I recently gained control of a trust that includes bond funds. Without statements, how can I calculate the shares' cost basis?
QUESTION: I inherited one-third of a trust back in the '60s. My father has been the executor and recently released the trust to my siblings and me. He has invested in a variety of securities, including bond funds over the last 10 years. I am trying to determine the cost basis for the securities and the problem I am having is that the bond funds kicked off a dividend every month. I have no access to the statements and was wondering how I can calculate the cost basis.
ANSWER: These days, you aren't the only one struggling with cost-basis issues (i.e. trying to figure out the original cost of a security, minus commission and load, if applicable). Questions about this topic are common since investors who sold stocks or mutual funds last year need this information to figure out their tax hit. If you're thinking of selling -- or simply trying to get a handle on the investments held in your trust -- it's wise to know the cost basis of your investments. And fortunately, tracking that information down shouldn't be all that hard.
The easiest solution to your problem may be to try to track down the missing fund statements. You could simply ask the trustee, who in this case is your father. If he doesn't have them, try his accountant or the attorney who created the trust. Another route is to reach the fund company directly via its toll-free number to see if it can give you the cost basis. If the bond-fund shares were purchased in the past five or 10 years, then there's a good chance the firm has the information you're looking for, says Norman Boone, a certified financial planner and president of San Francisco-based Boone Financial Advisors. If the shares are much older, however, the fund family might not have that information. "There's only been a recognition in the last couple of years that (record-keeping is) an important service they can provide to their investors," says Boone.
If you come to a dead end, but can figure out an approximate date of purchase for these shares, you can check with the fund company to determine the bond funds' ensuing periodic distributions. Any fund company should be able to provide this information, at the very least.
If the fund family is unable to give you your actual cost basis but can provide you with the funds' dividend history, you can easily calculate the cost basis on your own. Simply take the amount invested in the shares, plus the total amount of dividends reinvested over the years; then divide that sum by the number of shares. The resulting figure is your average cost basis -- or your average per-share cost over time.
It may be, however, that the dividends weren't reinvested. In the case of a sprinkle trust, for example, the trustee would have the power to decide whether or not to distribute the periodic income to the beneficiaries, says Art Ford, a certified public accountant and CFP with Sullivan Bille & Co. in Tewksbury, Mass. Or maybe the trust specified a mandatory income distribution, which means that you received periodic payments even before the trust officially became yours. In any case, if the dividends weren't reinvested, then you don't need to add them to the original amount in order to calculate your cost basis -- just divide the original amount invested by the number of shares.
Still with us? Then get ready for a curve ball. What we've just described here is the average cost basis, which is a quick and easy way to establish your average gain per share (or loss -- although that's unlikely with a bond fund held over a number of years). But there are three other (more complicated) ways to calculate cost basis, which may be more beneficial if you're selling some shares and if some of the shares held in the account were purchased on different dates. The catch, though, is that you most likely really do need those fund statements since you'll need to know the price you paid for shares bought with reinvested dividends (if applicable) or the different prices paid for shares over time (again, if applicable).
Assuming you get your hands on that info, our article will walk you though the different techniques and let you know when to use them. Otherwise, you're pretty much stuck with average cost basis.