How are inherited mutual fund shares from my mother-in-law taxed? Basis questions

That's such a relief! One follow-up question - does it matter whether these funds come directly from a regular brokerage account vs. from an inherited IRA? I just realized I'm not 100% sure which type of account these mutual funds are in.

Yes, it absolutely matters whether the mutual funds are in a regular brokerage account versus an IRA. The rules I described apply to non-retirement accounts (regular brokerage accounts). If these mutual funds are in an IRA that your wife is inheriting, the rules are completely different. With an inherited IRA, distributions generally will be taxable as ordinary income (not capital gains). For non-spouse beneficiaries of IRAs from someone who died in 2024, the account typically needs to be fully distributed within 10 years, and those distributions are taxable as ordinary income.

Did it actually work with inheritance stuff specifically? I'm inheriting some stocks from my grandma and feel completely lost. Did you have to pay for it?

I'm skeptical about AI tools handling complex tax situations. How detailed was it really? Did it address things like holding periods or wash sale rules if you had owned similar funds?

It actually did work really well with inheritance situations. I was surprised because I had some weird partial shares from dividend reinvestments. It walked me through exactly what to do, and even explained how the holding period rules work differently for inherited assets versus regular purchases. As for complexity, it handled more than I expected. It explained how the inherited assets get long-term capital gains treatment immediately regardless of how long I hold them, and it caught that I had some similar funds in my own account which could have created wash sale issues if I had sold them around the same time. The step-by-step guidance was really helpful.

Wait, I don't get it. How does this actually work? I thought it was impossible to get through to the IRS. Is this just paying someone to wait on hold for you?

Come on, this sounds like a scam. The IRS is notoriously understaffed - no way you got through in 20 minutes during tax season. And even if you did, most IRS reps aren't allowed to give tax advice, they just answer procedural questions.

It basically holds your place in line with the IRS and then calls you when you're about to be connected with an agent. So you don't have to personally wait on hold for hours. It's not a separate service that answers tax questions - it just gets you through to the actual IRS faster. I was skeptical too until I tried it. I called around 10am on a Tuesday which might have helped with timing. The agent I spoke with was able to confirm the general rules about stepped-up basis and explained the documentation I needed to keep. They didn't give me "tax advice" per se, but clarified how the specific forms needed to be filled out for inherited assets, which was exactly what I needed.

That's a really good point I hadn't thought about. Do you know how we would find out if there were distributions during that period? Would it show up on statements from the brokerage?

Yes, it would definitely show up on the account statements. The mutual fund company should provide statements showing all activity, including any dividend or capital gain distributions that occurred after the date of death. If the estate is still open, those distributions might be reported on the estate's tax return (Form 1041). If the distributions were already passed to your wife, she should receive a 1099-DIV showing those amounts, which would be reportable on your joint return as investment income.

Great point. Six states have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates and exemptions vary by state and your relationship to the deceased. Spouses are usually exempt. Children and direct descendants often pay lower rates than siblings or more distant relatives.

This is really helpful advice! I'm new to dealing with inheritance and didn't realize the importance of getting the exact time-of-death valuation. Quick question - if the death happened on a weekend when markets were closed, would we just use the previous Friday's closing price or the next Monday's opening price? Also, when you mention updating cost basis records in our own tracking system, do you mean something like a spreadsheet we maintain ourselves, or are there specific software programs people use for this? We've never had to track cost basis for inherited assets before and want to make sure we're doing it right from the start.

For weekend deaths, you'd typically use the closing price from the last trading day before death (so Friday's close in your example). The IRS generally accepts the closing price on the date of death, or if markets were closed, the last trading day's close. For tracking cost basis, you have several options. Many people start with a simple spreadsheet that includes the asset, date of death, death date value (your new basis), and any subsequent transactions. But there are also software options like Quicken, TurboTax's tools, or even some brokerage platforms that let you manually enter the stepped-up basis information. The key is to keep the estate documents, death certificate, and the valuation statement from the brokerage all together in one file. Years from now when you sell these shares, you'll need to prove that stepped-up basis to avoid paying capital gains on the portion you shouldn't owe tax on.

This is such an important point about the different purchase lots! I hadn't even considered that the mutual fund shares might have been bought at different times over the years. When you say you had to work with the brokerage to make sure their records were correct, what exactly did you have to do? Did you need to provide them with specific documentation, or was it more of a matter of just calling and asking them to review the account? Also, your point about reconsidering the investment strategy is really smart. These funds might have been perfect for my mother-in-law's situation but completely wrong for where we are in life. Do you know if there's typically a waiting period after inheriting before you can make changes, or can you usually sell/reallocate right away once the account is transferred to your name?

When I dealt with the multiple lot issue, I had to call the brokerage's estate services department (not regular customer service) and provide them with the death certificate and estate documentation. They had to manually review each purchase lot in the account and update their cost basis records to reflect the stepped-up basis for all shares, regardless of original purchase date. It took about 2-3 weeks to get fully sorted out, but it was crucial for accurate tax reporting later. As for timing, you can typically make investment changes as soon as the account is officially transferred to your name, which usually happens after the estate provides the necessary paperwork to the brokerage. There's no mandatory waiting period from a tax perspective. However, some people choose to wait a bit to avoid making emotional decisions during the grieving process. One strategy is to sell everything immediately after transfer to lock in the stepped-up basis with minimal gains, then take time to research and choose investments that better fit your goals. Since you'll have a fresh cost basis at the date-of-death value, selling right away usually results in very little taxable gain.