Cost basis of inherited mutual funds

By George Saenz, Bankrate.com

Dear Tax Talk,

My wife and I own some stocks and mutual funds jointly with right of survivorship. When I die, what will be the basis of these assets? Will they "step up" to the price on the date I die or remain what we paid for them? I know that if I inherit individual stock, the basis "steps up." Great series you write! Thanks!

-- George

Dear George,

All Georges have great things to say (this is not a political endorsement).

The general rule is that when you die, the basis of your assets for purposes of calculating future gain or loss on their sale becomes the value at the date of your death. The holding period for calculating gain or loss is considered long term for inherited property.

An account held between a husband and wife as joint with right of survivorship is generally considered owned one-half by each. The basis of the inherited half is considered the value on your date of death, so that one-half value is added to your wife's one-half original cost, determined on an asset-by-asset (i.e., each stock or mutual fund) basis.

For example, if your portfolio consisted of 100 shares of IBM with a cost of $1,000 and a value at your death of $1,200, your wife's basis would become $1,100. The $1,100 is calculated by adding your wife's one-half cost of $500 to the one-half value of $600. If the value were $800 at your death, your wife's basis would be $900 ($500 cost plus $400 value).

If your wife transfers her appreciated stock to you within one year of your death, the step-up in basis would be denied if she were to reacquire it at your death.

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