You said "irrevocable trust." Any gift tax return filed to ascertain property out of estate for gift and estate tax purposes? [And, perhaps, Medicare look-back depending on the state and its use rules.]
If truly irrevocable and out of the estate/MC estate, what powers (in the trust instrument) did the grantor(s) retain making the trust a grantor trust for income tax purposes? For example, see tax research on grantor trusts and commonly retained administrative powers making the grantor subject to income tax, IDGT, etc., but perhaps, the transfer still being subject to gift tax or an ETIP).
Finally, has it been assumed that the trust is a grantor trust merely because the grantor still lives in (benefits from) the property? Does that 'square' with any retained interest issues for estate tax purposes or are we just trying to get a step-up on death (i.e., see the recent IRS rulings on 'acquired from a decedent' and grantor/irrevocable trusts). Last but not least, do the grantors pay rent to the trust, have signature authority over the trust, contribute assets (repairs) to the trust, etc?
I know it's not an answer, but I'd suggest starting with the attorney who drafted the trust (presumably as a Medicaid trust) and ask them the specific powers retained by the grantors, if any, to determine what the original intentions were (for income, gift, estate and Medicaid purposes). My guess is that once you know that, things will line up a little more clearly for tax purposes.
