You are dealing with the three children of the late Janice – Katey, Ken, and Kris, who are also the executors of her will. You prepared Janice’s will before her death and are now sorting things out in her estate. Husband John predeceased Janice some years ago. Katey, Ken, and Kris don’t get on. They are all in their sixties with several children each. And the cousins don’t get on either.
In her will Janice gave specific assets to each child which – to your surprise – did not cause any arguments between them.
Janice also had a substantial share portfolio that she had very successfully built up over many years, which she left to her 3 children as tenants in common in equal shares. Janice hoped this would give her children something to work on together as a happy family. But it hasn’t.
The shares have increased a lot in value since Janice bought them (the shares were all acquired after 1985 when Capital Gains Tax (‘CGT”) came in). The shares will be subject to CGT on sale or, as becomes painfully evident later, transfer between family members other than by will.
Katey, Ken, and Kris just can’t agree on what should happen with the shares.
Katey wants them to be sold and the proceeds split so she can pay down her mortgage. Ken wants them to be transferred in specie to honour his mother’s wishes. Kris says not b….. likely – I do not want to become a joint shareholder with you lot for the rest of my life.
You hold several meetings but the temperature keeps increasing and they start to mutter about getting separate lawyers and heated mumbles of “see you in court you stupid person” start to be heard.
You tell them that all this bickering is disrespectful to the memory of their late mother. Ken heatedly agrees but Katey and Kris take no notice.
Eventually you lose it and say – for heaven’s sake – we’ll transfer them to you jointly pursuant to the will and you can take your squabble somewhere else. At least that will mean one less lawyer involved!
So they all sign – Ken happily but Katey and Kris grudgingly.
The sting
You missed it. There was a window of opportunity before the shares were transferred but it is now shut.
While the shares will pass to the three children CGT free under Janice’s will, there is no easy answer going forward.
Tenancy in common in equal shares means that Katey, Ken, and Kris each own one third of every single share in the portfolio.
Katey can’t sell even one share without Ken and Kris’s involvement, let alone one third of all the shares because she doesn’t wholly own even one. Maybe they would agree to sell a parcel of shares and give her the proceeds – provided she paid all the CGT – but maybe not.
Ken can be satisfied that his mother’s wishes have been followed – but the time will surely come when he or his descendants will want or need to sell and then he or they will have the same problem that Katey does now.
Kris might get her siblings to agree to a partition and to jointly sign a transfer of one third of the shares to each of them. But CGT will hit because everyone would be disposing, at market value for CGT purposes, of their one third interest in two thirds of the share portfolio – with CGT calculated on 50% of the increases in value since they were acquired by Janice. At the same time, each of them would acquire a two thirds share in one third of the share portfolio – to leave them with 100% ownership of a separate one third of the shares.
What they could have done, if you had thought of it at the time, was to agree to do the partition before they were distributed. If they did each of Katey, Ken, and Kris would have become the owner of a separate parcel of one third of the shares which would pass to them under the will with no CGT and leaving each of them free to whatever they may choose – and defer CGT until eventual sale – either in this generation or the next.
Katey would have been happy because she could sell all her own shares with no sibling involvement. Kris would be happy because she would have her own shares with no future involvement with pesky siblings. Ken may not have been happy but if you explained the long term implications of joint ownership he probably would have agreed.
But how could this be so easy?
The first thing is that under section 128-15 of ITAA 1997 if an asset “passes to” a beneficiary of a deceased estate it is exempt from CGT.
Section 128-20 (1) (c) tells us what “passes to” a beneficiary means. This is obviously the case if it is simply pursuant to the terms of the will. But it also “passes to” if “it is appropriated to the beneficiary … in satisfaction of … some … interest or share in your estate…”
In other words – it is open to the executors of a will to appropriate one third of a joint shareholding to each of three equally entitled beneficiaries instead of transferring all the shares jointly. The separate shareholdings would have peacefully passed CGT free each of Katey, Ken, and Kris!
Takeaway points
- Appropriations and partitions are different.
- There’s mostly more than one way to solve a problem.
- Capital Gains Tax and deceased estates are a unique mix.
Author: Jim Main