Ask the Expert: What are the tax rules for inherited mutual funds?
My wife and I have non-retirement money in mutual funds in a joint account. Upon the death of the survivor, will the estate owe a capital-gains tax or will it acquire the funds at their market value? We have four children who will share in the estate.
Let’s start by clarifying this question for other readers. Assets that are jointly owned with right of survivorship are automatically inherited by the surviving joint owner. They don't pass through a deceased owner's estate. In other words, your children won't inherit this account until their surviving parent's death, assuming he or she leaves it to them in a will, or names them account beneficiaries.
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My wife and I have non-retirement money in mutual funds in a joint account. Upon the death of the survivor, will the estate owe a capital-gains tax or will it acquire the funds at their market value? We have four children who will share in the estate.
Let’s start by clarifying this question for other readers. Assets that are jointly owned with right of survivorship are automatically inherited by the surviving joint owner. They don't pass through a deceased owner's estate. In other words, your children won't inherit this account until their surviving parent's death, assuming he or she leaves it to them in a will, or names them account beneficiaries.
Under current tax law, jointly owned marital assets are owned 50% by each spouse. The survivor inherits half of a couple's jointly owned assets; he or she already owns the other half.
And for tax purposes, an investment's original value is called its cost basis.
Here’s a simple example.
Michael and Laura invest $20,000 in a mutual fund in their jointly owned account. When Michael dies, it’s worth $175,000. Laura's cost basis in the half she inherits from Michael is its $87,500 market value at the time of his death. Her cost basis in her own half is $10,000 — 50% of their original $20,000 investment. Her total cost basis is therefore $97,500 ($87,500 + $10,000). If she cashes out, her taxable gain is the difference between the sale price and her $97,500 cost basis.
If she leaves the account to her children instead, under current tax law they inherit it at its market value at the time of her death. If it's worth $500,000 when she dies, for example, their cost basis will be $500,000.
The bottom line
Most non-retirement assets currently pass to heirs at their market value.
More information
TO ASK THE EXPERT Send questions to act2@newsday.com. Include your name, address and phone numbers. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own consultants for your specific needs.