What is the cost basis of an inherited mutual fund?

What is the cost basis of an inherited mutual fund?

• A. Initial purchase price of the shares
• B. The NAV of the shares when the owner dies
• C. Average price over the last year
• D. Market price at the time of transfer

Answer: (B)

The cost basis of an inherited mutual fund is determined by the net asset value (NAV) of the shares at the time of the owner’s death. This rule is part of the stepped-up basis concept, which provides a tax benefit to heirs. When an asset is inherited, the beneficiary receives a new cost basis equivalent to the fair market value of the asset at the time of the decedent's death. This means that if the mutual fund's NAV increases after the original owner purchased it, the heir will benefit from this increase for tax purposes, as they will not be taxed on the appreciation that occurred during the decedent's ownership. Instead, their basis is reset to the NAV on the date of death, providing a more favorable tax scenario when they decide to sell the inherited shares. This approach simplifies the calculation of gain or loss when the heir disposes of the asset compared to using the original purchase price.

The cost basis of an inherited mutual fund is determined by the net asset value (NAV) of the shares at the time of the owner’s death. This rule is part of the stepped-up basis concept, which provides a tax benefit to heirs. When an asset is inherited, the beneficiary receives a new cost basis equivalent to the fair market value of the asset at the time of the decedent's death. This means that if the mutual fund's NAV increases after the original owner purchased it, the heir will benefit from this increase for tax purposes, as they will not be taxed on the appreciation that occurred during the decedent's ownership. Instead, their basis is reset to the NAV on the date of death, providing a more favorable tax scenario when they decide to sell the inherited shares. This approach simplifies the calculation of gain or loss when the heir disposes of the asset compared to using the original purchase price.