Estate and 1099r

I seem to always get stuck with the trust/estates in my office and no one seems to be any more confident than I am so any input is greatly appreciated!

Fiduciary of decedents estate cashes out deceased trad IRA to the tune of 130k to pay beneficiaries (per will) and to fund testamentary trusts for those not yet of age. Caveat is that fiduciary does not want any beneficiaries to pay tax at individual level (grandchildren). So at this point I have the estate paying the full tax (about 50k). Everything I keep reading says that tax is paid at final destination, which would be the individuals and the trusts, So I want to make sure that there is nothing wrong with having the estate pay the full tax so all beneficiary distributions past and future are all tax free. I keep reading things about trapping and accumulation distributions so I want to make sure there won't be anything like that to deal with later.

I don't think you have a choice here if distributions were made.

So even though the intent of the deceased was for her grandchildren to receive gifted amounts and not pay any tax there is nothing we can do? I have the will in front of me, unfortunately there is only the gift amounts and it doesn't say anything about taxes. I tried to explain to the fiduciary that it makes more financial sense for the whole estate for individuals to be taxed and what we could do is distribute to the younger one's trust and have the estate pay the tax at the trust level for them, but what about the older ones that got the cash already? I mean, if she would have cashed this out before she died she would have paid the tax and would have gifted them tax free.

Are these specific bequests in the will or residuary distributions?

specific bequests.

See Sec 663.

Ok. Thanks. So if i understand this statement correctly gifts/bequests are excluded from beneficiary income except if they can be paid only from income, then they aren't considered gifts so therefore are not exclusions? "For this purpose an amount which can be paid or credited only from the income of the estate or trust shall not be considered as a gift or bequest of a specific sum of money".
Geez they make it so confusing, I guess I should have went to law school as well.
So not considering the IRA what if the estate had enough corpus in savings account to cover any distributions in 2013. Technically, there hasn't been much distributed yet. The trusts have not yet been funded, and i have the fiduciary talking to the lawyer since I am not even sure all the trusts have been set up.

The IRA is likely corpus for accounting purposes. The reference to "income" is referring to a clause in the governing instrument which would pertain to trust accounting income, not taxable income. So, I tend to think you have specific bequests. And, this would be the case even if, for example, a specific bequest of $100k was called for in the will, but there were no assets other than a $75k IRA balance with which to fund the bequest. In this case, I'm pretty sure the IRS would rule that the bequest is still a bequest for 663 purposes, but one that has simply been partially abated. End result is that even though the entire bequest was funded with taxable income, it's still a bequest. Estate would pay tax on the the $75k and whatever is left over, after paying said tax at the entity level, would be paid out to the bene as a specific bequest. See PLR 9548020 as to this point.

Thanks for your help. I now feel confident in having the estate pay the entire tax. I won't even mention the 500 per month beneficiaries are supposed to get with the remainder of what is left...that will be next year! I appreciate your input.