Because trusts are not subject to double taxation, either principal or income on which the trust paid taxes can be distributed tax-free to the beneficiaries.Likewise, any taxable distribution to beneficiaries is deductible by the trust.In a taxable stock acquisition, the buyer acquires stock from the target company's shareholders, who are taxed on the difference between the purchase price and their basis in the assets sold, and the selling corporation's shareholders are taxed on the distribution of sale proceeds.

The complexity of trust taxation arises because of several factors: When a trust earns income or pays expenses, the income or expenses are allocated either to principal or to income.Capital gains--the difference between what you sell a stock for versus what you paid for it--are "tax preferred," or taxed at lower rates than ordinary income.Ordinary income includes items such as wages and interest income.If a stock is sold within one year of purchase, the gain is short term and is taxed at the higher ordinary income rate.On the other hand, if you hold the stock for more than a year before selling, the gain is long term and is taxed at the lower capital gains rate. A trust is a fiduciary entity whose objective is to hold and invest money or property held in the trust for the benefit of the beneficiaries.Trust property consists of principal (aka corpus), which is the property transferred to the trust by the grantor, and income earned by the trust, usually from investments.Three states (Georgia, Illinois, and Louisiana) currently operate under the 1962 UPAIA.Rhode Island has not adopted any form of the UPAIA.Tax advisers should understand the options available under state law, including the "power to adjust" and "unitrust" provisions, and how those provisions intersect with Regs. FAI, also referred to as trust accounting income, is determined by the governing instrument and applicable local law.Although it is not a tax concept, FAI is important in determining whether the fiduciary or beneficiaries pay tax on the trust's income.However, book value and tax basis may diverge over time due to different depreciation/amortization methodologies (e.g.straight-line depreciation for accounting purposes versus accelerated depreciation for tax purposes).If the trust retains income beyond the end of the calendar year, then it must pay taxes on it.