Either the estate can pay the taxes and distribute this portion of the residue of the estate to the beneficiaries tax free, or the income can be passed through to the beneficiaries on Schedule K-1 (Form 1041) to be taxed on the beneficiaries' tax returns. Unless the amount involved is small, it's usually beneficial to pass the income through due to the rapidly increasing tax brackets of the estate. For 2015, the maximum estate tax rate is reached at $12,300 of estate taxable income.
