Unfortunately if you were the only named benificuary then the distribution belongs to you and you are responsible for the tax. What you do with the money is up to you. If you give it to the grandchildren then that is just a gift from you. If the amount to any one person is more then $15,000 then you must file a form 709 (gift tax return).
Your friend should have gotten tax advice before putting the burden on you and should have named the grand children as beneficiaries on the pension fund rather then you. By naming you as the sole benificuary what she asked is immaterial as far as tax law is concerned. Her request cannot override tax law.
If I were you, I would figure the amount of tax that you will need to pay and subtract that from the amount that you gift to the grandchildren so that you are not paying the tax but the inheritance is.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
