Annuities are part of a person's estate. So yes, there might be inheritance tax owed if the estate is large enough. For 2011, "large enough" is about $5,000,000 for federal purposes. Your state might have a lower threshold.

Annuities are not part of the probate estate, if the beneficiaries were named on the annuity. That means that the Executor doesn't have access to these funds, and cannot use them to pay any estate debts. The money goes directly to the named beneficiaries.

But annuities might also be subject to income tax. If the account has grown since it was opened, the income is taxable to the heirs as it would have been to the original owner. Let's say grandmama opened an annuity a few years ago with $100,000. When she passed away, it was worth $130,000. She has two beneficiaries, each to get half of the annuity. Each beneficiary would get a 1099-R for $65,000. Of this amount, $15,000 would be subject to federal income tax. The distribution would not be subject to any early distribution penalties.

State laws about tax on annuities can vary. Som follow the federal completely; others might exclude some or all of the income. I know PA has some unusual tax considerations for retirement accounts, but I don't know enough to give firm advice about it.