Splitting Your Shares Between The Kids? It's Not As Simple As You Think

For many Australians, shares are more than just an investment you make during lifetime – they often form part of the legacy they hope to pass on to their children, particularly when shares have been held long-term.

I was recently posed the following question from aMoney Magazine reader:

I'd be interested to know how your father was able to split his CSL shares between you and your sister, as my husband and I would like to split our shares, not CSL, between our son and daughter. Can we do this simply before we die or what wordingshould be used to clarify our wishes in our Wills?

It's a common question. 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.

A threshold issue: how are the shares held?

Before looking at either approach, it is important to check how the shares are owned. The reader's question refers to shares owned by "my husband and I," which suggests the shares may be held jointly.

If shares are held as joint tenants (which is common for married couples) they pass automatically to the surviving joint tenant by right of survivorship on the first death. They do not form part of the deceased's estate and cannot be dealt with by the will of the first joint-holder's to die. Only after both joint holders have died (or if the joint tenancy has been severed during lifetime) will the shares form part of an estate that a will can direct.

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

If you are unsure how your shares are held, your broker or share registry can confirm the position.

Getting this right at the outset is essential, because the form of ownership determines whether your will has any effect over the shares at all.

Transferring shares while you are alive

If you want to divide your shares between your children during your lifetime, this can usually be done through the share registry or your broker using an off-market transfer form. However, this means you would be effectively giving up your interest in your shareholdings during your lifetime.

Gifting shares while you are 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. For that reason, many people prefer to keep their investments in their own name and deal with them through their will.

Leaving specific shares in your will

There are numerous 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. 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."

These are known as specific gifts. When the estate is administered, the executor arranges for the shares to be transferred to the named beneficiary through the relevant share registry.

2. A will can also gift a specific number of shares, such as:

"I give 500 shares in XYZ Ltd to my son."

This can be useful where you want to divide particular investments or a specific number of shares between beneficiaries.

A word of caution: "Ademption"

If you make a specific gift of shares in your will but no longer hold those shares at the date of your death, for example, because you sold them or the company was taken over, the gift will generally fail. This is known as the doctrine of ademption. The beneficiary will not receive a substitute asset or cash equivalent unless the will expressly provides for that possibility.

Because people often buy or sell shares over time, it is wise to review your will periodically to ensure any specific gifts still reflect your intentions and remain practical to administer.

Splitting shares equally

If your intention is to divide a shareholding equally between children, it's important to make sure the number of shares can actually be divided evenly.

For example, if you hold 101 shares and intend to split them between two beneficiaries, one person will inevitably receive more than the other unless some or all of the shares are sold and the proceeds divided.

What happens if shares aren't specifically gifted?

Not every will lists individual assets.

If your shares are not specifically gifted, they usually form part of what is known as the residue of the estate. The residue is everything left after specific gifts, debts and expenses have been dealt with.

In that situation, the executor may:

• sell the shares and divide the proceeds between the beneficiaries, or
• transfer the shares directly to beneficiaries in the proportions set out in the will, using what is known as a power of appropriation.

The ability to transfer shares directly rather than selling them will depend on the powers granted in the will and the circumstances of the estate. Many well-drafted wills include an express power allowing the executor to distribute assets in specie, which gives the executor greater flexibility. Where the will is silent, the executor may rely on the statutory power of appropriation, although this is subject to conditions – including that the appropriation must not prejudice any other beneficiary's entitlement.

This is particularly relevant if there are unequal numbers of shares, as the executor may need to decide whether to sell or transfer them to achieve the intended distribution. It is another reason why careful drafting of the will is important.

Tax considerations for beneficiaries

Finally, beneficiaries should also be aware that there may be tax consequences when inheriting shares.

For shares acquired by the deceased on or after 20 September 1985 (post-CGT assets), beneficiaries generally inherit the deceased person's original cost base for capital gains tax purposes. If they later sell the shares, any capital gain will be calculated using that inherited cost base.

For shares acquired by the deceased before 20 September 1985 (pre-CGT assets), the position is different. The beneficiary receives a cost base equal to the market value of the shares at the date of death. This distinction can be significant for long-held portfolios.

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

It is also worth noting that if one beneficiary elects for their proportion of the shares to be sold by the estate while another beneficiary elects for their proportion to be transferred to them in specie, this could result in an uneven distribution of value ultimately received by the beneficiaries, depending on how the market moves between the date of death and the date of sale or transfer.

For this reason, beneficiaries should obtain financial or tax advice before deciding whether to keep the shares in their own name or have them sold by the estate.

The Bottom Line

Shares can be divided between beneficiaries quite easily with the right wording in a will, but careful drafting and regular reviews are important to make sure the plan still works as intended.

Transparency and communication can also be helpful when drafting your will – will your children wish to retain the shares or would they prefer the shares be sold?

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

How We Can Assist

As Accredited Specialists in Wills & Estates, we regularly advise clients on structuring their wills so that investments such as shares are dealt with clearly and effectively.

This includes:

• advising on whether shares should be gifted specifically or form part of the residue
• drafting wills with clear and practical wording to minimise ambiguity
• ensuring proposed distributions are capable of being implemented in practice
• identifying potential tax and administrative issues for executors and beneficiaries
• conducting periodic reviews so your estate plan keeps pace with changes to your investments and circumstances

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.