When you die and an accounting is made of all that you own and have interest in, then the government steps in to collect tax on it's transfer.

The Form used for this is called "United States Estate (and generation-Skipping Transfer) Tax Return" or Form 706.

Download it and read what is on it to understand it.

It doesn't matter what you paid for an item or what they were worth when you got them it is the current "Fair Market value" that concerns the IRS.

Everything together such as real estate, savings, annuities, the whole shebang is added up and that is the "Gross Estate".

There are some deductions and sometimes reductions in value allowed when determining your taxable estate.

Considered are costs of administration of the estate, mortgages, debt, what is passed of to qualified charities and the spouse.
Farms have a special deal as well with operating costs.

Lifetime taxable gifts gifts since 1977 come into play when they exceed $100,000.
As it is the wealthiest top 2% of Americans are affected.

If your estate is simple you usually don't need to file an estate return.
If you died in 2010 or later your estate has to be $5000,000 to file the Form 706

Gift Tax

If you, transfer give or sell something to someone for $0 or less than it's real value it can be considered a gift and is taxable as such if the person doing the giving intends it to be a gift or not. Gift tax applies if:

You give property (including money) without expecting an exchange of equal value
You allow the use of or income from property, without expecting an exchange of equal value
If you sell something at less than its full value
If you make an interest-free or reduced-interest loan.

As of this writing 12 / 4 / 2011

You can give gifts to multiple people of up to $13,000 per year and not be subjected to a gift tax. GIfts of future interest (that will kick in some time in the future) can be taxed.

Married couples can each give up to $13,000. There are more details but this is a brief overview.

Download Form 709 and Form 709 Instructions to better understand how this works and how it can affect you.