Lifetime Gift Tax Exemption: Why Using It Now Could Offer Advantages Over Waiting

Your exemption shelters a dollar amount, not a future value

Use your exemption at death, and it shelters a fixed dollar figure. Use it during your lifetime, and it can shelter that same figure plus every dollar of growth the gifted assets earn from that day forward.

That’s the heart of the case. When your estate already sits above the exemption, each dollar of future growth is a dollar that could be taxed at 40%.² A large lifetime gift can effectively freeze part of your estate at today’s value and may allow future appreciation to occur outside of your taxable estate, subject to applicable tax laws and individual circumstances.

What the difference can look like

Consider a hypothetical married couple with a $50 million estate. Assume their assets grow 6% a year and the second spouse dies in 15 years.

If they hold everything until death, their estate could grow to about $119.8 million. After their combined $30 million exemption, the estimated federal estate tax could be about $35.9 million.

Now say they give $20 million to an irrevocable trust today. At the same growth rate, the trust could be worth about $47.9 million in 15 years, all of it outside their estate. The rest of their estate could grow to about $71.9 million. With $10 million of exemption left, the estimated estate tax could be about $24.8 million.

That’s a potential savings of about $11.2 million. It comes from roughly $27.9 million of growth that never landed on their balance sheet.

This hypothetical example is for illustration only. It assumes a constant 6% annual return, a 40% federal estate tax rate, and a combined exemption held at the 2026 level of $30 million. It doesn’t reflect future inflation adjustments to the exemption, income taxes, state estate taxes, fees, or the performance of any actual investment. Your results can differ.

Waiting carries its own risks

Holding your exemption until death can feel like the cautious choice. For a taxable estate, it often isn’t.

Permanent in tax law means until Congress changes it. IRS regulations finalized in 2019 generally protect exemption you’ve already used if the exemption later drops. Exemption you haven’t used has no such protection.

Portability has limits, too. A surviving spouse can claim a deceased spouse’s unused exemption, but that amount stops growing with inflation after the first death, and it doesn’t include the generation-skipping transfer tax exemption. It also generally requires filing an estate tax return after the first death.

And every year you wait is another year of growth that stays in your estate.

Grantor trusts let a gift keep giving

Many large lifetime gifts go to an irrevocable grantor trust. The trust sits outside your estate for estate tax purposes, but you continue to pay the income tax on what it earns.

That tax bill works in your favor. Each dollar you pay on the trust’s behalf leaves your estate without counting as a gift, while the trust grows without an income tax drag. Over 15 or 20 years, that can add up to a meaningful second transfer.

Grantor trusts can also include a power to swap assets. Later in life, you may be able to trade cash or high-basis assets into the trust in exchange for low-basis assets, bringing those back into your estate where they could receive a step-up in basis.

Strategies that stretch each exemption dollar

Several techniques can move wealth while using little or none of your exemption. Each has its own rules and risks.

Grantor retained annuity trusts. A GRAT pays you a fixed annuity for a set term. Growth above an IRS-set hurdle rate passes to your beneficiaries, and the trust can be structured to use almost no exemption. GRATs tend to work best with assets that have strong growth potential, and the benefit can be lost if you die during the term.

Sales to a grantor trust. After seeding a trust with a gift, you sell it assets in exchange for a promissory note at the IRS minimum interest rate. Growth above that rate stays in the trust. Because it’s a grantor trust, the sale generally isn’t a taxable event.

Gifts of non-controlling interests. Interests in a family business or family investment entity may qualify for valuation discounts for lack of control and marketability. That can let you move more underlying value per dollar of exemption. The IRS looks closely at these transfers, so a qualified appraisal and careful structure matter.

Gift tax, paid on purpose. For families prepared to give beyond their exemption, gift tax is calculated only on what the recipient receives. Estate tax is calculated on everything, including the dollars used to pay the tax. That can make gift tax paid during life less expensive than estate tax paid later, as long as you live at least three years after the gift.

Put your GST exemption to work

You also have a separate generation-skipping transfer tax exemption, which matches the $15 million estate and gift tax exemption in 2026.² Allocating it to lifetime gifts to a long-term trust can help shelter those assets, and their growth, from estate tax at your children’s generation and beyond.

Timing matters here, too. GST exemption allocated to a lifetime gift is measured against today’s value. Wait, and it’s measured against whatever the assets are worth later. Unlike the estate tax exemption, GST exemption isn’t portable between spouses.

Keep access, if you want it

Some married couples hesitate to give away a large sum outright. A spousal lifetime access trust, or SLAT, can help. One spouse gifts assets to a trust that can make distributions to the other spouse and to descendants. The assets can sit outside both estates while the family keeps indirect access.

SLATs come with tradeoffs. That access can end if the beneficiary spouse dies first or the marriage ends. And when spouses create trusts for each other, the trusts need to be meaningfully different to hold up.

The tradeoffs worth weighing

Cost basis. Assets you still own at death generally receive a step-up in basis. Gifted assets carry your original basis to the recipient.⁴ For a taxable estate, the estate tax saved on future growth often outweighs the capital gains tax your heirs may owe, but not always. Cash, high-basis assets, and assets with strong growth ahead tend to make the best gifts. Deeply appreciated assets may be better held for the step-up in basis at death.

Control and liquidity. An irrevocable gift is exactly that. Before assets move, your plan should hold up under a long life, potential health care and long-term care costs, and weak markets. Give from surplus, never from security.

State taxes. Several states impose their own estate or inheritance tax, often with thresholds well below the federal exemption. A few also tax gifts or add recent gifts back into the estate. Where you live, and where you own property, can change the math.

Annual exclusion gifts of $19,000 per recipient in 2026 still have a place.³ At your level of wealth, though, they’re a supplement to the strategy, not the strategy itself.

The reasons that have nothing to do with taxes

Giving during your lifetime lets you see the wealth at work. It also gives you a chance to prepare the next generation, set expectations, and watch how they handle it while you can still offer guidance.

For many families, that’s the most valuable part of the plan. The tax savings are a bonus.

A reasonable place to start

Confirm your exposure. Project your estate forward, not only at today’s values, and include any state estate or inheritance tax.

Decide how much you can comfortably part with. Then match the right assets to the right structure, whether that’s an outright gift, a grantor trust, a GRAT, a SLAT, or a combination. Review your existing documents, too. Formulas drafted years ago may not do what you intended at a $15 million exemption.

Using your exemption well is less about the size of the gift and more about timing, asset selection, and structure. Your Mercer Advisors team brings financial planning, tax, estate, and investment management together under one roof, so those decisions can be made as one plan and the right fit can reflect your assets and your family.