Yes, you have complete understanding of the way to handle the rental property when it came out of the trust and transferred directly to the beneficiaries.
This is a way to keep the depreciation in tact without doing any real manual adjustments. Add the difference between what the depreciation should be on each return and the amount that actually belongs to the trust return, to the rental income. This will balance out the excess depreciation that doesn't really exist (it's just that it was used on the trust instead of the individual returns). The result will be the correct net profit or loss on the rental activity for both your wife and her brother.
The return will e-file without manual intervention for the depreciation itself. And the beneficiaries will have the correct recapture amount when it is sold later because the correct depreciation will be present.
We are sorry for your loss.
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