I have found out the answer for this scenario.
It should be entered as inheritance. I will explain why below.
You enter the Aquisition date as date of death (not the date the property was transferred). Enter the FMV (full market value) of the property at time of Aquisition, which is known as using the step-up basis rule.
You are probably thinking...how is this possible when the property was transferred at an earlier date, and so isn't that a gift?
Well, its to do with property transfers with retained life estates and their implications on the gross estate. This is Internal Revenue Code Section (I.R.C. §) 2036 which outlines the rules regarding property transfers where the decedent retains a beneficial interest lasting for the rest of their life.
Here are the key points:
Definition: When a person transfers property as a gift (without adequate and full consideration in money or money’s worth) but retains a beneficial interest in that property for their lifetime, it falls under I.R.C. §2036.
Inclusion in Gross Estate: The value of such property is included in the decedent’s gross estatefor estate tax purposes. In other words, even though the decedent legally no longer owns the property, it is still considered part of their estate.
Examples:
The rule also applies to situations where the decedent retains benefits substantially akin to outright ownership, such as the right to physical use and enjoyment of the property or the right to designate another party who will ultimately receive outright ownership or income during the donor’s lifetime.
So, basically, if you have person who made the property transfer retains a life estate in the property (usually an agreement drawn up by the 2 parties by a lawyer which prohibits sale and completed gift until death) then this is then regarded as part of the GROSS ESTATE. Now normally assets in the gross estate go through probate so debts can be paid and the will is administered. However. a property with a life estate (while part of the gross estate) will skip the probate process and the bequest will be effective on date of death. Therefore it's an inherited asset. Maybe that's why you can't enter the FMV in the gift part of online s/w.
That's my understanding...hope it helps.
