Hi and welcome to Just Answer!Some income received by the estate or beneficiaries AFTER the decedent passed away might be classified as Income in Respect of the Decedent (IRD) - and could be taxable. Examples of IRD include interest and dividends paid to the estate AFTER the date of death, distributions from tax deferred accounts (401k, IRA, annuity, etc), gain from the sale of inherited assets. Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable for the decedent. Thus - if the grandmother had after tax contribution into the annuity - that amount is distributed tax free - but the distribution above will be subject of federal income taxes.In PA - distributions from retirement annuity that is part of an employer-sponsored program or a commonly recognized retirement program are not taxable income.However - If the grandmother invested in a retirement annuity that is not part of an employer-sponsored program or a commonly recognized retirement program, beneficiaries may have PA taxable income on the distribution. You must report the difference between the amount you receive and your previously taxed investment as taxable interest on a PA Schedule A.
Pennsylvania inheritance tax purposes - some assets are exempt from tax. These include life insurance proceeds (but not annuities), lump sum social security death payments, and certain employment benefits. So unless the annuity may be characterized as life insurance - the transferred of the annuity to beneficiaries is subject of Pennsylvania inheritance tax.
If the annuities represent a return on an investment (a single premium was paid), they are taxable and should be reported on REV-1510 Schedule G of the REV-1500 Inheritance Tax Return - Resident Decedent. Annuities do not qualify for the $3,000 exclusion allowed for transfers made within one year of the decedent's death.
Whether a retirement account characterized as an “annuity” by the provider is exempt from Pennsylvania Inheritance Tax as life insurance - see this publication - www.portal.state.pa.us\portal\server.pt\document\996249\inh-10-002_pdf