There is a deed that reflects transfer and an appraisal of market value as of death date for original trustor. The software recommends form 4797, but this is not a sale.
You will never get anything resembling a reasonably accurate answer with what you posted.
In the first place, trusts do not "inherit" from other trusts. There may be a transfer from one trust to another due to any number of occurrences, but not an "inheritance".
Without being able to view the terms of the trusts, it is next to impossible to provide any specific advice or draw any conclusions. You should seek guidance from a local tax professional and/or legal counsel.
See https://taxexperts.naea.org/listing/service/estates-gifts-trusts
Tagteam:
Thanks for your quick response. The trust law firm suggested the "inheritance" classification for a filing with the state where the real property is located. The original trust calls for establishment of a second trust to include the real property and funds for property maintenance. So here is a simpler question: how do I capture the transfer of real property from the original trust to the other on form 1041 so that the basis is properly reflected in both trusts? Thanks again.
The transfer out of the old trust should be just that; a transfer without any consideration (i.e., not a sale, the property is simply removed from the trust as in distributed to what they are apparently calling the "second trust").
The "second trust" should take a carryover basis from the original trust (i.e., the basis in the "hands" of the "second trust" is the same as that in the original trust).
The forgoing presumes standard language and terms which should be reviewed by professionals who can actually read the terms of the trusts.
Thanks again. How is this transfer technically done in the software? Form 4797 is suggested, but I don't see how that works.