She can give upto $12000 per grandchildren ($24,000 per child if her spouse joins in the gift) without owing any gift tax or requiring her to file a gift tax return.
She can give gift over this amount too but in that case she will have to file a gift tax return. She may not owe any gift tax as long as she does not exceed $1 mn. in taxable gifts in her lifetime.
Gift received by the donee(recipient) is not income and hence is not taxed to the recipient.
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. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.
By law, Medicaid can investigate to see if you gifted away any assets within the three years prior to your application. If so, they will deny you benefits for the number of months those assets would have paid for. So you might want to give as much gift as possible to reduce your estate when you are in good health.