Advice on Annuity Disposition

Talk to your tax professional.
It sounds like your biggest liability are taxes (not fees or lost opportunity or surrender charges).

I am anti annuity too.

I’ve used This to polish up some turds and solve the problem you are facing before.

You can do a tax free exchange into this annuity and it adds an “earnings enhancement” where they add 40% to whatever the annuity earns that’s pays out as life insurance. Essentially covering your tax bill. (She doesn’t have to go through any underwriting for this)

Also, you could use the income from the annuity to fund a life insurance policy on her. Policy would pay out tax free on her death and you use it to pay taxes on remaining annuity and qualified assets. (Assuming that she is insurable).
You could also add a “chronic illness rider” to the insurance so you could use it in the event that mom needs additional care later in life.

Or just use the income from the annuity to buy VTI and (hopefully) get a step up on basis upon her death and use that money to pay your taxes.

If she is insurable, I’d do the LI policy. The annuity provides a guaranteed payout to cover premium and the insurance is contractual so you don’t have to worry about congress screwing with it- like you would if you were relying on a step up in basis.

If she's in good health, I would consider taking the income option within the annuity. This would be the most tax-efficient option as a portion of each payment would be basis, and it would be stretched over her lifetime. While this is a conservative approach, the guaranteed income might allow her to invest more aggressively in other areas. I would also be sure that there's around a 10 year guarantee in case she died early. (Not sure how old she is, so that might change what I would do) As someone mentioned, the income could be used to buy a LI policy on her, which would have the affect of converting a tax inefficient asset into a very tax efficient one. Since she likely has no surrender charges, she could exchange it into a low-cost VA in order to continue to defer taxes.

There is no stepped-up basis for the annuity gains, which are taxed at ordinary income rates. It might be wise to exchange to a low-cost variable annuity, and have her take some distributions each year, stopping when it would be taxed at higher brackets. I am a fan of income annuities for specific situations, but the expenses, lack of stepped-up basis, and having gains that would normally be capital gains taxed at ordinary income make VAs mostly unattractive to me.