How to Track Mutual Funds From the Deceased

Inherited mutual funds receive special tax treatment.

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An inheritance of mutual funds requires you to do a little homework. You’ll have to submit documents and research the price history of the funds. You also might have to pay an inheritance tax. You must know how to evaluate inherited funds so you can figure your gains or losses when you sell them.

Tax Issues

If the deceased leaves behind a large estate, the executor might have to sell assets to pay estate taxes. Your inheritance will shrink if the sold assets include some of your mutual fund shares. In additional, several states tax inheritances separately from estates. If you live in an inheritance-tax state, you might have to sell off some of the shares to pay the tax. This can trigger capital gains or losses. If the probate court assigns you mutual fund shares, the court will provide you with an official detailed list of these assets.

Cost Basis

You receive a “step up” in cost basis when you inherit mutual funds. The new cost basis of the shares is their price on the day the deceased died. The mutual fund company can provide you with this information. You’ll need to work with the mutual fund company to transfer the shares to a new account in your name. You can instead have the fund company sell the shares and forward you the proceeds. You will have to provide documents such as the death certificate, probate court orders and proof of identity. The fund company will have various forms you’ll have to complete.

Share Values

When the fund company transfers the inherited shares to your account, make sure it sets your cost basis to the stepped-up values. In this way, you can use the fund company’s online resources to accurately track your gains and losses. Fund companies update the net asset value of each fund after the end of the trading day. You might be able to see your updated fund values in the evening, or you might have to wait till the following morning. If you have personal financial software, you might be able to download your daily gains and losses automatically.

Individual Retirement Accounts

You might inherit mutual funds held in an individual retirement account. These shares do not receive a step-up. You don’t pay income tax on the inheritance until you withdraw the money from the IRA. If the deceased was your spouse, you don’t have to begin distributing the IRA until you reach age 70 1/2. Otherwise, you’ll have at least five years to distribute the IRA. Internal Revenue Service rules might allow you a longer distribution period, depending on the ages of beneficiaries and the deceased's age at death.