No. of Recommendations: 7
Am I correct in assuming an unlimited exemption means my mom won't pay any taxes on her portion? Nor his kids from his lifetime exemption? Can that be dolled out to 3 people?

No. You're mixing it up. Only a spouse can inherit any amount of property with no taxes due. The lifetime exemption kicks in when anyone other than a spouse inherits, and that includes children. This is one reason that spouses who may be subject to estate tax generally make sure they don't leave their property directly to their spouse, or they lose one exemption when the 2nd spouse dies.

To illustrate, Spouse A and B have an estate valued at $5 million. Spouse A dies and leaves everything to Spouse B which B inherits without any estate tax being due. When B dies and leaves everything to the kids, B's lifetime exemption [I think it's 2 million right now, but am not sure, but let's use that for my example], the first $2 million passes to the kids tax free because they use B's lifetime exemption, but the remaining $3 million is subject to estate taxes.

If A and B had done some estate planning, then when A died, $2million would have been placed in a trust for the benefit of B, and the remaining $3 million would got to B, still tax free. B can access any of the $5million in assets, so still has control of that and can benefit from that. When B dies, the $2million in the trust from A can then be used for the benefit of the kids, but note that it didn't belong to B, so there's no estate tax. And there's another $2million that is passed to the kids free of estate taxes to use up B's lifetime exemption leaving the kids with $1million subject to estate taxes instead of the $3million in the above example.

Making proper use of the lifetime exemption is a key component to good estate planning, and can save the heirs quite a lot of money.
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