As the trust is irrevocable, the trust would have been paying income taxes
on the income not being distributed.
Here's the basic outline of how that happens
The estate’s or trust’s taxable income
is computed using the following formula:
Deductible trust expenses
Personal exemption amount
Taxable income before distribution deduction
Applicable tax rates
As the trust pays taxes and you pay taxes on any distributed income, and you are a beneficiary the result will affect you either way ... you may actually want to pay income taxes yourself(you and you sons) because personal tax
brackets are much higher (lower taxes on the same amount of income) for individuals that trusts.
Look at the difference here between trust tax brackets and tax brackets for Married FIling Jointly
If taxable income is: The tax is:
Not over $2,450 15% of the taxable income
Over $2,450 but $367.50 plus 25% of
not over $5,700 the excess over $2,450
Over $5,700 but $1,180 plus 28% of
not over $8,750 the excess over $5,700
Over $8,750 but $2,034 plus 33% of
not over $11,950 the excess over $8,750
Over $11,950 $3,090 plus 39.6% of
the excess over $11,950
Married Filing Jointly:
10% on taxable income from $0 to $17,850, plus
15% on taxable income over $17,850 to $72,500, plus25% on taxable income over $72,500 to $146,400, plus28% on taxable income over $146,400 to $223,050, plus33% on taxable income over $223,050 to $398,350, plus35% on taxable income over $398,350 to $450,000, plus39.6% on taxable income over $450,000.
Essentially both entities file a tax return (beneficiaries and trusts)
Any capital gains or income will not be taxed twice.... If the trust distributes it takes a deduction and the beneficiary pays the tax.
He real work to be done is to run things both ways to see which has the lower net tax cost (because both the trust's taxes - less to pay out to you - and the beneficiaries' taxes - same income taxes at a lower rate it the trust distributes it - will have a effect on the beneficiaries)
To answer your question - Yes there will be tax effect, either way, but the analysis work you should have the trustee do, is to see whether distributions should be made before termination, because both the beneficiaries and the trust will have a tax return to do for 2013.
Hope this helps