Self Cancelling Installment Note (SCIN)

A Self-Cancelling Installation Note (SCIN) is a private debt arrangement characterised by the potential for the obligation to be extinguished before full repayment is received if the creditor dies at any time before the end of the repayment schedule. SCINs are commonly used in estate tax planning and are an estate freeze technique.

SCINs are employed in intra-family wealth transfer as a means to transfer assets to those who would ordinarily be estate beneficiaries. The SCIN allows the asset to be removed from the creditor/decedent’s estate, avoiding estate tax as long as certain conditions are met.

– The transaction itself must be a bona fide transaction to avoid being treated as a gift, which would have gift tax consequences that would potentially undermine its efficacy as an estate planning tool.

– The rate of interest on the note must exceed the prevailing market rate for a similar arms length transaction to account for the risk presented to the creditor by virtue of the early cancellation provision.

[or]

– The face value/purchase price of the note must be above the prevailing market rate for a similar transaction to account for the risk presented to the creditor by virtue of the early cancellation provision.

– Repayments must be made as per the debt agreement.

– There must be no reason to believe, based on actuarial expectations, that the creditor will not realistically be alive long enough to collect full repayment of the note.

Rules regarding the taxation of appreciated assets sold via a SCIN in an intra-family transfer are complex. Sale via SCIN does not avoid taxes during life- capital gains taxes may be payable, and even in the event of the premature death of the creditor. The deferred gain will likely be recognized for income tax purposes, upon cancellation of the note as of the seller’s death, either in the deceased seller’s final return or her estate’s first return. This withstanding, in many situations the benefits exceed the cost- particularly for projected estate tax payers.

Mr. Client has a net worth that greatly exceeds his unified credit and his estate is likely to be an estate tax payer. As part of his wishes, his intention was to leave a family property to his son, Michael. At the age of 72 Mr. Client enters into a purchase agreement with his son whereby Michael will purchase the property called Greenacre in lieu of leaving it to him via his estate as a bequeathal.

Greenacre FMV: 6,200,000 USD
Greenacre purchase agreement price: 6,800,000 USD (+600,000 USD premium)
Interest rate: 4.19% p.a compounded quarterly (= current mid-term Applicable Federal Rate + 1% premium for the sake of robustness)
Note term: 9 years
Monthly repayments: 75,640 USD

Mr. Client passes away at age 75 after his heart conditions deteriorates rapidly following his 74th birthday. Up to that point Michael had made x3 years of repayments at 75,640 USD p.m, totaling 2,723,040 USD.

At the time that the note is extinguished, the FMV of the property is assed to have increased, and have a FMV of 6,900,000 USD.

Michael and his father successfully avoided 2,760,000 USD in estate tax on Greenacre by removing a NET 4,176,960 USD of property from Mr. Clients estate (Greenacre FMV at death – installment payments received during life).

*this example does not take into consideration the taxes payable by the estate on the deferred capital gain that Mr. Client received from selling the property that had conceivably appreciated during his ownership period, along with any other payable estate taxes or expenses.