Inherited mutual fund

[bterrier]

My wife and her three siblings inherited an income-oriented mutual fund (reinvested monthly distributions) from their mother who died in May 2022. The cost basis of the fund is stepped up to the fund's value on the date of her death.  Am I then correct in assuming that fund distributions between the date of death and the date of fund transfer to the siblings' own brokerages  are taxable events for the four siblings? It took the brokerage six months to finally effect the transfer, so there are a half dozen distributions to deal with.  My wife and I plan to cash out her fund share later this year. How do I enter all this (dividend distributions in 2022, and then cost basis info when selling the fund in 2023) in TurboTax (premier version)?  

Many thanks.

[Anonymous_ · Accepted solution]

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@bterrier wrote:

 The cost basis of the fund is stepped up to the fund's value on the date of her death.  

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Date of death would be the valuation metric (fair market value = price at close on that day).

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@bterrier wrote:

Am I then correct in assuming that fund distributions between the date of death and the date of fund transfer to the siblings' own brokerages  are taxable events for the four siblings?

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The dividends post-mortem would be taxable (assuming a taxable MF) and, as income in respect of a decedent would be allocated among the siblings or the estate (depending upon how the brokerage account was handled after death).

[BrittanyS]

Yes.  Dividends from inherited mutual funds would be taxable to each sibling.  If you received a 1099-DIV for 2022, you would enter this in TurboTax by following these steps:

1. Select Federal from the left menu, then Wages & Income
2. Locate the section titled Investments & Savings and select Show More, then select Start or Revisit next to Dividends on 1099-DIV
3. Select Okay! On the screen Time to kick off your investments! OR Yes on the screen Did you receive any dividend income? then Continue
4. Add investments or Add another 1099-DIV, then Continue
5. Enter your information as listed on your 1099-DIV
6. Follow the on-screen instructions to enter the info from your 1099-DIV
7. When you reach the screen Here's your 1099-DIV info, the form you just entered should be listed

You will want to keep record of your cost basis at the date of death and selling documents once the mutual funds are sold, for filing in 2023.  When the sale occurs in 2023, it would be reported on the 2023 return.

How to enter a 1099-DIV in TurboTax

[Anonymous_]

Use caution here, @bterrier; it matters who received the dividends and how they were reported by the brokerage firm.

If the estate got an EIN, reported it to the brokerage firm and received the dividends, the firm may issue a 1099 in the name of the estate and with that EIN. In that case, the estate may need to file a 1041 and issue a K-1 to the beneficiaries (siblings).

If the brokerage firm issued (or will issue) one 1099 to one of the siblings with the entire amount of dividends reported, then you have a nominee scenario.

The dividends need to be reported accordingly.