It depends. If the trust is a grantor trust, and your daughter is the grantor of that trust, then your daughter as grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor. The IRS provides the following information about grantor trusts:
"Grantor trust" is a term used in the Internal Revenue Code to describe any trust over which the grantor or other owner retains the power to control or direct the trust's income or assets. If a grantor retains certain powers over or benefits in a trust, the income of the trust will be taxed to the grantor, rather than to the trust. (Examples, the power to decide who receives income, the power to vote or to direct the vote of the stock held by the trust or to control the investment of the trust funds, the power to revoke the trust, etc.) All "revocable trusts" are by definition grantor trusts.
Here is link to the above information. Abusive Trust Tax Evasion Schemes, Q & A.
Is your daughter the grantor of the Trust? You mentioned in your post that the father initially established the trust. Ordinarily, the grantor (also known as trustor, settlor, or creator) is the creator of the trust relationship and is generally the owner of the assets initially contributed to the trust.
If your daughter is not the grantor of the trust, then it would appear that trust income would not be included on your daughter's return. Does the grantor letter identify who the grantor is and what other information is in the grantor letter? Providing some additional information will help us to better understand your tax situation.
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