The Self-Canceling Installment Note (“SCIN”) is a planning technique usually used in a sale of an asset to either a trust or directly from an older family member to a member or members of a younger generation. Basically, the older generation sells the asset in exchange for an installment note with a term shorter than the seller’s life expectancy, which is found in Internal Revenue Service (IRS) Tables. The SCIN is a valuable tool because, if the seller dies before the term of the note, the remaining balance is completely canceled and is not included in the seller’s estate.
The SCIN is best structured as requiring interest-only annual payments until a balloon principal payment is due at the end of the term. By deferring the principal payment until the end of the term, the amount canceled upon death will include the entire principal amount of the promissory note.
Of course, the IRS would not allow this transaction without a modification of the terms of the note to make it an arms-length transaction between the parties. So, either the principal amount or the interest rate must be increased to make this a bona fide transaction. The older the seller is, the greater the mortality risk premium will be. However, with long-term interest rates being at historical lows right now, the time has never been better for an estate-freezing transaction using a SCIN.
For example, using October’s rates, a 55-year-old person could sell assets using a 28-year SCIN with a balloon payment and an interest rate of only 2.695%. If the seller died before the end of the term, the value of the entire principal amount would be transferred to the trust without incurring any estate tax.
These low rates make a SCIN not only a good idea for clients looking to freeze some of the value of their estates, but there is also opportunity for clients who have already entered into DGT sales (see other articles on website that describe DGT sales as a popular estate planning/freezing technique) to refinance with a SCIN, possibly at lower rates and the self-canceling feature.
For more information regarding estate planning, business law or tax controversy and compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.
In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.