I'm not a CPA, but I have experience with doing the taxes for a trust in my family for the past several years and my parents also had life insurance in a trust.
The proceeds of the life insurance policy should be tax free and should not need to be reported anywhere on either the trust tax return or your individual tax returns. If the life insurance policy was held by the trust and the trust was irrevocable, then there are also no estate tax implications to your parents' estate, because it was not considered owned by them.
If the proceeds of the life insurance policy do remain in the trust long enough and generate taxable income, then that would be taxable income to the trust. The trust can distribute this income to your wife and your brother-in-law, and if done properly would then be reported by the trust to you and the IRS on a K-1, and then reported on your wife's and BIL's tax return. It retains it's character in this scenario, so if it was interest income in the trust, it'd be interest income to your wife and BIL.
I don't know for sure if the distribution of the life insurance proceeds is actually reported on the K-1, since the K-1 is used for reporting taxable income of various kinds. I don't think it is but I'm not 100% sure on that.
Obviously once you receive the proceeds from the trust you'll be responsible for the tax liabilities associated with that money if you invest it or earn interest on it, but I think you probably knew that and that wasn't the point of your question.