Sugar skulls are literally skulls made out of sugar used to decorate ofrendas (altars or shrines) during the first two days of November called, Day of the Dead. They are made from molds--you can purchase molds on line from Mexican Sugar Skull--if you are so inclined and are looking for a great project to do with kids or just want to try letting your own creative spirit go.
In Mexico, there are several places that are very well known for their "sugar markets" during the week or so preceding Muertos. I've seen some absolutely beautiful and amazing items made of sugar in Toluca, Morelia and San Miguel de Allende. The skulls often will have names, of the person who is deceased, written across the forehead on the tissue paper or just on the skull itself. And they come in lots of different colors and styles.
The sugar skulls featured above were made by a local artist. They are fragile but will keep for 10-15 years if stored in a cool and dry place. They add a bit of whimsy and authenticity to any Day of the Dead ofrenda or celebration.