Here's the deal, my wife's parents had set up mutual funds for each child. For my wife, the funds are in her name and she has to claim the dividends each year on her income taxes. However, the money actually belongs to her parents and they are currently cashing in some of the funds to pay for the building of their brand new retirement home.

Huh? This doesn't compute. If the funds "belong" to your wife, how can her parents redeem them? Either this is a joint account between your wife and her parents or you wife is redeeming the shares and giving her parents the cash.

We have never contributed a dime to these funds so I was wondering what the tax consequences would be. Do we have a cost basis of zero dollars or is our basis equal to what her parents paid for those shares?

Tax answer: Your wife is her parents' nominee. Instead of paying tax on the distributions, she should be issuing a 1099-DIV to a parent to pass the income along to its true recipient. Likewise, if your wife redeems any shares, she should issue a 1099-B to pass along the proceeds. Better yet would be to get your wife off the account all together, since she has no equitable ownership interest in it.

Family relations answer: I'm without the first clue as to why this business is set up this way, but I assume your wife knows why. She should consider the effect of her actions on her relationship with her parents.

TMF ExRO
Phil Marti