"Does estate file a F1041?"
This distribution to the estate is includible on the estate's Form 1041 if the income to the estate is of an amount sufficient for the estate to be required to file a tax return, which seems likely given the estate's receipt of a distribution under the 5-yea rule. (The 5-year rule only applies if the decedent died before the decedent's required beginning date for RMDs. Otherwise, annual RMDs are required, determined by the age of the decedent.)
"Does spouse need to receive a K-1 to report the distribution on his personal F1040?"
If the estate passes the income through to the spouse for reporting on the spouse's individual tax return, yes this requires that the estate's income tax return include a Schedule K-1 with a copy of the Schedule K-1 provided to the spouse.
"Will spouse have to also pay tax on distribution although the estate already paid the tax?"
When the income is passed through to an estate beneficiary for taxation on the beneficiary's individual tax return, the estate tax return will include a deduction for this Distributable Net Income, so there is no double taxation.
Tax withholding on retirement distributions paid to the estate should generally be declined if the estate will not have any tax liability due to passing the taxable income through to estate beneficiaries because credit for the this tax withholding cannot be passed through to the estate beneficiaries on the Schedule K-1. Instead, excess tax withholding will need to be refunded to the estate and subsequently distributed to estate beneficiaries.
