"the Grantor retains the right to the taxable gain exclusion pursuant to IRC 121"

That's how it would work in a typical Grantor Trust if trust property is sold while Grantor is alive.

But Grantor is dead, and property is sold after death. 

Which of Sections 671-677 made it a Grantor Trust?

Sounds like this could be an Intentionally Defective Grantor Trust.