irrevocable trust

I would so appreciate if someone can put a fresh set of eyes on this:

Older couple transfer their personal residence to irrevocable Medicaid Trust in 2018. Trust permits full use of real property and grantors responsible for expenses during lifetime. Grantors have right to sub property of equal value for trust principal. Grantors hold no other powers, appointments, etc. No record of gift return at transfer or parents original cost (parents bought in 1960s). This was the only asset, they lived there until hospitalized.

Both grantors die of covid in 2020. Kids sell house in late 2020. Trust is seller. Funds have been sitting in trust bank account which they opened with the closing check. From my research (albeit limited because kids came to me with this right before April 15) the trust pays the tax, no residence exclusion and no cost basis???? Please help!

In general the §675 power will result in estate inclusion for the property and a full step up. Basis is most likely fmv as at second death. If there is Medicaid liability the funds stay in bank until settled.

and the reason for the step up is only b/c there was a life estate?

Basis step up is via 1014 and 2036. No tax on sale.