The Uniform Principal and Income Act generally dictates that capital gains are corpus and they stay within the trust/estate unless the decedent's living trust or will says capital gains can be distributed to the beneficiaries.
Without such directive, who was listed as the seller on the final escrow closing statement? If the estate was the seller, the sale must be reported on the estate's 1041. If the heirs were the sellers, then the heirs would report their pro-rata shares on their respective 1040. In this letter case, there should be four sets of final escrow closing statements, one for each heir.
If the property has not been sold yet, the successor trustee/executor can distribute the properties to the beneficiaries and have the beneficiaries sell the property.
In the final year of the estate, even without such a directive, I believe the capital gains can be distributed to the beneficiaries and have the beneficiaries pay the capital gain tax on their 1040. See § 1.643(a)-3 below.
Did you adjust the cost basis using the stepped-up market value as of the date of death + closing costs to arrive at the $2 million capital gain?
As to the capital gains tax rate for the estate, here's what the IRS Form 1041 instruction says:
Instructions for Form 1041 and Schedules A, B, G, J, and K-1 (2024) | Internal Revenue Service
Capital gains and qualified dividends.
For tax year 2024, the 20% maximum capital gains rate applies to estates and trusts with income above $15,450. The 0% and 15% rates apply to certain threshold amounts. The 0% rate applies to amounts up to $3,150. The 15% rate applies to amounts over $3,150 and up to $15,450.
The final year of an estate-special rules. (estate planning) (column)
In case of a net capital gain, the estate would pay tax on the income. (General rule)
26 CFR § 1.643(a)-3 - Capital gains and losses. | Electronic Code of Federal Regulations (e-CFR) | U...
Under the terms of Trust's governing instrument, all income is to be paid to A during the Trust's term. When A reaches 35, Trust is to terminate and all the principal is to be distributed to A. Because all the assets of the trust, including all capital gains, will be actually distributed to the beneficiary at the termination of Trust, all capital gains realized in the year of termination are included in distributable net income. See § 1.641(b)-3 for the determination of the year of final termination and the taxability of capital gains realized after the terminating event and before final distribution.
