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Since in most trust setups the income earned is taxable (even though it is reinvested as it is received) every year as received the basis will be the sum of the original investment plus all reinvested earnings (interest and dividends being the most common). Any additional gain due to market value changes will therefore determine the gain to be recognized when the final distributions are made. In simple terms the basis will be the total of the original investment plus earnings. This is then deducted from the redemption receipts to determine gain. Additionally, depending on the trust's earnings the children may not actually need to file returns or pay tax every year. If the income is less than $500 per year (current rules) they are not required to file.
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