trust return with tax-exempt interest

[EllieB]

Client is trustee of spouse's decedent trust (first year), Income is interest, dividends capital gain/loss, and tax-exempt interest. There are no trustee fees. Trust requires all income to be distributed but is silent on capital gains. No trustee fees, and in fact income was not actually distributed because was not needed. I think i can handle most of this with the help of the TaxBook, but am puzzled as to how the tax-exempt income comes in and how it is carried from the K-1 to the client's return. Obviously, this is my first attempt at a trust 1041, but I am pretty sure it wont be my last.
Thanks for any help!

[Burke]

Tax exempt income is reported on the 1041, and any expenses must be allocated between taxable and non-taxable income on a percentage (or other selected) basis. But you say no income was distributed? If the trust document mandates this, why wasn't it done? Does the trustee have discretion? Have you completed DNI on page 2 of 1041?
Suggest you download instructions for Form 1041. They can be quite complex. Normally, capital gains are retained by the trust even if income is distributed, and they do not pass through to the K-1. There can be exceptions. PS: Tax exempt interest will appear on the K-1 on Line 14a.