The Economic Growth and Tax Relief Act of 2001 (EGTRRA; P.L. 107-16 ), among other tax cuts, provided for a gradual reduction in the estate tax. The estate tax applies to wealth transferred at death and had, at that time, a unified exemption for both lifetime gifts and the estate of $675,000. 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 so there is 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 expire in 2011, returning the tax provisions to their pre-EGTRRA levels. The exemption would revert 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 will not be taxed on gain accumulated during the decedent's life when they inherit assets). During debate on the estate tax, most agreed that the 2010 provisions would not be continued, and, indeed, could be repealed retroactively. President Obama proposed a permanent extension of the 2009 rules (a $3.5 million exemption and a 45% tax rate), and the House provided for that permanent extension on December 3, 2009 ( H.R. 4154 ). The Senate Democratic leadership has indicated a plan to retroactively reinstate the 2009 rules for 2010 and beyond. Senate Minority Leader McConnell proposed an alternative of a 35% tax rate and a $5 million exemption. A similar proposal for a $5 million exemption and a 35% rate, which also includes the ability of the surviving spouse to inherit any unused exemption of the decedent, is often referred to as Lincoln-Kyl after the two Senators who have supported it. Proposals have also been to begin with the $3.5 million/45% rate and phase in the $5 million/55% rate. Others have argued for a permanent estate tax repeal. At the end of 2010, a temporary extension for two years, with a $5 million exemption, a 35% rate, and inheritance of unused spousal exemptions was enacted in P.L. 111-312 . At the end of 2012, absent legislation, the provisions will revert to the pre-EGTRRA rules ($1 million exemption, 55% top rate). To address abuses and tax avoidance, President Obama has included proposals in his 2011 budget outline. One of these proposals, to reform the Grantor Retained Annuity Trust (GRAT), is included in H.R. 4849 . This provision is discussed in detail below. After a brief description of the estate and gift tax and of options, this report compares the alternatives, focusing largely on a $1 million exemption and 55% rate, a $3.5 million exemption and a 45% rate, and a $5 million exemption and a 35% rate. Several policy effects and issues are analyzed: the share of decedents subject to tax; revenue effects; distributional effects; and effects on savings, charitable contributions, and compliance and administration. The report also considers other aspects of the proposals, such as whether the exemptions are indexed for inflation, a proposed inheritance of the exemption for spouses (which applies under the new rules to 2011 and 2012), and proposals to address perceived abuses. This section describes the estate tax as it existed in 2009 and will exist in future years, absent legislative change. For 2010, there is no estate tax, although the gift tax remains and there is a tax on gains accumulated during the decedent's lifetime when assets are sold by heirs (with a $1.3 million exemption plus $3 million for a spouse). An election can be made for 2010 to apply either 2010 or 2011 rules. Because the exemption from gains is smaller than the overall estate tax exemption for 2011, some estates would have lower tax liability by electing the 2011 rules. 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. In the past, a single effective exemption applied, but under the 2001 tax revisions effective in 2009, the gift tax exemption was more limited than the combined exemption for both estate and gift taxes. Thus, although a unified rate schedule applies to both bequests and gifts, the exemptions differed in 2009. The combined exemption was $3.5 million, whereas the exemption for gifts was $1 million. For 2011 and 2012, the combined exemption is $5 million and that exemption applies to gifts as well. In 2013, the combined exemption will be $1 million, absent legislative change. 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, under the 2009 and the 2011-2012 rules. Thus the taxable estate was subject to a flat 45% rate in 2009 and will be subject to a flat 35% rate in 2011-2012. Under pre-EGTRRA law, which will apply in 2013, absent legislation, there are some graduated rates on taxable estate amounts between $1 million and $3 million because the exemption is not large enough to offset tax at lower rates. Rates begin at 41% for amounts over $1 million and rise by 2 percentage points at each additional $500,000, reaching 53% on amounts between $2.5 million and $3 million. There is also a 5% surtax designed to phase out the benefits of lower rates so that very large estates are taxed at a flat 55% rate. Individuals are also allowed to exempt annual gifts of $13,000 per recipient, which are not counted as part of the lifetime exemption. The annual gift tax exemption is indexed for inflation in $1,000 increments. A generation skipping tax is also imposed, to address estate tax avoidance through gifts and bequests to a later generation. Estates are allowed to exempt some assets from the estate tax and take a deduction for selected other transfers. Transfers between spouses are exempt. Estates are also allowed to take deductions for charitable contributions and administrative expenses. Currently estates are also allowed a deduction for taxes paid on estates and inheritances imposed by states. Prior to 2001, a credit was allowed, subject to a cap, for state estate taxes, but the credit was phased out and replaced by a deduction in that legislation. (Should EGTRRA provisions expire, the state credit would reappear.) Under the rules for 2011 and 2012, a spouse can inherit any unused exemption. Thus if a husband dies and leaves an estate of $3 million, the remainder of his $5 million exemption can be used by his wife, whose exemption would be increased by the $2 million difference. A series of provisions benefit small businesses, including farms or landowners. These include the ability of family businesses to pay the tax in installments with only interest payments during part of the installment period, special use valuation, conservation easements, and, if the law reverts to its 2001 rules, a deduction for family owned business assets. Minority discounts, although granted by courts rather than specifically in the law, may also benefit small businesses. 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. Since 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 and only 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, for example, to be subdivided for development. Heirs are required to continue use 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 where, 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. In prior law, another provision benefitting small businesses was the Qualified Family Owned Business Income (QFOBI) deduction. This provision allowed estates with at least half of their assets in a family business to take a deduction for these business assets. This provision originally allowed up to $675,000 of business deductions at a time when the basic estate tax exemption was $625,000, and imposed an overall cap of $1.3 million on the total of both deductions. Once the regular exemption passed the $1.3 million level, the provision was no longer relevant.