Retained Life Estate - Basis Step-Up After House Fire

Decedent transferred residence to daughter but retained a life estate. The decedent died in a house fire that destroyed the property. The property was insured for 49% less depreciation. Insurance settlement will be less than house was worth before the fire. Daughter is going to sell the lot. The retained life estate would normally result in a step-up in basis, but I’m trying to wrap my head around the mechanics of this one since the death occurred while the house was on fire. Absent the fire, proceeds from the sale of the property would be tax free. I wouldn't think the insurance proceeds and subsequent sale of the lot should result in gain subject to tax, but I'm not sure how to approach.

Any thoughts would be greatly appreciated.

25.2512-5

no step up

Actually, under §2036, transfers with retained life estate are includible in the gross estate, resulting in a step up in basis of the underlying property.

25.2512-5

no step up

Hi Dennis,

I appreciate your input. Would you mind explaining or expanding a bit?

Sorry... misread question. Valuation of an asset where value changes on date of death is a complicated issue. For stocks you use average of high and low and I would expect a burning house to get similar treatment. Insurance proceeds would be treated under the casualty loss rules.