If you inherit an investment such as mutual fund shares, the securities or shares are yours to do with as you wish. Fortunately, the tax rules give benefits to inherited property, so you will not face a big tax bill if you choose to sell fund shares soon after you have received your inheritance. You do need to keep good records to accurately report the sale on your next tax return.
Transfer of Inheritance
The executor of the estate that is the source of your inherited mutual fund will handle the transfer of the fund account into your name. You can assist in the process by providing your personal information, such as address and social security number, to the executor. When the transfer has been completed, verify with the fund company that they have your information listed correctly on the account. As an alternative, if you know you are receiving fund shares and plan to sell those shares as soon as possible, you can talk to the executor about having the estate sell the shares and just giving you cash as your inheritance.
Sell by Phone
After the inherited fund shares have been transferred to an account in your name, you are the owner of the mutual fund investment and can do with it as you want. To sell a mutual fund, you call up the fund company and tell them to sell your shares -- either a partial or full redemption of your account. The sale will be completed on the day after you make the call. You can receive the proceeds by check or have the money sent to your bank account by electronic fund transfer.
Capital Gains Taxes
When you sell mutual fund shares, you produce a profit or loss that must be reported on your tax return. The fund company will send you a Form 1099 at the end of the year showing how much money you received from the sale of the shares. For inherited investments, all gains are treated as long term capital gains for tax purposes, no matter how long you actually owned the shares. Long term gains are taxed at a lower rate than your other income. If you have a loss on the shares, that loss can be used as a tax write-off.
Stepped Up Basis
The profit -- or loss -- on sold fund shares is the difference between the selling value and the cost basis. With inherited investments, your cost will be the value of the fund shares on the date of death of the person who left you the shares. You do not pay taxes on the gains the previous owner had in the fund while she was alive. To make sure that the IRS does not come back to you for more taxes, you need to note on your tax return that the fund shares were an inheritance. The executor of the estate can help with the cost basis information for your tax return.
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