My dad had a non-qualified annuity & named the trust as beneficiary. We want to take a lump sum payout and want to know how much Fed & state tax we should have withheld?

[dmertz]

Probably none.

II assume that the trust will pay out this to the beneficiaries as Distributable Net Income and the income will be passed through to the trust beneficiaries on Schedules K-1 (Form 1041).  However, credit for the withholding cannot be passed through on Schedules K-1, so the trust would have to obtain a refund of the withholding and then distribute the cash to the trust beneficiaries in the following trust tax year.

Instead, let each trust beneficiary increase their own withholding from other sources or pay estimated tax payments to cover their overall tax liability for the year that includes the income passed through from the trust.