I got an email from a reader that other day and I will paraphrase it as follows:
"My sisters and I sold some farmland in 20XX. This land had been in several trusts. A trust that was formed in 19XX when our grandfather passed away owned a portion of the land. Another two trusts; one for dad who passed away in 20XX and one for mom who passed away in 20XX owned the remaining interest in the land. Help, what is our cost basis?"
The key on this type of calculation is to determine which portion was owned by each person that was included in their estate (even if no estate tax return was filed). For example, let's assume that grandpa, mom and dad's trust each owned 1/3 of the land when they passed away. Let's assume the land was worth $250,000 when grandpa passed, $2,000,000 when dad passed and $5,000,000 when mom passed away.
Therefore, the total cost basis in the land is 1/3 of $250,000 plus 1/3 of $2 million and 1/3 of $5 million or $2,416,667 ($83,333 $666,667 $1,666,667). In many cases, the heirs will use the cost basis from grandpa and not pick up the extra cost from mom and dad. In this situation, it would cost the heirs easily an extra $500,000 or more of capital gains tax that is not owed.
If you have a similar situation, make sure this does not happen to you.