The estate and gift tax is imposed on bequests at death and on inter-vivos (during lifetime) gifts. The rate of the tax and the level of exemption have been under discussion for some time, with temporary provisions in place for a number of years. The American Taxpayer Relief Act of 2012 ( P.L. 112-240 ) established permanent rules for the estate and gift tax for 2013 going forward. Although details of the tax structure are addressed in the following section, the principal rules are as follows: In 2011, estates and lifetime gifts had a combined exemption of $5 million in asset value, indexed for inflation. This exemption was made permanent and is $5.49 million for 2017. The estate tax rate on the taxable portion of the estate, if any, is 40%. The exemption from the estate tax applies to estates and lifetime inter-vivos gifts in the aggregate. The separate annual exemption per donee for inter-vivos gifts is retained; it is also indexed in $1,000 increments and has increased from $13,000 in 2012 to $14,000 in 2017 and $15,000 in 2018. Transfers to spouses remain exempt, but spouses can inherit any unused portion of the exemption from each other, so that the combined exemption for a couple was $10 million in 2011. Other estate tax deductions, such as those for charitable contributions, are retained. A number of special rules for farms and small businesses are retained. A doubling of the exemption level was adopted in the 2017 tax revision ( P.L. 115-97 ), effective from 2018 to 2025; for 2018, the exemption is $11.2 million. This report describes the basic structure of the estate and gift tax, provides a brief history of recent developments, discusses the revenue effects and distribution of the tax, and briefly discusses issues and options. The estate and gift tax is a unified tax, so that assets transferred as gifts during a person's lifetime are combined with those transferred at death (bequests) and subject to a single rate schedule. The tax is imposed on the decedent's estate and the rate structure applies to total bequests and gifts given; heirs are not subject to tax. The exemption for 2017 is $5.49 million, and it is indexed for inflation. From 2018 to 2025, the exemption is doubled, and it is $11.2 million for 2018. Although the rates of the tax are graduated, the exemption is applied in the form of a credit and offsets taxes applied at the lower rates. Thus the taxable estate is therefore subject to a flat 40% rate. This rate is higher than the 35% rate that prevailed in 2011 and 2013, but lower than the 45% rate that applied in 2009. Individuals are also allowed to exempt annual gifts of $14,000 per recipient for 2017, which are not counted as part of the lifetime exemption. The annual gift tax exemption is indexed for inflation in $1,000 increments and will rise to $15,000 in 2018. A generation-skipping tax is also imposed, to address estate tax avoidance through gifts and bequests to a later generation. Transfers between spouses are exempt. Estates are allowed to take deductions for charitable contributions and administrative expenses; a deduction for taxes paid on estates and inheritances imposed by states; and to exempt up to $5.49 million for 2017 ($11.2 million in 2018) in remaining assets from the tax. A spouse can inherit any unused exemption. Thus, if a husband died and left an estate of $3 million in 2017, the remainder of his $5.49 million exemption can be used by his wife, whose exemption would be increased by the $2.43 million difference. A series of provisions benefit small businesses, including farms and landowners. These provisions include the ability of family businesses to pay any estate tax due in installments with only the interest payments during part of the installment period, special use valuations, and conservation easements. Minority discounts, although granted by courts rather than specifically in the law, may also benefit small businesses. Minority discounts are allowed when assets are left to a family partnership in which no individual has a controlling share and are thus deemed to lose value for that reason. Although the estate tax return is due within nine months of the death, small businesses are allowed to defer payment (except for interest) for the next five years, and pay the remaining installment payments over 10 years. Because the last interest payment and the first installment coincide, the overall delay in full payment is 14 years. The benefit is allowed only for the business portion of assets if 35% of the estate is in a farm or closely held business. Small businesses are also allowed to value their assets at use as a farm or business. This provision is particularly beneficial to farms and allows a reduction in the estate value of up to $1 million. It means, for example, that the value of the farm will be what it could be sold for if restricted to farm use rather than to be subdivided for development. Heirs are required to continue use of the assets as a farm or business for 10 years. Farmers and other landowners may also benefit from conservation easements, a perpetual restriction on the use of the land. In addition to the reduction in value due to the easement itself, an exclusion of up to 40% of the restricted value of the land, capped at $500,000, is allowed. Heirs take as their basis (the amount to be deducted from the sales price) for purposes of future capital gains the value of the asset at the date of the decedent's death. This treatment is referred to as step-up in basis and means that no capital gains tax is paid on the appreciation of assets during the decedent's lifetime. For example, if a decedent purchased stock for $100,000 and the value of the stock at the time of death were $200,000, if the heir sells the property for $250,000 a gain of $50,000 ($250,000 minus the stepped-up basis of $200,000) is recognized. The $100,000 of gain that accrued during the decedent's lifetime is never taxed. The step-up rules do not apply to gifts, in which carryover basis is applied. In that case, the original basis of $100,000 would be carried over and the gain would be $150,000 ($250,000 minus $100,000). Both the gain accrued by the donor and the gain accrued by the donee are taxed. Aside from the different exemption levels in some estate tax rules, there are other differences between the taxation of gifts and bequests. As noted above, gifts do not benefit from the step-up in basis. When the donee subsequently sells an asset, the cost (referred to as basis) deducted from the sales price is the original cost to the donor. For example, if a donor purchased stock for $100,000 and the value of the stock at the time of the gift were $200,000, when the donee sells the property for $250,000 a gain of $150,000 ($250,000 minus the original basis of $100,000) is recognized. The basis cannot be less than the fair market value at the time of the gift if a loss is realized. In addition, the gift tax is tax exclusive (i.e., the tax is imposed on the gift net of the tax), whereas the estate tax is tax inclusive (i.e., the tax is applied to the estate inclusive of the tax). To illustrate, consider a 50% tax rate. Assuming the exemption is already used, to provide a gift of $1 million costs $1.5 million: the tax rate of 50% is applied to the gift of $1 million for a $0.5 million tax. To provide a net amount of $1 million for a bequest, $2 million is required: a tax of $1 million (50% of $2 million) and a net to the heir of $1 million. Another way of stating this is that the gift tax rate, if stated as a tax inclusive rate like the estate tax, would be 33%. Thus for a 40% estate tax rate, the gift tax rate equivalent is 28.6%. The Economic Growth and Tax Relief Act of 2001 (EGTRRA; P.L. 107-16 ) provided for a gradual reduction in the estate tax. A unified exemption for both lifetime gifts and the estate of $675,000 applied at that time. Under EGTRRA, the estate tax exemption rose from $675,000 in 2001 to $3.5 million in 2009, and the top tax rate fell from 55% to 45%. Although combined estate and gift tax rates are graduated, the exemption is effectively in the form of a credit that eliminates tax due at lower rates resulting in a flat rate on taxable assets under 2009 law. The gift tax exemption was, however, restricted to $1 million. For 2010, EGTRRA scheduled the elimination of the estate tax, although it retained the gift tax and its $1 million exemption. EGTRRA also provided for a carryover of basis for assets inherited at death, so that, in contrast with prior law, heirs who sold assets would have to pay tax on gains accrued during the decedent's lifetime. This provision has a $1.3 million exemption for gain (plus $3 million for a spouse). As with other provisions of EGTRRA, the tax revisions were to expire in 2011, returning the tax provisions to their pre-EGTRRA levels. The exemption would have reverted to $1 million (a value that had already been scheduled for pre-EGTRRA law) and the rate to 55% (with some graduated rates). The carryover basis provision effective in 2010 would be eliminated (so that heirs would not be taxed on gain accumulated during the decedent's life when they inherit assets).