The Holiday Inn comment made me chuckle. I do have a CPA but have worked in software realm for last 24 years not in accounting.  The $50 k in the example for sure would never be taxable to a spouse and she can in fact take money principal out tax free.  so no open question on my side there). It is  as you a tax question ( but that's also a section of the CPA exam) but you are right this is not a run of the mill H&R Block tax return scenario.

Open net question is still if a distribution to the residual bypass beneficiaries while the spouse is still living would be construed as a gift (and require IRS 709 reporting) or if it's effectively just an early distribution to the residual beneficiaries and does  not require gift tax reporting. I do know that if we do nothing and wait until the surviving spouse dies none of the assets in the bypass would be subject to estate tax and this might be safest approach. Appreciate the responses so far as I try to educate myself on options