Leaving shares to your kids? What your will must cover

For many Australians, shares are more than just an investment made during a lifetime. They often form part of the legacy they hope to pass on to their children.

So, what does happen to your shares when you die? If you own shares and want to divide them between your children, can you simply split them before you die, or does it need to be dealt with in your will?

The answer is that both approaches are possible, but most people ultimately deal with shares through their estate planning.

How shares are held and why it matters

Before looking at either approach, it's important to check how the shares are owned. In other words, are the shares held by an individual, or are they jointly held with a spouse.

If shares are held as joint tenants (which is common for couples) they pass automatically to the surviving owner when one person dies, regardless of what the will says. The shares will only be distributed under a will once the last surviving owner dies (or if the joint ownership was changed during their lifetime).

If the shares are held as tenants in common (each person owns a defined proportional interest), each person's share forms part of their own estate and can be dealt with in their individual will.

Getting this right at the outset is essential, because how you own them determines whether your will has any effect over the shares at all.

Transferring shares during your lifetime

If you're looking to divide your shares between your children during your lifetime, this can usually be done through the share registry or via your broker using an off-market transfer form.

However, it's important to remember this means you would be effectively giving up your interest in your shareholdings during your lifetime.

Be aware, gifting shares while you're alive can trigger capital gains tax, as the Australian Taxation Office generally treats the transfer as if you sold the shares at market value at the time of the gift.

Leaving specific shares in your will

There are a number of ways shares can be dealt with under your will, it's all a matter of will-drafting and your wishes.

1. A will can deal with shares very precisely, naming a specific beneficiary. This is known as a specific gift. For example, it might say: "I give my shares in CSL Limited to my daughter Jane," or "I give my shares in BHP Group Ltd to my son David."
    
2. A will can also gift a specific number of shares. This can be useful when you are wanting to divide particular investments or a specific number of shares between beneficiaries, for example: "I give 500 shares in XYZ Ltd to my son."

Important factors to keep in mind

• It's wise to review your will periodically to ensure any specific gifts still reflect your intentions and remain practical to administer. If you make a specific gift of shares in your will but no longer hold those shares at the date of your death, the gift will generally fail.
• If your intention is to divide a shareholding equally between children, it's important to make sure the number of shares can be divided evenly (if you own an odd number of shares, one beneficiary will inevitably receive more than the other).
• If your shares are not specifically gifted, they usually form part of the residue of the estate, which is everything left after specific gifts, debts and expenses have been dealt with. A well-drafted will should include an express power allowing the executor to distribute assets in specie, which gives the executor greater flexibility. If the shares form part of the residue of the estate, the executor may:

1. sell the shares and divide the proceeds between the beneficiaries, or
2. transfer the shares directly to beneficiaries in the proportions set out in the will.

Hidden tax traps when inheriting shares

There may be tax consequences to consider when inheriting shares.

When you inherit shares, any tax payable will depend on when the original owner bought the shares.

If they were bought after September 20, 1985, you effectively step into their shoes and inherit their original cost base for tax purposes. If they were bought before that date, the shares are instead valued at their market price when the person died, which can change the tax outcome significantly.

In either case, where the deceased held the shares for more than 12 months, individual beneficiaries may be entitled to a 50% CGT discount on a later sale, regardless of how long they personally held the shares after inheriting them.

Be aware that if one beneficiary elects for their proportion of the shares to be sold by the estate while another beneficiary elects for theirs to be transferred to them in specie, this could result in an uneven distribution of value, depending on how the market moves between the date of death and the date of sale or transfer.

So, beneficiaries should get financial or tax advice before deciding what to do with their inherited shares.

A little planning goes a long way

Thoughtful planning now can make a significant difference to how smoothly your estate is administered later and can help avoid unintended outcomes for your beneficiaries.

Sound legal advice, and careful will drafting with regular reviews are important to make sure the plan works as intended.

Ultimately, a well-structured will helps ensure your investments pass smoothly to the next generation and avoids unnecessary complications for your executor and family.

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