IRS allows you can to give up to $1,000,000 in gifts, total, in your lifetime, before you start owing the gift tax
. (This gift is not per (donee)person but its a per donor limit). So you can make gifts that are worth up to a million bucks during your lifetime without paying the gift tax.
Note that, you can give up to the annual exclusion amount ($12,000 in 2006) to a person, every year, without facing any gift taxes and note that such amounts do not count as part of your $1,000,000 lifetime total.
So You don't use up any of this amount until your gifts to one person in one year exceed the annual exclusion amount. For example, if you make a $14,000 gift in 2006, you have used up only $2,000 of your lifetime limit.
Any amount you use out of your lifetime gift tax exclusion counts against the estate tax exclusion, which is $2,000,000 for 2006($1,500,000 for 2004 and 2005). This means that if you use $250,000 of the limit by making gifts during your lifetime, you have reduced by $250,000 the amount that can pass through your estate free of the estate tax (which means in effect your estate tax exclusion has reduced from $2,000,000 to $1,750,000)
If you make a taxable gift, you must file Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax
Return, which is due April 15 of the following year. Even if you do not owe a gift tax because you have not reached the $1,000,000 limit, you are still required to file this form if you made a gift that does not qualify as excludable. The IRS needs to keep a running tab of your $1,000,000 lifetime exemption.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases.