by Arrnica Dayannandan

Created on: February 02, 2009

Taxes on inherited mutual funds come into play under the following circumstances:

- Shares inherited in a mutual fund:

Whenever an individual inherits shares in a mutual fund, the original basis is calculated or valued as the fair market value (FMV). The FMV means nothing but the last price quoted for public redemption purpose, on the day of expiry of the decedent. Alternatively, this date can also be another date chosen for valuation purposes in the event of estate taxes applicable.

- Community property states:

Community property states, is a situation, wherein both the individual in concern and his/ her spouse own one half of the estate property each, while not taking into consideration any other separate property. In the event of the demise of any one spouse, if even half the community interest generated can be traced to the decedent's gross estate, then the corresponding FMV of the property on the date of death of one of the spouses becomes the basis for both the properties. This holds true irrespective of the fact, as to whether the estate is bound to file a return or otherwise.

For instance, on the date of death of one of the spouses jointly owning the community property, the FMV of the total community interest is established at $100000. Then the basis for the other spouse's shares is valued at $50000. The same amount of $50000 is also the basis of the shares of the heir to the deceased spouse's half of the community property.

- Inherited mutual fund shares:

In case you are faced with the event of inheriting mutual fund shares, you will automatically be considered to be holding those mutual fund shares for over a year. This holds true, irrespective of how long you have truly held those inherited mutual fund shares.

- Cases of Exceptions:

The basis rule becomes ineffective in cases involving those individuals, where the decedent died before 1982, or for those who inherited mutual funds prior to the date of August 14, 1981.

- Mutual fund shares that a decedent inherited from you:

A different kind of a basis rule altogether, comes into play if you happen to be the one from whom the decedent received inherited mutual fund shares. This new basis rule holds true when either you or your spouse had given inherited mutual fund shares to the decedent and if within the one year period ending on the date of the decedent's death, if on the date of gifting of such inherited mutual fund shares, the shares had also happened to be appreciated property. In such a case, the basis applicable is the adjusted basis of the decedent applicable on those shares, just before the decedent's death, instead of their FMV.

Thus you are now familiar with the tax implications on inherited mutual funds.

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