The federal gift tax requires you to file a gift tax return in the year that you give any one individual more than the allowed amount ($12,000 this year). You can give $12,000 per person, per year.
If you give more than $12,000 to any one person, then you file a gift tax return but you don't pay anything. The "tax" that you pay is actually deducted off your lifetime exemption of $1M.
The beneficiary of your gifts do not have to pay any tax.
First, the gift tax is paid by the donor, not by the donee. So if you give money to your son and his children, any liability for gift tax is yours, not theirs.
Second, you are entitled to an annual exclusion from gift tax of $12,000 per person per year. That figures is going to increase to $13,000 per person is 2009. So, if the total gifts you make to your son this year, including Christmas and birthday gifts is $12,000 or less, you do not owe a gift tax and you do not need to file a Federal Gift Tax Return (IRS Form 709). If, however, you give your son - for example, $15,000 this year - then you have to file an IRS Form 709. However, you still may not owe a gift tax because you are ALSO entitled to a $1,000,000 lifetime exclusion. So the gift tax return will report a gift of $15,000, minus a $12,000 annual exclusion, and the remaining $3,000 will be subtracted from your $1,000,000 lifetime exclusion leaving you with $997,000 of remaining lifetime exclusion (assuming you have not previously made any gifts above the annual exclusion to anyone).
Third, this could become an extremely lengthy e-mail were we to continue about the (i) interplay between lifetime gifts and transfers at death and (ii) the role of irrevocable trusts. So, the best suggestion is for you to hire - if you do not already have one - a competent certified public accountant. He or she will be able to advise you of the proper way to handle a gifting program.