My uncle was one of 4 beneficiaries of a large insurance annuity held by my recently deceased grandfather. My uncle passed away unexpectedly and tragically before Christmas leaving behind his wife whom is not a direct beneficiary.

The family decided not to inform my grandfather as he was far gone with dementia and the news would probably cause him to suffer even more. Before any estate or beneficiary changes could be established however, my grandfather passed away a week later of natural causes.

The estate lawyer said that my uncles wife is not entitled to any inheritance as she is not on the will or as the beneficiary of the above mentioned annuity being by far the largest asset in the estate. This is an uncomfortable situation now as it is not clear what the surviving three children of my grandfather will do. My father, stated he was going to give a quarter of his inheritance to my uncles wife but was concerned about double taxation as he would have to pay income tax on his distribution of the annuity and then my aunt would then pay income tax on her portion as it would greatly exceed the allowed gift exclusion of $15k. It is also not clear if my other aunts and uncles plan to be as generous as my father.

Since the deaths were only a week apart, my uncles estate is still in full force so why exactly does his quarter of the annuity not go into possession by his estate then? Why cant my uncles estate just take the payout and pay he income tax on it directly, then get distributed to my aunt and closed out?

The location is Pennsylvania, USA.