Estate taxes are different from, and in addition to, income taxes. When you die, your estate must pay estate taxes if its net value (including your tax-deferred accounts) is more than the amount exempt at that time. In 2012, the federal exemption is $5,120,000; every dollar over this amount is taxed at 35%. Some states also have their own estate/inheritance tax; your estate could be exempt from federal tax but not from state tax.
Estate taxes must be paid in cash, usually within nine months of your death. If money must be withdrawn from a tax-deferred account to pay the estate taxes, the result can be disastrous – because income taxes must be paid on the money that is withdrawn to pay the estate taxes.