What to do with an inherited gift

When you inherit money or assets from a family member or friend’s estate, it may not be at the forefront of your mind to think about tax and insurance. However, taking care of some practical financial matters early on can help you avoid future difficulties and financial loss.

Capital gains tax (CGT)

Let’s start with CGT. It can be a headache to determine your CGT liability when disposing of bequeathed assets. To avoid potential problems, document whether the assets were acquired by the deceased before or after 20 September 1985. If retained assets were acquired before this date, obtain an accurate valuation as of the date of death, as any future CGT liability will be determined by the increase in value from that date (known as the “cost base”).

It’s also important to know how the gifted assets are classified for CGT purposes. Assets are generally divided into collectibles, personal use assets, and other assets. Some special CGT exemptions can apply to collectibles and personal use assets, based on their cost base.

Valuations are particularly important for assets or objects categorized as collectibles. If the market value of a collectible, including antiques, was less than $500 at the date of death, any capital gain will be disregarded. A similar, but much higher, exemption applies to personal use assets of up to $10,000.

Collectibles vs personal use assets

Collectibles are defined as artwork, jewellery, antiques, coins or medallions, rare folios, manuscripts or books, postage stamps, or first-day covers that are used or kept for personal use or enjoyment.

Personal use assets are non-collectible assets, other than land or buildings, used or kept for the personal use or enjoyment of the deceased.

An item of personal furniture would normally fall into this category, unless it is determined to be an antique, for tax purposes. In this latter case, it will fall into the collectible category.

When an antique is not an antique

Determining whether an asset is an antique for CGT purposes can be complicated. However, a tax ruling has been issued to clarify this point, stating that “an antique is an object of artistic or historical significance that is of an age exceeding 100 years”. The point at which an asset is deemed to be an antique for CGT purposes relates to when it is disposed of, not when it is acquired. It may be very useful to ascertain the relative age of any old and valuable furniture, as this can have a significant impact on the tax position. Obtaining such information from the deceased’s records soon after their passing can be much easier than trying to determine the age of an antique many years later when you plan to sell it.

If the deceased acquired an asset on or after 20 September 1985, it’s generally not necessary to obtain a valuation for tax purposes. The cost base for the beneficiary will be the same as that of the deceased. Similarly, the beneficiary is taken to have acquired an item as a collectible or personal use asset. It’s still necessary to find out what the inherited cost base is for future reference.

Protecting gifts

Valuation and related information about the cost of asset purchase will be useful in determining the level of insurance required. Valuable assets need to be cared for by the executor during the estate administration period, and insurance protection against theft, fire, and other damage should be considered. Beneficiaries need to be ready to take over this responsibility, and reviewing insurance protection may be prudent.

Dealing with estate issues can be complex, and they can become even more difficult to handle over time. If you or your family members become estate beneficiaries, seeking professional advice is always a good idea.