What will an investor's cost basis be if they inherit mutual fund shares?

When an investor inherits mutual fund shares, the cost basis is generally determined by the fair market value of the shares at the time of the original owner's death. This means that the investor's cost basis will be the net asset value (NAV) of the shares on the date of the owner's death. This step-up in basis reflects an adjustment to the value of the assets to their current worth at the time of inheritance, which is beneficial for the heir, as it can minimize capital gains taxes if the shares are sold later.

The other choices do not accurately represent how inherited assets are treated for tax purposes. The NAV 90 days after the owner's death is not used to determine cost basis; rather, it is the NAV on the date of death that applies. Similarly, inheriting the same cost basis as the deceased owner would not be correct, as inherited assets receive a step-up in basis to their date-of-death value. Furthermore, capital gains distributions are not accounted for in changing the inherited cost basis from the market value at the date of death; thus that option also does not apply.