Unsure of the tax law for discretionary income distributions, but the majority of the trusts I have seen which allow for discretionary payments of principal also require distribution of all income. Maybe that's not your situation, but if it is, the distribution should be deductible by the trust to the extent that it is from income which the beneficiary is entitled to. If indeed distribution of income is discretionary and taxed at the trust level regardless of whether or not it is distributed, which I think is correct, it would seem to be trust principal at at point. As a lay trustee of various trusts, I can't recall every observing my CPAs charging the beneficiary with income if it was principal they received rather than distributable net income. I would get a second opinion if I were you!
