The following quote I found from this group's archives is pretty close to my questions:
I'm trying to research what a 1041 for a family member trust (died in
2007) would look like.I've determined it is a simple trust for 2007 and there is about $10K of interest income in 2007, with five equal beneficiaries.
Question 1: can the trust simply not take the income distributions deduction and pay the tax at trust tax rates? Then there would be no need to send K-1's to the beneficiaries? The tax rates look higher, but the simplicity of distributing tax free money might make up for it.
Question 2: if the trustor died in 2007, then it is possible that trust income required to be distirbuted annually has not actually been distributed before year end. But if K-1's are issued to each beneficiary and the income distribution deduction is taken on the 1041, the beneficiaries might suddenly have a 2007 tax hit for cash they didn't receive until early 2008. But, then I read that the trust can pay estimated taxes and pass the estimated payments through to the beneficiaries. Will this avoid any underpayment penalty for the beneficiaries due to cash they got a 2007 K-1 for, but didn't physically receive until 2008?