Option 2 is correct. Since it has your dad's SSN, you need to issue the 1099-INT to the trust. You can also do a 1099-int to each beneficiary -if that is how the money was distributed. It sounds like between your parents you have moving parts. Issuing 1099 forms from the decedent is the easiest way to keep things straight.
See: General Instructions for Certain Information Returns
My deepest sympathies.
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