Assuming the 1099-R was issued for a tax deferred IRA, 401(k) or other tax deferred retirement account, taxes "WILL" be paid on that money when it is withdrawn from the account, regardless of who withdraws it...be it the owner of the account, or a beneficiary recipient of the account when the owner passes.
Generally, the beneficiary recipient has choices on how to handle an inherited Traditional IRA for 401(k)
1. THe recipient can leave the money alone and do nothing, meaning that earnings will continue to accumulate tax deferred.
2. The beneficiary recipient can chose to "roll over" the entire account into their own IRA, and the roll over will not be a taxable event.
If the beneficiary recipient chooses to withdraw funds from the account, then taxes will be paid on the withdrawn funds in the tax year they are withdrawn. The tax rate will depend directly on what tax bracket the beneficiary recipient falls into. Additionally, if the original owner of the account would have been "UNDER" retirement age when the funds are withdrawn by the beneficiary recipient, then the 10% early withdrawal penalty applies. However, if the original owner of the account would have been OVER retirement age, then no early withdrawal penalty is assessed.
Now the above is how things work (or can work) on the federal taxes. If your state taxes personal income, then how your state handles it may be different.
