Financial Industry Regulatory Authority (FINRA) Practice Exam

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What is the cost basis of an inherited mutual fund?

The net asset value (NAV) of the shares when the owner dies
The NAV 30 days after the owner's death
The same cost basis as the deceased
The same cost basis as the decreased plus capital gains distribution

The correct answer is: The net asset value (NAV) of the shares when the owner dies

The cost basis of an inherited mutual fund is determined by the net asset value (NAV) of the shares at the time of the owner's death. This is commonly referred to as a "step-up in basis." This means that the beneficiary inherits the asset with a cost basis equal to its value at the date of the original owner's death, which can be advantageous for tax purposes. If the beneficiary decides to sell the inherited shares, any gains would be calculated from this stepped-up basis, thus minimizing potential capital gains taxes. In inheriting an asset like a mutual fund, the beneficiary does not use the previous owner's cost basis, nor is it affected by any capital gains or losses that the original owner had. Utilizing the NAV at the date of death provides a clear and definitive valuation for tax reporting and further investment decisions.