You actually need to get some professional tax and legal guidance for this scenario.
First, you have to realize that, generally, a transfer of property by a grantor to an irrevocable trust (depending upon the terms of the trust itself) constitutes a gift to the beneficiary(ies). As such, in many instances the donor/grantor would be required to file a gift tax return for the year in which the transfer occurred.
Next, assuming this transfer was actually a gift, then the basis would be bifurcated. The basis for figuring a gain would be the same as the donor's adjusted basis while the basis for figuring a loss is the fair market value of the property on the date of the gift. You would be able to add the cost of improvements to your basis, of course.
Further, it is important to understand that the beneficiaries have not "inherited" anything; they are simply the beneficiaries of a gift. The grantor/donor is still alive.
Finally, I would urge you to (a) get professional tax/legal guidance with respect to this situation (again) and, (b) get an appraisal from a licensed (certified) appraiser for the value of the property in 2007 (and also in 1989 if the basis is not available).
