A Self Cancelling Installment Note (SCIN) is a special estate planning item.
If the owner of property, usually common stock in a business, wants to “freeze” (set the value) of the stock for death tax purposes, it might be appropriate to consider using a SCIN. However, there are some special rules to observe (what a surprise).
A SCIN is a contingent payment sale with a stated maximum price. When the seller (note holder) dies, any unpaid balance on the SCIN isn’t included in the seller’s gross estate because of the self-canceling feature. The note is canceled — nothing more is to be paid on it.
It’s important for the interest rate be determined using the long-term Applicable Federal Rate (AFR) for the month the note is done — also known as the section 7520 rate. Those rates are published by IRS each month. Generally the interest rate is to be 120 percent of the midterm AFR for the month the note is done.
Also, the term of the note should not be longer than the life expectancy of the seller. IRS Regulation 1.72-9, Table V is usually used to determine the life expectancy for an installment note.
When the seller dies, if there’s any balance owing on the note, the balance is canceled. Neither the seller nor her estate reports any remaining gain for the canceled payments because of the rules under IRS Section 453B. The buyer has tax basis only for the payments that were made before the death of the seller. The buyer isnt required to make any payments after the seller’s death.
There’s also a need for the note amount to be increased for the risk of the seller dying before all payments have been received.
A SCIN may be classified as either an installment sale or as a private annuity sale.
Of course there are various tax cases dealing with SCINs and various IRS regulations. Each note should be done with the various facts, circumstances and goals in mind.
If someone is interested in getting more information on this particular planning idea, it’s best to meet with an experienced attorney. Also consider looking on the internet for more information.
The main goal is to limit what estate tax the seller might have without having taxable gifts.
Did you hear? “A little thought and a little kindness are often worth more than a great deal of money,” by John Ruskin.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.