I found nothing in the UPIA for CA to disallow this discretion.  16335 supports it:  

16335 a) In allocating receipts and disbursements to or between principal and income, and with respect to any other matter within the scope of this chapter, a fiduciary:

(1) Shall administer a trust or decedent's estate in accordance with the trust or the will, even if there is a different provision in this chapter.

Beneficiary, who is also the trustee, received 46K in "distributions of earnings" as characterized by the investment custodian. The K1 shows 9K of dividend income and 36K of tax-exempt income.  This is quite a deal. 

As @Karen_pdx states, "My understanding has always been that a trust document's provisions can't override the IRC."

There are two kinds of allocations.  One allocation is between trust and beneficiary, and usually involves capital gains.  Trustee can allocate them to the beneficiary, which often saves tax, or to the trust, which is usually the default.  IRS doesn't care who reports the income, as long as it gets reported.

And then there is allocation of deductions between taxable income and tax-exempt income.  That's required by the law of the land, not by the "law" of the trust document. 

Maybe you could allocate all of the taxable income to the beneficiary, and therefore all of the deductions.  But you can't allocate some of the tax-exempt income, and none of the deductions related to it, to the beneficiary.  

But, might the tax preparation fee be allocable to taxable income? It is only incurred because a tax return is needed,

Agreed. I have never allocated accounting, legal fees or fiduciary fees to tax exempt income. Those relate to the entity itself, not generally to the type of income being earned in the trust.

"The powers you cited - 1. appears gives the power to choose on a decedent's estate/trust whether to deduct a given deduction on the 1041 or the 706. 2. appears to give the power to decide the timing of a deduction or income, but my understanding has been."

Since IRS and CA law can't be overridden, does this make the trust defective?

Thank you.

Not in the sense of making it an "intentionally defective grantor trust," if that's what you are referring to. To be defective in that sense, there are certain powers that have to be included in the document, for example, the grantor having the right to substitute assets in the trust. 

I suppose it could be "defective" in terms of what the grantor thought the results would be from the language in the  trust document vs. what the results actually are. But that's beyond the scope of this commentary 🙂

Advisory fees are not deducible any more, same for 1041s as for 1040s(former miscellaneous deductions still allowed I some states).

I have seen many bank as trustee 1099s which allocate legal and accounting fees between taxable and tax-exempt income. I do that also.

The tax deduction does reduce taxable income to either the trust or the beneficiary.

There are circumstances where some or all of the advisory fees are deductible.  Treasury issued some obtuse regulations on this in 2020.  Also, what are called "advisory fees" sometimes include commissions on trading, and you can use a reasonable method to "unbundle" them.

I allocate legal and accounting fees between taxable and exempt income, but if it made a big difference in tax I might take a second look at it.  

Some states still allow the deduction, too.

"1. (iii) to elect any item either as an income or estate tax deduction for any tax reporting purpose; "

This means that for tax deductions, the fiduciary can choose whether to deduct on the 1041 or 706, when there is a choice. That comports with the IRC and CA law.

Since IRS and CA law can't be overridden, does this make the trust defective? No