If an investor inherits mutual fund shares, what is her cost basis?

When an investor inherits mutual fund shares, the cost basis for those shares is generally determined by the fair market value on the date of the owner's death. This is often referred to as the 'step-up in basis.' The rationale behind this is to minimize capital gains taxes on inherited assets, as the heirs receive the asset at its current market value rather than at the original purchase price.

The net asset value (NAV) on the date of the deceased’s passing reflects the current value of the shares, which will be used by the heir to calculate any future capital gains or losses when they decide to sell the inherited shares. This approach helps ensure that the capital gains tax is applicable only to the appreciation that occurs after the inheritance, rather than any appreciation that occurred while the deceased held the shares.

This method of establishing the cost basis for inherited assets is especially important for heirs to understand, as it can significantly affect their tax situation when they ultimately sell the mutual fund shares. By using the NAV on the date of the owner's death, the investor benefits from a potential reduction in tax liability.