Yes, I have worked through the DNI worksheet.  When I do, the amount to be picked up by the beneficiary is reduced by the state income taxes paid by the trust while the trust is getting a deduction in a like amount on page 1 of the return. 

Effectively, you get to the same place from a total liability standpoint of the trust if you eliminate the deduction at line 11 because as I indicated before the income distribution deduction is increased by a like amount.

The beneficiary is then reporting his distributive share of incoe without an offset for the state income tax.

Otherwise, it looks like a double benefit to me which seems problematic.