The taxable amount is to be reported as Other Income to appear on Form 1041 line 8. It can then be treated as DNI, reported on the beneficiaries' Schedules K-1 Box 5, Other Portfolio and Nonbusiness Income.
Tax withholding other than backup tax withholding is not permitted to be passed through to beneficiaries. (The taxes that were withheld in this case are not backup withholding.) Because of this, unless the trust will be paying taxes, taxes should generally never be withheld on income paid to a trust. The tax withholding will be refunded to the trust. The trust will need to remain open to receive this refund which can then be distributed to the beneficiaries.
