1. Estate taxes are taxes paid by your inheriting heirs, out of their inheritance, when you die. In simple terms, if you left your kids $100 and the tax rate was 40%, your kids would only inherit $60. (I've simplified this example just to show the effect of estate taxes in general).
2. If you are a United States citizen, then the assets that your spouse inherits from you are not subject to a federal estate tax. Generally, others people who inherit from you DO pay estate taxes unless the amount falls under a certain amount.
3. If you are not a United States citizen, then the assets that your spouse inherits from you CAN be subject to a federal tax if the assets exceed a certain amount called the exemption amount. As of January 1st, 2013, the exemption amount is $5,250,000. This means that if leave your spouse less than this amount, you inheritance will not be subject to an estate tax.
4. Whenever estate taxes are due, they are only due on amounts over and above the exemption amount. Here is a simplified example: If your heirs were inheriting $11 from you and the exemption amount was $10, then they would only pay tax on the $1.
5. There are two basic strategies to deal with estate taxes. (Again, in simplified terms). The first is to figure out a way for your heirs to have cash on hand to pay the estate taxes so that they do not have to sell assets. This is usually done through an insurance policy. The second is to give your money away prior to your death either outright (as a gift) or in a trust. There are drawbacks to giving your money away during your lifetime (you might need it!).
6. Estate tax exemption amounts and rates have varied wildly over the past twenty years, from the current $5M+ to a low of $600,000. As of this date (January 2013), the exemption amount is "permanent", which basically means that the law does not have a scheduled "sunset" or termination.
7. The value of the assets you leave to your heirs is called your "net estate". Debts and liabilities are subtracted from your net estate. So, for example, in calculating your net estate, the value of your home would NOT be its market worth of $700,000 if you still owe money on the mortgage.