if the only beneficiary died, there would be a step up to FMV on the date of death. if the property is then sold by the estate, any gain would be reported on the estate 1041. The executor generally must follow the provisions of the trust as to what happens to the assets of the estate. However, most state laws give the executor some discretion. Thus the executor may have the option of paying the taxes on the gain at the estate level (form 1041) and distributing the remaining proceeds tax-free to the beneficiaries or distributing the gain by distributing the proceeds to the beneficiaries and issuing each a k-1.
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you need to read and understand the trust agreement.
