A deferred annuity does not get a step-up in basis. The taxable portion of the distribution in Income in Respect of a Decedent and is taxable on the recipient's tax return.
If the decedent was subject to federal estate taxes (on Form 706), the beneficiary can claim a deduction for that beneficiary's share of the estate taxes paid up to the amount of the IRD. Otherwise there is nothing you can do to lower the effect of this taxable income.
