Your dad left you mutual funds either through his will, living trust, a transfer on death account, or the proceeds from the account liquidation. Whether or not you owe inheritance taxes depends on the amount of the assets and the state in which your dad lived at the time of his death. However, you must pay income taxes on any dividends or capital gains from the funds once they are transferred into your name.
There is no federal inheritance tax, which is tax paid by the beneficiaries of an estate. However, there is a federal estate tax, which must be paid before the executor or administrator passes designated assets to heirs. As of 2012, estates with a gross valuation of up to $5.12 million are exempt from federal estate tax, although the individual state tax exemption on estates may be lower. The federal exemption varies from year to year, going up or down, so the amount of the exemption depends on which year your dad died.
State Inheritance Tax
Not all states impose inheritance taxes, and those that do often do not impose inheritance taxes on lineal descendants such as the deceased's children or grandchildren. As of 2012, eight states impose inheritance taxes of between 10 and 16 percent on amounts over the individual state exemption. If your dad lived in Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania or Tennessee, be prepared to pay up if your mutual funds proceeds exceed the exemption. You can contact the executor or attorney handling your dad's estate for information on what you owe.
If you've inherited the mutual fund and later decide to sell it, whether or not you owe taxes on capital gains is the difference between your cost basis and the sale price. People often purchase mutual fund shares over time, so keeping good records is essential for the cost basis of your own mutual funds. Because it's so difficult to ascertain the actual cost basis of inherited mutual funds, your cost basis is its value on the day your dad died. If the fund was worth $50,000 on the day he passed and you sell it a year later for $55,000, you owe taxes on that $5,000 capital gain. However, if you sell it for $45,000, you can declare a $5,000 capital loss.
If you were the beneficiary of your dad's mutual fund IRA account, things are a little different. You can set up your own inherited IRA by the last day of the year in which your dad died. You can take a cash distribution after transferring the funds to your inherited IRA; that amount becomes part of your gross income for the year and you must pay taxes. If you keep the inherited IRA, once you are over age 59 1/2, you can begin taking required minimum distributions from it.
- Internal Revenue Service: Frequently Asked Questions on Estate Taxes
- Internal Revenue Service: In 2012, Many Tax Benefits Increase Due to Inflation Adjustments
- Financial Web: Which States Have the Lowest Inheritance Tax Rates?
- U.S. Securities and Exchange Commission: Cost Basis for Securities Transactions
- Fidelity: Inherited IRA