Why do you think the money is tax-exempt? Money in qualified pre-tax retirement accounts is always taxed when it is withdrawn, because it was not taxed when it was contributed. In this case, the estate will get a 1099-R showing the distributions and the tax withheld. The actual tax owed will be calculated on an estate tax return that you will need to file. If there was more tax withheld than the estate owes, you will get the difference as a refund, and if the estate owes more tax than was withheld, the estate will have to make an additional payment.
