My grandmother has a stock account that has accrued approximately $40K in LT capital gains. If I, as the executor, liquidate these assets and distribute the cash to those inheriting, I assume that the capital gains tax would be paid by the estate. However, if I distribute the shares themselves, and allow the receiver to liquidate them, then I understand they would pay cap gains accrued from the day they took ownership. What would happen to the original $40K in LT Capital Gains? Does that still need to be paid by the estate?
Nobody pays tax on the gain that accrued prior to your grandmother's death. That's the great benefit of "stepped up basis." The basis of the stock is the fair market value on the date of her death. Only the gain after that date is taxable. The gain that accrued prior to her death disappears and is never taxed. And it doesn't matter whether the estate sells the stock or the beneficiaries sell the stock. Either the estate or the beneficiaries get the stepped up basis.
If you distribute the shares to the beneficiaries, for the purpose of calculating taxable gain, "the day they took ownership" is the date of your grandmother's death, even though title is not actually transferred until later.
You don't "pay capital gains." Capital gain is the profit you make from selling a stock or other investment. The capital gain is income that you receive, not something that you pay. You pay income tax on the capital gain income that you received.