Contentious Marital Trust Issue

We had a client pass who left 1/3 of his estate to his second wife in a marital trust. The wife was going to be allowed to the income from the trust and the the two grown sons would be entitled to the remainder. The second wife was not the boys mom so there is bad blood already.

The income was deemed not high enough for the spouse so they agreed to a monthly distribution far in excess of the income earned. There is a corporate trustee involved who is granting every request of the second wife. In addition, the corporate trustee seems to always agree to additional distributions for items that do not seem warranted. (ie minor repairs, minor medical procedures, etc).

But here is my question. Even with the distributions far exceeding income, the income taxes are being paid at the trust level and being charged to principal in the trust accounting. Shouldn't the wife be getting a K-1 and paying the taxes? The taxes are significant, tens of thousands.

Perhaps the agreement they conjured up provides the monthly allowance is paid from corpus and replaces the income distribution? In other words, monthly payment does not equal income + principal but only principal and the income stays in the trust. You'd have to read the agreement. I would change my investment strategy from income to growth if that is the case.

The income distributions are definitely Tier 1 distributions and should be reported on the 1041 Schedule B, line 9. The additional distributions should be reported on line 10 of Schedule B. These amounts should also be reported on Schedule K-1 to the extent that they're taxable income.

Because trust tax rates are so much higher than individual tax rates, I think the trustee may be violating a fiduciary duty by allowing the trust to pay taxes. E.g. $40,000 income, trust pays about $10,000. Beneficiary (assuming no other income) would pay about $3,700 instead.