I'm not a lawyer but was in a class recently when this came up. Your Grandmother would be entitled to a 250,000 lifetime exemption when she sold. If she bought it with her husband and hadn't used his credit then I believe she would have a credit of either 450 or 500K. The balance less allowed deductions would be subject to a capital gains tax. But if she dies owning the house, it goes into her estate. In 2013, the estate amount subject to state or federal taxes starts at 5 Million.
Please check with a lawyer, but she should retain ownership of the house.
As for the estate tax depending on what other holdings she has I believe the 1 million may be under the federal taxable minimum, but that is in flux from year to year. You really have to look at the estate as a whole and consult a good tax attorney to develop a sound strategy to proceed ahead.