The purpose of the gift tax is to prevent people from "sneaking" around the estate tax by giving away assets before death. There's no official definition of a gift, but the general understanding is that a gift is any transfer of property that makes your estate smaller. The gift tax part of the Internal Revenue Code expressly says that it is not a "gift" to pay someone's medical or educational expenses. There's no exemption for everyday living expenses, but as far as I know the IRS has never tried to characterize basic consumption, such as the cost of feeding and housing your kids, as a taxable gift.
Even with those exceptions, every Christmas present and birthday card would still be a taxable gift, and only the most miserly among us would not be required to file Form 709 every year. To avoid the resulting absurdity, Congress wrote in something called the "annual exclusion." It's presently $13,000 per recipient per year, and that number adjusts for inflation every so often. Put simply, the first $13,000 in gifts you make to a person in any one year are "freebies," ignored for gift tax purposes. If you have two children, you can give each of then $13,000 and not owe any gift taxes. A married couple can combine their exclusions (something called "gift splitting") and give $26,000 per year to each recipient tax free--it's considered to come equally from both, no matter who wrote the check or made the transfer.
Now here's the tricky part: the annual exclusion only applies to a "present interest" gift; that is, something that the recipient can enjoy immediately. A gift of a right to receive something in the future, or a gift in trust that won't be distributed immediately, is not a present interest, and doesn't get the benefit of the annual exclusion.
It's often not a good idea to make a substantial gift outright to a young person, or an adult with maturity or creditor problems. You'd want to hold the property in trust so the beneficiary can't mishandle it--and, in the case of a minor, so you don't have to establish a guardianship to hold the property. Section 2503(c) of the IRC sets out a specific exception for gifts in trust to a minor, but section 2503 trusts have to terminate when the beneficiary reaches age 21. 21 is the traditional age of majority, but not always a comfortable age to be distributing substantial wealth to someone.
So does that mean that if you want to make a gift in trust to, say, age 30 you can't use the annual exclusion? No; there's a work-around called a "Crummey power," named after the United States Tax Court case which validated the tactic. The trust will give the beneficiary a legal right to withdraw property as soon as it's added to the trust, but that right expires one month after the date the beneficiary (or, if a minor, her parent or guardian) is advised that a contribution has been made. That's a present enough present interest to qualify the gift for the annual exclusion. As you might expect, this is something we use a lot in my business.
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