Pedro Bourbone is the founder and owner of a highly successful small business, and over the past several years, has accumulated quite a significant amount of personal wealth. His portfolio of stocks and bonds is worth nearly $8,000,000, owns real estate worth $6,000,000 and generates income from dividends and interest of nearly $320,000 per year. With his salary from his business and dividends and interest, Pedro has taxable income of approximately $700,000 per year and is clearly in the top individual marginal tax bracket. Pedro is married and has 3 children aged 16, 14 and 12. Neither his wife nor children work and make income. Pedro has come to you as his CPA to discuss ways to reduce his individual tax liability as well as to discuss the potential estate tax upon his death. You mention the possibility of making gifts each year to his children. Explain how annual gifts to his children will reduce both his income during lifetime and estate tax at death.