved one, understanding how shares are taxed after death is essential. It’s not just about compliance, it’s about preserving value, avoiding surprises, and honouring the legacy of a lifetime of investment.

If you’d like help navigating this process, our team at Resources Unearthed is here to guide you through it with clarity and confidence.

What’s Next in the Series?

In our final article, our legal contributor will explore the legal treatment of ESS shares upon death. We’ll look at how scheme rules affect ownership, what happens to unvested shares, and how to ensure your ESS is properly documented in your will and estate plan.

This legal perspective is essential for understanding your rights and obligations, and for ensuring your ESS legacy is protected from a compliance and governance standpoint.

Need Help Navigating ESS Tax After Death?

Whether you are planning ahead or managing the estate of a loved one, we’re here to help. Our team of tax and financial planning professionals can guide you through the complexities of ESS inheritance and ensure your legacy is preserved with clarity and confidence.

For more information and to arrange a 20-minute discussion with Craig Barry, please contact Resources Unearthed on +61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au.