No.
First, a 1099 only needs to be issued by businesses under certain situations, not individuals.
Second, legal settlement income is taxed according to how the income type it is a settlement for would have been taxed. Since a cash inheritance would not have been taxable to person 1, the settlement is also not taxable. (And since the cash inheritance was never taxable to heir 2, the settlement is not a deductible legal expense by heir 2.)
