if you distributed the income accruing to the estate in 2021 to the beneficiaries, then you would report the income as having been distributed and issue K-1s to the beneficiaries.
You do not need to report distributions of corpus (principal); only income and gains. Further, Form 706 is to report estate tax while Form 1041 is used to report estate income tax.
In the final year of the estate, all income, gain, deductions, credits, et al, are generally considered to be distributed so the exemption is not applicable.
