Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

The basis for securities inherited by an heir is determined by the market value at the time of inheritance. This concept, known as the step-up in basis, means that when securities are inherited, their basis is generally adjusted to their fair market value on the date of the decedent's death. This adjustment can benefit the heir by maximizing potential gains when they sell the inherited securities, as any appreciation in value that took place during the decedent's ownership is not taxable to the heir.

In contrast, options that suggest using the original purchase price by the donor or the donor's cost do not account for the appreciation in value that could occur over time. The concept of zero basis for inherited securities is also incorrect because that would mean the heir would have no basis for tax purposes upon selling the securities, which is not reflective of tax law concerning inherited assets. Thus, the correct understanding is that the market value at the time of inheritance sets the new basis for the heir.