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

If an individual inherits securities, what is their holding period classified as?

1. Short-term

2. Intermediate

3. Long-term

4. Variable

The correct answer is: Long-term

When an individual inherits securities, the holding period is classified as long-term. This designation is important because it determines the tax implications when the inherited securities are eventually sold. In the case of inherited securities, the holding period is automatically considered long-term regardless of how long the original owner held the securities. This rule is a benefit to the heir, as long-term capital gains are generally taxed at a lower rate than short-term capital gains. Since the heir is treated as having held the securities for more than one year, any gains realized upon their sale will be taxed at the more favorable long-term capital gains rates. This classification arises from the tax law provision that provides for a "step-up" in basis, meaning that the cost basis of inherited securities is reset to the fair market value at the date of the decedent’s death. This mechanism effectively benefits the heir by minimizing potential capital gains taxes when the securities are sold. Understanding this aspect of inherited investments is crucial for effective estate planning and investment strategies, making the classification of the holding period as long-term significant in both a financial and tax context.