My understanding is the same as PaulaM's.
Noodling through it a bit, the 1041 Fiduciary (in your case, trust) return is different from the 1040 Individual return. State tax refunds are only SOMETIMES taxable on the 1040. Basically, the rule are set such that you can't game the system by taking a big deduction on state taxes overpaid in year 1, and then get the money refunded to you in year 2. In year 2, your income is increased such that you eventually get taxed and the gimmick fails.
This presumes the Individual in question itemizes deductions on 1040 Schedule A (if not, the state tax is irrelevant).
Expanding on that, if a 1040 Individual filer pays, say, $500 in state taxes in year 1, but chooses the STANDARD DEDUCTION for year 1, it makes no difference whether the filer paid $5, $50, $500, $5,000, or $50,000 in state taxes. There's no deduction for it. Consequently, in year 2, any refund is moot as well. There's no deduction gimmick for the IRS to bust.
Trusts don't get the option of itemized deductions vs standard deductions. For the purposes of state income taxes, 1041 acts as though every return "itemizes" deductions every year. State taxes paid are deducted on line 11. No choice.
Consequently, if the trust gets a state tax refund in year 2, that refund benefitted the trust in year 1 and you had better believe the IRS wants to claw that back....
...so, yes, you do have to report state income tax refunds on line 8 on the 1041.
