Yes, that is correct. You get a lifetime gift and estate exemption of $1,000,000. Anything above and beyond the exemption amount is taxable to the estate. This amount is increased through 2010 until the entire estate is tax free. I however do believe that gifts given within the lifetime of the estate owner decrease the exemption that can be taken by the estate at the time of death (however any gift below 11,000 annually, 22,000 if married, is not taxable at the time it is given). It does however later reduce the total LIFETIME exemption amount. (Again, I am not positive that that is how the lifetime exemption is calculated).
I am a CPA, but tax and estate planning is not my specialty. Now I'm curious and am going to have to look into this!
There is even a Generation-Skipping Tax to prevent you from leaving you estate to your grandchildren instead of you children to avoid a generation of tax. For example, you are taxed when you leave your estate to your children and it is taxed again when your children leave it to your grandchildren. You can't just leave it to your grandchildren and avoid a layer of tax.
Okay, after doing some research, I'll correct myself. Gifts given in the amount of $22,000 or less (for a married couple are tax free) and do not reduce the lifetime exemption amount. If a gift exceeds the $22,000, the amount in excess of the 22,000 reduces the lifetime exemption. No gift tax is paid at that time however.