A family member is inheriting a mutual fund from her father, who died in January. The father's account is managed by, let's say, XYZ Investments. The account is invested 100% in a bond fund which has done well for the past several years, but has lost 8% of its value since the father's death. With rising interest rates and other market factors, the bond fund stands to lose even more value.
1) Does the stepped-up basis belong to the account or the fund? Can the daughter redirect money in the account to other funds managed by XYZ Investments, and retain the stepped-up basis?2) If the daughter moves money out of the XYZ account and its bond fund, segregates it in a CD, and reinvests future interest earnings in the CD, would the stepped-up basis follow the money and exclude tax on the interest and increased value of the CD, up to the basis amount? Or is the stepped-up basis lost when the money is moved.
Thanks