My father has set up a revocable trust for my sister and I, we are in our 50's. All parties live in New Mexico. The trust includes real estate contracts payable to my father, as well as land, and a couple of rental properties. My father says that my sister and I will inherit the property through the trust at it's current market value at his death. When my Dad eventually passes, will we have to have all of this property appraised right away to determine it's current value? Then what are the tax liabilities when we sell assets from the trust? All of his bank accounts are "payable upon death". Will we be taxed on the "cash" we inherit as ordinary income?

Thanks you for your advise!

Excellent questions.

Your father is correct. You and your sister will receive a step-up in cost basis upon your father's death. This means that your cost basis is "stepped up" to the fair market value at the date of death. I would highly recommend obtaining an appraisal when your father passes. It is much easier to do this now rather than later when the IRS audits your father's estate tax return. Your tax liability upon sale of the property will depend on when you sell. The step-up in cost basis means that the gain up to your father's death goes away, but if you continue to hold the property it can increase or decrease in value after the death. You are not taxes on the value of the assets, but they will be included in your father's estate. The majority of taxpayer's will not owe any estate taxes.