Business & farm

No matter what you try to do, the Trust will have to pay tax on the gain if retained. - see discussion.

Capital Gains can under certain conditions be included in the DNI calculation if any of the following apply:

1. The gain is allocated to income in the accounts of the estate or by notice to the beneficiaries under the terms of the will or by local law.
2. The gain is allocated to the corpus or principal of the estate and is actually distributed to the beneficiaries during the tax year.
3. The gain is used, under either the terms of the will to determine the amount that is distributed or must be distributed.

So, provision 1 would allocate gain to DNI and therefore would be taxable to the beneficiary.  Provision 2 would allocate gain to the Trust (and the Trust would pay the C/G tax) and gain proceeds are distributed. Provision 3 relates to when a fixed distribution is required and the income received is insufficient.  

To reiterate, many states that tax Trusts (indeed, those that also tax live persons) require that the gain be a taxable event within the trust irrespective of the proceeds being distributed.

All that said, if state law allows capital gain to be allocated to DNI and if the Trust document also provides, the Trustee can allocate and distribute the gain.

HOWEVER:

1. The distribution deduction of the Trust is limited to the lesser of trust income (IRC §651) or DNI for simple trusts, or the lesser of distributions or DNI for complex trusts (IRC §661) 
2. DNI is the maximum amount of taxable income of the trust that is taxed to a beneficiary of a trust as the result of a distribution to the beneficiary as determined under IRC §643(a)

So no matter what you try to do, the Trust will have to pay tax on the gain if retained.