My understanding agrees with yours, with one added step. If the estate sells shares in order to distribute cash, the estate realizes a capital gain and is liable for the income tax on that capital gain. As executor, you have the choice to have the estate pay the tax on that income or to pass the income on to the heirs who want cash via schedules K-1 generated with the estate's form 1041.
I don't have IRC references off the top of my head, sorry. I think my head would explode if I tried to store those in there.
