Legal Question in Wills and Trusts in California

Re: Capital Gains or Gift Tax on family trust property

Generally, property receives a "stepped-up basis" to the fair market value as of the date of death. Gains since the date of death would be taxable, subject to deductions for costs of sale.

The proceeds would go to the trust, but are taxable to the beneficiaries if they're distributed before the close of the year. Check with a tax advisor before doing the sale, to make sure the tax burden, if any, won't catch you by surprise--you'll also want your sister to share in the burden if there is a tax issue. Your sister will probably also want to structure the sale to avoid the property being reassessed for property tax purposes, if possible (if the house is in California).