For those of you who are interested in this issue:

I spoke with a lawyer in New York today who was able to tell me the procedure to assign the amount each person receives from the sale of the house (Life Tenant and Remainders) and how to apportion basis.

IRS puts out a table called Life Estate and Remainder Interest Tables.  It is based on the age of the Life Tenant at the time of sale.  The percentages are what they are entitled to and what the Remainders are entitled to.

According to the lawyer, start with the Gross Sales Price.  Subtract all Selling Expenses.  Apply the appropriate percentages to determine how much money the Life Tenant receives and how much is to be split among the Remainders equally.

Then subtract out the original purchase price and purchase costs when the Life Tenants purchased the house.  Subtract out the cost of all Capital Improvements that were made to the house from the time the house was purchased to the time it is sold.

Subtract any costs to get the house ready for sale.

The net resulting basis is to be apportioned to Life Tenant and Remainders according to the same percentages used when determining how much money each person will receive upon sale.  

Also the Life Tenant may use the home capital gain exclusion if they otherwise qualify for it.

Hope this helps.

I do have another question now - how can I come up with a dollar value for capital improvements for a home that was owned for the past 65 years?  I have some idea as to things that were done but I don't have any receipts.  Any thoughts?