If the trusts were not there and this was a simple case of (a) husband and wife residents of community property state; (b) jointly owning a rental property with right of survivorship, then what you are doing is correct i.e. achieve a basis change in the property for depreciation purposes. But in doing so you have also unduly changed the useful life of the property, when all you wanted to achieve is to record and affect recognition of basis change. I agree with all your other statements as to step-up basis adjustment. Think a different way to do this is to show a disposition at DOD adjusted basis -- from Trust-A ( husband's trust / estate ) to Trust-C ( Family Trust ). Then start a new asset representing the rental property with the new basis ( note that FMV is total asset value including land ) and use this for depreciation. Since this is owned by the irrevocable trust-C, the income reporting is at the trust level and not at your individual level. The income that you get from the trust is the inheritance for you and therefore is not taxable to you. So this would mean that evrey year you will have to file a trust return and your own individual return --- for both Federal and CA. Does that make sense ?
