You will want to get some advice about the best ways to manage these funds.

Tax-wise, the money will not be taxed until you take it out, and then it's taxed to you the same way it would have been to your rather -- as retirement. Depending on what you've done with the accounts, and your father's age at death, there might be some time limits as to when you have to take the money out. Depending on how much you inherited, finding both an experienced tax pro and a friendly broker would be a good thing to do.

You can't exactly gift retirement funds to anyone. You can name them as beneficiaries, or you can take a distribution, pay the tax, and gift the balance to the g'kids.

As the beneficiary of your father's 401k account, you have at least two options, and possibly three
1. Roll the money over into an inherited IRA
2. Take a taxable distribution (practically you may need to roll it into an Inherited IRA, then take a distribution)
3. You may be able to leave the money in the 401k plan in your name, but only if the plan allows for this.

As for the IRAs, your options are similar
1. Roll the money into an inherited IRA
2. Take a distribution

It is likely the best result for you to have the 401k money and the IRA money all rolled into one inherited IRA. This will be much easier to look after (one investment strategy, one set of statements, etc...) than multiple accounts but you can have multiple inherited IRA accounts should it serve you well.

Inherited money is not taxable to the recipient / beneficiary. Your father may owe estate tax but that will be settled separate from the money your receive as the beneficiary.

The money will continue to be tax deferred until you take money out of the account, at which point it is taxed as ordinary income and subject to your marginal tax rate.

Very important - you must take a distribution (called a required minimum distribution) from the inherited IRA each year. The first one must be taken by 12/31 in the year following the death of the account owner (your father in this case). As an example, if he died in 2009, you must take your first required minimum distribution by 12/31/10 and then the next one . Consult the IRS life expectancy tables to help determine the amount to take.

Regarding gifting to the grandkids - you would have to take a distribution, pay the tax, and then gift it to the grandkids. If the grandkids happend to be listed as the contengent beneficiary on your father's accounts, then your can disclaim all or part and it will go to the next listed beneficiary.

As you can see, there are many options. Seek out a professional who can guide you through this.